High public spending boosts Saudi cement demand

A surge in capital expenditure as part of high public spending prompted by the global fiscal crisis has kept cement demand in Saudi Arabia strong, with sales swelling by over 13 per cent in the first nine months of 2010.

Forecasts by National Commercial Bank (NCB) showed cement sales in the world’s dominant oil power and largest Arab economy would surpass 36 million tonnes through 2010, driven by a construction upswing.

In a study sent to Emirates 24/7, NCB said the Gulf Kingdom’s cement sector has been driven mainly by high government spending on projects over the past year within its counter-crisis fiscal expansion policy.

“The fundamentals for the Saudi cement sector are fuelled in part through the government’s continued high expenditure on economic and social infrastructure buoyed by a young demographic structure,” said NCB, the largest Saudi bank.

“In the first nine months of 2010, total local cement sales amounted to 34.4 million tonnes, an increase of 13.3 per cent over the same period in 2009. By end of 2010, we forecast total local sales to be 36.5 million tonnes.”

According to the study, both consumption and prices of cement have been increasing since the beginning of the year, driven by the eight per cent growth in construction activity by the first half of 2010. Cement prices have swelled to nearly SR270 per tonne by September 2010, it added.

NCB’s figures showed the Saudi economy has more than doubled over the past 10 years as measured by nominal GDP.

“NCB estimates GDP by end 2010 to reach SAR1,625.8 billion, with corresponding GDP per capita of SAR62,746, a 130 per cent increase from the SAR 706.7 billion GDP in 2000,” the report said.

It noted that the government’s budget for 2010 continued to focus on capital expenditure with SR260 billion or 48 per cent of resources being allocated to infrastructure projects. “Consumption for cement, therefore, can be projected vis-à-vis aggregate expenditure on construction in the Kingdom.”

The report expected total expenditure in the construction sector, as measured by its components in the country’s gross fixed capital formation (GFCF), to reach SR188 billion in 2010, a 13.2 per cent increase from last year.

Announcing its 2010 budget just before the end of last year, Saudi Arabia said it would maintain an expansionary fiscal policy to support economic growth following a sharp slowdown caused by the 2008 crisis.

Besides record public spending, the 2010 budget also includes record investment expenditure, with an increase of more than16 per cent over the last year’s budget, which was the largest historically, and about three times the level in 2005, the first year in the current eighth development plan. 

A government statement said the budget gives emphasis to projects that ensure sustainable and balanced development as well as job creation. 

Total spending in 2010 was assumed at SR540 billion and revenue at SR470 billion, creating a deficit of SR70 billion.

Saudi Arabia, which controls over a fifth of the world’s extractable crude deposits, also plans to spend nearly $400 billion in the next five years on infrastructure and other development projects, according to official estimates.

In an earlier study, NCB said licences for new cement projects and expansions of existing units would boost total production to a record 54 million tonnes in 2010.

“While cement exports absorb nearly 10 per cent of the total cement sales, the remaining 25 per cent is met by the transient demand created by the waves of construction projects, both public and private sectors,” it said.

“Upon completion of these projects, a time we believe could be around 2015, excess capacity above the sustainable domestic demand and exports is widely feared amongst industry analysts. Thus, in the domestic market perspective, the capacity overhang looks as a real possibility that would tend to intensify competition among local cement producers and to push prices lower.”

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