Saudi cement sector seen recovering

A recovery in the construction sector due to sustained high public spending and better economic conditions will give a shot in the arm of cement producers in Saudi Arabia following a slowdown, according to a bank study.

The Gulf Kingdom’s domestic market for cement has been well supplied by the 13 local factories during the first nine months of this year, with total production growing by 13.9 per cent to 32.2 million tonnes as one more factory, Al-Jouf Cement came on the production stream with an output of  around 180,000 tons last month, said the study by National Commercial Bank (NCB).

Of total production, the domestic market bought 96.2 per cent (30.96 million tonnes) while foreign markets received about 3.5 per cent (1.1 million tonnes), and the remainder was transferred to inventory with stock levels closing at 807,000 tons by the end of September, the study said.

With emerging sluggish demand on slowing construction activities in the home market, domestic cement prices started weakening on a “price war-like” campaign, exports were resumed by five factories to a combined total of 1.75 million tonnes, including 658,000 tonnes of clinker.

Its figures showed that on a monthly basis, the net-earnings of the eight listed cement companies shrank by 16 per cent year-on-year, from SR102.65 per tonne of cement sold in local and foreign markets last year to SR 86.22.

“Thus, the overall net profit of the eight listed companies dropped by 2.6 per cent to SR 2,821 million in the first nine months of 2010 over SR2,897 million in the same period of last year,” said NCB, the largest bank in Saudi Arabia.

“Investors responded in a subdued fashion to listed cement companies, causing a two per cent drop in their stock prices so far this year. As the construction sector recovers, the demand for cement will start to pick up in a paced fashion.”

The study also expected high capital expenditure approved by the government within its 2010 budget to keep cement demand robust and reduce inventory.

Announcing its 2010 budget just before the end of 2009, Saudi Arabia said it would maintain an expansionary fiscal policy to support economic growth following a sharp slowdown caused by the global fiscal distress.

Besides all-time high public spending, the 2010 budget also includes record investment expenditure of SR260 billion, an increase of about 16 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. 

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.

NCB said licences for new cement projects and expansions of existing units would boost output capacity to a record 54 million tonnes by the end of 2010.

 “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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