Cement factories in the UAE are expected to boost exports in the coming period to utilise a projected increase in surplus capacity because of a decline in demand following the end of the oil boom, the Emirates Industrial Bank (EIB) said yesterday.

In its monthly bulletin, the government-held EIB estimated the UAE's installed cement production capacity at nearly 25 million tonnes per year, the second largest output among the Gulf Co-operation Council (GCC) states after Saudi Arabia.

"Construction activity having abated but with more capacity coming online, the cement factories are not likely to be producing at full capacity soon. Price adjustments are not likely to boost demand, so the industry's decision to hold moderate prices and not to allow price wars or a price crash is an appropriate one. If the prices fixed by the industry's association can be held, business will continue to remain profitable despite some excess capacity, though this will vary from factory to factory," it said.

"New added capacity is best utilised by focusing on exports. Exports might be more challenging than selling domestically but the UAE's cement factories have been long in the business to find a niche in the international markets."

The EIB noted that Ras Al Khaimah, the largest cement producer in the UAE, exports nearly 90 per cent of its output. It showed that Bahrain and Oman were major cement importers in the GCC while key non-GCC importers include Pakistan, Yemen and Ethiopia.

"In the short- to medium-term, the UAE's cement industry is likely to focus on exports to utilise its excess capacity. Unlike the Western world, the neighbouring markets have not been affected by the global financial crisis since 2008. Demand continues to be robust there and offers an opportunity to profit from the recently expanded capacity," the EIB said.

Referring to the upswing in domestic production and demand during the oil boom, the EIB said while trading companies can quickly adjust to changing demand, the challenge was much greater for manufacturing companies.

Cement is the most important of the construction materials and demand for it was such during the boom years that despite producing at full capacity, domestic factories were not able to meet the requirement, it said.

"The consequent demand-supply gap had to be filled by imports. This gap has now have been reversed. According to a global study on cement, the UAE has one of the highest per capita cement consumption rates in the world, standing at 1,757 kg/person even before the construction boom," the study said.

"The consequence of the construction boom was an exploding demand for cement, leading to shortages and higher prices. Demand increased from around seven million tonnes in 2000 to nearly 12 million tonnes in 2006 and to a peak of more than 25 million tonnes in 2008. Most of the demand was met by rising domestic production with sustained expansion of capacity."

Its figures showed the UAE's cement production capacity had almost doubled since 2004. It said because of the sustained demand, more capacity was added in the past decade, including new cement plants.

It noted that since it takes almost two years to implement capacity expansion plans, capacity expansion was not able to meet rising demand, which led to price increases, shortages and imports. "By the time some of the production capacity came online, the market had changed. Because of the two year period it takes to install new capacity, cement production capacity is set to rise further. According to market sources, capacity is expected to increase by almost 19 per cent in 2011, as a consequence of decisions taken earlier," the study said.

"Consequently, competitiveness in the market is set to increase. Certain cement companies would continue to perform well due to their favourable cost structure and advantageous location. However, the challenge is not new and the cement industry has experienced excess capacity situation earlier."

The study recalled that a large number of cement factories in the UAE faced excess capacity difficulties during the recession of the eighties, with the situation of excess capacity continuing till around 2000 and exports filling the gap. "Since then, the situation was reversed when cement supply shortages resulted in imports and added capacity in existing as well as new factories for both, cement and clinker production."

Citing figures by the UAE Cement Manufacturers' Association, the report put domestic cement sales in 2009 at around 17.8 million tonnes.

"This can be taken as a fairly accurate estimate of the production, suggesting a 28 per cent excess capacity. Such an excess capacity level may not be ideal, but is not critical. Few manufacturing industries produce at full capacity at all times. However, the problem is that the cement manufacturers' association estimates demand to slide further to about 13.5 million tonnes by the end of this year, namely another decline of almost 25 per cent," EIB said.

"This may be an overestimate, but demand does not look to be recovering in the short run, so the industry needs to have an appropriate strategy during the low demand period while waiting for demand to revert to earlier levels for which the new capacity was built. While the industry as a whole will be able to weather the storm, some individual factories may find the situation difficult," it said.

Turning to prices, EIB said during the oil boom, demand soared to such levels that prices almost doubled between 2003 and 2004. A five per cent import surcharge was lifted and imports started to come in, it said, adding that prices stabilised at about 10 to 20 per cent more than previous levels and manufacturers pumped large investments to add capacity to meet demand.

According to the study, the recent demand-supply gap meant that a price adjustment was inevitable and prices have fallen. It pointed to a decision by the Ministry of Economy in April 2009 to fix cement prices across the UAE at Dh280 per tonne and Dh14 for a bag, saying this reflected conditions prevailing at that time, when factories were selling cement at Dh300 to Dh310 per tonne.

"While at that time there was reluctance among manufacturers to accept these prices, they were compelled to reduce prices in the following months," it said. "To avoid price wars and bring stability, the industry decided to fix prices. In February 2010, the cement manufacturers' association announced prices at slightly higher than prevailing levels. Though the decision has no legal binding, all member factories are expected to abide by the prices."