Saudi cement sector thrives

An economic upsurge fuelled by high oil prices has largely boosted Saudi Arabia’s construction sector and this has given a fresh boost to the cement industry, the Gulf Kingdom’s largest bank said on Wednesday. Cement supply grew by nearly 6.4 per cent in 2011 and the sector is projected to continue growing over the next two years, National Commercial Bank (NCB) said in a study on the Saudi cement sector, the largest in the region. As Saudi Arabia propels forward in diversifying its economy away from oil dependency, it has embarked on numerous infrastructural projects and implemented mechanisms to further encourage foreign direct investment,” NCB said in the study, sent to Emirates 24/7. It said these development initiatives have boosted investor confidence in the Kingdom, thereby contributing to the growth of the construction sector, taking shape in the form of residential, industrial, and transportation projects. “On the back of the recent construction spike and primarily large government tenders, the Kingdom’s oligopolistic cement sector will continue to grow over the coming two years. Despite the introduction of new production lines from new market entrants, cement prices will likely witness an increase,” it said. “This is due to a shortage in fuel allocation from (the country’s state oil operator) Saudi Aramco, and the decline of clinker inventory over the past two years. However, the Ministry of Commerce and Industry will act to mitigate these price increases, as it heavily regulates the cement market.” The report noted that the Saudi cement sector has been fuelled by strong domestic fundamentals, namely the government’s continued high expenditure on physical and social infrastructure, driven by positive oil price movements, and buoyed by a young demographic structure. Other factors include the relatively low fuel and raw material costs as a result of the subsidized power/gas, and minimal royalty mining fees, sustaining domestic producers’ competitive advantage as well as new market entrants, leading to an influx in capacity dispersed geographically in areas of concentrated demand. It showed that over the past decade, the Saudi economy has more than doubled, as measured by the current size of GDP. By the end of 2011, nominal GDP reached SR2,163 billion, a 206 per cent increase from the SR707 billion in 2000. “Both the construction and building materials sectors follow the growth trajectory of the country’s GDP. As expenditure on mega infrastructure projects is deter-mined by government revenues, the robust 19.48 per cent increase in construction activity can be attributed to oil prices averaging at $107.8/ bbl in 2011, which created strong demand for building materials including cement.” It noted that the government’s budget for 2012 continued to focus on capital expenditure with SR280 billion or 40 per cent of resources being allocated to infrastructure projects. Earlier, in 2010, the Public Investment Fund (PIF) took additional measures to provide funding for industrial projects when it raised the cap on lending from 30 to 40 per cent of project value and extended loan duration from 15 to 20 years. According to the study, the Saudi cement market has been well supplied by domestic producers. At the end of 2011, the total supply of clinker reached 43 million tonnes, growing at 6.4 per cent YoY. Total cement production amounted to 48.4 million tonnes, growing at approximately 12.6 per cent YoY. Since 2005, cement production has averaged 7.5 per cent more than clinker production levels, the report showed.