Limited fuel supply will spark cement price increase JEDDAH – Saudi Arabia has lined up plans to spend an estimated SR690 billion on infrastructure and welfare in 2012, aided by higher oil prices and revenues. However, Al Rajhi Capital said in its Saudi Cement Sector report released Saturday that any dramatic fluctuation in oil prices will impact the government's investment plans over the next 3-5 years as it continues to count on oil export earnings to support its ambitious expansion drive. Al Rajhi forecast earlier in its Economic Monthly for April that the Saudi economy will expand at 4.4 percent this year with the expected oil price to hover around $112 for the year. Unfortunately, Al Rajhi said majority of the cement companies in Saudi Arabia lack proper disclosures of their businesses and engage in very less mutual dialogue with its investors. Such a scenario creates ambiguity and prevents shareholders and investors from securing transparent and accurate information about the companies. The report said “from our experience, Arabian Cement, Saudi Cement and Yamama Cement are the best, in terms of disclosures and transparency.” The report further forecast that the Saudi cement sector will experience robust demand over the next four years as more projects get visibility. This growing demand will be met by planned capacity ramp-ups by some of the existing players, who are either scaling up or replacing their plants coupled with few more licenses being awarded by the government. However, cement prices will fluctuate over the next couple of years, if the capacity ramp-up does not materialize resulting in a tight supply situation. The sector is experiencing a moderate supply surplus and the industry supply should achieve a CAGR of about 5.5 percent until 2015. Supply depends solely on Aramco's allocation of fuel to the sector, it pointed out. Construction activities have accelerated in 2011 and should continue in the same vein in 2012 and 2013, the report further said. Consequently, the Saudi cement market has a positive undertone to it in terms of near to medium-term demand growth. Excess supply fears, which have been a bit of a concern over the last two years, have been eliminated despite the large amount of new capacity coming up. Nevertheless, expansion programs are projected to raise production capacity in the Kingdom to close to 66 million tons per year by 2015. Saudi cement makers continue to benefit from subsidized fuel and a protected operating environment, prompting us to believe that 2012 and 2013 will be robust years for the cement manufacturers. Strong near-term demand will be reflected in the operators' top-line and bottom-line over the next three years. Overall, the report said the demand will rise gradually over the next three years from 41 million tons in 2010 to 57 million tons by 2015, at a CAGR of 6 percent. Al Rajhi forecast that demand will peak in 2014 and thereafter assume a slight fall in 2015, unless government announces fresh funds to finance its projects. However, the export market will remain subdued as the global downturn has prompted the neighboring countries to slow down their infrastructure investments, while the ongoing export ban will encourage cement producers to only concentrate on their domestic markets. The announcement of 500,000 units should take concrete shape over the next couple of years - a move which will keep cement producers interested. The Kingdom's per capita cement consumption increased at a CAGR of 7 percent during the period 2005-2011 to reach more than 1,677 kg in 2011 compared to 1,070 kg in 2005. On a per capita basis, Saudi Arabia's cement consumption is currently among the highest in the world following the country's need to develop its infrastructure, including industrial, aviation, transportation, education, tourism and health sectors - though the oil sector structurally supports these high per capita levels to a material extent. The average cost of producing cement in KSA is close to SR114 per ton with pricing being around SR250 a ton. This high margin advantage has prompted a number of new players to foray into the cement industry over the last few years. From around five companies in 2008 to the current 20, the number is swelling with a few more gearing up to enter the market.
