Saudi Arabia's cement production capacity is expected to jump above 66 million tons annually by 2015 from 47 million tons this year as the Kingdom gears up to meet demand for big infrastructure projects, Al Rajhi Capital said in a report Saturday. The report entitled "Banking on Government Support", noted that the positive outlook on the Kingdom's cement sector is underpinned by the massive $385 billion planned infrastructure projects until 2014. The government spending remains the major catalyst for the cement sector in the medium term. Local cement demand is estimated to increase at a CAGR of 6 percent until 2015. This increase will be mainly driven by the priority of the government in building infrastructure and scaling up education, healthcare and public utilities. The government has further announced constructing 500,000 residential units as part of a Kingdom-wide plan boosting real estate investments to accommodate the increase in young population. This would create a continuous demand over the coming three years for cement consumption which has increased by 14 percent y-o-y in 2011 compared to 10 percent y-o-y in 2008, the report said. "Construction activities have accelerated in 2011 and should continue in the same vein in 2012 and 2013. Consequently, the Saudi cement market has a positive undertone to it in terms of near to medium-term demand growth," the report said. "Total cement capacity has risen from 31 million tons in 2008 to 47 million tons currently and is expected to increase to over 66 million tons by 2015." "Overall, we expect demand to rise gradually over the next three years from 41 million tons in 2010 to 57 million tons by 2015," Al Rajhi said. It predicted cement prices would cool during the month of Ramadan, between mid-July and mid-August, a time when demand usually slowed, but would overall remain stable for the rest of 2012, ending the year at SR249 per ton ($66.40). Al Rajhi Capital's Head of Research Dr. Saleh Alsuhaibani said: "This pace of growth in Saudi Arabia is the highest in the GCC and the strong increase in net profits is purely organic due to higher cement dispatches, strong demand and effort by the government to stabilize cement prices in the Kingdom." Saudi Arabia is the cheapest cement producer in the Gulf Cooperation Council. Its cement production cost is around $30 per ton against $44 in other GCC countries, the research report said. According to the report, 11 out of 14 cement factories in Saudi Arabia have applied for an increase in fuel supply to expand their production lines and ramp-up capacities to meet rising demand particularly from the central and western regions. Applicants are still waiting for approvals on increases in fuel supply from Aramco, the sole allocator of fuel to the sector. While the arrival of new players, the government ban on exports, and setting a ceiling on cement prices at SR280/ton create a recipe for overcapacity, the supply will remain neck-to-neck with demand through 2015 at least. The projected growth in production capacity will reach 66 million tons by 2015. The net profit margins (aggregate 47 percent) enjoyed by the cement sector are considered the highest among major Saudi Arabian industries. This, in addition to subsidized fuel which constitutes 35 percent of the total cost of production at almost SR114/ton, has attracted many new players to ramp up operations. The sector has maintained a high standard in ROE and ROA with average profitability for the five picked companies standing at 20 percent, with Qassim Cement Company enjoying the highest net profit margin in 2011.
