Despite a prolonged global economic slowdown, the Saudi cement sector remains robust on cheaper fuel and gas cost provided by Saudi Aramco, resulting into strong sales primarily due to government construction projects, independent industry reports released by Credit Suisse and HSBC Saudi Arabia said. Credit Suisse noted that the Kingdom's cement industry is among the most competitive in the GCC region, saying that while energy costs as a proportion of total costs in cement production range from 30 percent to 40 percent (based on grid vs captive power) at commercial rates of energy, the energy input is only 18 percent of costs in Saudi Arabia. Moreover, the Kingdom has the most favorable cost structure in the region. While the markets throughout the region appear set to suffer from overcapacity, Saudi producers have the most favorable cost structure and many are well positioned to maintain high operating rates via exports. Besides, Saudi producers mine their own limestone and the bulk of raw material does not need to be imported, again saving on costs, Credit Suisse said. The cement production is vertically integrated, it added. HSBC report said cement sales in the Kingdom have been strong this year but “we have been reluctant to adopt a positive stance on the sector,” adding that it expects demand for cement to “remain strong.” It noted that local demand for cement has picked up in recent months, with sales increasing 23 percent year-on-year in May compared to the 15 percent growth rate seen in the first four months of 2009. The increase in sales is mainly driven by the rise in construction contracts, which have tripled in value this year, HSBC said. “This pace of growth has not been replicated elsewhere in the GCC,” the bank said. Saudi Arabia has stepped up spending amid the global recession and has budgeted $400 billion for new projects until 2013. The bank noted the decline in the Kingdom's foreign assets is a sign that the government is providing the financing needed to keep planned projects going. However, HSBC does not rate any cement companies in Saudi above “neutral,” because it sees the entry of new players into the market and the build up of inventory levels to 33 percent of annual local demand as a threat to future sales growth and earnings. Of the five companies HSBC rates, only two are projected to have a rise in net profit in the second quarter of 2009, namely Qassim Cement Co. and Yanbu Cement Co. The best player in the Saudi cement sector is Yamamah Saudi Cement Co., HSBC said, because it offers a potential return of 11 percent and is expected to see lower declines in net income in the second half of 2009. Credit Suisse further said in the report that the expected approval of Mortgage law could be a positive catalyst. “The anticipated approval of mortgage law is likely to be a fillip to residential construction, supporting a healthy demand-supply balance in the medium term,” Credit Suisse pointed out. Moreover, the Kingdom is committed to improving infrastructure. Even with its current rate of expansion, Saudi Arabia's cement capacity growth is well aligned with its GDP growth. In addition the government is encouraging investment based on a robust economic platform and construction has accounted for 4.4 percent of GDP on average over the past three years. While the bulk of it has been in petrochemical capacity construction, the cement sector has received an uplift. It stressed that besides the six economic cities, Riyadh is one of the fastest-growing cities in the Middle East, with a population of almost five million, up from 2.8 million in 1992. “We also expect large infrastructure and housing investments in Riyadh.” Credit Suisse report further said that based on cement company announcements, “we expect capacity additions to rise from 43mtpa at end-2008 to 63mtpa in 2011, or an increase of 14 percent per annum on average. While this would place the Riyadh region under margin pressure, we think the companies within the region would be competitively well placed.” “Transportation costs from Jeddah to Riyadh range from SR20-30/ton, 10 percent of expected factory price. We prefer Riyadh/central region because while it is vulnerable to inflows from other regions, it is well placed to supply markets both to the north and east of Saudi Arabia.”
