Historians often refer to the Assyrians and Babylonians as the pioneers of the cement industry. So it was perhaps fitting at the beginning of the year that both Iraq and Syria announced they were moving ahead with plans to privatise their state-owned cement works and ramp up their respective production capacities. After years of underinvestment - and in Iraq’s case war, sanctions and general neglect - two of the region’s potential cement heavyweights were finally looking to regain their former prominence.
They will have their work cut out to catch up with the rest of the regional cement industry. Across the Middle East, and especially in the Gulf, construction activity has reached unprecedented levels, leading to a huge wave of investment in cement capacity. It is needed. With 90 per cent of cement produced locally, prices have shot up over the past two years as a result of an increasingly tight supply and demand balance. Without Egypt, the third largest producer globally, the Middle East and North Africa would have become a net importer.
Demand for cement will remain high for the foreseeable future. “We looked at the planned capacity expansions and the kind of growth in demand and we predict about 14-15 per cent annual growth [in the construction sector] at least until 2008,” says Zahed Chowdhury, GCC investment analyst at HSBC Bank Middle East. “If the market can generate that level of demand each year, there will be no supply overhang.”
The continuing buoyancy of the construction sector was underlined in December, when in a single month investors announced $40,000 million worth of new projects across the Gulf. The construction market in the GCC, Iraq and Iran is expected to reach about $1 million million by the end of 2006, suggesting cement demand will achieve double-digit growth.
There have been constraints on supplies for three years now. In 2003, combined cement production in North Africa, the Levant, the GCC and Iran reached 114 million tonnes a year (t/y), just ahead of demand of 106 million t/y. By 2005, the Middle East market, excluding Iran, was producing about 41.1 million t/y, with consumption in the GCC alone rising above 45 million t/y. Bahrain, the region’s smallest cement market, saw consumption grow by nearly 8 per cent from 2000-03, compared with global averages of about 4 per cent. In Qatar, consumption over the period climbed by about 25 per cent.
“In the next couple of years, the demand is there to support the capacity,” says Raghu Sarma, financial analyst at Global Investment House. “I don’t see much of a problem in terms of cement offtake, but after that it’s difficult to predict what will happen as it will depend on the price of oil.”
The regional cement industry is dominated by four producers: Egypt, Iran, Saudi Arabia and the UAE. Each has production capacity of above 10 million t/y, and together account for more than 80 per cent of regional output. The three latter also account for the bulk of new regional cement capacity investment, which at the start of January was estimated at about $5,900 million by MEED Projects.
More new capacity is in the pipeline. Up until last June, Saudi Arabia’s Industry Ministry had issued industrial licences for 27 new factories with combined design capacity of 45.2 million t/y and an initial invested capital of SR 21,600 million ($5,800 million). So far, only a handful have moved into the implementation stage.
The UAE, producer of about 11 million t/y, is also hiking up production. Despite being the fourth largest regional producer, it still imports about 6 per cent of its annual consumption. Much of the new investment is planned in the established centre for cement production, Ras al-Khaimah. “We will substantially increase investment in the cement industry during the next three years,” says Izzat Dajani, chief executive officer of Ras al-Khaimah’s Investment & Development Office. “We aim to double production capacity to over 10 million t/y by 2008.”
HSBC estimates an additional 25 million t/y of new GCC capacity will come on stream by 2007, increasing installed capacity by 70 per cent to about 60 million t/y. The expectation is that the sharp ramp up in production will finally cool prices. In the UAE, the government was forced to put a price cap of $4 on a 50-kilo bag in 2004 after a 53 per cent rise - but the move did not stop cement rising by 21 per cent to about $4.80 a bag last year.
Saudi Arabia has fared little better. Annual growth in cement demand is running at about 11 per cent. In 2004, demand outstripped the kingdom’s installed capacity of 21.4 million t/y by almost 3 million t/y. By last February, the crisis had reached breaking point as cement stocks ran out. Projects were delayed, producers panicked and prices escalated. While the regional average price per tonne varied from $65-70, Portland cement in Riyadh was changing hands for about $107 a tonne, double the previous year’s price. The increases have continued despite producers stepping up imports. Prices are up by about 20 per cent year on year.
Qatar’s situation has been even more acute. Qatar National Cement Company (QNCC), the country’s sole producer at 5,500 tonnes a day (t/d), struggled to meet demand of about 9,000 t/d. In response, it raised its official selling prices from $2.50 to $3 a bag in 2004. By the end of 2005, cement prices had reached about $4.11, although retail prices have been as high as $6. High prices have been further compounded by Doha being forced to import most of its raw materials, adding considerable transportation costs and increasing delays in projects. The government has reacted, with QNCC increasing its production, while the newly formed Gulf Cement Company is to build a 5,000-t/d clinker line by 2008.
While producers may be reaping the benefits, the picture looks gloomy for contractors. Predictions that the market prices would soften by the second half of the year appear over-optimistic. “The conditions remain favourable for producers,” says Chowdhury. “With importers to the Gulf such as Egypt and India also witnessing a construction boom, it means they have little surplus capacity to challenge regional producers. Price levels are likely to remain on the high side for some time.”
“Cement is the one thing that is worrying me,” says one Dubai-based contractor. “We are expecting prices to increase again in the second half of the year, because demand will increase again in the Gulf.”
As in all emerging markets, worries remain about oversupply in the medium term. If Saudi Arabia does press ahead with its proposed 27 new plants, it would reach capacity of 83.2 million t/y by 2010. According to Jeddah-based The National Commercial Bank, that would in effect mean almost tripling current annual demand. Analysts suggest that by 2011, the region - including Iran - will have surplus capacity of 104 million t/y.
“Capacity will be a challenge,” says Sarma. “For starters, oil prices may soften and investments may come under pressure. Then if you’re exporting, you’re in a competitive market with a flood of cement. If all the existing plants are implemented. the most efficient producers with the greatest profits will survive.”
One solution may well prove to be consolidation of the sector. In contrast with the global market, the regional cement industry remains fragmented with strict ownership structures. Most producers have an average capacity of about 1.5 million t/y - the global average is 10 million t/y. Cost reductions can be achieved through larger production facilities: the spate of mergers in the Egyptian market in the 1990s improved operating efficiency and average plant capacity to about 3 million t/y. Foreign ownership in regional cement companies is limited to minority stakes and until now only about 6 per cent of total installed capacity is foreign owned, as opposed to 70 per cent in Western Europe.
“As far as the Gulf is concerned, foreign players will not come in because the enterprise value per tonne is still very high,” says Sarma. “After three or four years, when prices soften and cement stocks are less popular, then they could come in, but at the moment even in a joint venture I don’t see local entrepreneurs giving up a share of the profits.”
The likelihood is that the rest of the region may follow Egypt’s example and opt for the privatisation model. Syria seems to have set foot on that path already: the General Organisation for Cement & Building Materials has invited international firms to expand and upgrade five local cement companies on a build-operate-transfer (BOT) basis. The objective is to double existing capacity to 10 million t/y. And as Gulf investors look to increase their investments region-wide, cement demand will also pick up.
“Beyond the Gulf, there is an even more acute shortage of cement, but until now investment has not been huge,” says Sarma. “In places like the Maghreb they have the capacity, but low utilisation rates. Of course, if the market booms, then they can rack up production.”
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