EARLY in 1993, Saudi Arabia’s six cement producers announced plans to expand their aging plants, many of them built more than 20 years ago. The spate of announcements was driven by a simple motive – to feed a seemingly insatiable demand.
Saudi Arabia’s neighbours have not been idle either. Several other GCC states have plans to increase local cement capacity in an attempt to cut imports and diversify economies that are still dominated by oil and gas.
But Saudi Arabia, the Gulf’s largest cement producer, could severely affect these plans. The kingdom will have new capacity in place well ahead of the other Gulf states and it may harbour ambitions to serve more than the domestic market. The other GCC states may find it hard to keep up with the pace of Riyadh’s expansion programme, or judge it folly to try to follow.
Demand for cement in Saudi Arabia began to soar in early 1992. In the first eight months of the year, demand was 80 per cent higher than in the corresponding period a year earlier. Over the full year, it rose by about 35 per cent to reach 15.3 million tonnes. This is still well below figures for the boom time of 1983, when the country had to import 15.4 million tonnes to satisfy local consumption of 23.6 million. But the sharp 1992 increase broke the mould of a stagnant Saudi market.
Throughout the late 1980s and into the 1990s, demand had hovered around 11.5 million tonnes a year, providing little incentive to modernise or install new capacity. But the industry miscalculated. When the upturn came, local producers could not deliver.
Prices soared amid the mounting shortages, forcing the authorities to step in. In early September 1992, prices for a 50-kilo bag of cement were frozen at SR 13.5 ($3.60), compared with market rates that had touched SR 30 ($8) a bag in some areas where shortages were particularly acute. Import duties were slashed, with the consequence that overseas companies were able to capture all the new business in a rapidly expanding market.
About 1 million tonnes of cement were imported last year, according to Southern Province Cement Company (SPCC) general manager Amer Saeed Bourqan. The kingdom’s cement industry also had to import 1.6 million tonnes of clinker. Bourqan says demand in 1993 increased by 18 per cent over the previous year, suggesting total demand in 1993 was about 18 million tonnes.
The forecasts for 1994 indicate that the boom is far from over. Bourqan says demand will rise by a further 5 per cent this year. The most optimistic industry analysts say the growth could even be as high as 10-12 per cent, but this is a minority view. With such growth potential, the local cement companies are keen to keep the business at home. The six expansion projects and plans to build a new plant, all announced last year, are still on track.
Germany’s KHD Humboldt Wedag has won the first two construction contracts, at plants owned by the Arabian Cement Company and Saudi Cement Company. The most recent award, to expand the SPCC plant, has gone to a group of South Korea’s Halla Engineering and the US subsidiary of Denmark’s FLS Industries, FL Smidth-Fuller.
A further three projects at Qassim Cement Company, Yanbu Cement Company and Yamamah Cement Company are also going ahead, although they are at an earlier stage. A new company, Tabuk Cement Company, also plans to build a plant in the north of the country. The completion of these expansions will raise Saudi installed capacity to about 20 million tonnes a year.
Whether there is sufficient long-term demand to justify all the expansions is open to question. And, there is some surprise that all the projects have made it this far. ‘At first, we thought only 50-60 per cent of the projects were going to go ahead; now we think all (of the projects) will go ahead,’ says one industry analyst, who has been closely associated with the programme from the outset.
If the surge in Saudi demand repeats the pattern of earlier boom-to-bust cycles and starts to falter, the cement industry will face a choice. The plants can either continue using all their capacity, keeping older lines in production until domestic demand drops, or the industry could be more aggressive. The Saudi firms could use any excess capacity to increase their share of the wider GCC market. There are signs that they have already done their market research with this option in mind.
Cement producers in other GCC states have shown much less determination to realise all their expansion plans, despite an increase in demand. In Oman, plans to expand the country’s two plants, as well as float shares in a cement company, have fallen behind schedule. A project to build a new cement plant at Umm Qasr in Qatar has been ready to go for six months, but there has still been no decision, industry sources say.
The UAE has been deliberating over increasing production capacity in recent years, but no firm commitments have been made. The emirates learnt a harsh lesson 15 years ago, when expansion plans outstripped local demand and left the country trying to find export markets to utilise capacity. There is no wish to repeat this costly experience. Between 1990-92, UAE cement production and exports both fell, according to figures published by the Brussels-based Cembureau. Exports shrank by about 29 per cent to 1.2 million a year and production fell by about 10 per cent to 3.8 million tonnes a year.
Neighbouring states have every reason to hesitate. They cannot match the kind of incentives given to the Saudi Arabian companies in the form of long-term, low-cost loans from the Saudi Industrial Development Fund. If Saudi Arabia can still afford to back all the expansion plans, other GCC states may decide that importing from the kingdom is a more cost-effective proposition than expanding their own capacity.
As things stand, Saudi Arabia has made a strategic decision to proceed with all the expansions. It may also be looking beyond the domestic market as an outlet for the new production. As the smaller GCC states tighten their belts and monitor capital spending more closely, it may make little sense to simply copy Saudi Arabia’s plans. Buying in as demand dictates could prove the smarter option.