Prices of construction materials have been falling steadily in Saudi Arabia since June 2008, due to a government ban on cement exports and plummeting global steel prices. But, over the first three weeks of 2010, there have been upward movements in major construction commodity prices.

Last year was disappointing for cement producers, already frustrated by the export ban, imposed by the Commerce & Industry Ministry in June 2008 to preserve domestic supplies, which had come under pressure due to the housing boom. The ban was lifted in May 2009, but with three conditions, which producers complain are hampering their businesses, with the result that they are still losing export trade to other countries.  

Three conditions

The first condition is that potential exporters must sell cement domestically at SR200 ($53) a tonne. Second, all local demand must be met before exports can be sold. And, third, every producer must keep a 10 per cent production capacity in reserve. Producers say the conditions mean the ban is still effectively in place.

“Domestically we are currently getting SR235-240 a tonne, so it is not worth exporting. We would need to export a lot to make our money back if we sold domestically at SR200,” says a source at one of Saudi Arabia’s biggest cement firms.

We are losing out to other countries, which are selling their surplus cement into GCC markets

Cement producer source

In 2009, 37.8 million tonnes of cement were produced in Saudi Arabia, out of a capacity of 46,000 million tonnes. Domestically, demand for cement has remained strong, although it has cooled since the peak of 2007. The biggest producers in 2009 were Saudi Cement Company, with 5.5 million tonnes, closely followed by Yamama with 5.2 million tonnes. These two firms reported record sales in 2007, and while 2009 figures are not too far from 2007 revenue, profits are down, along with sales prices. At Yamama, for example, sales in 2007 reached SR1.19m; in 2008 they dipped to SR1.12m but rose again in 2009 to SR1.16m. However, profits have fallen steadily, from SR731,430 in 2007 to SR561,747 in 2009. This trend is repeated among all of the kingdom’s 12 cement producers, who say they are concerned about the effect the export ban has had on their international businesses.

“We are losing out to other countries, which are now selling their surplus into GCC markets,” says the source.

However, analysts say that cement producers are failing to account for the drop in demand for cement internationally.

“The reality is that the demand base is significantly lower than it was in 2007,” says an analyst at a local bank close to all the major producers. “Producers thought that the lifting of the ban would be their salvation but in countries such as India there is a lot of excess supply, which is being sold at low prices. Saudi Arabian producers are falsely relying on the promise of future exports.”

Despite the constraints on exports, some cement firms have been forced to cut local prices in order to sell their excess production overseas. These include Najran Cement and Tabuk Cement. The only other companies to export in 2009 were Saudi Cement Company and Eastern Province Cement Company, although this was mainly to Bahrain under special permission of the ministry.

“The ministry allowed exports of 25,000 tonnes a week to Bahrain, even when the ban was in place,” says the analyst.

The export ban could not have come at a worse time for the cement industry, as many producers had launched expansion programmes in response to the soaring demand of 2006 and 2007. Total capacity is forecast to grow to 53 million tonnes by 2015.

Price war

“Demand for cement is expected to rise 20 per cent in 2010 but the problem is that everyone thinks they are going to get it,” says the analyst. “More new capacity will come into the market through 2010 and 2011, outpacing demand. The kingdom’s cement producers are heading for a price war.”

As a result, expansion projects have been scaled back. On 16 March, MEED reported that the 1.8 million-tonnes-a-year (t/y) Hofuf plant in the Eastern Province will be delayed until late 2010. Project backer the Al-Ahsa Development Company told MEED the $320m scheme will still go ahead, but not until market fundamentals improve. Firms in the Eastern Province tend to be more reliant on exports than those in Riyadh and Jeddah, because local demand is lower.

Construction of the factory is scheduled to take 30 months. Other schemes on hold include the 1.2 million t/y Jizan cement plant, the 1.8 million t/y Al-Bayan cement plant in Riyadh and the 2.75 million t/y Labuna Cement plant, a joint venture of the local Arabian Cement Company and Italy’s Italcementi. The good news for cement firms is that during the past month prices have started to rise again as demand increases. The effects of Riyadh’s record $129bn infrastructure spend are beginning to be felt by the construction industry. According to UK consultant Davis Langdon, the price of a 50-kilo bag of cement had fallen from $6.5 a bag in early 2009 to $3.2 a bag in February. But by March prices were at $3.9 a bag.

“We feel prices will continue to go up. There is big demand here, with major projects getting under way. Contractors are worried,” says Muhyiddin Itani, director of Davis Langdon’s Beirut office. Steel prices, too, are beginning to recover. Saudi Arabian steel producer Hadeed, a subsidiary of Sabic supplies over half the kingdom’s reinforcement steel bar (rebar) and has increased its prices. “Over the past four weeks, 8mm rebar has risen by SR100 a tonne. Demand is the key factor, but the rise is also in line with international steel prices,” says Itani.

Rebar recovers

The price of rebar has been falling since it spiked at $1,600 a tonne in 2008. By February 2010, the price of rebar had fallen to $600 a tonne, but by March it had recovered to as much as $653 a tonne.

To ensure that prices do not rise steeply again, the ministry this month reminded steel producers that they must not sell at prices greater than those set by Hadeed, and must continue to meet market demand. In a statement, Minister of Commerce & Industry Abdullah bin Ahmad Zainal Ali Reza said he would “issue penalties for violators of price of iron or [producers] abstaining from selling.”

Prices for other construction materials, such as structural steel, have remained flat. But, in line with increasing cement prices, the price
of aggregate has begun to creep up from $14
a tonne throughout 2008 and 2009 to $15.5 a tonne in February 2010. Analysts attribute this to rising local demand. Projects with high concrete requirements, such as refineries and railways, are underpinning this growth.

“Projects are really moving now and demand is picking up. Cost inflation will occur over the next year,” predicts Itani.

With more than $645m-worth of projects planned or under way in the kingdom, construction demand is set to fuel price inflation. In the cement sector the forthcoming new capacity should serve to prevent prices rising too much and a price war could be the result if new capacity outpaces supply.