The result has been a healthy cement market. With billions of riyals of investment still to come in real estate, industry and the hydrocarbons sector, the kingdom's cement producers are tapping into a rich vein. The eight existing producers in Saudi Arabia are only just meeting local demand. Firms produced 24.7 million tonnes in 2006, almost a 1 million-tonne increase on the previous year, according to annual statistics from Yamama Cement Company. Local deliveries stood at about 22.9 million tonnes. Unlike other GCC markets, Saudi Arabia has avoided the cyclical shortfalls that traditionally dog the sector by planning ahead. The irony being that recent plans to boost production further could leave the sector facing overproduction in years to come. Existing producers are coming out of the situation well. Prices have stabilised at about SR 265 ($70.70) a tonne or SR 60 ($16) a bag. The eight producers posted net profits in 2005 of SR 3,120 million ($832 million), nearly SR 600 million ($160 million) more than in 2004. But with the economy expanding rapidly, analysts believe that by 2010 demand could be in the 34 million-40 million-tonne-a-year (t/y) range. 'Based on figures for project investments identified and their project mix, we project compound annual growth of 12 per cent in cement demand in volume terms during 2005-08,' says a recent Global Investment House report on the cement sector. Meeting future demand is top of the producers' agenda. Nearly all of them are pressing ahead with capacity expansion plans worth a total of about $10,000 million, which will double local capacity to about 42 million t/y. About 34 per cent of this new capacity will come on stream by late 2007, while 46 per cent will be commissioned in 2008.

Overcapacity

This should more than meet the anticipated growth in demand, but moves to bring new producers to the sector to guarantee supply could leave Saudi Arabia facing overcapacity concerns. Over the past year, the government has granted 27 new licences to greenfield cement producers. The new players could effectively see as much as 40 million t/y of new capacity with an investment of more than $18,000 million. It is unclear whether all the projects will go ahead, but so far about eight are moving ahead with combined capacity of nearly 12 million t/y. This would mean that unless there is a rapid rise in local demand over the next five-10 years, the kingdom would have a surplus of at least 10 million t/y. The sector's profitability will be tested. In all likelihood the price of a tonne of cement will halve.

There is a precedent. Between 1996-2001, the kingdom was forced to cut back the cement industry after local producers were unable to shift an excess of 5 million t/y. With operating costs accounting for the majority of a plant's expenditure, producers can ill afford to stockpile reserves. And exporting may not be an option. The kingdom's GCC neighbours are rapidly expanding their capacities, with production by 2010 expected to exceed 100 million t/y. Iran alone is forecasted to have surpluses of 24 million t/y, while India, just two hours away, will also add competition to the kingdom's potential exporters. Market consolidation is likely to be the most viable option. Those with relatively small capacities most producers average less than 3 million t/y will in the long term be less efficient and have higher operating costs. Those that have the highest production will be able to absorb any downturn in the market and in turn become more attractive should the market consolidate. The next three years are likely to remain bright for the country's cement producers. Beyond that much will depend on whether the kingdom's project portfolio continues to expand at current rates.

Factfile: Clinker

Clinker is a granular product produced by grinding together raw materials such as limestone, shale, clay and sand in predetermined proportions, and heating the ground materials at very high temperatures (1,500°C) in rotating kilns. It is ground to become Portland cement or interground with other active ingredients to produce alternative cements such as blastfurnace slag. If kept dry, clinker can be kept for several months without loss of quality. Easily handled, it is easier and cheaper to trade than the finished cement product.