Gulf cable sector enters slow period

21 August 2009

Gulf manufacturers face falling demand for the next two years before sales begin to pick up

The Gulf cables sector is passing through a period of flux, with new production capacity due to come on line in the next few years and weaker demand because of the global economic slowdown.

According to forecasts by the London-based Commodities Research Unit (CRU), the Gulf cables market will contract slightly in 2009 and 2010 before returning to growth. There was demand for 472,000 tonnes of power cables in the Gulf in 2008, but CRU predicts this figure will dip to 445,000 tonnes in 2009 and 428,000 in 2010, before bouncing back to 461,000 tonnes in 2011.

Since 2000, cable consumption in the Gulf has risen on the back of strong demand from the power and construction sectors. Demand for internet cables rose from 10,800 tonnes in 2000 to 31,000 tonnes in 2008.

Energy infrastructure cables, particularly high-voltage land and submarine cables, used for the interconnections between electricity networks and to take power to offshore production facilities, remain in high demand in the Middle East. They account for almost 96 per cent of cables produced in the region, with production doubling between 2004 and 2008.

Production increase

Strong demand and a total production value of more than $5bn in 2008 has prompted a rush of new entrants to the Gulf cables market.

Four more production facilities came on stream in 2008: Nuhas Oman, the UAE’s Power Plus Cables, Saudi Arabia’s Red Sea Cables and Bahrain Cable. CRU expects a further eight to 10 to come on line in the medium term, alongside aggressive expansions by existing manufacturers. CRU says total production in the Gulf will rise to 1 million tonnes of conductor cable a year over the next few years, almost double the 510,000 tonnes produced in 2007.

GCC cable production capacity 
YearCapacity (million tonnes of conductor)Number of local manufacturers
End 20070.5110
End 20080.7214
End 2010f122-24
f=forecast; Source: CRU

At the end of 2007, there were 10 local power cable manufacturers in the Gulf, dominated by Saudi firms, which represented just under 50 per cent of the market. Riyadh Cable alone accounted for a quarter of the Gulf’s total production last year.

The majority of new production projects were planned in late 2007 and early 2008, before the effects of the global economic downturn were felt in the region. According to Robert Daniels, London-based principal consultant at CRU, it is unlikely many will be delayed.

“Some of the projects that are not very advanced may be paused, but a lot of the projects are well established and will be coming on stream soon,” says Daniels. “It is not quick to set up a cable factory. The whole process takes about two years from planning, through equipment procurement to production. Going into next year there will certainly be a lot of new capacity coming on stream.”

Falling demand

Producers may be more willing to press ahead at a time of reduced demand to ensure they are ready for any resumption of growth. In April, Dubai Electricity & Water Authority (Dewa) and Abu Dhabi Water & Electricity Authority (Adwea) signed an agreement with Dubai Cable Company (Ducab) to manufacture high-voltage cables though a joint venture called Ducab-HV.

The new entity will own a 22,000-square-metre factory, which will be built next to Ducab’s existing facility at Jebel Ali. Ducab-HV will complete the factory in late 2010.

Ducab-HV will supply the UAE with 30,000 tonnes a year (t/y) of high-voltage cables, ranging from 66kV to 400kV. Ducab already produces more than 90,000 t/y of low, medium and high-voltage cables.

In June 2008, France’s Nexans signed a similar agreement in Qatar to create the first cable manufacturing facility in the country, Qatar International Cables Company (QICC), producing low and medium-voltage cables. According to QICC, the joint venture will generate revenues of about $150m by 2010.

Egypt’s El-Sewedy Cables has a joint venture with Yemen’s Hassan & Massoud Company and is establishing a $42m low-voltage cable production plant in Yemen, announced in May this year, with a maximum output of 12,000 t/y of copper and aluminium.

This growth in GCC cable production capacity will outstrip demand in the next few years, putting pressure on prices and therefore profit margins. In this environment, pricing will be the most important element in a producer’s business strategy and prices will inevitably fall as the sector’s newest entrants clamour for market share.

“Other than at the high-voltage end, there is not a huge amount of difference in quality between products,” says Daniels. “Quality is a given, and obviously there is a service element to agreeing a contract, but typically the main factor is the price.”

Global metallic cable consumption (kg per person)
GCC Average27.6
Saudi Arabia12.9
South Korea7.6
Source: CRU

GCC producers may have some relief, however, as cable imports slow on the back of weaker demand and increased competition. The volume of European exports to the GCC fell by more than 30 per cent in the first two months of 2009, according to CRU. Exports from Japan, South Korea and China were down by 26 per cent in the first quarter.

There may be opportunities for Gulf cable producers to look beyond the region and export to Europe, as they seek to escape their overcrowded domestic markets.

But growth rates in Europe will hardly excite most of the GCC’s cable sales managers. Per capita metal cable consumption of 7.7kg a year in Germany, for example, is barely 15 per cent of Qatar’s 52kg a year, and less than half the GCC average of 27.5kg a year.

“The [GCC] region will remain one of the best performing in the world [in terms of cable production], but there will be challenges, particularly for an industry that had become so used to strong growth,” says Daniels.

Although it only produces one fifth of the region’s cables, the UAE has been a major market for regional producers because of the strength of its construction market since the turn of the millennium. Its 36 per cent share of regional consumption in 2008 matched that of Saudi Arabia, the GCC’s largest cable producer.

But the dramatic slowdown in the real estate and construction sectors in Dubai has dealt a massive blow to the industry.

The total value of construction contracts awarded in Dubai in the first five months of this year is down by 82 per cent on the first six months of 2008. Dubai’s developers had awarded $4bn worth of contracts up to June, compared with $23bn worth in the first half of 2008, according to regional projects tracker MEED Projects-CMI.

The GCC cannot avoid being affected by the global economic recession. But the bursting of the Dubai real estate bubble should not be overstated. While the UAE construction market has suffered, cancelled projects are less than 0.5 per cent of the $4bn total, meaning there is still considerable activity in the UAE projects market. “There is lots of activity in the oil and gas sector, and long-timescale projects” says Daniels, referring to the GCC projects market as a whole.

Long-term prospects

The Saudi market offers strong prospects for Gulf cable companies. The Saudi government has the biggest public spending plans in the region, announcing an expansionary fiscal policy in late December 2008, with planned expenditure of SR475bn ($126.7bn) in 2009, up 15 per cent on last year.

Total production value by company
Riyadh Cable24
Oman Cable15
Saudi Cable13
Jeddah Cable10
Source: CRU 

Spending will not just come from the public sector. “Saudi Aramco plans to spend $60bn over the next five years to boost oil production, Kuwait Petroleum has similar plans, and [then there is] Qatar Petroleum on the gas side,” says Daniels. “These projects have a long timescale so are continuing, and there is a lot of investment activity going on.”

Compared with the global market, the medium to long-term outlook for the cable industry in the Gulf appears secure, even if -profitability takes a short-term hit from the global financial downturn.

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