Gulf cement sector banks on recovery

07 November 2008

Gulf cement producers’ commitment to boosting capacity is sparking fears of oversupply as construction megaprojects across the region face delays due to the fallout of the credit crunch.

Despite signs that the global credit crunch is hitting construction projects in the Arabian peninsula, cement producers remain committed to their plans to dramatically expand capacity.

Cement capacity is predicted to double, reaching more than 100 million tonnes a year (t/y) by 2010, as a wave of plants come on stream in Saudi Arabia and the UAE. Given
the global economic downturn and the fact that a number of projects are being delayed or reconsidered, this could lead to supply outstripping demand.

But, industry executives attending MEED’s Cement & Concrete 2008 conference in Dubai on 29 and 30 October insisted the GCC market would not suffer from oversupply, provided the economic downturn in the region was short-lived. “If the recession lasts for more than a year the market will be in trouble by 2010-2011, but if it lasts six months, it will not be a problem,” said Khaled Hegazy, director of Hegazy Trading & Contracting Company of Egypt.

Market imbalance

“There no indication of a surplus in the GCC. Demand is still there,” said Mohamed Ahmed Bin Abul Aziz Al-Shehhi, undersecretary at the UAE Economy Ministry. “With the number of projects announced in Saudi Arabia and in the UAE, I do not believe there will be a surplus.”

In Saudi Arabia, where production capacity is expected to reach 59 million t/y by 2011, compared with 42 million t/y today, there are 158 large projects planned or under way, which are expected to absorb the majority of the fresh capacity.

Among the largest projects planned is the programme to build six economic cities, in an effort to diversify the economy away from its traditional reliance on oil.

“Demand from the megaprojects is huge,” says Fadi Mujahed, marketing director at Saudi Ready Mix, part of the local Alturki Group. “Each economic city will need 2-3 million tonnes of cement over the next 10-20 years.”

However, with capacity coming on stream in anticipation of future orders, supply in Saudi Arabia is already exceeding demand, and some industry sources are reporting downward pressure on prices.

The market imbalance is being aggravated by the kingdom’s restriction on cement exports, however, this is expected to be lifted by the end of the year.

Despite the surplus, the Saudi Arabian authorities have issued licences for six new cement plants since the end of Ramadan in late September, in a clear indication that the kingdom’s cement consumption is expected to continue to accelerate. The optimism is surprising given the doubts that are being raised about the sustainability of the Middle East construction boom in the wake of falling oil prices and the growing difficulties in securing project finance.

However, industry executives predict the region will suffer less from the financial crisis than other parts of the world.

“The GCC remains the most economically lively region in the world and the effects of the financial crisis will be less here than in the other regions,” says Mustafa Gorgunel, general manager of Ras al-Khaimah-based Union Cement Norcem.

Al-Shehhi says that the financial crisis could ultimately benefit the region. “We believe a lot of investment will come to this region as it is a safe haven for investment.”

But even if the Gulf does escape the worst of the financial downturn, there could be other unwelcome side-effects. In particular, there are fears that the global slowdown could trigger a surge in cement imports to the Middle East as demand in other key markets, such as Europe and the US, starts to dry up.

Rising imports

“There have been extensive capacity additions in Turkey aimed at serving the Russian market, but over the past month the Russian market has turned down and the producers are now targeting Africa, but they also want to come to the Middle East to see what is happening here,” said Hegazy.

With freight rates dropping by as much as 80 per cent over the past 2-3 months, Imran Akram, head of research for construction materials and property at investment bank Collins Stewart, warns that the cost of bringing cement into the region has come down significantly and international producers will redirect volumes to the region.

However, the region can take some actions to address this. Al-Shehhi says that, if the market looks like it is in danger of becoming flooded, the UAE will re-impose customs duties that were lifted earlier in the year to alleviate the then cement shortage.

In March, the UAE removed customs duties on imports of cement and reinforced steel in an effort to keep construction costs under control. In the months leading up to that decision, prices had been reaching record levels and were adding to the problem of inflation for the construction industry.

“There is some surplus internationally so more cement is coming to this part of the world, but we do not expect price pressure as demand is so huge,” he says. “But if there is too much supply we would stop the customs waiver in order to restrict imports and protect the industry.”

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