The region’s cement producers have recorded uneven results so far in 2012, with prices rising in some markets and remaining stable in others. The demand for social housing schemes in Saudi Arabia and World Cup infrastructure in Qatar will increase demand for cement in those markets over the coming years, while the continued political uncertainty in Syria is likely to result in prices falling in Lebanon.

There has been a shortage of supply due to the problems in obtaining fuel allocations for new plants [in Saudi]

Farouk Miah, NCB Capital

Saudi Arabia, the Middle East’s biggest construction market, recorded some of the largest increases in cement prices over the six months from October to March, according to the latest survey of the region’s construction material costs from the Dubai office of the UK’s Davis Langdon. Over that period, the price of a 50kg bag of cement in the kingdom rose by 16 per cent to $4.27. The first increase in cement prices for three years was the result of a combination of rising demand and short-term supply issues.

Rising housing demand

Increased construction activity, driven by an urgent need for new housing and improved infrastructure, resulted in cement demand in Saudi Arabia increasing by 10.9 per cent year-on-year in 2011, according to the GCC Cement Quarterly report from Global Research, a wing of Kuwait’s Global Investment House. It was particularly strong in the fourth quarter, increasing by 15.8 per cent year-on-year.

When the projects start, [Qatar] may need to change the supply chain and import materials if the capacity [isn’t there]

Nick Smith, EC Harris Middle East

“The demand for cement has been strong in the last couple of quarters,” says Farouk Miah, head of equity research at Saudi investment firm NCB Capital. “The first and fourth quarters are usually stronger due to seasonal demand and the weather is better so there is more project activity.”

This rising demand contributed to the revenues of the nine cement companies listed on the Saudi Stock Exchange (Tadawul) rising by 21 per cent to SR9.6bn ($2.6bn) in 2011, according to NCB Capital. Its latest KSA Cement report found that the average price for a tonne of cement for the listed firms increased by about 7.5 per cent to SR245 in 2011, with the average cost growing by 3.5 per cent to SR112 over the same period.

The total sales volume for the nine listed cement companies increased by 13.7 per cent to 39.1 million tonnes in 2011, and the sales volume for the country’s four private producers rose by 1.7 per cent to 10.1 million tonnes, according to NCB Capital.

Another major factor behind the recent price rise is the lack of confirmation from state oil giant Saudi Aramco that it will provide fuel allocations for new cement lines. The local Yanbu Cement and Southern Province Cement companies have faced difficulties in reaching agreement with Aramco for fuel allocations and the oil major refused an application from Qassim Cement to open a cement line.

“The shortage of fuel for the new plants is the main reason for the prices rising,” says Miah. “The demand is strong, but there has been a shortage of supply due to the problems in obtaining fuel allocations for new plants. All of the fuel is subsidised for cement producers and if the fuel allocations are interrupted, it affects production.”

Construction projects in Saudi Arabia

Demand in the Saudi cement sector is expected to continue to grow over the next couple of years as the kingdom presses ahead with its vast construction programme.

In 2010, Riyadh approved plans to spend $385bn on infrastructure development over the next five years. The government’s commitments to public expenditure were strengthened in March last year when King Abdullah bin Abdul Aziz pledged to spend $67bn on building new housing for Saudi nationals.

NCB Capital expects increased government and private investment in construction projects to result in demand for cement rising by 10 per cent in 2012 and 8 per cent in 2013.

Although demand for cement in the kingdom is expected to continue to grow, government regulation of cement pricing should prevent costs inflating to the levels seen in Dubai’s construction boom. “The government price ceiling will ensure that prices don’t spiral out of control,” says Miah.

The Saudi government has also extended its cement export ban to keep the market balanced. A conditional ban was first introduced in 2008, which allowed firms to export cement at a maximum price of SR200 a tonne, as opposed to its market value of SR250 a tonne. But in February this year, the Trade Ministry introduced a blanket ban on exporting cement and clinker in anticipation of the expected rise in demand.

On top of this, in March Riyadh announced it was lifting the ban on cement imports to prevent potential supply shortages. NCB Capital says that easing export regulations is unlikely to have a major impact on prices in the kingdom, as clients will be reluctant to meet the additional transportation and insurance costs. However, Saudi Arabia’s acceptance of cement imports may benefit other GCC countries, such as the UAE and Oman, which are suffering an oversupply.

Falling profits for cement firms

In the latter part of 2011 and early 2012, the UAE also experienced a rise in cement prices. According to Davis Langdon, the price of a 50kg bag of cement increased by about 10 per cent from $3.50 to $3.90 between October 2011 and March. The price of aggregate grew by 16 per cent from $10.50 to $12.50 during this period, while the price of ready-mix concrete increased to $63 a cubic metre.

Contractors attribute the short-term rise to suppliers taking an opportunity to increase prices as the Dubai construction market witnessed a small pick-up in activity in the first quarter of 2012 and the Abu Dhabi Executive Council approved more than 20 stalled infrastructure projects in January.

Despite the short-term rise in prices, the longer-term outlook for the UAE’s cement sector is not as positive; the profits of cement firms have fallen steadily since the real estate market crashed in 2009. According to Global Research, the average cement price in the UAE fell by 5.3 per cent year-on-year from 2010 to 2011.

The future prospects for the UAE cement sector will be heavily dependent on the progress of major infrastructure schemes planned in Abu Dhabi. The Executive Council approval should ensure they go ahead, but with no time frame attached to the projects it is unlikely they will all start at the same time and have a significant impact on cement prices.

The UAE’s cement export market is well placed to benefit from Saudi Arabia’s recent decision to relax cement import laws, with its excess capacity easily transportable to the kingdom.

Oman should also benefit from Saudi Arabia’s decision to allow imports. According to Global Research, the dumping of low-price cement from UAE suppliers caused the price in Oman to drop by 19 per cent from RO30.60 ($79.40) a tonne in 2010 to RO24.70 in 2011.

Along with the reduction in UAE imports, cement demand and therefore prices in Oman are expected to rise into 2013 as the sultanate pushes ahead with several major construction and infrastructure schemes. As a result of protests in February last year, Muscat reaffirmed its commitment to the spending set out in its eighth five-year development plan for 2011-15. The proposed investment of $30bn represents one of the region’s highest ratios of spending to gross domestic product. The construction programme includes nine new hospitals and more than 100 schools.

Cement prices in Qatar remained stable for the six months to March, with the price of a 50kg bag of cement remaining at $4, according to Davis Langdon. The price of aggregate was also flat at $19.50 a tonne, while the price of ready-mix concrete fell marginally from $94 to $92 a cubic metre.

Cement prices are expected to start rising in 2013 as Qatar begins a raft of construction and infrastructure projects in preparation for hosting the World Cup in 2022. Analysts believe that, with more than $60bn of developments planned, Doha will need to import large quantities of cement unless it is able to ramp up domestic production.

“Qatar is an interesting market; it is in the procurement stage of selecting consultants [for its construction schemes],” says Nick Smith, head of cost and commercial for consultancy firm EC Harris Middle East. “It needs to get all of this sorted before the projects [move ahead]. When the projects start, they may need to change the supply chain and import materials if the capacity [isn’t there].”

Lebanon uncertainty

Lebanon recorded the biggest price rise among the countries surveyed by Davis Langdon, with the cost of a cubic metre of ready-mix rising by almost 5 per cent from $81.50 to $85. The price of cement remained flat at $5.20 for a 50kg bag, the most expensive in the region.

The short-term outlook for Lebanon’s cement sector is uncertain, with internal and external demand continuing to fall. The collapse of the country’s government in January 2011 and the political unrest in neighbouring Syria resulted in the number of construction permits dropping by 6.8 per cent in 2011, according to the Order of Engineers of Beirut and Tripoli. Domestic demand for cement in Lebanon is unlikely to grow in 2012, with the uncertainty in Syria continuing to have a negative impact on the country’s economy.

Lebanon’s cement export market has also been deeply affected by the political crisis. In addition to a reduction of demand for cement from Syria, Lebanese cement producers continue to have difficulties transporting cement through their neighbour to reach major export destinations such as Iraq.

In addition to fluctuations in supply and demand, cement prices may also be vulnerable to changes in the regional and global political and economic climate. The continued unrest in Syria, uncertainty over Iran’s nuclear intentions and continued volatility in the eurozone are just some of the factors that could affect cement prices over the next year.