As cement is a core product for construction and its usage is directly proportional to construction activity, demand for cement in Iraq has been on the rise and continues to grow as the country’s reconstruction efforts gain pace.

Iraq’s projects market is one of the fastest growing in the Gulf, with a total of $303bn-worth of schemes planned or under way. Oil projects make up the majority of these, with a pipeline of 59 unawarded projects in the country worth an estimated $121bn. This is followed by the construction sector, with 79 unawarded projects worth in excess of $48bn.

The transport and gas sectors rank third and fourth, with 14 and 23 unawarded projects in their respective pipelines worth in excess of $32bn and $26bn.

In light of its healthy portfolio of projects, growth in demand for cement in Iraq has risen from 6 per cent in 2008 to just over 20 per cent in 2011. Cement usage that year was estimated to be about 20 million tonnes. Demand is strongest in the areas in and around Baghdad and central Iraq, as well as the southern region of Basra and the northern Kurdish region.

Reconstructing infrastructure in Iraq

Cement demand in central Iraq is being driven by the need to rebuild infrastructure following decades of war and underinvestment. There is also massive industrial development in the area. In southern Iraq, demand mainly stems from a slew of projects in the oil sector and associated developments, which will facilitate the expansion of crude production in the area.

Several large oil pipeline projects are expected to increase demand for sulphate-resistant cement, which is currently produced by only a few local players. Ordinary Portland cement comprises the bulk of local production.

Iraq’s cement market comprises a handful of local producers, with an identified 22 production facilities currently in the country. The major local producers are Iraqi Cement State Company, Northern Cement State Company and Southern Cement State Company. Most of these producers are very old, with some established more than 55 years ago. The age of their local facilities coupled with an inability to maintain them effectively has resulted in low utilisation rates, with the market average currently estimated to be below 50 per cent. The low operating rates are exacerbated by severe electricity shortages throughout the country, particularly in the central and southern regions.

Many plants are forced to use off-grid power supplies, namely generators, to maintain operations. In August, the Al-Douh cement factory, based in Samawa, signed a contract with the local distributor of the US’ Cummins to supply it with 15MW of self-generation capacity.

However, a handful of new, state-of-the-art facilities have come online in recent years, which operate at full capacity and are shaping and instilling an international standard of excellence. Most noteworthy of these are those rehabilitated and operated under the joint venture of France’s Lafarge and Merchant Bridge, a London-based private equity group, such as the 1.8-million-tonne-a-year (t/y) Karbala cement plant, which underwent a $200m facelift. Lafarge is the largest foreign investor in Iraq, with three cement plants producing a total of 8 million t/y.

Iraq’s reliance on cement imports

The low operating rates among local cement producers has created a major supply gap in Iraq, leaving it heavily reliant on imports from neighbouring countries to satisfy rising demand. These imports have tended to originate from Iran, Turkey, Jordan and Saudi Arabia, with the UAE, Lebanon, Pakistan and India contributing to smaller volumes. However, Saudi Arabia is no longer a key supplier to Iraq, following a ruling introduced on 1 January 2012 that prohibits local producers from exporting cement. The directive is intended to keep the kingdom’s construction market well-supplied with cement and to prevent prices from rising.

Cement imports to Iraq from the Middle East and North Africa region have grown from just under 3.6 million tonnes in 2005 to an estimated 11.7 million tonnes in 2011. This represents a compound annual growth rate of just under 22 per cent for the period.

Today, imports account for more than 50 per cent of Iraq’s cement supply; however, this is expected to change in the future as the authorities work to reduce the country’s reliance on imports and encourage investment in local manufacturing. New import regulations are also expected, which, once finalised, will impose tariffs on imported goods, including cement.

Cement imports to Iraq from the Middle East and North Africa have grown to an estimated 11.7 million tonnes in 2011

Despite the clear need for investment in new cement production capacity, Iraq remains a difficult market to penetrate for prospective investors. Ongoing instability across the central and southern regions, along with price pressure and high-quality imports offered at competitive prices all serve to discourage investors from investing in the Iraq cement market.

The ramping up of local production coupled with the inflow of competitively priced high-quality cement imports has been placing downward pressure on cement prices, which have decreased by an average of 13 per cent from 2009 until today. This has served to intensify competition in the country as players seek to minimise operational costs in an attempt to maintain or improve profitability.

The northern Kurdish region has emerged as an attractive area for investment in Iraq due to its well-developed infrastructure and more importantly, its stability. It is here that many cement producers in recent years have sought to establish their operations, but the region has now become saturated with cement producers. Penetrating other regions in Iraq, though an attractive prospect, still proves difficult in light of poor infrastructure, insufficient electricity supply and the lack of security.

Iraq’s need for development across various sectors means demand for cement will continue to grow

Opportunities within the local cement market do exist, however, which is evidenced by the strong and growing demand driven by the country’s expanding pipeline of projects across all sectors. Iraq is enjoying robust economic growth as a result of high oil revenues and its population of 32 million is estimated to be expanding at 3 per cent a year. The need for continued investment in its infrastructure, construction and industrial sectors means cement demand will continue to grow strongly in the years ahead. One of the critical challenges for the government is to address the country’s housing shortage. It is estimated that Iraq needs to build 3 million new homes to accommodate its growing population.

Domestic investment

Iraq is not without its shortcomings and challenges, but investment in local production remains attractive in light of the government’s efforts to boost local cement production and reduce the country’s large reliance on imports.

In particular, the anticipated increase in demand for sulphate-resistant cement coupled with the removal of Saudi Arabia as a major exporter to Iraq presents an opportunity for local producers to expand production and international producers to enter the market.