SAUDI ARABIA: Supply beats demand for local cement

17 October 1997
SPECIAL REPORT CONSTRUCTION

The Saudi Arabian cement industry is at a turning point. A series of major expansion projects initiated in the construction boom years of the early 1990s is coming on stream. In just over a year, the industry will be able to produce an extra 19,000 tonnes a day (t/d), driving supply far in excess of domestic demand.

Turbulence in supply and demand is nothing new to the industry. Although local cement production began in the 1970s, prompted by rapid development, producers were badly hit by a sharp fall-off in construction activity in the 1980s. The industry later recovered, helped in part by a 20 per cent duty on cement imports. By the end of 1995, the Saudi Industrial Development Fund had made loans for cement projects totalling SR 4,725 million ($1,260 million), the fund's fourth largest allocation after chemicals, engineering and consumer products.

However, with combined profits down 10 per cent in the first half of 1997, the seven, soon to be eight, local producers are considering whether they can afford to keep paying the generous dividends to shareholders, or if they should return even more by decapitalising because there is little short- term potential for investment. Another option taken by some is to diversify from the core business.

Surplus threat

There are still differences of opinion among analysts as to the extent of any imbalance and its threat to local producers. Some estimate local supply and demand to be in balance this year, at around 17 million tonnes a year (t/y). More pessimistic assessments put current consumption as low as 13.5 million t/y, implying an already considerable surplus.

However, analysts agree that the gap between local supply and demand is likely to widen in 1998. The 3,500-t/d expansion of the Saudi Cement Company, completed in December last year, is fully operational, making the company the leading national producer at 4.2 million t/y; Arabian Cement Company also inaugurated a new 4,000-t/d plant last December; Southern Province Cement Company has, since April, been gradually bringing larger capacity on stream in Bisha, which will contribute an extra 4,000 t/d; Yanbu Cement Company is set to raise output by a similar amount later this year; and Tabuk Cement Company, the newest Saudi cement venture, is expected to start producing 1.1 million t/y of clinker by April 1998.

By the middle of next year, with all the new projects on stream, total production capacity will be around 21 million t/y. However, analysts do not anticipate a commensurate increase in local demand for cement, despite activity in the private sector and a gradual pick-up in the government sector. Further expansions are unlikely until around 2005, industry sources say.

The gap between supply and demand has already resulted in an increase in stocks, which had been allowed to run down in the last five years when demand was high. The majority of companies are likely to replenish stocks to about 200,000 tonnes, industry sources say. For the moment, prices remain reasonable for producers but are expected to come under pressure next year as competition becomes fiercer for domestic sales. 'We are already seeing slightly lower prices in Jeddah and Riyadh,' one source said.

The most significant response to a surplus is likely to be a drive to increase exports. The markets targeted will vary from company to company, industry sources say. Producers in the Eastern Province are looking mainly to the GCC, the Indian subcontinent and south-east Asia. Those located nearer the west coast are more likely to try to penetrate Egyptian, Sudanese and other east African markets. Southern Province Cement is well-placed to enter the Yemeni market with plants in Abha and Bisha.

Efforts to increase exports have already met with some success. About 2 million tonnes of clinker and cement have been exported to GCC markets this year, one source says. And most local producers are optimistic about the outlook for exports. 'Prices are reasonable at the moment and there are no problems in marketing to the Gulf, Sri Lanka and beyond,' says another. 'The cost of production is relatively inexpensive so we are competitive. We have advanced new plants so productivity is good, energy prices are low, we have good raw materials from local sources and economies of scale due to high volumes of production.'

Local producers also say the high quality of the product gives Saudi cement an edge over some competitors. There have been instances of Saudi firms gaining $2-3 a tonne more than their rivals, one producer says.

Some question whether increasing exports is the best approach to a domestic over-supply situation. 'The industry is highly-advanced technically but behind in marketing,' says one. 'Companies are concentrating on daily and annual sales but not on long-term strategic issues. Exports are not very good as a solution to what's going on in the local market. Prices can be low, competition is greater and companies must invest in expensive equipment for exporting without knowing for how long they will use it.'

In the longer term, local demand for cement could be significantly raised if structural problems in the construction sector were reduced, one analyst says. The construction industry is too labour-intensive, he says. 'At the moment, a two-storey house in western Saudi Arabia costs about $350,000, which is expensive. If the cost of construction was less, demand for cement could go up by a third.'

Another possibility raised in some quarters is that the industry should adapt by introducing more sophisticated products. 'Companies have not yet been released from systematic engineering [constraints] that impede marketing strategy...They should sell ready-made products rather than just bulk products,' says one source. If pre-cast concrete became available, the construction industry could be streamlined, he says. 'Pre-cast depends on cement and it brings standardisation, faster building of houses and reduces other construction operations, such as painting.'

However, moves in this direction, which would probably require a considerable effort from all the cement companies, do not appear to be imminent. Most producers appear cautiously optimistic that they will prove successful exporters until such time as domestic demand rebounds. Rapid population growth suggests that, given time, it must.

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