Structure

With annual capacity of 6.5 million tonnes of cement products, Riyadh-based Yamama Cement Company is the third-largest cement manufacturer in Saudi Arabia, and the largest in the central region of the country. It produces 15 per cent of national cement product output – 4.5 million tonnes in 2008.

In September 2008, Yamama announced plans to invest in new venture Hail Cement Company. It is also undergoing a corporate overhaul this year that aims to identify and promote talented staff internally, and streamline the company’s management strategy.

One of the oldest producers of construction materials in Saudi Arabia, Yamama has been producing cement for more than 40 years. Its factory and management offices are based in the southern suburbs of the Saudi capital, and it employs 1,000 staff. Today, the business, launched by Prince Mohammad bin Saud al-Kabir in 1961 with SR25m ($6.7m), is a joint-stock company with capital of SR1.35bn.

Its major shareholders include the founder’s heirs, Sultan and Faysal bin Mohammed bin Saud al-Kabir, members of the Al-Rajhi family, the General Organisation for Social Insurance, and the Public Pensions Agency.

Company snapshot

Date established 1961
Main business sectors Producing and selling cement
Main business regions Saudi Arabia
Business value SR1.19bn ($317.8m)
Chief executive officer Jehad al-Rasheed

Operations

Yamama began commercial cement production in 1966, starting out with a daily line capacity of 300 tonnes of clinker – the unfinished cement product that is ground to become Portland cement, the most widely used finished product. In 1972, the company added a second line to produce 800 tonnes of clinker a day. Six years later, it added two further production lines, each bringing capacity of 1,500 tonnes a day, taking total capacity to 1.23 million tonnes of clinker a day.

In 1985, the factory went through a radical upgrade, introducing new technology in the form of a 3,000-tonne-a-day preheating short kiln to replace older production systems.

In 2005, Yamama announced an SR1bn programme to introduce German technology that would expand clinker capacity further. Today, the capacity of the plant’s seven production lines is 6 million tonnes of clinker and 6.3 million tonnes of cement. There are currently no plans to invest in new capacity, but the company is considering debottlenecking to free up capacity by a further 15-20 per cent.

Output comprises sulphate-resistant cement and Portland cement. However, production of masonry cement is scheduled to begin in the first quarter of 2009, and Yamama is expected to produce 150,000-200,000 tonnes by the end of the year. Yamama has capacity to spare. In 2008, it produced 4.5 million tonnes of material, down from 4.7 million tonnes in 2007.

Ambitions

Yamama is also undertaking a management overhaul, with a focus on improving planning, market focus, customer service, corporate identity and social responsibility.

Externally, the company is urging the Saudi government to rethink the ban on exports of cement introduced in July 2008.

Several Saudi cement companies had turned to exports to boost their earnings after domestic profits were reined in by a cap on cement prices in 2007. While Yamama has historically focused on the central Saudi markets, the company considers exports to be the only way to use its surplus capacity at a time of rising domestic overcapacity, which is already estimated at 7 million tonnes of clinker a year.
That said, Yamama’s core market remains Riyadh and the Saudi heartland, a region that has been earmarked for heavy investment in infrastructure, education centres, hotels and leisure projects, and transport developments.

Yamama’s decision to invest in the Hail Cement Company was taken with a view to securing domestic market share, while gaining access to lucrative external markets. The company, based in the north of the country, is ideally placed to export cement and clinker to the Iraqi market. Launched with a capital of SR1.2bn, Hail Cement hopes to offer half its shares through an initial public offering later this year.

MEED assessment

These are challenging times for Yamama, and for all Saudi cement producers. While government-backed projects have secure access to finance, the collapse of the inter-national debt markets in late 2008 has affected private sector construction in the kingdom, with projects facing delays and cancellations.

This coincides with Saudi government moves to open to fresh competition a market that is currently based on eight large, established producers. In 2005, the government awarded quarrying rights to six new companies to start producing cement.

Yamama’s own projections suggest that while demand will reach 40 million tonnes a year in 2010, supply will be close to 55 million tonnes, levelling out at that level towards 2015, when annual national demand is expected to reach 50 million tonnes.

Analysts expect this excess capacity will keep pushing down cement prices. This expected overcapacity has called into question proposals to award additional new licences complete with new quarrying rights.

The construction boom fuelled a dramatic increase in cement prices between 2002 and 2007, reaching an all-time high that prompted the government to cap prices. This drove Saudi cement companies to turn to exports to boost their earnings. This, in turn, led the government to ban cement exports.

In 2007, Saudi companies exported 3.5 million tonnes of cement, accounting for 12 per cent of total sales. However, with the economic outlook now very different, one proposal is for the ban to be lifted, in exchange for a price cap on exports.

Despite these negative factors, Saudi Arabia has $400bn worth of confirmed projects under way. Demand for cement is set to continue, with annual population growth of 2.5 per cent, and Yamama will be a key supplier for the planned regeneration of the capital.

Q&A Jehad Al-Rasheed, CEO, Yamama Cement Company

How did Yamama perform in 2008?

Last year, Yamama Cement reduced output. We produced 4.5 million tonnes of cement and clinker, down from 4.7 million tonnes in 2007.

One of the main reasons for the decline in output was the impact of the government’s decision in 2008 to ban the overseas export of cement. This has had a major impact on the Saudi cement-producing sector, as exports represented significant business for Saudi cement producers. And it came as a blow to Yamama Cement, because we exported 10 per cent of our output, about 300,000 tonnes of material, in the first half of 2008, when our main overseas markets included the Gulf countries and surrounding areas, in particular Iraq, Yemen and Sudan.

What are your expectations for the coming year?

We hope to increase output this year. New projects that are scheduled to break ground in 2009 ensure new demand in the market, and from the second quarter of the year in particular.

We also expect the export ban to be lifted very soon. That will help us move our production levels closer to capacity. But we are also looking for new investment opportunities. Our finances are healthy and we believe that the prospects for Saudi Arabia’s construction industry remain solid.

What impact has the export ban had on the Saudi cement industry?

With new companies coming into the Saudi market, there is clearly a real danger of oversupply. All Saudi factories have high inventory costs and are already producing above market need – there is surplus production of about 7 million tonnes of clinker, according to our estimates.

These pressures are growing and this means, in the view of the Saudi cement industry, that the government needs to lift the export ban as a matter of urgency.

What signs have you seen of a slowdown in domestic construction?

Saudi Arabia’s project sector is split between the government and private sector ventures. So far, we have seen no slowdown in government projects for economic reasons, although some projects have experienced problems in terms of planning or in meeting their schedules.

However, we have seen some slowing down in private sector projects because sources of project finance have dried up in recent months, and some of Saudi Arabia’s so-called mega-projects will almost certainly be delayed.

How has this affected cement prices?

Prices of all construction materials are undoubtedly coming down, but Saudi Arabia already produces the most competitive cement on earth, with a cash cost of about $22 a tonne. And unless the export ban is lifted soon, there is a very real risk that cement prices will fall even further.

What gives you cause for optimism?

Our location and focus on the domestic market have protected us from the full impact of the export ban, unlike cement producers from the Eastern Province, whose export volumes have accounted for 30-35 per cent of total production. Companies in this region have been badly affected by the ban.

At home, the Saudi government is continuing to invest heavily in infrastructure – every-thing from expanding the roads to building schools, universities and hospitals. A lot of this investment is focused on the central Saudi market, which is the market we produce cement for. Four universities are being built in Riyadh alone.

What are the plans for Hail Cement, and what makes it an attractive investment?

Hail Cement Company is a new company, whose capital is being put together in 2009. The factory will be based 110 kilometres outside the northern city of Hail. Yamama Cement has decided to invest SR60m ($16m) in a 5 per cent stake in the company.
Its output will be 1.5 million tonnes of clinker and cement a year, although we do not expect production to start before 2012.