The Saudi market for cement has remained one of the strongest globally, helped by government support for large infrastructure projects in the country and a relatively strong economy. Domestic cement sales volumes increased by 23 % in 2009 and are estimated to expand a further 19% in 2010 to 44 million t. Some observations from Saudi Cement Sector - Cornerstone of the Kingdom’s Development, a new report just published by NCB Capital. The report indicates that capacity in the cement sector will continue to exceed demand. This is exacerbated by the ongoing conditional export ban, which is unlikely to be lifted in the short term.
Saudi cement companies enjoy the strongest profitability globally, benefiting from low energy and feedstock costs. Average margins for the publicly listed incumbents were 54% in 2009, versus an average of 33% for peers in the region and 32% globally.
NCB Capital expects the ongoing excess supply situation to lead to lower pricing and ultimately to margin pressure for the incumbent cement companies. It forecasts average gross margins for these companies to decline to 48% in 2015 from 54% in 2009. In addition, pressure is expected from new companies to continue. The incumbents lost 20% market share through 2008 and 2009 as new companies entered the scene and this is expected to continue.
Sales set to increase
On the back of continued strength in the country’s construction industry, cement sales are expected to increase by 19% this year, 9% in 2011 and a CAGR of 8% to 2015. Although this would appear to augur well for the cement industry, NCB believe the absolute demand in volumes will continue to remain below the capacity levels. Capacity is set to continue to grow and reach 60 million t by 2015 compared to a demand of 58 million t to SR217/t. Excess supply in the market will lead to average cement prices falling by 1% this year and 8% by 2015.
New production capacity
In addition to the existing overcapacity, it is expected that several new companies will start production over the next two years, thus exacerbating the situation. Inventory levels are currently at record highs with the sector holding enough clinker to cover about three months worth of cement sales. With the export ban expected to remain until at least the end of the year, the demand-supply mismatch will only worsen in the short term.
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