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Falling cement prices could be the silver lining for Middle East contractors

World Cement,

While some countries are more exposed to the downturn than others, the region as a whole has proved vulnerable to falling oil prices as well as the worldwide evaporation of credit. The result has been depressed business investment in the region that has caused many construction projects to be shelved or delayed. The construction markets of the United Arab Emirates, where speculative demand was very high, has been the hardest hit with an estimated 25 - 50% of planned construction projects now on hold. Crashing residential and commercial property prices in the UAE, especially in the high-end luxury market segment, have also spilled into other Middle Eastern real estate markets, like Qatar and Kuwait.

Construction demand and cement price down
As construction demand has declined in the Middle East, so too have prices for materials such as cement – that may be the only silver lining to this year's gloomy outlook for the region. As capacity constraints and supply shortages – factors which have helped drive up prices in the past few years – have faded away in the midst of weakening domestic and global demand, prices have dropped through the first five months of this year.

Sales increase
Recent jumps in cement sales indicate that (some) contractors are enjoying the price relief. According to a report by investment firm NCB Capital, cement sales in Saudi Arabia climbed to 3.45 million t in July 2009, representing a 33% jump from the 2.66 million t of cement sold during the same month a year earlier. NCB Capital further reports that both cement production and exports increased by similar scales over the same time period. Though certainly squeezed by the global credit crunch, contractors who can afford to continue to build are benefitting from some of the lowest costs that they've seen in years. This is especially true for Saudi Arabia, where construction activity is the strongest in the region with diversified projects including industrial cities as well as energy related projects.

Cement prices will return to previous levels
Of course, the sharp fall in cement prices in the Middle East has not come without consequence. The other side of the story is that Saudi cement companies have suffered dramatic deteriorations in profitability through the first half of 2009. As such, it is expected that the price relief to contractors will be short lived as economic activity is projected to strengthen from these depressed conditions next year. With recovery, commodity prices – including cement – are expected to bounce back to previous levels, and it may be that this silver lining for the Middle East contractors fades away almost as quickly as it appeared.

Author: Laura Hanlon, IHS Global Insight.

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