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After the Boom

World Cement,

For professionals in cement trading and markets, analysis and expectations of the market performance are now taking a new form. Estimates and future prospects used to be based on stable and clear figures of expected market consumptions, built on reliable economic and financial expectations. Today, it is much more difficult. Changes are happening so quickly, markets are aggressively shaken, and curves are falling down much faster than predicted. There is no professional way to predict what is going to happen in the coming months. It is wise to use the terms ‘guessing’ and ‘personal opinion’ to evaluate the most probable scenarios that the markets may follow. Different studies are likely to produce different expectation figures.

After the boom

The Gulf Cooperation Council (GCC) countries are going through the ‘after the boom’ scenario. Through 2003 to mid-2008, the region witnessed over-performance in terms of the earnings and spending programmes, either from governments or from private investors. The region’s economy was hitting above the normal expectations, and the construction market was a key factor in this. It was recognised worldwide as the heaviest construction activities spot on the planet.

The two main factors that pushed the boom to end were falling oil prices and tightening credit conditions

Falling oil prices

In 2008, when the oil prices hit US$ 140 - 150/barrel, the studies were based on a solid price of US$ 100/barrel. The decline in oil price that began in July 2008 initially had little impact on the Gulf’s economic outlook; the precipitous drop in prices over the summer from US$150/barrel to US$ 100/barrel had no impact on the region’s economic fortunes. Concern increased, but remained muted, when the price dropped to US$ 70/barrel. Some of the previous exuberance moderated, but worries over stability and growth were offset by recognition that spending plans across the region remained readily affordable. The slip from US$ 70/barrel to US$ 50/barrel raised more significant concerns, and anxiety steadily replaced the comfort that had prevailed. Brent’s slip below US$ 50/barrel represented, in the company’s view, the region’s tipping point price. So the price of US$ 45 will be used as the base of this study, as this price would most likely be the expected average. Although the price of oil has regained some of its strength recently, it is not certain to remain there.

Tightening credit conditions

Tightening credit conditions are obvious in the banks’ evaluations and limitations of available credits and selectivity criteria for the loans to be granted. This is a typical situation for the private investments, which have already received damages from the stock markets and deteriorations of assets. This, combined with the panic from the lack of trust in the financial system, caused more withdrawals from the investment market.

Gulf oil revenues

All Gulf states rely on oil revenues to fund their budgets, with energy earnings accounting for, on average, 70% of central government receipts. Vulnerability to falling prices varies significantly according to the levels of oil production they command, and the size of their spending commitments.

The oil revenues in the GCC were about US$ 410 billion in 2007, jumping up to reach about US$ 590 billion in 2008. This is expected to fall in 2009 to about US$ 240 billion, which is less than half.

GCC public spending

Fiscal spending, in particular, has risen as revenues have soared, driving the minimum oil price required to hold the budget in balance upward. The rapid growth in domestic demand that the rise in oil earnings has stimulated has also sharply increased the region’s demand for imported goods and services, boosting, in turn, the minimum oil price required to maintain a balanced current account.

Public spending has continuously risen in recent years, from US$ 210 billion in 2006, to US$ 240 billion in 2007, and up to US$ 280 billion in 2008, an increase rate of about 16%.

This year, public spending is witnessing two major opposing forces. Falling revenues are pushing it down, while the reserves that have been built over previous years have secured finance for keeping the spending up, rescuing the countries’ economies from falling into deeper recession.

Khaled Hegazy of Hegazy Trading provides a focus on the GCC, country-by-country, including the maineconomic indicators and the expected reflection on the cement consumptions inthe full version of this article, which can be found in the November issue ofWorld Cement. 

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