Cement demand is to continue strongly, led by government expenditure. The recent government intervention of reducing the price cap and providing fuel to new expansions has aided supply and reduced prices. However, over the long run, it is believed that supply constraints remain the key concern. These assessments are recorded in a new report issued by NCB Capital.
The report indicates that the government has planned to spend more than SR780 billion on infrastructure and transportation projects during the year. Railways, airports and major infrastructure projects are being constructed across the country with demand for cement high from these projects. The government spending will continue to be the main driver for the sector in the medium term.
The government has carried out many steps to control prices and support supply. "On March 18, a Royal Decree instructed Saudi Aramco to provide fuel to all cement expansions temporarily for six months. At the same time, a committee was formed to analyze the current cement situation and forecast the future demand. The committee has to report its suggestions within six months. Moreover, the government has reduced the price ceiling of cement from SR250 per ton to SR240 per ton following the recent significant increase in prices. In addition, the Ministry of Trade announced that it is actively monitoring cement prices and violators will be fined. In fact, the ministry fined Najran Cement for not complying with the new price limit," the report said.
The reports refers to the strong demand in the Western Region that has increased significantly in 2012 due to the size and urgency of the projects in this region. The new Jeddah airport, Haramain Railway and other major infrastructure projects such as Rabigh Port are examples of the mega projects taking place in the region. As a result, Central and Eastern Region cement companies have increased their sales in the Western Region directly or indirectly by selling cement or clinker. Additionally, this also means cement companies with a focus on the Western Region are best exposed to the demand momentum of the sector.
The cement price ceiling has declined from SR250 per ton to SR240 following a Royal Decree which aims to ease cement supply shortages and to control cement prices. On March 21, most of the cement companies announced their compliance with the new pricing.
However, as a result of the lower price limit, cement companies have stopped providing incentives and discounts to its major clients. The average price of cement in Q1, 2012 reached SR254 compared with an average of SR248 in Q4, 2011. Companies operating in the Western Region on average exceeded the price cap of SR250 in Q1, 2012 due to the strong demand on other cement types which are sold at higher prices.
Those companies will be the least affected by the new price cap compared with companies operating in other areas of the Kingdom. The average expected price for Western cement companies in Q2, 2012 is SR246 compared to an average of SR243 for the rest of the country.
Moreover, companies with limited capacities complained that the decrease in prices will affect them more as they operate at a high utilization rate and have no expansion plans. Cement prices to remain close to the SR240 cap in the medium term due to the strong demand which is linked to the government expenditure. The average price per ton is expected to be at SR245 in 2012 and to decline to SR242 in 2013.
Due to the strong demand, stock levels have declined sharply for the sector from 8.2 million tons in December 2011 to 5.2 million tons in May 2012. The clinker stock as a percentage of monthly sales have declined from 165 percent to 93 percent during the same period i.e. on average, a cement company has less than one month of cement sales inventory in stock. In absolute terms, Saudi Cement has the highest inventory of 925,000 tons followed by Southern Cement with 793,000 tons. The average stock level for the sector excluding Saudi and Southern Cement is 314,000 tons only (80 percent of monthly sales).
On the other hand, cement companies are operating at high utilization rates (+95 percent) and the room to increase production is limited to three companies only; Saudi Cement, Southern Cement and Yanbu Cement given their spare capacity off the back of recent capacity expansions. It is believed that high utilization rates and the declining stock levels are the sector's main constraints and may limit future growth.
Following the Royal Decree which reduced the cement price cap and provided fuel temporarily to new expansions, cement supply has increased by 4.4 million tons per year. The extra capacity came from Yanbu, Southern and Najran Cement which had new lines ready to operate.
These companies are located in the Southern and Western Regions of the country and thus have the ability to sell primarily in Makkah and Jeddah where the demand is strong and the shortage is higher. The extra supply will solve cement shortage problem in the short term only and some shortage will start again toward the end of 2012. This is mainly due to the mega infrastructure projects that will start construction soon and thus cement demand will remain elevated after using up the existing spare capacity.
Supply shortage and the strong demand expected in the medium term have encouraged cement companies to expand. In fact, several cement companies have announced plans to build new lines. Najran Cement which went public in May 2012 will use a portion of the IPO proceeds to build a new 1.98-million-ton line. The line is expected to be operational in Q2, 2013.
Jouf Cement also started to build a 1.65-million-ton line which is expected to be operational in 2014. Finally, Southern Cement announced in May that it has assigned Sinoma Ltd. to build a new 1.65-million-ton line which is expected to operate in two years.
It is believed that several other companies are planning to build new lines; however, the risk of fuel shortage remains the main obstacle to all of these expansions. "If these firms cannot gain assurances from Aramco for ongoing supply of subsidized fuel, then commercial operations will be extremely difficult," a market players said.
The Ministry of Trade announced on Feb. 14 an export ban of clinker and cement. Total exports in 2011 came to 2 million tons representing around 4 percent of total sales. Exports to Bahrain (which is excluded from the ban) represented 35.8 percent of total exports. Jouf Cement and Northern Cement will be the only companies affected by the decision. While the export ban will have a limited effect on cement supply.
The Ministry of Trade announced on March 5 that cement imports will be allowed. However, importing cement has two main issues: Transportation costs and purchase price.
Cement shipment (by sea or land) is associated with high costs and requires particular logistic methods which are not available. Secondly, imported cement will be significantly more expensive than local cement given that fuel (the major cost component of cement production) is subsidized in the Kingdom.