UAE cement producers face unsettled future
With eye-catching newspaper headlines indicating that much of the UAE is now facing a boom to bust scenario, a stream of daily news highlighting the wholesale cancellation, or at least a halt to, various major building contracts and, not least, with Dubai’s major road network seemingly a bit less congested, even during rush hour periods, it’s apparent that the global credit crunch is now being felt in the Emirates, despite the region’s massive oil and gas wealth and its resultant spill-over into financial and banking, property and allied service industries. Not surprisingly, such developments are beginning to blow a cold breeze through much of the regional cement sector, which now sees an appreciable downturn in demand, higher production costs and fierce competition from imports as the new operational reality.
In total, the complete UAE region has over 11 integrated production facilities. A further eight dedicated local grinding operations using clinker, usually imported from countries such as China, India or Pakistan to grind and then produce cement. Furthermore, there are a further three or four large-scale trading operations which make quite a lucrative living importing either bulk or bagged cement in ships, again from Asia or the Indian-sub-continent for local sale and distribution.
In essence, the region is having to come to terms with just too much cement availability and with two new integrated plants coming into service this first quarter of 2009, namely the 3.1Mta Emirates Cement factory in Fujairah and now the new 2.4Mta Star Cement (clinker production only) plant in Ras Al Khaimah things can only get worse for local producers.
Ras Al Khaimah cement producers, the main production base for Dubai markets, represent a total of five factories, now with a combined capacity of 11.4Mt feel particularly hard-done by, despite sitting on some of the region’s best limestone reserves. They claim a rapidly rising cost base and at times shortages in gas fuel supplies, plus fierce competition from lower cost imports and the high transport costs involved in delivering cement to their main customers, ie construction companies centred around the hub of Dubai. Add to all this a price cap by the UAE government, with the Ministry of Economy dictating ceiling prices on local cement sales and the picture becomes even clearer – times are certainly changing and not for the better.
Cement imports are a particularly contentious issue. According to latest estimates they amounted to almost 700,000t in 2008. Recently freed from import taxes and with the main terminals located in ports such as Jebil Ali which is much closer to the major Dubai consumers, importers are enjoying a resurgence, at a time when their own import costs are falling fast as a result of lower overseas commodity prices and better still, a collapse in ocean freight costs. In effect to discharge cement today in the UAE from China is now about US$15 cheaper than it was 12 months ago. The five clinker import/grinders have also been given a similar boost by such falling international prices, although they too face rising local costs in the final processing operations.
With local demand now plummeting, possibly as much as 20 per cent this year, it’s clear that local competition for a slice of this diminishing cement cake is going to take its toll on cement prices. At present bulk cement prices are capped at AED360 per tonne (US$98) while bagged prices are similarly pegged at AED320 per tonne equivalent (US$87.10) or if you prefer AED16 (US$4.35) per 50kg bag. But the new talking point is not the current price ceiling but quite the reverse. Will prices drop in 2009 in the face of slowing consumer demand and a continuing fight for market share and if so by how much.
Moreover, cement import costs falling. Current deliveries from India or Pakistan are reportedly being landed in the UAE at about the US$65 per tonne. Add to this a low local transport cost to customers in Dubai of about US$1.5 per tonne and traders are thus able to deliver good quality bulk cement from Pakistan or India at a cost price of well under US$70 or an equivalent AED257 per tonne. With today’s bulk cement market prices in Dubai at around the US$98 ceiling level, importers clearly have some decent room for manoeuvre in their 2009 price negotiations with customers.
International market conditions have also given the dedicated cement grinders a boost in recent months. One year ago, Chinese clinker was available in the export market at US$48 per tonne. Today its down at US$32-34. Add in a current much-reduced shipping cost of US$16 and you are able to land a 60,000t shipment of clinker in Jebel Ali for about US$48-50 per tonne. The same calculation using Indian or Pakistani clinker would at today’s prices also see clinker landed at about US$48. Factor in a grinding, storage and distribution cost of US$15 and such cement is on the Dubai market at a cost (not price!) of between US$63-65 per tonne. By comparison, some of the higher cost producers in the Fujairah region claim to have a cement production cost approaching US$60 per tonne. Then add to this an extra road transport cost of about US$4 per tonne to service the main Dubai markets and the market cost is thus again close to the mid-US$60s.
Should a price war kick-in later this year its clear that all three types of cement delivery into the local Dubai market have quite a margin with which to negotiate with customers, although the higher fixed costs associated with full integrated factories and the effects of rapidly rising fuel and power prices on such production facilities could give rise to added concerns in some quarters.
Local producers are however hopeful that the term price-war remains journalistic hype, preferring to believe that their local cement association, the CPA, will find some common ground between producers to keep prices stable. And while dangers of price under-cutting by importers keen to maintain or improve upon their own market positions in a declining market is clearly a possibility, commonsense should prevail. We shall certainly find out more at the upcoming Cemtech conference to be held at the Grand Hyatt hotel in Dubai on the 14-17th February. For more details please visit the Cemtech Middle East conference section on this website.
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