Saudi Arabia’s over-supply challenge

Saudi Arabia’s over-supply challenge
Published: 08 January 2011

With cement capacity increases in Saudi Arabia keeping cement prices down, domestic producers have made fresh calls for the government to lift the ban on cement exports. However, with other cement markets in the GCC region also facing overcapacity, the impact of the eventual removal of the ban may only be marginal.

The Saudi market continues to witness volume additions that are outstripping demand, leading to an oversupply situation. Jehad Al Rasheed, general manager of Yamama Saudi Cement – the kingdom’s third-largest producer by market value, recently commented that: “Cement capacity is growing every year, which drives many cement companies to seek government approval to lift the existing export ban without conditions.

Saudi Arabia banned cement exports in June 2008 at the peak of the construction boom in the Gulf region, as the government sought to restrain local prices and maintain adequate supply, even though the export market offered a profitable alternative for some producers. In October 2009, the government lifted the ban subject to certain stipulations, but an unconditional removal of the ban is yet to be announced.

While domestic demand remains buoyant, competition between Saudi manufacturers is intensifying. Consumption is expected to increase by 15.7% in 2010 to 44.5Mt and by 8.5% in 2011 to 48.2Mt. However, capacity expansions are likely to stay ahead of demand in the near-term. According to a recent report by Global Investment House (GIH), the market saw an extra 7.8Mt come on-stream last year, taking total capacity to 52Mta and this figure may reach 58Mta by 2013. The supply-demand gap has reduced from a peak of 10.9Mt in 2008 to 7.6Mt in 2009, but GIH expects a gap of 5-6Mt is likely to persist until 2013.

Domestically, new companies are responsible for most of the growth in dispatches and established producers are expected to continue losing market share, although at a lesser pace. Yamama’s market share fell to 12% in the 3Q10 from 14% in 2009 as unlisted companies such as Riyadh Cement, Najran Cement and Medina Cement expanded capacity. Eight Saudi publicly-traded companies, except Al Jouf Cement which started trading in August, reported a 5.3% drop in third-quarter profits to US$205m from the year-ago period. Yamama expects to post a profit in 2011 although the margins will be hurt by higher supplies.

The supply-demand gap has resulted in prices averaging SAR229.50/t in 2010 from peaks of SAR253.80/t in 2008. Further falls are expected, albeit at a slower rate, to SAR224.80/t in 2011 and SAR219.60/t by 2013.

On a more positive note, high inventory levels – which reached 11.49Mt in 2009 – declined in the first nine months of 2010 to 9.38Mt. Strong domestic demand and increased competition in the local market have resulted in companies looking to clear their stocks. It is therefore believed that inventory levels have peaked and are likely to reduce going forward.