Saudi cement sector: growing demand, eroding overcapacity

Saudi cement sector: growing demand, eroding overcapacity
Published: 26 February 2010

Analysts at HSBC expect local Saudi cement sales to rise 22 per cent in 2010, offsetting the new capacity which affected 2009 numbers and stock prices. Such growth would mean certain firms to reach full capacity quickly favouring companies with excess capacity such as Saudi Cement Company and Tabuk Cement. HSBC believes the pace of recent price erosion will now slow as the growth in demand eats into surplus capacity; more importantly, however, strong demand will mean several companies to reach full capacity quickly. However HSBC remans Neutral on the other stocks

Underinvestment in infrastructure and the need to accommodate rising population growth has encouraged the Saudi government to announce that it would spend USD400bn on infrastructure over the next five years from 2009. The 23% growth in cement sales volumes in 2009 bears witness to this, and a brief analysis of construction projects suggests that their value will increase by 30% in 2010e resulting in 22% growth in local cement demand.

Capacity increased from 29Mta in 2007 to 47.4Mta in 2009, while demand stood at 36.7Mt in 2009 (and 27Mt in 2007). HSBC preferred plays and Overweights are Saudi Cement Company (SCC) and Tabuk Cement (upgraded from Neutral), both of which are trading on a 2011e PE of around 10x. For SCC, its estimates may even be on the cautious side if the margin improvements shown in 2009 continue. For Tabuk, HSBC believes it will no longer suffer pricing pressure as it has accepted the conditions for the export ban being removed. The sector looks cheap compared to global peers on an EBITDA/tonne measure (more appropriate than EV/tonne) at 2010e of US$31 versus US$24.