Saudi cement capacity set to touch 50Mt by 2009

Saudi cement capacity set to touch 50Mt by 2009
Published: 08 July 2008

Saudi cement industry has benefited from the increasing demand, with the industry’s average growth reaching 8.4 per cent in 2007.

According to the Jeddah-based BMG Financial Advisors, the net profit margin of cement companies averaged 58 per cent in 2007.

In a report on the industry, BMG however said that there may be a surplus in the short run by end 2009 because of the increase in capacity.

Recently, the ministry had announced plans to offer seven new cement licences in Saudi Arabia through a direct bidding process. Under the new system, the ministry would ensure that these licences would be limited to only serious bidders a regulatory step to bring about an increase in cement supply in a more orderly fashion, said the report. "Although Saudi Arabia is currently in a launch phase in terms of the major investments planned, there is concern about the Kingdom’s capability of supporting the capacity increases and, in turn, preventing the cement industry from becoming saturated in terms of profitability," said BMG Financial Advisors in the report.

Earlier, nearly 100 investors had applied for a cement licence, while only 10 obtained permits and 10 were issued quarry licences from the Ministry of Petroleum and Mineral Resources, according to news reports

According to government officials, the ministry decided at that time to stop further issuances of quarry licences in order to prevent a substantial oversupply from taking place.

The report said an oversupply scenario is not imminent on a large scale, and forthcoming capacities will be put to use in the years to come. "We are wary of the loss of market share by an influx of capacity that is expected by end 2008/2009 and its effects on producers located in lesser buoyant regions," the report said.

"The massive, liquidity-fuelled infrastructure investment taking place in Saudi Arabia is attracting investment in capacity by existing and prospective cement producers. Combined cement capacity is expected to increase from 31 million tonnes to 50 million tonnes by end-2009. This additional capacity is expected to be met with an expected three-year compounded annual growth rate of 23 per cent in local consumption," the report added.

Saudi Arabia has taken major initiatives to become an regional economic powerhouse by spending billions of dollars in major infrastructural development projects to boost investor confidence and private sector investment.

The mega projects encompass transport initiatives, including new intercity roads, development of ports and railroads expected to cost approximately $6 billion (Dh22bn). Of particular importance are the six economic cities, which is expected to contribute $150bn to the GDP growth by 2020 and accommodate 4.8 million of the total population.

The aggregate cost of infrastructural and real estate projects in the next five years exceeds $300bn.

Taking into consideration that the budget for cement in such projects usually ranges at around six per cent to 10 per cent of a project’s total value, the opportunities for the Kingdom’s cement producers are immense.

The growth rate of cement industry varies across the country’s different regions, with the highest growth expected in the western region.