The top 10 listed cement companies in the Middle East saw a 27% average increase in first-half profits due to soaring cement prices and rising demand from the region’s $1.45tn building boom, according to data compiled by Zawya.com.
“High demand for cement amid the regional construction boom has contributed to increased revenue for the region’s cement producers,” Roaa Alian, equity analyst at National Bank of Abu Dhabi’s asset management group, told Zawya Dow Jones.
Real estate projects planned, or already under development, in the oil-rich Gulf Co-operation Council (GCC), region, which includes Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman, are worth approximately $1.45tn, according to London-based projects magazine Middle East Economic Digest (Meed).
The oil fueled construction boom has led to unprecedented consumption in the building industry, which has stretched local cement production plants to breaking point, leading to shortages and soaring prices.
In the UAE, the Gulf’s largest construction market, 821.3bn dirhams ($223.8bn) worth of real estate projects are under construction, according to Meed.
Cement demand in the emirates has risen from 7mn tonnes in 2000 to 12mn tonnes in 2006, while the value of a one ton cement per bag almost doubled between 2003 and 2005, according figures from Emirates Industrial Bank.
“The rise in income for the top cement producers was mainly price driven rather than volume driven as most producers in the region are already running at full capacity and are facing short-term capacity constraints,” Khaled Hamza, head of research at Noor Capital told Zawya Dow Jones.
In response to soaring prices, the UAE’s ministry of economy fixed the price of cement at 295 dirham a tonne in June.
“This first-half profit is before the rent cap was introduced so we expected it to be higher. Producers stopped importing cement into the region at the end of 2006 so this has helped profits,” said Alian.
Gains across the sector in the first half were buoyed by Kuwait Cement Co’s net income which more than doubled to $140.3mn during the second half of 2007 from $65.3mn a year earlier.
The cement producer, which is partially owned by the government, has benefited from Kuwait’s booming real estate sector, which was worth approximately $211bn in 2006.
Five of Saudi’s eight cement producers: Southern Province Cement Co; Yamama Saudi Cement; Saudi Cement Co; Yanbu Cement Co; and Eastern Province Cement Co posted some of the strongest first-half results as the value of the kingdom’s real estate projects doubled, according to the Zawya.com data.
Analysts expect cement producers’ strong profits to continue into the second half but are concerned about increased pressure over the next three years as the cement industry undergoes radical change, with existing producers adding capacity and new companies coming into the market.
“High oil prices, moderate inflation rates, abundant liquidity, political stability and repatriation of funds have all been economic variables carrying the real estate market to unprecedented levels over the last few years,” said Faisal Hasan, head of research at Kuwait-based Global Investment House.
“Looking forward, the construction material especially cement industry is expected to benefit from $8bn worth of private investment and $3bn worth of government investment over the next five years,” Hasan added.
Total GCC cement production is expected to exceed 100mn tonne a year by 2010.
In the UAE new capacities are due to come on stream in the fourth quarter of this year, but the impact of the new plants won’t be felt until the end of 2008.
“Profits of UAE cement producers will sink as new capacities come on line and capacity overrides consumption. It won’t be a meltdown, but more of a gradual decline,” Noor Capital’s Hamza said.
“Exaggerated prices will fall with overproduction and producers will find it hard to export to countries in the region which are selling cement at a lower price,” he added.