Saudi Arabia shifts focus as spending curtailed

With the publication of the 2016 budget, Saudi Arabia has put an end to the high rates of spending prevalent before a subdued oil price environment took hold. However, the oil crash has prompted diversification and this means further investment in other sectors can be expected through the government’s Vision 2030 and the National Transformation Programme.

Total cement sales in Saudi Arabia fell 6.8 per cent YoY to 47Mt in the first 10 months of 2016, according to a report from Al Rajhi Capital Research. Clinker output also witnessed a decline, falling 1.7 per cent YoY while cement inventories are rising 16.4 per cent YoY to record levels. As sales volumes fell, price realisation also took a hit, resulting in sector revenues experiencing a 19 per cent YoY decrease.

Tabuk Cement and Qassim Cement were the only producers to report positive YoY growth in sales volumes, registering an increase of seven and three per cent, respectively. At the other end of the spectrum, Northern Cement and Najran Cement saw the most substantial decreases, at 49 and 45 per cent, respectively.

Mounting cement and clinker stocks in Saudi Arabia prompted the government to lift the long-standing export ban in July. Nevertheless, a major obstacle remains as companies exporting cement and clinker will have to pay back a sum to the government in return for the energy subsidy that domestic cement producers receive. Until a formula is found to calculate this subsidy figure, exports are unlikely to commence. Potential export destinations would include Qatar, UAE, Jordan, Egypt, Iraq, east Africa as well as Yemen if peace is established.

The Saudi cement sector is expected to continue to benefit from the country’s growing need for housing, transportation and other social infrastructure. However, as spending is curtailed the emphasis has shifted from mid-sized projects with less social and economic importance to those that are key in the economic and social development of the country. The shift in focus indicates Saudi cement producers can expect a lower level of domestic demand for the foreseeable future. Meanwhile, given the current rise in inventories and a domestic supply glut, Saudi producers appear to have no other option than to cut production and see utilisation rates fall.

The latest developments in the Saudi cement markets are also reviewed in ICR’s November issue.