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GCC cement sector outlook – Hettish Karmani, Global Investment House

Video recorded at Cemtech MEA 2015, 8-11 February 2015, Grand Hyatt Dubai, UAE

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Thank you, Keith. Good morning ladies and gentlemen. The topic I'll be covering today will be on GCC, mainly in light of oil, and the budget for the recent countries have announced. I'll be giving a much brighter outlook on the smaller countries, and I'm living the UAE part mainly to be covered by our next speaker.

I'll start with the recent economic outlook the time issue has shaped up the global economy. Okay, thank you. Global growth in 2015 and 2016, projected by MF 3.5% and 3.7%. As per IMF global growth will receive a boost from low oil prices which reflects to an important extent to the increase in supply from across the globe, and real terms growth and GCC is expected to be positive because of the increased supply, but in nominal terms it could be negative, and it could range between a negative of 3% to 15% from across the border DCC.

Qatar should be slightly less affected because of long term gas contracts, their contracts from companies to their input in five or 10 years. So, we expected a little lesser back on Qatar. Like you see the chart the Russia is the one which is expected to the most impacted because of the oil prices, they say that their break even on oil prices is above $100 so this is the country which will be most impacted. The only country IMF recently updated its outlook was U.S only because their shell production is catering to their demands, and that's where the main impact is coming in.

In Saudi Arabia, you see the little decline in the growth focus mainly because of oil prices. Now, the main reason for the oil prices decline this is what the oil prices have been in the last 10, or five years. They've been on an average there has been around $100 per barrel in last four or five years.

But, recently they have seen a bigger decline. What happened in the last four or five years is that, the oil prices remain at $100 per barrel this increase the countries to increase the supply. They increase in investment in oil, and the oil supply increase gradually, which is the reason why we see that the oil production globally rose from 90 million barrels to 93 million barrels.

Another reason for the decline into oil presence have been in Libya and Iraq. Many assume that Libya and Iraq will not be able to catch up after the war very gradually, but they picked a very good pace, and they increased the production very gradually, and they are not a very sustained level they're producing. Other reason is the main shale oil. Shale oil has been doing very well in the last five years. Their capacity has grown from two million barrels to six million barrels as of now. So, this is one of the main concern facing the GCD as of today. What we expect in terms of oil that very will be in the next five years like you the current table, it tells you where does the oil come from, and what is the cost of production of those sources? And if you see that 20 million barrels of oil comes from Middle East, this is from the land sources. The cost of production ranges between $15-40 per barrel, so in average around $29 per barrel is the cost of 20 million barrels. Now, if you go to 20 million barrels globally from offshore shelf areas which are a little costly in terms of production.

So, the average production $43 per barrel. Then 10 million barrels comes globally from extra heavy oil and oil from deep water sources. The cost of production is $51 billion, $51 million per barrel. Then 11 million comes from onshore sources of Russia, 12million from Inland productions globally five million barrels from ultra d forters[sp?]. So, on an average the sum product if you take, the total cost is $47 per barrel, and on a simple average of 53, so on a supply and demand basis the oil can not go $50 per barrel.

Now, what has happened at these levels is that many of the rigs develops their many companies and countries at the same time they have a stop production from those areas which are costly to produce which are the extra heavy oil areas, offshelf areas. So, they have to stop production from those, they abandon those areas.

We recently heard in a certain from the Shell CEO, that they have abandoned many of the places which are costing them over $70 per barrel. At these current levels approximately 2/3 of Shell Oil producers whose cost ranges from $25 per barrel to $120 per barrel. On an average their cost is around 60 if you take as weighted average of all their production levels.

At these prices many of the Shell Oil producers are out of business as well. Russia and Iran which are earlier not joining O-pack in the last meeting, they were thinking that they would talk to Russia and Iran, and go in for production cut. But, they did not entertain the request at the last time. So, what we believe is that, these are the reasons forwards we believe that, while forecast in the next 2014. 2015 could be around $65 per barrel 2016 around 75 and 2017 around $80 per barrel, but we don't expect the oil to go above $100 per barrel. Because that these levels, all the other sources of production such as Shell, they've become active and they come into the play.

So, we do not expect oil to go above $100 in the next five years. These are the recent announced budgets of GCC countries. Every country has estimated a different oil price as per their understandings. Now, oil production in Kuwait currently it's 3.2 million barrels. Now, they expect the oil production to go down to 2.7 million per barrel in 2015.

They are expecting an oil prices of 90 from drop 93 in 2014 the actual prices. But they ahve budgeted the new budget at $45 per barrels. The government revenue is expected to decline from 32 billion KD to 12 billion KD in 2015. But, at the same time they are expecting a lesser decline and spending. Now, Kuwait has never spend that much amount every year they spend roughly around 60-70% of total budgeted amount. And out of the total 23 billion they spent, let's say in 2014 around 10-11 goes into government salaries, so the total amount they expand under oral infrastructure and construction for Lexus is very less compared to what we've seen in other GCC countries.

They're expecting a deficit of 7 billion KD which they haven't seen in the last five, six but we're yet to assume that once they will see the oil prices increasing, they might be not experiencing a deficit as of what we believe. Their cost of production is around 15-20 billion, $15-20 per barrel, and they will break even if they spend around 20 billion KD, the break even a price of oil is $64-66. So, we don't expect oil, we don't expect Kuwait end up in deficit, but this is what the budget is at right now.

Now, Saudi Arabia, it's a very interesting country, they have budgeted the oil prices at 56. Now, Kuwait has budgeted at 45, and Saudi Arabia at 56. They expect the revenue to decline big time from 855 to 715. But, their expenditure they're expecting to increase, and they have actually done very well in last couple of months also. They have, we have been talking to the big contractors, and so they have said that they have rolled out the tender amount of this context, or what so much heard that they expect that they have actually rolled out 10$ to 15$ billion in the first couple of months of this year.

So, we expect Saudi Arabia to do well in terms of expanding, and then they gave out the good statement that we'll be expanding more than the last year. They expect a deficit of funds 45 billion drills. Coming to Oman, another interesting country, their budgeted oil price is 80. They have been at 80, 85 in the last five years. So, we see a very different budgeted oil prices for each country.

They are spending money is spending more than three times more than UEA. They're spending at around 14 billion of money dirhams in 2015. They expect 11.6 billion of revenue and they expect a deficit of 2.5 billion of money dirhams. The oil revenue is roughly 70% of the total revenue around $7.7 billion money dirhams. Dubai is the only country which is not expecting a deficit, they are surprisingly expecting a surplus, they are expecting revenue and spending around 45 billion dirhams, that is marginal surplus.

So, we have seen a very different levels of budgeted oil prices from different countries of GCC, which gives a very different indicators as to where oil prices will be as per the country's level. Despite these problems, they are one of the global surplus providers in the economy throughout the world. Saudi Arabia, Kuwait, U.A.E and Qatar are top 10 surplus provider in the globally. As compared U.K, U.S, Canada and Australia are the top 10 deficit countries, that the largest creditor economy as well, so Arabian, Kuwait they provide credit to globally everywhere.

In terms of project markets, where the current project market stands, around 2.5 billion worth of product have been planned for the next five to eight years period in GCC. So, the Arabia stand up the market leader with $940 billion, followed by UEA at 688, and Qatar at 255. On an average $30 billion of projects were rolled out, the contracts were rolled out, each quarter in the last year.

For 2.5 trillion of total projects and 80% of them being active, and around 35% of them being in the infrastructure segment. It is supposed to result in a demand of around 102 million tons per annum during 2014 to 2022. The other government development plan was there recently announced, coal development plan has been announced for the year 2014 to 2018 estimated size of KD 37 billion, around 25 billion in oil tech investments, around 1100 projects, 70,000 new homes. They focus greatly on warding new homes to the residents.

Qatar world cup, we've been talking to the Qatar national cement company, and the have become very optimistic about what's happening in Qatar. They have seen new customers coming in, they have seen demand increasing, and at the same time they're increasing the capacity also. So, they have seen great activity in Qatar happening, and we are very positive on Qatar as well at the same time.

Oman, recently announced the last development plan versus announcement in 2011, which will run to 2015. They'll be spending 30 billion in that plant creation of 40-55,000 jobs. Dubai world expo I believe everybody knows about it, what's happening at this level. And Saudi hasn't announced in the process of announcing the 10th development plan, so that this is the last update as per the plan last time.

So, at currently GCC cement sector capacity is at 124 millions tons, it grows from 82 million tons in 2008. GCC Cement capacity is 3% of the world capacity, and over 30% of the minor region. Per capita cement consumption is highest in the world. Saudi Arabia leads with a capacity of 63 million tons followed by 41 million tons of UAE, and six around roughly six Oman, Qatar and Kuwait.

Now supply, if you see that supply still above the demand at grinding level. The demand which we are expecting in 2015 is at around 95 million tons compared to 88 million tons in 2014. Saudi Arabia has a capacity of 16, has 16 plants with the capacity of 63 million tons. 15 plants with clinker around 54 million tons capacity of clinker. So, in 2015, we are expecting a demand of 59 million tons in Saudi. So, at clinker level they will be at a deficit of five million tons but at cement level they will be in positive they have a surplus of cement. In U.A.E, we are expecting demand gap demand gap of 26 millions tons at cement level and 11 at clinker level. Kuwait, we are expecting negative on clinker, and that almost breaking even at the grinding level. Oman negative again at clinker level, and almost breaking even the grinding level. Bahrain, is the main importer of cement and clinker, both we are expecting a deficit in both the cement and clinker, and Bahrain. So, in total there's an additional capacity of 13 million tons in GCC with a slightly almost breaking out level of clinker.

Now, moving on to the country profiles. Bahrain, country with two cement producers, one cement plant and one cement grinding mill, various cement trading companies are present to cover for shortfall. Absence of raw materials they bought their raw materials from Saudi Arabia, UAE, India and other countries, Bahrain demands is dependent on imports mainly from Saudi Arabia to meet the demand for cement. New cement plant by outsider cement capacity with a capacity of 0.8 million tons has been announced, but the timeline of the completion has not been announced as of yet. Two cement producers Falcon cement company and Ultra type Bahrain. Falcon cement factory were two us on by campon[sp?] started production in 2009, at industrial area forpa[sp?], and 2013, the plant increases capacity to 1.2 million tons. Star cement operates at clinker grinding in Bahrain, and has the capacity to produce 0.5 billion tons of cement.

Ultra tech cement middle east of India and sumtam[sp?]. In Bahrain, as per the number it was given by USCS and 2010 and 2011 was 0.7 million tons when it rose to 2.8 million tons 2012 and 2013.It is expected to touch 121.2 million tons in 2014 and 2015. On an average in the past four years, Bahrain has imported around 1.2 million tons of cement, which is expected to beat depth marginally in the absence of big ticket projects which they haven't announced any in the last couple of years. Country has been promised around 10 billion dollars of aid from UAE, South Arabian and Kuwait.

They've always been very supportive to Bahrain, and this is where the major activity happens that they get the aid from these countries, then they take off many of their projects. So, in terms of actual amount which they have received, they haven't announced any specific numbers but what we believe is that the amount has been very low. They haven't received the promised rate as faith. This is what is keeping the demand of cement very low in Bahrain.

Moving on to Kuwait, the three cement players, only one was has the clinker level, clinker production capacity. Clinker is mainly imported from India, Pakistan and Saudi Arabia whereas cement imported from India, Pakistan UAE and Saudi Arabia. Country lacks natural resources, lesser land granted for industrial expansions, but two new cement line are expected to come online.

One came online from the Kuwait cement plant, other one from Lafarge, Kuwait. Kuwait to invest over USD 75 billion on mega major projects in 2016 and a total of 130 billion KD in 2014 to 2018. Well, this is what they have budgeted and promised, but we see a very lesser application effect in actual terms. The cement produce Kuwait cement with capacity of a 5 million tons, they are recently increased capacity. The clinker is at around 400 million tons. As equal as another plant which has a very small capacity. There's a new Lafarge cement has come into play, the plant is running now as well, they import clinker and they grind it and sell it off.

There are various trading companies such as Hilal cement, Kuwait Portland cement and Manar holding. Cement protection in Kuwait in 2010 and 2011 was about 2 to 2.5 million tons which is expected to touch 4 million tons in 2014, because of the recently increased capacity of Kuwait cement. Demand fell in 2010 and 2011 because government as I said earlier that they have been spending very less in terms of that actual they only spend on the oil project, the intersection and construction spending has always been very less.

On average in the past five years since 2009 and 2014, clinker and cement imports ordered above 2 million tons. Cement imports are expected to drop while clinker import are continued because a new plant has come up. So, Kuwait cement can import clinker and grind it off to sell it. We have seen great improvements in the financial performance, the gross margins have improved in 2014, because of the new plant which has come up by the Kuwait Cement.

Their net margin has improved as well, their debt has gone down because the plant has come online, and they have paid off roughly most of their debts. And the return ratio improving at the same time as well. So, in terms of outlook cement process continued and continue to rise in Kuwait till 2008 as the regional price of high level because of the booming construction market.

Official lagged prices are at around KD 21 per ton, but with a better demand outlook compared to last years. There are no official prices that are at around 22, 23. With Kuwaiti parliament in place for more than a year compared to several elections because we see, in six months periods we saw two three elections but the current parliament has been in face for more than roughly one and a half years, so we see a greater implementation of the projects.

They have approved a new plan to 2014 to 2018, as I said earlier, it's a 30 billion KD plan. More than USD 15 billion and context could be awarded in next year alone, 50% more than in 2013. Opportunities can be available at low cost producer in UAE, Oman and Saudi Arabia to tap on the opportunities in Kuwait. Break even oil prices for Kuwait is very low, it's around 60 to 65. Hence, even if oil price remain at this level it won't affect them much, and they will be ending up in surplus.

This is what we project as compared to the government with the expected deficit. Qatar, country with the highest per capita cement consumption in GCC, the four cement players, two intergeted and two with grinding mills. Shale imported from Saudi Arabia but also from India. Demand fell into 2011, 2012, as everybody expected that because World Cup would give a boost to the demand but it hasn't happened till yet, and that expecting that they are recently seen this into ending of the half period of 2014, and now that they have seen many new customers coming in.

Demand expected to pick in 2017 and 2018, and to on average of 8 million tons during 2014 to 2021 period. Currently in 2014, demand stands at 6 million tons. Opportunities for neighbors once the World Cup related activities pick face which have recently actually happening, so we can see there's an opportunity for recent affairs. That three cement, four cement producers, Qatar National Cement, one of the biggest producers it has at 4.5 million tons of cement currently it is increasing to around 6.2, which will come online in 2016. The gropers[sp?] and Orstrogapus[sp?] small capacity of 1.6 million tons, then that through the small producers as Jabbu Cement Industries and Qatar Saudi Cement company.

Cement production in Qatar in 2012 and 2013 was around 4.5 to 5 million tons, which is expected to average around 6.5 million tons during 2014 to 2021 period. If no new expansion apart from the Qatari part, the Qatar National is announced. We expect demand to pick in 2017 to 2018. On an average in past five years clinker and cement import worth 1.5 millions tons, which have dropped in the last couple of years because of the dampened demand because of the world cup related contract do not take place, but right now going forward we expect things to improve.

We've various projects in different sectors which are being planned. They range from 4 billion to 45 billion, and recently we have seen the greater activity taking place. So, that contract, if you see that the contracts are increasing, or the last five years, same has been the project sizes, so we see a greater activity happening in Qatar which will definitely boost the cement demand.

The financial performance has been gradually improving, we cannot say much that has mainly because of the static cement prices. The cement prices hasn't moved in the last five years there have been 240 Qatari riyal, so this is the reason why the gross margins and net margins have been almost at the same level.

That's have been increased mainly because in the current year because of the new capacity announced in Qatar National Cement. The return ratios have been slightly stable and increasing as well. So, in terms of outlook for Qatar moving on to Saudi Arabia, country with 16 cement companies, demand continues to grow fueled by few mega project. Mega projects includes railway, airport, stadium, medical cities, utilities and pet chemical facilities. Several new licences have been issued, but there has been no progress yet because they haven't been given the guest supply line. Restaurant and diligence are the crucial pockets of demand, nearly half of the players are situated in this regions. Country is rich with natural resources and raw materials. There was a severe labor issue in 2013 and 2014 which dampened the demand not by much, but it or all we expected a demand of 58 million tons and 2014 by Saudi Arabia but a drop of 56.5. Cement continues can not export because of governmental ban they can only export to Bahrain with a very per week capacity of allowed limit is 25,000 tons.

Fuel is highly subsidized which is the main reason why the highest margin producers in GCC. Last two years, what has happened in the demand went down which has increased their inventory levels, the inventory levels has turned to 20 million tons. Inventory levels are rising at the same time this can be a tool at to the cloning contact 2013 and 2014.

Yamama[sp?], Saudi, Yanbu and Rajamn[sp?] have the highest inventory levels. In 2013, higher clinker imports increase the inventory levels, with greater activities witness in the start of this year as I said earlier that the big contracted companies, they have been mentioning that they have seen the context being announced standard. So, demand is expected, what we expect is the demand will touch around 59 million tons in 2015 for Saudi Arabia. Gross margin of the cement producers were on the decline mainly because of fallen cement, prices in 2014, cement prices dropped to 246 per ton in 2014 compared to 51 in 2013, so when the demand went down we see also decline of prices as well, in terms of margins the margins has been declining also because of the decline in prices.

Oman, the last seven [xx] I'll be covering, the three cement [xx] two of them listed. The country is rich with natural resources. The Oman development plant which was announced is also filling the demands in the country. Oman exports having been directed to South Arabia from UAE. Recently, the band which is announced Oman was the increase in the gas prices.

They double the gas prices from 1.5 mm to 3mm [xx]. So, this will affect them heavily as per the announcement by both of the companies residual in Oman cement. The cost will go up by Omani riyal 5 million tons for residual and around 6.6 for Oman cement, so this will greatly impact their margins, and I believe Qatari companies will be second bigger margin producers, and the GCC after Saudi Arabia compared to Oman as of today.

The other clinker production levels they have been almost static at the levels and quarterly friends of the production of cement and clinker. Cement sales have been also largely into small decline which is in last quarter because of the summer quarter to third quarter. The prices for both the cement companies, Oman Cement has a slightly lesser price compared to [xx] because [xx] to the plant and by the cement [xx]. But, that is the main reason they have a higher realization price compared to the other companies. The last country which I will not be covering in much detail because of the next speaker is the UAE, there are 18 cement companies, nine of them listed their financial performance has been not improving at a much considerably pace.

Abu Dhabi covers up the most of the demand, roughly 60% demand comes from the UAE. But, the new expo 2020 which has been announced, this will take Dubai over Qatar, Abu Dhabi in terms of demand. Prices have recovered from their all time low and in terms of demand we expect the demand to rise from 13 million tons and 2014 to around 15 million tons and to 2015. Thank you so much.

Thank you so much.

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