JEDDAH – The Saudi cement sector is fuelled by strong domestic fundamentals, namely: (1) the government's continued high expenditure on physical and social infrastructure, driven by positive oil price movements, and buoyed by a young demographic structure; (2) relatively low fuel and raw material costs as a result of the subsidized power/ gas, and minimal royalty mining fees, sustaining domestic producers' competitive advantage; and (3) new market entrants, leading to an influx in capacity dispersed geographically in areas of concentrated demand, the National Commercial Bank said in its latest "Saudi Economic Review" released Tuesday. The size of the current cement market can be determined using the Kingdom's construction activity as a proxy. Given the recent spike in construction, it is important to differentiate between core demand and transient demand for cement. Core is identified as the 2002-2006 CAGR demand for cement, which was equivalent to 5 percent. This period is generally representative of a natural business cycle for the Kingdom, excluding the intermittent construction boom. Transient is that generated from ongoing mega-project construction activity which we have identified as commencing in 2007. Using the 2007-2011 CAGR of 15 percent, it can be assumed that the differential 10 percent represents transient demand because this trend is unlikely to continue in the long-term as the pace of new projects is likely to slow in the medium-term. Consequently, while in absolute terms transient demand appears to have increased since 2007, the overall growth trajectory is decelerating, with transient demand decreasing by 30.9 percent in 2011. By the end of 2011, total local sales amounted to 47 million tons, a 12.3 percent Y/Y increase. Of this total, an estimated 16 million tons represented transient demand. According to the Central Department of Statistics and Information, a 50kg bag of cement in 2011 costs SR13.96 on average, which translates into SR279 per ton. Thus, total revenues are estimated to have reached SR13 billion. NCB estimates that total expenditure in the Saudi construction sector, as measured by its components in the country's gross fixed capital formation (GFCF), reached SR169 billion by the end of 2011. This represented a 200 percent increase from 2000, and a 16 percent rise from 2010. The GFCF is composed of two components; Residential Building Construction (RBC), and Non-Residential Building Construction (NRBC). Examining the relationship between GFCF and the SR value of local cement consumption from 2006-2011, it can be estimated that, on average, the Saudi riyal value of local cement consumption accounts for an estimated 6.7 percent share of GFCF. According to market insights, the cost of cement accounts for a range of 3 percent-7 percent of the awarded contract value. It is important to note that GFCF is not accounting for the total value of contracts awarded, thus the two values are not equivalent. A key challenge to the sector is the ongoing export ban, which will serve to constrain growth for Saudi cement producers. In the almost four years since its introduction, neighboring and regional countries have developed their cement markets, becoming substitutes to the Saudi production. This will make it difficult for local producers to retain their high levels of exports should the export ban be removed. In addition, fuel shortages reported by some cement companies in recent months is another important challenge that the sector faces. According to market insights, it is new fuel allocation that is causing the delay, which is affecting the start of new production lines and output. Consequently, this will put upward pressure on cement prices, due to the increased reliance on inventory, which lowers stockpile levels, and results in a non-optimal utilization of resources. – SG
