GCC cement sector is starting to solidify after it crumbled in the fourth quarter of 2008 as a result of the economic downturn and liquidity crunch, which resulted either in postponement of several real estate projects or closure altogether. Recent data showed that the first quarter of 2009 ended on a positive note. A report on earnings of listed cement companies in the GCC by the Kuwait-based Global Investment House (GIH) released on Tuesday, said that net income in the first quarter of this year ended with a profit of $351 million compared to a loss of $42 million in the fourth quarter of 2008. Increase on a quarterly basis occurred due to better performance by the equity markets and revival of confidence in the building and construction markets, it said. But on a yearly basis, the first quarter of this year's profits were down 43 percent, the study pointed out, “because of better realization prices and high cement demand earlier.” GIH said in the report that the region's total $3 trillion (SR11.01 trillion) worth of projects announced, “even if half still continue, there would be sufficient demand to fuel the growth of the cement companies” in the Gulf states. Last year the sector earned revenue of $5 billion compared to $4.4 billion in 2007, a growth of 16 percent, GIH said. On a quarterly basis, Oman emerged out to be the best performer at a 356 percent, followed by Qatar at 73 percent and Saudi Arabia at 39 percent. While UAE, emerged out of heavy losses and ended the first quarter with a profit while Kuwait has been the only country witnessing a decline in profit mainly due to continued decline in their equity markets. On an annual basis, Qatar witnessed the least drop in profits at 11 percent followed by Saudi Arabia and Oman at 19 percent and 21 percent, respectively. UAE witnessed a decline in profits by 73 percent, while the most was reported by Kuwait at 14 percent. Meanwhile, Al Mal Capital Research analysts predicted a drop of 5 percent in construction growth rate this year to 15 percent, and another 2 to 13 percent in 2010. Based on the decline in demand, the cement sector will suffer in the coming years because of recent expansion of cement capacity in the market. “We expect an oversupply of cement in the UAE at the end of 2010 or beginning of 2011,” a report from the firm said. Overall cement production capacity of the GCC is expected to increase to 112 million tons per annum by 2011 compared with 85 million at the end of 2008. The UAE alone is increasing its capacity from 29 million tons annually in 2008 to 41 million by 2011. Mala M. Pancholia, equity research analyst at Al Mal Capital Research, said that the construction industry in the UAE is slowing significantly. “Until mid-2008, over 80 percent of UAE projects were real-estate focused. However, bearing in mind the current circumstances, Moody's has assigned a negative outlook to the GCC realty sector for 2009,” she said. Pancholia added that in the UAE over 50 percent of the projects announced earlier have been either put on hold, cancelled or delayed and the situation is not expected to change or recover in the near term. She noted a possible 22 percent reduction in cement prices starting from April 1, as per the Ministry of Economy's suggestion, though the Cement Producers Group has yet to discuss this with the ministry before implementing it. “(With the) changing demand/supply dynamics in the industry and the looming possibility of cement oversupply and overcapacity situation in the UAE, we retain our negative view of the cement sector,” said Pancholia. On an individual performance in the quarterly basis, GIH said the star performer was Raysut Cement which witnessed a profit growth of 706 percent, followed by Tabuk Cement and Sharjah Cement whose profit rose by 278 percent and 179 percent respectively. The company which witnessed the most decline was Gulf Cement at 94 percent followed by Arkan Building Materials and Umm Al Qaiwain Cement Company at 80 percent and 79 percent respectively. On a yearly basis, Kuwait Portland Cement recorded an impressive performance with a profit growth of 4747 percent followed by RAK Cement and Union Cement at 187 percent and 94 percent, respectively. Decliners were led by Arkan Building Material, Hilal Cement and Kuwait Cement Company at 630 percent, 205 percent and 157 percent respectively. With the correction in the equity and real estate markets continuing and liquidity constraints increasing, the projects announcements which rose to as $2.68 trillion in April 2009 decline to $2.2 trillion in the month of May 2009. Major decline in the projects announcement came from UAE whose total size went down to $960 billion from $1.32 trillion in April 2009. Oman witnessed the second most decline in the project announcement to $96 billion from $110 billion. Even so, work on different projects in Saudi Arabia and Qatar is going on at a brisk pace despite an overall project announcement in the countries dropped 9 percent and 4 percent to $586 billlion and $209 billion, respectively, GIH said. GIH forecast conservatively that if fifty percent of these projects amounting to $1.1 trillion go in to actual implementation phase, and if 40 percent account to building and construction related projects, then the sector would been witnessing a cement demand of close to 90mtpa on an average during 2009-15. The report added that the sector will be expanding its capacity to 92mtpa by 2009 and 112mtpa by 2011 based on discussions with various companies and other industry sources. __
