The Saudi cement industry – which was facing an overcapacity problem five years ago – is currently producing higher quantities while undergoing a huge expansion at an estimated investment of SR10 billion ($2.67 billion).

With the existing annual capacity of 21.4 million tonnes of clinker, the eight listed cement companies can produce Portland cement equivalent to 23 million tonnes. These eight companies are expanding their production capacity by 52.6 per cent above the current level, equivalent to 11.25 million tonnes, thereby meeting the long-term demand for the Saudi construction industry. The ongoing capacity expansion will raise the kingdom’s total clinker capacity to 32.65 million tonnes, which will be adequate to produce 34.5 million tonnes of Portland cement.
In addition, two new cement companies – namely Khiat Cement and Riyadh Cement, are presently under construction with a combined production capacity of 2.55 million tonnes of clinker, accordingly lifting the kingdom’s total expansion to about 14 million tonnes. They are expected to go for trial production in 2007 but commercial production will likely commence from early 2008.
When all are completed, the aggregate design capacity of clinker for the 10 cement plants in the kingdom would escalate to 35.2 million tonnes in 2008, an equivalent of 37 million tonnes of Portland cement. This is nearly 47 per cent higher than the level of domestic cement consumption in 2004 (Chart 1).
In the 12 months to October last year, Saudi Ministry of Industry had issued eight more licences for the establishment of cement factories in the kingdom with a combined production capacity of 14 million tonnes. However, it remains to be seen when these projects are launched.

Consumption/expansion
In the last five years, aggregate domestic consumption of Portland cement has been growing by 11.6 per cent a year to reach 25.14 million tonnes in 2004 (Chart 2). While capacity constraint put a lid on local deliveries by the eight cement companies, imports estimated at 1.3 million tonnes suggest that consumption growth has slowed down to 8.1 per cent last year (Chart 1 and Table 1).
As a result, local producers met 95 per cent of the total domestic consumption while the residual 5 per cent was met by imports. The nearly 14 million tonnes of additional cement capacity, currently in the implementation phase, will not only displace imports but would also comfortably absorb domestic demand growth to the extent of 9.5 per cent a year in the next four years through 2008.
As the ongoing construction boom in Saudi Arabia is unlikely to continue in the long-term, strong yearly average domestic consumption growth rates seen in the recent years are expected to slowdown to around 5 per cent a year in the coming four years through 2008. As a result, the quantity of domestic consumption of Portland cement will rise from 25.14 million tonnes in 2004 to nearly 31 million tonnes in 2008. By the turn of that year, the industry’s designed capacity would have exceeded domestic consumption by nearly 6 million tonnes, which is about 16.2 per cent of the combined design capacity of then 10 cement plants in the kingdom (Chart 3).
If the excess capacity remains idle, competition will surface among local cement companies, which in turn would impair the profitability of the cement sector companies.
Accordingly, share prices of the quoted cement companies would likely drop to trim the wealth of investors. The kingdom’s cement companies have faced a similar situation during 1993-95 and 1997-2000 periods, but came out of the crisis by finding export markets. Before the recent surge in demand, Saudi exports of cement and clinker together were running around 5 million tonnes a year. As in the past, Saudi cement companies again would be looking for export markets to protect the sector from a crisis.

Portland cement sales
Aggregate sales of Portland cement to local and export markets by the Saudi cement companies rose modestly by 2.6 per cent to 25.58 million tonnes in 2004 (Chart 6). The combined volume of cement and clinker sales last year suggests a near 110 per cent industrial capacity utilisation by the eight cement companies, thus constraining further supplies. The quantity of cement directed to the local market in 2004 constituted nearly 93.2 per cent of the total sales while the residual 6.8 per cent were exported.
In the meantime, Saudi Arabia is estimated to have imported 1.3 million tonnes of Portland cement in 2004, which brings the quantity of net-exports (exports minus imports) to the extent of 440,000 tonnes in the same year (Table 1).
Following a 9.11 per cent increase in 2003, supplies of cement by local factories directed to the domestic market rose by 7.1 per cent to 23.84 million tonnes in 2004. The slow growth in local deliveries witnessed last year was due to  capacity constraint, while drawdown from clinker inventories and the loss of exports have supplemented to the additional supplies for the local market. In the last six years to 2004, cement sales in the local market by Saudi cement companies rose 11.1per cent a year, with the peak seen in 2001.

Cement/clinker demand
The combined exports of cement and clinker by the eight Saudi cement companies declined by 64 per cent in the last four years, from 4.8 million tonnes in 2000 to 1.7 million tonnes in 2004. The surge in domestic demand was the main factor behind this decline. Thus, the loss of 3.1 million tonnes in exports was redirected to the domestic market in the same period. The fall in Saudi exports continued well into last year, whereas the exports of Portland cement declined by 18.9 per cent to 1.52 million tonnes in 2004 while that of clinker plunged 72.5 per cent to only 0.22 million tonnes in the same year.
The diminishing level of exports, both cement and clinker, since 2001 clearly demonstrates that the capacity constraints were inhibiting the ability of local cement producers to meet growing demand in the domestic market.

Domestic market
While total domestic deliveries by the eight companies amounted to 23.84 million tonnes in 2004, four of them dominated the local market to capture 60.45 per cent share in the same year. Yanbu Cement, coming first, sold 4.27 million tonnes and represented nearly 18 per cent of the total quantity of cement sold by the eight companies last year. It was followed by the Southern Cement at 16.1 per cent share and quantity of cement sold at 3.49 million tonnes and Arabian Cement (14.63 per cent share) and 2.82 million tonnes) sold in the same year. The predominately export-oriented Saudi Cement Company sold last year 3.84 million tonnes in the domestic market (16.1 per cent) and exported 812,000 tonnes last year. Qassim Cement sold 2.16 million tonnes in the domestic market and exported 336,000 tonnes in 2004. Chart 4 exhibits domestic market share by company out of their local cement deliveries.

Production
Clinker is a basic input used in the production of Portland cement and can be stored for a much longer period than Portland cement. The combined clinker production of the eight cement companies rose marginally by 1.4 per cent to 22.51 million tonnes in 2004, about 5 per cent more than the design capacity of 21.4 million tonnes.
Fixed clinker design capacity and the buoyancy in domestic demand for cement has caused a rapid depletion of clinker inventory in the last four years, falling from nearly seven months in 2000 to just an equivalent of two months of production in 2004. In absolute terms, inventory dropped from 4.845 million tonnes at the end of 2003 to 3.477 million tonnes at the end of 2004. With clinker inventory is currently running at a four-year low, any significant surge in the domestic demand for cement would tend to accelerate imports in 2005 (Chart 5). Meanwhile, partial completion of ongoing capacity expansion in 2005 would likely compensate for the rise in domestic demand this year.

Domestic prices
The Saudi domestic market for Portland cement is protected from foreign competition by a 20 per cent custom duty on cement imported from the non-GCC areas. By virtue of the protection, the domestic prices of cement do not vary significantly from one region to another. In Saudi Arabia, Portland cement is either sold in bulk to large contractors at SR200 per tonne or in retail package of 50 kg each at SR210 per tonne. The quantity of cement sold in bulk constitutes around 60 per cent while the retail packages account for the remaining 40 per cent of the total Portland cement sold in the country.
Financial performance
The underlying financial stance of the eight listed cement companies continues to be good while investors are reaping the benefit of wealth growth on holding cement stocks. The financial positions of the listed cement companies have substantially improved with the sector’s net-profit rising by 19.7 per cent to SR2.91 billion in the 12-month to December 2004 from SR2.43 billion in the same period of last year.
In the last six years of 2004, the combined net-profit of the eight cement companies rose every year at an annual average growth rate of 18.8 per cent, climbing from SR1.23 billion in 1999 to SR2.91 billion in 2004. The corresponding average net profit on each tonne of cement sold, both in domestic and foreign markets, soared from SR73.21 per tonne in 1999 to SR113.75 per tonne in 2004, largely attributed to improvement in the sector’s efficiency and increased quantity of cement sold.
The combined total assets of the cement companies rose by 7.3 per cent to SR13.93 billion in 2004. The outstanding debt of the cement sector has assumed a declining trend, falling by around 13 per cent a year to reach SR1.44 billion in 2004 from SR2.88 billion in 1999. However, it rose moderately in 2002 by 5.4 per cent as a few of the cement companies started their expansion projects.

Conclusion
The kingdom’s cement industry is operating at near full capacity, with the domestic demand comprising 93 per cent of the total supplies and the foreign markets representing the remaining 7 per cent.
While the ongoing construction boom is expected to cool down in the medium term, cement companies would have to find export markets in order to absorb additional capacity being put in place in the next fours years. With yearly average demand growth expected at around 5 per cent, the cement sector will likely face an over-capacity problem to the tune of 6 million tonnes by 2008.
However, investment in cement stocks is expected to continue offering high double-digit return in the coming few years.