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RIYADH: An increase in construction activity due to the Red Sea and other development projects in Saudi Arabia is expected to boost the recovery of the cement industry after demand fell last year due to the pandemic.

“The industry will be positively affected by the resumption of construction in the north, with the Red Sea project, and residential developments. The effect will not be immediate but will be reflected in the long term, until 2030” said Omar Hatoum, managing director of Saudi concrete products manufacturers, SACEP, in an interview with Arab News.

In terms of residential developments, he said the Kingdom has already achieved a lot in recent years. “This means that the impact of any new development on the sector will be spread over the next few years,” he explained. “These projects will result in the gradual growth of the cement industry.”

Mazen Al-Sudairi, head of research at Al-Rajhi Capital, expects construction activity to boom due to rising commodity prices which have risen significantly this year, according to a cement report published by the asset management company at the end of March.

“We also expect the inflationary trend to cap cement demand as we expect cement sales to be flat to negative in 2022, compared to 2021, and limit an increase in cement prices,” he said. -he declares.

Although Al-Sudairi sees the financial performance of the cement sector improving, he expects the improvement to be limited by weak demand and pricing conditions.

Suspended capacities

The cement market in Saudi Arabia is concentrated with 17 market players in the country, according to Argaam.

The chairman of the Saudi Al-Emar Group, Abdullatif Saleh Alsheikh, points out that the country’s cement companies are currently operating at around 60% of their total capacity. “This leaves room for growth as companies reach their full production potential,” Alsheikh added.

He doesn’t see any new cement plants opening soon, although some may open branches in the north to meet new demand there.

Cement volume for the eight months ending August 2021 increased slightly, by 4.5% year-on-year, according to a report by Al-Rajhi Capital, published late last year.

The average annual growth rate of the cement industry – calculated by Arab News based on figures from Argaam Investment Company – stood at 3.3%.

Last year, the market was weighed down due to COVID-19 restrictions and the slowdown in development projects. A gradual easing of restrictions and a resumption of construction, especially in megaprojects, should support the cement sector this year.

Al-Sudairi, in a report published last September, predicted a recovery in the cement industry in 2022. He attributed this to the expected growth in spending to execute various mega and giga projects across the country. “These, in turn, are likely to contribute to the recovery of construction products. However, it will take time to increase the volume of cement,” he noted.

The cement industry has seen slow growth and contractions in 2021, with the exception of April and May.

Cement volume growth in April and May 2021 was 41% and 65%, respectively, year-on-year, according to Al-Sudairi.

“Growth in these two months was primarily driven by a weaker base in previous years due to the COVID-related lockdown and travel restrictions. Excluding these months, cement sales would have been lower than the previous year,” he pointed out in his report published last year.

Sluggish returns

In addition, the cement industry experienced severe contractions in the last quarter of 2021. For example, total sales of 17 Saudi cement producers fell by 6% to 4.9 million tons in January 2022, compared to 5.2 million tonnes in the same month the previous year. , according to a report by Argaam.

Total sales fell 7% to 4.8 million tonnes in December 2021, from 5.2 million tonnes in the same month a year earlier. In November 2021, cement sales fell 5% to 4.7 million tonnes in November, compared to 4.9 million tonnes in the same month a year earlier. They fell again to 10% and 4.5 million tonnes in October, against 4.9 million tonnes a year earlier.

This southward trend has been reflected in the profits of Saudi companies, as the overall profit of 14 cement companies listed in Saudi Arabia fell by 29% in 2021, as revenues fell due to lower sales prices.

IN SHORT

The increase in cement volume for the eight months ending August 2021 increased slightly, by 4.5% year-on-year, according to a report by Al-Rajhi Capital, published late last year.

Cement majors recorded a collective profit of SR2.5 billion ($667 million) in the year, up from SR3.6 billion a year ago.

For example, a major industry player, Saudi Cement, saw a 27% decline in profits to SR332 million in 2021 due to a 10% decline in revenue.

Similarly, Najran Cement, Yanbu Cement, Qassim Cement, City Cement, Umm Al-Qura Cement, Eastern Province Cement, Saudi Province Cement, Tabuk Cement, Yamama Cement and Hail Cement all saw lower profits.

However, Northern Region Cement bucked the trend as its profit remained almost unchanged at SR 107 million, even though sales fell. Al-Jouf Cement, on the other hand, widened its losses from SR 98 million to SR 150 million in 2021.

A decline in sales may not have been the only factor in corporate profitability.

Riyadh Cement and Arabian Cement saw sales increase by 14% and 19%, respectively, and still saw declining profits.

In the case of Yamama, although the company increased its cement deliveries to the local market to 5.22 million tons in 2021 from 4.6 million tons in 2020, its turnover fell by 23% in year-on-year to reach SR 735 million.

This downward trend suggests that in the case of Yamama Cement, the implied average price of a ton of cement on an ex-factory basis fell by around 30% to SR 140 per ton in 2021 from SR 200 per ton in 2020. .

“In our view, the year-over-year decline in cement demand can be attributed to weaker construction activity due to a labor shortage and new regulations for new permits. to build,” Al-Sudairi added in the report.

Operational bottlenecks

Other key market challenges and new dynamics expected to impact the cement industry in Saudi Arabia include the expatriate tax imposed on foreign nationals and the adoption of greener and newer technologies for factories. low energy consumption.

The expatriate tax imposed on foreign nationals was seen as a significant challenge to the cement market in Saudi Arabia, according to an article titled: “Saudi Arabia Cement Market – Forecast and Analysis Report 2021-2025”.

“This expatriate tax is particularly burdensome for companies that have a workforce made up of more foreign nationals than Saudi nationals,” the newspaper said.

In terms of new dynamics, the report notes that the Saudi cement industry is considering greener, low-consumption plants, as fuel and energy costs typically account for 30-40% of total production costs.

“As a result, cement vendors in the region are focusing on adopting alternative means to meet expected increases in production costs due to rising energy prices,” he added.

Other trends include changes in cement price forecasts. Saudi suppliers are further encouraging the launch of new products and expanding their customer base after the cement export ban was lifted. The easing of export restrictions was intended to support the recovery of the construction industry. “If the ban is not reimposed, cement prices could rise further,” Hatoum said.

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