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Global crisis hits UAE cement consumption

26 May 2009
The UAE's annual consumption of cement is expected to drop by 14 per cent by 2010. According to earlier estimates, UAE's annual consumption in 2010 was expected to be around 31.5 million tonnes, whereas new or revised estimates - keeping in mind the current economic slowdown - have revealed that the demand could only rise to 26.62 million tonnes in 2010.

Meanwhile, cement firms have been urged to introduce remedial measures to cope with the current crisis.

Several companies have been going in for capacity additions and local production is expected to cross 35 million tonnes by 2010, creating additional capacity within the local market.

Khaled Hegazy, Vice Chairman of Hegazy Company, said the cement sector in the GCC is currently going through a rough time and both the government as well as the producers need to introduce steps to minimise the impact.

Speaking during the recent Cement Arabia conference at the Sharjah Expo, Hegazy said that more than 50 million tonnes of extra capacity would be added to the GCC market by 2010, with Iran and Saudi Arabia being the main contributors. "The whole cement industry from producers to traders are going through a difficult time. A year ago the situation was totally different. We were witnessing a scarcity in Dubai. There was a shortage, resulting in prices moving up. Today the situation has become just the opposite," said Hegazy.

"What we are facing right now is a crisis in the market. During the past few years we witnessed greater spending by the government. Construction in the GCC was looked upon by the rest of the world," he said.

According to him two main factors have caused the end of the robust growth - falling oil prices and lack of liquidity within the market.

"If we look at Gulf oil revenues, the earnings in 2007 was about $590 billion (Dh2.1 trillion) and it is expected to fall to $240bn in 2009," he added.

In the GCC the public spending he said has witnessed an average annual increase of 16 per cent from 2003 to 2008. "As long as the governments continue with public spending the demand for cement would continue to remain stable. We can see such a situation in Kuwait and Saudi Arabia. The governments there have not reduced budgets for construction projects," said Hegazy.

"Unless more construction projects are announced within the region the exceess capacity will seriously hurt the local market," he added.

By 2010, Saudi Arabia alone would be producing about 22 million tonnes excess cement followed by UAE with an additional capacity of nine million tonnes. "Add to this another 20 million additional capacity in Iran and imports from Pakistan and China. The market is going to be flooded."

The initial estimate was that by 2010 the cement consumption would increase to 37 million tonnes. Whereas current estimates show that the demand would only increase to about 32.3 million tonnes. In Qatar too it changed from 4.23 million tonnes to 3.86 million tonnes; from 3.7million tonnes to 3.31 million tonnes in Oman and from 5.35 million tonnes to 4.77 million tonnes in Kuwait.

In an effort to negotiate the current situation companies he said should think of various measures including mergers and acquisitions, and vertical integration.

"Vertical integration would mean cancelling double marginalisation. Vertical integration form higher entry barriers, investments in fleet and ports infrastructures to handle the possible expected export volumes and decreases the probability of exiting the market," said Hegazy.

Meanwhile, according to a report by the Kuwait-based Global Investment House , cement companies have performed during the first quarter of 2009 compared to the last quarter of 2008.

However the figures fell drastically when compared to the same period the previous year. According to the report net income for the first quarter of 2009 ended with a profit of $351m as compared to a loss of $42m in the last quarter of 2008.

However, on a year-on-year comparison the first quarter profits were down 43 per cent. The results compared to the previous quarter was better because of a good performance by the equity markets and revival of confidence in the building and construction markets, said the report. "While decline on a year-on-year basis was because of better realisation of prices and high cement demand earlier. Nevertheless the tables have turned and as expected the profits are emerging despite economic slowdown."

On a quarterly basis, Oman has emerged as the best performer with profit growth of 356 per cent followed by Qatar at 73 per cent and Saudi Arabia at 39 per cent.

The UAE emerged out of heavy losses and ended the first quarter with a profit whereas Kuwait has been the only country in the region witnessing a decline in profit, "mainly due to continued drop in their equity markets", it said.

Similarly comparison with the first quarter of 2008 reveals that Qatar witnessed the least drop in profits at 11 per cent followed by Saudi Arabia and Oman at 19 per cent and 21 per cent respectively. UAE witnessed a decline in profits by 73 per cent while the most was reported by Kuwait at 147 per cent.

Raysut Cement witnessed a profit growth of 706 per cent during the first quarter of 2009 compared to the previous quarter.

Similarly profits of Tabuk Cement and Sharjah Cement rose by 278 per cent and 179 per cent respectively. "The company which witnessed the most decline was Gulf Cement at 94 per cent, followed by Arkan Building Materials and Umm Al Qaiwain Cement Company at 80 per cent and 79 per cent respectively. "On a year-on-year basis, Kuwait Portland Cement recorded an impressive performance. RAK Cement and Union Cement registered 187 per cent and 94 per cent growth respectively," the report said.

The construction and cement companies whose profits declined include Arkan Building Material at 630 per cent, Hilal Cement at 205 per cent and Kuwait Cement Company at 157 per cent.

"With the correction in the equity and real estate markets continuing and liquidity constraints increasing, the projects announcements which rose to $2.68trn in April 2009 declined to $2.2trn in May 2009," the report said.

The GIH report added that major decline in the projects announcement came from UAE whose total size went down to $960bn from $1.32trn in April 2009.

The value of new projects announced declined from $110bn to $96bn in Oman. "Although it is being heard that the work on different projects in Saudi Arabia and Qatar is going on at a brisk pace, the overall project announcement in these countries went down by nine per cent and four per cent to $586bn and $209bn respectively," said the report.

Even a conservative estimate it said would increase the demand for cement to about 90 million tonnes per annum. "Even if 50 per cent of these projects amounting to $1.1trn go in to actual implementation and of them if 40 per cent account to building and construction related projects, then the sector would been witnessing a cement demand of close to 90 million tonnes per annum on an average during 2009-15.

On a positive note, the report said that it "believed that the construction activity has revived in most of the countries within the GCC".

"As we witnessed in March that Saudi reported a monthly deficit in demand and supply and was able to shrug off some of its previously piled up inventories."

© Emirates Business 24/7 2009

By Joseph George