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SAR270B project pipeline

Saudi Arabia launched projects worth SAR270-billion last year. No wonder there is a shortage of cement. Expect more shortages as the construction boom kicks off in earnest.
The Saudi Ministry' decision to ban cement exports to ensure there is plenty of supply available for the local market is a sign of hectic construction activity in the Kingdom.



The Ministry has also been instructing cement producers to send supply to regions that are suffering shortages. The news is even more telling when you consider that country's cement sector increased production by 23% in January to 4.8 million tonnes from 3.9 million tonnes, according to Yamama Cement Co.

The Kingdom is in the midst of a construction boom which has already seen prices of raw material and real estate run up quickly. Apart from launching a raft of infrastructure projects over the past few years, the government announced the development of 500,000 housing units last year and launched a number of projects to stimulate the economy and create jobs.

According to Citibank data, Saudi Arabia has close to USD210-billion under way and accounted for 33% of new projects announced in the region in the first ten months of last year.

Zawya Projects Monitor shows 562 major projects are under way in the Kingdom with at least 142 expected to be completed within the next two years.

In the fourth quarter of 2011 alone, SAR93-billion were awarded in Saudi Arabia, taking the total number of contract awarded last year to a staggering SAR270-billion, surpassing the SAR207-billion awarded in 2009, according to NCB Capital.

In the second half of 2011, the value of awarded contracts reached an impressive SAR188.2 billion, which was higher than the total value of awarded contracts during all of 2010, said a NCB Capital report.

"The transportation sector garnered the largest share of awarded contracts during the fourth quarter, ac-counting for 32% of the total value," said NCBC analysts. While the power and industrial sectors accounted for 20% and 12%, respectively.

While the first half of the year was marred by the shock of regional unrest, Saudi Arabia's government moved quickly to unleash a number of projects in a bid to stimulate the economy and lay the ground work for job creation.

"Nearly 69% of the value of contracts during the year were awarded during H2'11. Moreover, the value of awarded contracts in 2011 grew by 155% over 2010 and by 32% over 2009," said NCBC.

The Saudi government led the way signing 2,600 projects with the private sector for an estimated combined value of SAR148.3 billion.

Nearly half of the SAR270 projects announced were focused on either in the transportation, power or industrial sectors.

And the construction spread is not restricted to the oil-rich Eastern provinces, as Makkah region made a significant contribution in Q4 with approximately 37% or SAR33.6 billion worth of contracts being awarded.

Hence, the shortage of cement in Western regions.

Not surprisingly, construction was the second best performing sector in the region last year, rising 11.6%, after manufacturing (which grew 15%).



2012: ANOTHER GREAT YEAR?
NCB expects the construction projects pipeline to remain high although slightly below 2011 levels.

"While we project total government expenditures to decrease slightly in 2012 compared to 2011, mainly due to lesser current expenditures, the government's ongoing expansionary policy that reflects its commitment to support the economy and enhance the Kingdom's infrastructure will not change," said NCBC.

"Moreover, our forecasted capital expenditures of SAR234 billion by the government for 2012 represents a 4% increase over 2011's actual capital expenditures."

The government's 2012 budget includes a number of initiatives focused on healthcare and construction.

The government intends to build 742 new schools and renovate 2,900 schools. In addition more than 40 new colleges are to be built and further work will be undertaken on the construction of facilities at newly-opened universities. SR25 billion has been appropriated for an electronic university.

On the healthcare front, 17 new hospitals are expected to be built, in addition to the 130 already under way.

Jadwa Investment notes that water, agriculture and (related) infrastructure spending is budgeted at SR57.5 billion in the new budget, an increase of 13%. Funds have been set aside for new projects in the industrial cities in addition to enhancing water supply and improving the water and water treatment networks.

Transport and telecommunications received the largest increase of any of the areas announced. Spending is budgeted to rise by 40% to SR35 billion.

"The jump is due to progress in the King Abdulaziz airport in Jeddah, which either reflects large payments at the completion of the project, or opening and operational costs, as 90% of the work is has been done and it should be complete by September 2012," notes Jadwa.

In addition, work will begin on 4,200 kilometers of roads and continue on the 28,100 kilometers of roads currently under construction. Once complete, these projects would increase the Kingdom's road network by nearly 17%.

NOT A SMOOTH RIDE

The boom has already had an impact, not all of which is positive. Residential real estate transactions in Riyadh rose nearly 25% last year and in Dammam nearly 52%.

Meanwhile, real estate consultants CB Richard Ellis (CBRE) estimates that in some areas Saudi residential property prices increased by as much as 60% in the early part of 2011 due to housing shortage.

A survey by Banque Saudi Fransi (BSF) last year indicated that asking prices for apartments grew by around 2% during H1-11 and villa prices grew by around 8% during H1-11. In Riyadh, prices of small villas rose 11.5% on an average during H1-11, while rentals increased 32% year-on-year.

Rental inflation remained at 8% for the third consecutive month, according to Jadwa estimates. "We assume that a greater supply of property will keep rental inflation under control. If higher spending feeds into a renewed rise in rents, would consider raising our inflation forecast. At present, we expect average inflation to fall to 4.6% in 2012."

PROJECT OVERLOAD

Clearly, not all of these projects come to pass.

"We believe the government's targeted 500,000 affordable units will only be built over the next several years due to construction capacity issues and scarcity of developed land," notes Dubai-based Rasmala, which expects to prices to rise 5% over the next two years.

The bank expects pent-up demand for new housing to rise to 900,000 by the end of 2014, which is unlikely to be met as regulatory issues such as a mortgage law and affordability could lead to delays.

A media report suggests that only 38% of Saudis own a home, and as the population rises and the young reach adulthood, their demand of raising a family and moving out of their parents' house will further add to that pressure.

CEMENT SURGE
With all the developments going on in the Kingdom, it's not surprising that cement sales grew by 12% last year, to reach 48.4 million tonnes, with clinker production rising 7.1%.



Virtually, all the leading companies increased production, with Al Jouf, one of the smallest producers, raising output by 224%, and Saudi Cement, the largest producer, increasing output by 6.1%.

Yamamah Cement, another major producer, is looking to raise capacity. The company announced on October 2011 that a feasibility study to replace five existing lines with a new one was successful and it would lead to a net increase in capacity of 1.5mn tons per year in 2014.

Southern Cement is also expected to raise capacity by an addition 1.5 million by mid 2012.

"With its location in the western region of KSA, it is likely to be a major driver for SPCC as it can meet demand in the Central/Western regions, as well as lowering the average cost per ton present at SPCC," notes an NCB Capital in a report on the company.

"However, due to the ongoing uncertainties with regard to fuel supply from Aramco, we conservatively assume the new line will commence in 2013, six months later than expected."

CONCLUSION
Saudi Arabia is one of the most promising construction markets in the world. Cement shortages are merely a symptom of growing demand which are expected to generate private sector activity, create much-needed jobs and stimulate the economy.

The challenge for the government will be to manage this growth without run away inflation. The bitter experience of the pre-2008 business environment when raw material prices spiralled out of control could return with a vengeance.

© alifarabia.com 2012