September 2009
Raysut Cement Company (RCC), which had recorded tremendous growth for several years is currently facing dwindling margins. However, senior officials of the company say there is no cause to worry. They point out that a main reason for this is the 30.6 per cent fall in cement production in the first half of 2009 - which necessitated higher imports - due to a planned maintenance and rehabilitation of its cement grinding systems.
The associated expenses resulted in the cost of sales soaring by 45.1 per cent to RO33.15mn for the six-month period. The sultanate's biggest cement producer's net profit fell by 15.7 per cent to RO17.30mn for the first half, from RO20.53mn for the same period last year, despite a 16.6 per cent growth in sales revenue at RO49.48mn.
"The drop in net profit reflects lower margins from imported cement, which the company procures to meet growing demand from the northern part of the country. Prices of cement were high in our importing countries in 2008, but have softened from the beginning of 2009 due to the economic slowdown," says Mohammed bin Ahmed al Dheeb, chief executive officer of the Salalah-based company. RCC produced 875,606 tonnes of cement and imported another 724,368 tonnes in the first six months of 2009, mainly from India and Pakistan.
"The maintenance work, which started towards the end of the first quarter, will continue in the third quarter and therefore, RCC will continue imports. This is affecting us temporarily, but in the long run, this will help us immensely. The clinker production came down only marginally due to the maintenance work," adds Samidh Mukhopadhyay, chief finance officer.
RCC's earnings before interest, depreciation and amortisation (EBITDA) margin - a measure of the company's cash flow before certain deductions - was ruling at 39.9 per cent for 2008 as against the 25.8 per cent for its rival Oman Cement Company (OCC), according to a study conducted by Credit Suisse. Earnings per share (EPS) fell in line with the fall in net earnings to 87bz by end-June 2009 from 103bz for the same period of 2008. The share price of RCC, which has a history of paying high dividends, nosedived to RO1.88 on August 24, 2009 - way below the RO2.65 it commanded on the same day of last year.
Meanwhile, the RCC management has initiated several measures to partially offset a temporary fall in net earnings following the planned maintenance. The focus has shifted to bringing down the cost of transportation by acquiring more vessels and setting up a new bunker at Sohar. "We will commission our terminal which will have silos in Sohar in October this year.
This will enable us to supply big quantities on time and bring down the cost of a floating terminal being operated there to supply cement for bulk customers," says al Dheeb. "This will also help us get a better market share in the northern part of the country."
RCC has similar terminals in Muscat, Mukalla and Aden (both in Yemen) ports. The terminal at Aden has a storage capacity of 16,000 tonnes of cement, while Mukalla and Muscat terminals have 14,000 tonnes capacity each. These terminal facilities enabled the company to strengthen its market share in northern Oman and Yemen. "Since we are joint venture partners of the terminal in Mukalla, we get revenue from there as well," says al Dheeb.
Plans are also afoot to acquire one or two more vessels for transporting cement, in a bid to cut the cost of chartered vessels. "We are evaluating a proposal to acquire one or two more vessels, each with a capacity of 10,000 tonnes to export cement to all our terminals in Muscat, Sohar and Yemen. This will give us an advantage of controlling shipping costs," adds al Dheeb. Presently, five chartered vessels are operating for RCC, which is in addition to its own Raysut 1 ship, acquired at a cost of US$7.3mn in October 2008.
"Our vision is to own our own vessels, which will give us an advantage on cost." Mukhopadhyay says that the company is taking initiatives to enhance productivity of employees, besides trying to bring down cost of imports. In fact, the company has achieved a four-fold growth in both sales revenue and net earnings in the past four years, thanks to a well-thought out expansion plan to strengthen its position within the country and export markets like Yemen and East Africa. Sales revenue shot up from RO21.52mn to RO89.09mn between 2004 and 2008, while net profit jumped from RO7.04mn to RO27.11mn during that period.
RCC has raised its cement production capacity to 3mn tonnes per annum (mtpa) in 2009 from a mere 800,000 tonnes in 2004 by adding additional production lines at a capital expenditure of RO50mn. Apart from ordinary Portland cement, the company has pioneered the production of high-grade special products like oil well cement. "We sell only oil well cement to GCC countries like Qatar and Kuwait and our ordinary cement is exported to Yemen and East African countries," says al Dheeb. "Our five-year business plan foresees a further organic growth," he adds.
RCC has certain advantages over its competitors in the region due to its proximity to the mineral-rich Salalah region, which provides low-cost raw material. The company has its own limestone quarries. Further, proximity to Yemen - a major export market for RCC - is another advantage.
Al Dheeb does not foresee any fall in demand because of the economic slowdown. Rather, he anticipates the demand to grow in the region of 6-9 per cent during the current year. "The stabilisation of oil prices at US$60 per barrel will have a positive effect on the infrastructure and real estate projects in the region. This in turn will boost demand," adds al Dheeb. The cement demand in Oman is expected to reach 4.7mtpa in 2009, while demand from the entire GCC region is estimated in the region of 78mtpa.
According to the Credit Suisse study, the GCC region will see an increase of 20 per cent growth in capacity during the current year over the previous year, whereas the demand will grow only by 4.5 per cent. The international investment bank also noted that although the construction market in Saudi Arabia, Qatar and Abu Dhabi is likely to remain strong, a wave of excess supply across the region is likely with additional capacity coming up in Saudi Arabia and the UAE.
As for competition, proposals of Bajil and Amaran - two cement producers from Yemen - to raise their production capacity is a factor that could have an impact on RCC's export market. In the domestic market, OCC's new clinker project will commence commercial operations by the first quarter of 2010. This will not enhance domestic cement capacity, but will help OCC bring down its import cost.
According to al Dheeb, the government's price cap of RO1.5 per bag (RO1.6 per bag on imported cement) for producers is not affecting their margin. "When the government introduced the price cap in June 2008, the factory price was ruling at RO1.3 per bag," he adds.
With a solid capacity and distribution infrastructure, it is only a matter of time before the company returns to a fast growth track. Once the maintenance work is completed, the foundation RCC has laid over the years with a well-planned expansion strategy will come handy in consolidating its position. And the availability of rich limestone deposits in Salalah, in close proximity to its plant, can only make the ride a smoother one.
Raysut Cement Company (RCC), which had recorded tremendous growth for several years is currently facing dwindling margins. However, senior officials of the company say there is no cause to worry. They point out that a main reason for this is the 30.6 per cent fall in cement production in the first half of 2009 - which necessitated higher imports - due to a planned maintenance and rehabilitation of its cement grinding systems.
The associated expenses resulted in the cost of sales soaring by 45.1 per cent to RO33.15mn for the six-month period. The sultanate's biggest cement producer's net profit fell by 15.7 per cent to RO17.30mn for the first half, from RO20.53mn for the same period last year, despite a 16.6 per cent growth in sales revenue at RO49.48mn.
"The drop in net profit reflects lower margins from imported cement, which the company procures to meet growing demand from the northern part of the country. Prices of cement were high in our importing countries in 2008, but have softened from the beginning of 2009 due to the economic slowdown," says Mohammed bin Ahmed al Dheeb, chief executive officer of the Salalah-based company. RCC produced 875,606 tonnes of cement and imported another 724,368 tonnes in the first six months of 2009, mainly from India and Pakistan.
"The maintenance work, which started towards the end of the first quarter, will continue in the third quarter and therefore, RCC will continue imports. This is affecting us temporarily, but in the long run, this will help us immensely. The clinker production came down only marginally due to the maintenance work," adds Samidh Mukhopadhyay, chief finance officer.
RCC's earnings before interest, depreciation and amortisation (EBITDA) margin - a measure of the company's cash flow before certain deductions - was ruling at 39.9 per cent for 2008 as against the 25.8 per cent for its rival Oman Cement Company (OCC), according to a study conducted by Credit Suisse. Earnings per share (EPS) fell in line with the fall in net earnings to 87bz by end-June 2009 from 103bz for the same period of 2008. The share price of RCC, which has a history of paying high dividends, nosedived to RO1.88 on August 24, 2009 - way below the RO2.65 it commanded on the same day of last year.
Meanwhile, the RCC management has initiated several measures to partially offset a temporary fall in net earnings following the planned maintenance. The focus has shifted to bringing down the cost of transportation by acquiring more vessels and setting up a new bunker at Sohar. "We will commission our terminal which will have silos in Sohar in October this year.
This will enable us to supply big quantities on time and bring down the cost of a floating terminal being operated there to supply cement for bulk customers," says al Dheeb. "This will also help us get a better market share in the northern part of the country."
RCC has similar terminals in Muscat, Mukalla and Aden (both in Yemen) ports. The terminal at Aden has a storage capacity of 16,000 tonnes of cement, while Mukalla and Muscat terminals have 14,000 tonnes capacity each. These terminal facilities enabled the company to strengthen its market share in northern Oman and Yemen. "Since we are joint venture partners of the terminal in Mukalla, we get revenue from there as well," says al Dheeb.
Plans are also afoot to acquire one or two more vessels for transporting cement, in a bid to cut the cost of chartered vessels. "We are evaluating a proposal to acquire one or two more vessels, each with a capacity of 10,000 tonnes to export cement to all our terminals in Muscat, Sohar and Yemen. This will give us an advantage of controlling shipping costs," adds al Dheeb. Presently, five chartered vessels are operating for RCC, which is in addition to its own Raysut 1 ship, acquired at a cost of US$7.3mn in October 2008.
"Our vision is to own our own vessels, which will give us an advantage on cost." Mukhopadhyay says that the company is taking initiatives to enhance productivity of employees, besides trying to bring down cost of imports. In fact, the company has achieved a four-fold growth in both sales revenue and net earnings in the past four years, thanks to a well-thought out expansion plan to strengthen its position within the country and export markets like Yemen and East Africa. Sales revenue shot up from RO21.52mn to RO89.09mn between 2004 and 2008, while net profit jumped from RO7.04mn to RO27.11mn during that period.
RCC has raised its cement production capacity to 3mn tonnes per annum (mtpa) in 2009 from a mere 800,000 tonnes in 2004 by adding additional production lines at a capital expenditure of RO50mn. Apart from ordinary Portland cement, the company has pioneered the production of high-grade special products like oil well cement. "We sell only oil well cement to GCC countries like Qatar and Kuwait and our ordinary cement is exported to Yemen and East African countries," says al Dheeb. "Our five-year business plan foresees a further organic growth," he adds.
RCC has certain advantages over its competitors in the region due to its proximity to the mineral-rich Salalah region, which provides low-cost raw material. The company has its own limestone quarries. Further, proximity to Yemen - a major export market for RCC - is another advantage.
Al Dheeb does not foresee any fall in demand because of the economic slowdown. Rather, he anticipates the demand to grow in the region of 6-9 per cent during the current year. "The stabilisation of oil prices at US$60 per barrel will have a positive effect on the infrastructure and real estate projects in the region. This in turn will boost demand," adds al Dheeb. The cement demand in Oman is expected to reach 4.7mtpa in 2009, while demand from the entire GCC region is estimated in the region of 78mtpa.
According to the Credit Suisse study, the GCC region will see an increase of 20 per cent growth in capacity during the current year over the previous year, whereas the demand will grow only by 4.5 per cent. The international investment bank also noted that although the construction market in Saudi Arabia, Qatar and Abu Dhabi is likely to remain strong, a wave of excess supply across the region is likely with additional capacity coming up in Saudi Arabia and the UAE.
As for competition, proposals of Bajil and Amaran - two cement producers from Yemen - to raise their production capacity is a factor that could have an impact on RCC's export market. In the domestic market, OCC's new clinker project will commence commercial operations by the first quarter of 2010. This will not enhance domestic cement capacity, but will help OCC bring down its import cost.
According to al Dheeb, the government's price cap of RO1.5 per bag (RO1.6 per bag on imported cement) for producers is not affecting their margin. "When the government introduced the price cap in June 2008, the factory price was ruling at RO1.3 per bag," he adds.
With a solid capacity and distribution infrastructure, it is only a matter of time before the company returns to a fast growth track. Once the maintenance work is completed, the foundation RCC has laid over the years with a well-planned expansion strategy will come handy in consolidating its position. And the availability of rich limestone deposits in Salalah, in close proximity to its plant, can only make the ride a smoother one.
By A E James
© businesstoday 2009
