Saudi Arabia’s total cement sales for Q1 2018 stood at 11.8 million tons, down 11 per cent year-on-year (y-o-y) and one per cent quarter-on-quarter (q-o-q) as a result of the continued slowdown in construction activity, a report said.
The combination of weak demand and high inventory levels forced the companies to seek other solutions such as entering other regions within the kingdom as well as exporting with low selling prices – a case in point is Yanbu Cement's export agreement which seeks to lower the inventory and increase cash levels, said Al Rajhi, a leading financial services provider in the kingdom.
Yanbu Cement’s low cash cost per ton gives the company the ability to export at lower prices, which is likely not possible for other companies to replicate, says Al Rajhi.
Going forward, demand is unlikely to pick up based on the trends witnessed during the first three months of 2018. Al Rajhi says it remains cautious as construction activities are bound to remain weak. It adds that Q2 will witness a material drop in sales volume due to seasonality (Ramadan and the Eid ) which will result in around 20 per cent drop on q-o-q basis to reach 9.6 million tons (-14 per cent y-o-y) based on Al Rajhi's analysis. For now, Al Rajhi remains neutral on the sector given the low demand, high inventories and price war in the sector, the company said in the report.
The overhang of excess inventory remains with a slight increase on a m-o-m basis. Inventory stood at 35.7 million tons (79 per cent of last twelve months - LTM - sales). In this backdrop, reaching the optimal level of inventories (two months dispatches) will take time, the report adds..
Due to the slowdown in construction activity and prevailing high inventory levels, companies started to enter new regions in the kingdom which triggered a price war, the report said.
The central region seems to be an attractive area especially for northern region cement companies due to the relatively bigger market. The sales market share for northern cement companies increased in the last six months. On the other hand, central region companies’ market share decreased slightly during the same period.
Yanbu Cement signed a one-year agreement to export one million tons of clinker and 0.5 million tons of cement starting April 2018. The deal is estimated to add SR100 million ($26.6 million) revenue in 2018 as per management commentary.
The agreement will help the company to lower its inventory (currently at 76 per cent of LTM sales) and increase cash levels which will support higher payout ratio for the year. On the other hand, lower margins on this deal will not aid material earnings improvement and the company will renew the deal next year if the local demand remains weak, it adds. – TradeArabia News Service
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