Middle East market developments

Cement producers in the Gulf Cooperation Council (GCC) nations witnessed a 24.3 per cent increase in revenues in the first quarter of 2012, reaching US$1.26bn (AED4.62bn) as construction picked up in certain parts of the Middle East. Saudi Arabia continues to be the region's strongest market, but improvements are being seen in the UAE and Qatar is gathering pace. However, a challenging operating environment persists in Egypt.

According to a report by Global Investment House (GIH), combined profits in the GCC sector rose to US$435.6m compared to US$359.54m in 1Q11, representing an increase of 21.2 per cent. However, net margins suffered a decline of 90.4 basis points during the period. Gross margins saw a 233.6 basis point rise in the first quarter to 43.7 per cent, compared to 41.4 per cent due to increased selling prices together with a fall in fuel prices.

UAE and Oman reported a reversal in declining revenues. Cement sales of UAE firms increased by 7.7 per cent to US$258.1m, bringing gross margins back to double-digits of 10.5 per cent. Further improvements have also been witnessed according to Rizwan Sajan, chairman of Danube Building Materials: "The second quarter of this year was much better than the first quarter on positive signs in the UAE," Sajan said. Earlier this week, UAE's Union Cement reported a rise in its net profit for the first six months of 2012 of US$5.6m, reversing the US$2.4m loss reported in 2011. However, the company said the increase was due to improved prices and a reduction in overheads both through trimming procurement costs and optimising production capacity.

Over in Oman, the country's leading cement producer, Raysut Cement, said profits jumped 54 per cent. The company attributed the rise to increased demand in export markets as well as improved cement prices. Revenue rose 17 per cent to OMR49.5m. In his director's report, Sheikh Ahmed bin Alawi al Ibrahim, chairman of Raysut Cement, said cement prices are slowly moving up and demand is on the rise in the region but noted that supplies in Oman are still under significant pressure from inflows from UAE, making the domestic scenario highly competitive. However, the rise in demand from Yemen and East African markets has had a favourable impact on the company. Raysut said it achieved higher revenue and profit during the period by pursuing with its non-traditional markets beyond its traditional base.

Indeed, a recent report by Bank of America Merrill Lynch states that Saudi Arabia will take the lead in terms of construction spending in the MENA region in the period to 2020. The MENA infrastructure and construction market is among the world's most attractive given its sheer size and Global Construction Perspectives and Oxford Economics predict a total of US$4.3tn will be spent on construction across the MENA region by 2020, representing growth of almost 80 per cent to that period. With its young and expanding population, Saudi Arabia should be the most buoyant market, in line with its economic development plan.

Furthermore, the recent approval of the mortgage law should help to drive growth in residential construction in response to the current housing shortage. In preparation for hosting the 2022 FIFA World Cup, Qatar will also be the one of the fastest-growing GCC construction markets, in BofA Merrill Lynch's view. Its planned growth will be accelerated by US$100bn of spending on rail, roads, water and other infrastructure, financed by oil and gas exports.

Meanwhile, the uncertain political situation and excess production capacity continue to present a challenge in Egypt. For the first four months of 2012, cement consumption improved by 14 per cent to 17.6Mt against a lower base from the same period last year, according to the Ministry of Investment. However, global cement majors with significant exposure to the Egyptian market have in turn witnessed declining volumes in 1H12. Lafarge reported a drop of 11.1 per cent while Italcementi saw a 6.4 per cent decline with exports limiting the reduction. Cemex's volumes, meanwhile, fell four per cent with a second quarter sales down 18 per cent reflecting low activity in the infrastructure sector in anticipation of the presidential elections.