The much-anticipated lifting of Saudi Arabia's ban on cement exports, first implemented in 2008 and extended in 2012, is expected to provide little relief for the country's cement producers, according to emerging market investment bank Arqaam Capital.
Mohammed Kamal, executive director of equity research at Arqaam Capital said that export volumes would likely be capped at 20 per cent of output and potentially subjected to an export tax. The net effect should be margins erosion, which partly dilutes the earnings per share growth that results from the expansion in headline sales. In isolation, exports can dilute blended EBITDA margins to about 30 per cent on average when transport costs are included into the equation. “In our view, the cash margin per tonne of exported cement can fall by 40 per cent to SAR60-100/t, depending on the region it is produced in and the market exported to. The incentives to export then are the depletion of clinker inventory, or the utilisation of idle production lines,” he added.
The exported cement volumes are likely to be taxed an amount equivalent to the fuel subsidy they carry taking into account that the remaining subsidy of SAR10/t was previously removed via reforms to industrial fuel prices. Combined with transport costs of at least SAR80-100/t rather than SAR50/t domestic land freight costs between regions, should lift the average cash cost per tonne by 50-70 per cent to SAR190-260/t, eroding the bulk of the margin differential Saudi producers enjoy over global peers.
”We estimate about 30 per cent EBITDA margin on exported cement volumes, in-line with global averages, assuming selling prices in target markets are accommodating, and averaging SAR300-400/t,” said Mr Kamal.
