Saudi's subdued second quarter
The Saudi Arabian cement industry is continuing to face headwinds with domestic producers reporting a tough second quarter amid the dual impact of lower cement demand and Ramadan season as well as weak price realisation. Welcome relief has come in the form of an increase in July sales and the potential effect of the government's decision to reduce cement export fees by half.
Saudi cement producers reported subdued second quarter earnings as the industry has been affected by falling cement prices and lower demand amid the ongoing supply glut. Dispatches are expected to have reached 11.9Mt in 2Q17, due to a lower pace of project spending, in addition to the impact of Ramadan.
Saudi Arabia's largest producer by capacity, Southern Province Cement Co (SPCC), registered a 37 per cent YoY decline in sales volumes to 1.29Mt in 2Q17. Revenue of SAR245m (US$65.3m) almost halved YoY due to a combination of lower prices and falling volumes. However, earnings analysis by Riyad Capital on a number of Saudi producers showed SPCC managed to improve its market share to 11.5 per cent with its dominance in the southern province a key factor. Although demand in the southern region declined, it performed better than the overall industry and SPCC enjoys a lion’s share of the market with the only competitor being Najran Cement.
The country's second-largest producer, Saudi Cement Co, reported revenue of SAR270m, down 45 per cent YoY and -22 per cent QoQ, with sales volumes falling 41 per cent YoY to 1.47Mt. A six per cent YoY and five per cent QoQ drop in price realisation to SAR224/t, combined with a sharp decline of 43 per cent QoQ and 49 per cent YoY in clinker production took utilisation rates to 57 per cent. Particularly worrying is the adjusted inventories (cement + clinker) figure of 5.44Mt, which is nearly 93 per cent of the last 12 months' (LTM) sales volumes. A steady fall in market share is also of concern, with Saudi Cement losing nearly 3.5 per cent over LTM. The cement producer is believed to have partially adopted a discount strategy but not enough to meet its peers' volume-price mix. "Saudi Cement's attempt to preserve its pricing is appreciated, but not a right strategy in a scenario of mounting inventories," Riyad Capital writes.
Meanwhile, Yanbu Cement’s sales volumes fell by 18 per cent YoY to 1.21Mt, greater than the overall industry decline. Price realisations were down by five per cent QoQ and 25 per cent YoY to SAR177/t, suggesting stiff competition in the western region. Revenue of SAR214m fell by 38 per cent YoY. Riyad Capital notes that Yanbu, which is the third-largest producer in Saudi Arabia by capacity, is facing multi-faceted competition from producers in the northern, western and central regions who continue to focus on these markets.
Other Saudi producers to have reported declines over the past few weeks include Qassim, Tabuk Cement, Al Jouf Cement, Arabian Cement, Northern Region Cement, Eastern Province and Hail Cement Co. Yamama Cement Co also reported lacklustre earnings, but a strategy to increase market share in the central region as partially paid off with sales volumes down by 1.2Mt by three per cent QoQ versus the industry’s 17 per cent drop.
The subdued scenario is likely to continue in 3Q17 due to less working hours in the construction sector over the summer season. For full year 2017, results are likely to be restrained with consumption forecast to fall by nine per cent YoY before a slight recovery in 2018 on the back of the government's determination to push through its diversification efforts, according to forecasts by the Global Cement Report, 12th edition.
Signs of relief
However, latest figures show cement sales of companies operating in Saudi Arabia recorded an increase of 11.53 per cent in July 2017. Sales rose to 3.49Mt in July 2017, compared to 3.13Mt during the same month of the previous year. Cement inventories decreased marginally by 1.96 per cent to 1.1Mt last month, compared to 1.12Mt in July 2016, according to the report.
Southern Province Cement topped the sales list with 409,000t sold in July, down 5.32 per cent from 432,000t in the prior year period. Yamama Cement was the second-largest seller, with a YoY sales growth of 17.5 per cent to 369,000t from 314,000t in July 2016. Meanwhile, Tabuk Cement registered the lowest sales of 61,000t in July 2017, a 17.6 per cent fall YoY.
Moreover, a decision by the Saudi government announced in the 2Q17 to cut the export fee for cement by 50 per cent from a range of SAR85-133/t (US$22.66-35.46/t) is being welcomed by the industry. The initiative aims to improve efficiency, revive the local industry and enhance competency globally. "This is a breather for the industry as nearly 5-6 companies have received a licence and are on the verge of starting exports, once demand and pricing offers an opportunity in the neighbouring markets,” Riyad Capital comments. Companies that have access to ports could be the biggest beneficiary of the move, but it cautions that the benefits only have limited scope as a large surge in exports is not expected given the supply glut in MENA market.
