Will Saudi Arabian producers turn to exports?

The full removal of export tariffs on cement, effective 1 February 2018, signals an important change for Saudi Arabian cement producers. While the Ministry of Commerce lifted Saudi Arabia's cement export ban in 2017, it did not stimulate trade, even when tariffs were reduced from SAR133/t to SAR85/t. The latest step removes the last outgoing trade barrier for producers who want to reduce their clinker inventories, with Iraq and Yemen as likely target destinations.
 
Exports from Saudi Arabia have remained below 1Mta of late, but there is now potential for these levels to rise to 3-4Mta in the medium-term, and ultimately as high as 7-8Mta, according to EFG Hermes Research. At around US$22/t, Saudi Arabian manufacturers produce the cheapest cement per tonne and now have a considerable cost advantage over Iranian, Egyptian and Pakistani exporters.

Excess inventory
As clinker inventory levels have been building up in the kingdom, the need to export has significantly increased. Al Rajhi Capital estimates that inventories stood at 35.2Mt in February 2018, or 75 per cent of domestic sales in the last 12 months. January saw the first decline in inventories, by-1.3 per cent, since April 2017 and clinker production was down by 25 per cent YoY.

The Ministry of Commerce has acted to ease restrictions on exports, having seen domestic cement dispatches decline by 15.1 per cent in 2017 to 47.23Mt compared to 55.65Mt in 2016, reports Al Jazira Capital. Utilisation levels have also plummeted to 65.5 per cent in January 2018 from 77.6 per cent in January 2017. The outlook for Saudi producers in 2018 remains mixed but with some positives for the year ahead, Riyad Capital told ICR.


Potential regional markets
While target markets are restricted by the growing trend of overcapacity in the GCC, Saudi exporters are likely to focus on Iraq which meets 50 per cent of its ~25Mta cement demand via imports, claims EFG Hermes Research. With their proximity to the Saudi-Iraq border, Northern Cement and Al Jouf Cement are well located to take advantage of low transport costs. Al Jouf Cement has reacted swiftly by renewing its export licence on 15 February 2018.

Jordan will also be seen as a territory that can be accessed by the northern Saudi producers for exports and Al Jouf Cement has signed an MoU with Jordan Housing Developers Association to penetrate this 5Mta market. In November 2017 it was reported that Saudi Industrial Export Co signed a contract with Al Jouf Cement for 72,000t of cement to be imported to Jordan to register in the financials of the 1Q18.

Saudi Cement Co and Eastern Province Cement are more likely to have their sights set on Bahrain which only imports about 1.2Mta. While Bahrain was the only country to receive Saudi exports after the export ban of 2008, this anomaly was virtually closed when Saudi Arabia tightened its export laws in 2017. Analysts expect that cement producers located in east of Saudi Arabia will now seek to regain lost Bahraini market share.

Much tougher may be the goal of breaking into east Africa where overcapacity is rife. Kenya, Tanzania and Ethiopia already have price-competitive markets. Southern Province Cement, United Cement Industrial Co and Al-Ghabiah Cement are located tantalisingly close to the Port of Sudan across the Red Sea, from where they could truck cement deeper into east Africa, although coastal routes to Mombasa and Dar es Salaam through the Gulf of Aden are also open for more distant trade paths.

Yemen is also a more volatile market for Saudi cement producers to target with the ongoing war and political crisis, but reconstruction in liberated Saudi-led coalition areas could offer medium-term contracts. This would be enticing for Southern Province and Najran Cement in particular as they are located nearby.

The Neom project
Domestic cement producers are still expected to react positively to Saudi Crown Prince Mohammed bin Salman's announcement last October of a new mega city to be built by the Red sea by 2025. The US$500bn Neom project, backed by the country’s sovereign wealth fund and an international investor, will be located in the northwest of the kingdom. It will connect to Jordan and will have an impressive King Salaman bridge route built to Egypt. Primed with drones, renewables and automated cars, the 26,500km smart city should be a beacon draw for Tabuk Cement because of its proximity, as well as other domestic cement producers.