Cement Industry

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GCC Cement Review and Outlook
The current construction boom in GCC has been a key factor driving the demand for the cement industry.
The construction sector is expected to maintain its robust performance in 2014, mainly supported by strong
government expenditure and improving economic performance across the GCC region. Up till 5 May 2014,
the total value of projects planned or underway in the GCC region stood at USD2,498bln, with Saudi Arabia
leading the table with USD1,080bln, followed by UAE (USD731bln) and Qatar (USD275bln). Bulk of the
contracts has been awarded to the real estate and construction sector.

GCC continues to spur investments into Infrastructure space
The infrastructure segment remains the centre of GCCs current construction boom. GCC countries are
making serious efforts to reduce their dependence on oil revenues by developing non-oil private sectors,
with a focus on the infrastructure segment. For example, UAEs focus remains on developing transportation
infrastructure. Some of the major projects underway in UAE include the Etihad Railway Network
(USD11bln), Dubai airport expansion (USD7.8bln), Dubai Metro (USD7.6bln) and other road and bridge
projects. Saudi Arabia, meanwhile is investing approximately USD16.5bln to improve the transportation
system in Mecca.

At the same time, the Saudi government plans to invest USD9.4bln in a high-speed rail line connecting
Mecca with Medina. Qatar also continues to witness rapid rise in infrastructure expenditure owing to its
preparations for the FIFA World Cup 2022. Qatars expenditure plans include approximately USD20bln on
roads, USD25bln on railway, and USD15.5bln on an airport and USD8bln on a seaport.

GCC Infrastructure Outlook continues to be positive
The rapid growth in the GCC infrastructure/construction market has been one of the most impressive and
salient aspects of the regional economic boom over the past decade. Rising oil prices were the main driver
behind this growth. At the same time, there was recognition among a new generation of leadership in the
GCC that it had to take advantage of the benign economic conditions to invest in their nations
infrastructure. With local populations growing rapidly, there was a realisation that existing infrastructure was
insufficient to cope. The explosion in transportation, education and healthcare project activity has been a
direct consequence of this demographic growth. This combination of factors has created a perfect storm for

November 2013

Highlights


Saudi Arabia Cement
Riding High on the ConstructionBoom
18 June 2014
Total value of projects planned or underway in the GCC region stood at USD2,498bln
The Kingdoms per capita cement consumption increased at a CAGR of 7% for the period 2005-2011
to reach more than 1,677 kg in 2011 compared to 1,070 kg in 2005
Saudi demand on Cement is expected to rise from 41mln tonnes in 2010 to 57mln tonnes by 2015
The cost of producing cement in KSA stands at USD30/tonne as against USD44/tonne in the GCC
region


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investment in infrastructure. Cities such as Dubai, Riyadh and Doha have been transformed by billions of
dollars of investment in their physical infrastructure, and international firms have flocked to the region to
capitalise on the huge demand for consultants, contractors and suppliers. The credit crisis of late 2008
caused a sharp correction in the industry as liquidity dried up and investors vanished, which lasted for
several years. But increasingly there are signs that the region is entering a new construction boom.

Further wary of their heavy reliance on oil and gas sectors, all GCC states have embarked on strategies and
programs designed to diversify their economies, enhance private sector activity, improve education standards
and boost employment for nationals. These efforts include large public spending programs on infrastructure,
education and health with supporting investments envisaged from the private sector. Not all are fully costed
out, but Saudi Arabias 9
th
Development Plan covering 2010-14 envisages spending of USD385bln. Kuwaits
development plan meanwhile proposes USD125bln over the same time frame, while Omans 2011-15 plan
envisages USD78bln in expenditure. Meanwhile, Abu Dhabi, Bahrain and Qatar have established Vision 2030
frameworks and national development plans/strategies to achieve those visions. The National Development
Strategy (NDS) for Qatar covering 2011-16 envisages spending totalling USD226bln, while Abu Dhabis Vision
2030 report estimated spending of USD160bln during the five year period 2008-13.

All GCC plans highlight investment opportunities in such sectors as transportation, power, water, utilities,
health care, housing, ITC, education and training. Spending on infrastructure is expected to be particularly
large in the coming years offering large opportunities in the construction sector. Transport projects are
particularly prominent, with all GCC states planning to develop new interlinked train networks, as well as
boosting roads, airport and port infrastructure. Demand for power is also rising strongly throughout the region
as economies develop and older generating plants commissioned in the 1970s and 80s need upgrading. More
country specific details are provided in the sections that follow below.

GCC Development Plans
Country
Development Amount
(USD Billion)
Plan Period
Abu Dhabi 160 2008-13
Saudi Arabia 385 2010-14
Qatar 226 2011-16
Kuwait 125 2010-14
Oman 31 2011-15
Total GCC 927
Source: MEED; KFHR

Saudi Arabia Cement
The Saudi cement sector is one of the established sectors in the Kingdom. The industry is benefiting from
massive investments currently underway in the Kingdom as the country bids to channel its oil revenues to build
its infrastructure and strengthen the non-oil sector. As a consequence, the government has initiated plans to
execute projects, worth around USD700bln, across the Kingdom over the next 20 years. Nearly half of the
government investments are set aside for real estate and housing in order to facilitate improved living
standards for its citizens. Other projects consist of developing roads, ports and railways, including the Land
bridge Project connecting Dammam in the eastern region to J eddah on the Red Sea, the cost of which is
estimated to be USD10bln. Another important investment is the development of the economic cities - mainly

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King Abdullah Economic City (worth USD50bln) and Knowledge Economic City which is estimated to cost
USD8bln. We believe these mega projects will continue to provide growth opportunities to the Saudi cement
producers. It is worth mentioning that Saudi Arabia is the cheapest cement producer in the GCC region, owing
to the cheap availability of natural gas allocated by Aramco and presence of natural resources at its disposal.
The cost of producing cement in Saudi Arabia stands at USD30/tonne as against USD44/tonne in the GCC
region.

Demand-Supply Dynamics
Construction activities have accelerated in 2013 and will continue in the same vein in 2014. Consequently, the
Saudi cement market has a positive undertone to it in terms of near to medium-term demand growth. Excess
supply fears, which have been a bit of a concern over the last two years, have been eliminated despite the
large amount of new capacity coming up. Nevertheless, expansion programs are projected to raise production
capacity in the Kingdom to close to 66mln tonnes per year by 2015.

Saudi cement makers continue to benefit from subsidised fuel and a protected operating environment,
prompting us to believe that 2014 will be robust year for the cement manufacturers. The Kingdoms per capita
cement consumption increased at a CAGR of 7% for the period 2005-2011 to reach more than 1,677 kg in
2011 compared to 1,070 kg in 2005. On a per capita basis, Saudi Arabias cement consumption is currently
among the highest in the world following the countrys need to develop its infrastructure, including industrial,
aviation, transportation, education , tourism and health sectors though the oil sector structurally supports
these high per capita levels to a material extent.

Overall, demand is expected to rise gradually from 41mln tonnes in 2010 to 57mln tonnes by 2015, at a CAGR
of 6%. Demand is expected to peak in 2014 and thereafter assume a slight fall in 2015, unless government
announces fresh funds to finance its projects. This growing demand will be met by planned capacity ramp-ups
by some of the existing players, who are either scaling up or replacing their plants coupled with few more
licenses being awarded by the government. However, cement prices will fluctuate over the next couple of
years, if the capacity ramp-up does not materialise resulting in a tight supply situation. The sector is
experiencing a moderate supply surplus and the industry supply should achieve a CAGR of about 5.5% until
2015. It is to be noted that the supply of cement depends solely on Aramcos allocation of fuel to the sector in
order for the companies to expand their respective production lines. Due to these prevailing uncertainties we
believe supply will remain neck-to-neck with demand in the next three years.

Conclusion and Outlook
Long-term outlook remains positive
It is worth mentioning that Saudi Arabia is the cheapest cement producer in the GCC region, owing to the
cheap availability of natural gas allocated by Aramco and presence of natural resources at its disposal. The
cost of producing cement in Saudi Arabia stands at USD30/tonne as against USD44/tonne in the GCC region.
The recent strong consumption of cement in Saudi Arabia is being fuelled by a massive construction boom due
to sustained investment on infrastructure and the governments stepped-up expansionary fiscal stance that
has only grown stronger since December 2008.

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The Kingdom unveiling its largest budget in history, with expenditures expected to reach SAR610bln will be a
positive catalyst for the cement market due to higher demand of the raw material. In addition, Saudi Arabias
cabinets approval of its first ever mortgage law will further stimulate the cement market through increasing
construction activity as the law will help increase the 1.5mln units the kingdom needs to stem the housing
shortage. Overall, construction activities accelerated in 2012 and should continue in the same vein in 2013 and
2014. Consequently, the Saudi cement market has a positive undertone to it in terms of near to medium-term
demand growth. Excess supply fears, which have been a bit of a concern over the last two years, have been
eliminated despite the large amount of new capacity coming up. Nevertheless, expansion programs are
projected to raise production capacity in the Kingdom to close to 66mln tonnes per year by 2015.

Spurred by massive government investments in the infrastructure space, we believe the outlook for the Saudi
cement sector is positive moving forward. Utilising massive oil revenues, the Saudi government is investing
heavily in healthcare, real estate, and education sectors. With plans to spend USD385bln on construction
projects until 2014, government spending remains the major catalyst for the cement sector in the near to
medium term. The robust demand on the back of large-scale government investments will ensure cement
companies remain profitable moving forward


Short-term challenges
The Saudi cement sector is currently passing through a rough patch as labor shortage has negatively impacted
construction activities across the Kingdom, although the sector is mature and well-established. The Saudi
governments efforts to implement the Nitaqat law and the recent labor market initiatives have posed
challenges for the construction and other labor oriented sectors. Around two million foreign laborers are
estimated to have left the Kingdom resulting in a shortage of laborers. As a result, the construction activities
have slowed down in the Kingdom, leading to lower sales volumes and inventory build-up for major cement
companies. In addition, the Saudi government continues to adopt its price cap policy as well as export ban on
cement, limiting growth opportunities. Nevertheless, we expect the cement sector to recover over the next
couple of quarters and fare well over the long-term on the back of the governments efforts to diversify the
economy away from the oil & gas sector, and promote more value added industries rather than just focusing on
fuel price advantage. Construction activities are expected to pick up as new foreign workers enter the Kingdom
through the legal route.


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Saudi Arabia Cement: Demand-Supply Dynamics (2009-2015E)


Source: CW Group, KFHR


Saudi Arabia: Annual Cement Consumption Growth Trends (2006-2014f)

Source: CW Group, KFHR











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