Cement sales in Saudi Arabia continue to remain weak and recent data could indicate further downward revision to market estimates of demand and sector earnings for 2017, a report said.

In the first two months of 2017, sales volume fell 20.4 per cent on an annual basis, while in 2016, cement dispatches declined 10 per cent year-on-year (y-o-y) (54.8 million tonnes), added the report titled “Changing fundamentals; Reality seems tougher” published by Al Rajhi Capital, a leading financial services company in Saudi Arabia.

“In this context, we show the impact on companies based on our expectations of demand in 2017. With regard to prices, we have already seen prices decline sharply for Central and Western regions as they are most accessible to producers,” the report said.

“If demand does not pick up, we believe there could be further downside to prices, after enjoying healthy margins in the past.”

Already higher fuel prices, intense competition and inventory pile up have triggered a price war among cement companies to maintain the market shares which has negatively impacted profitability in the sector.

While dividends are likely to be cut, few companies with strong cash positions and limited future expansion might see lower impact on dividend payments. “We see limited benefits from exports as well and do not expect a near term recovery in construction sector. We also highlight current upside and downside risks in the sector. Under current market conditions, we are Neutral on Saudi, Southern, Yamama and Arabian cement as we believe that most of the weaknesses are priced in, while we are underweight on Qassim and Yanbu cement.”

70pc decline in value of awarded projects

Cement sector continues to be weighed down by weaker construction activities in the kingdom. According to the General Authority of Statistics’ 2016 GDP preliminary figures, the construction sector output in the kingdom dropped 2 per cent y-o-y in 2016, which was the first negative growth since 1999.

The current weak conditions in the construction sector is attributed to lower government spending, as Govt. adjusts to lower oil prices through spending cuts and prioritization of projects. Moreover, in 2016, though Ministry of Finance approved 1,192 construction projects (-18 per cent y-o-y) the total value of the awarded projects dropped 69 per cent y-o-y to SR24 billion ($6.4 billion).

Going forward, the construction sector has not shown any signs of recovery in the short term, which is likely to weigh on the cement sector. Construction sector is likely to depend on the private sector given government’s plan of cancelling and delaying unnecessary projects.

Demand and supply

In 2016, cement dispatches declined to 54.8 million tonnes (10 per cent y-o-y) as construction activities have been witnessing signs of spending cuts across various small and medium size projects as well as limited demand from mega projects that are nearing completion such as Riyadh metro, King Abdullah Financial District etc.

In 2017, demand is unlikely to pick up steeply given that construction activities are bound to remain weak, thus we expect sales volume to remain modest with a decline of about 12-15 per cent y-o-y (about 47 million tonnes).

On the supply side, clinker production in 2016 declined to 55.5 million tonnes (2.6 per cent in yearly basis). Recently, Yamama and Najran Cement temporarily shut down part of existing production lines. The lines have a clinker production capacity of 5,600t and 3,000t/day, respectively. We believe that under the current weak market conditions, cutting production would be one of the realistic options for balancing the market. We anticipate cut in clinker production this year by more than 12 per cent y-o-y. – TradeArabia News Service