Domestic sales of core building materials rise in Oman as prices hold steady

Domestic output of both steel and cement has recorded a substantial rise amid recent price pressures, suggesting the supply of building materials will continue reliably at cost-effective levels as the country looks to clear a large infrastructure project pipeline on a tighter budget. With regional demand set to continue growing – by as much as 6% per year in 2015-19 for cement, according to an analysis by UK-based Industry Today – driven by a construction surge across the GCC, manufacturers of building materials are investing in new capacity to boost production and enhance efficiency.

Cement

In February 2017 Oman Cement Company, the larger of the nation’s two main producers, announced that after-tax profits in 2016 had risen by 10% to OR12.9m ($33.5m). One driver of this was higher sales, which increased in volume by 10.6% to 2.3m tonnes, and in value by 8.5% to OR56.6m ($147m). In the first nine months of 2017 the firm’s cement production continued to rise, jumping 8% year-on-year (y-o-y) to 1.86m tonnes – following a 19.7% rise in clinker output – according to World Cement, an industry news outfit. Sales rose in tandem, by 9.6% over the period.

Oman’s second-largest producer, Raysut Cement, however, saw after-tax profits shrink by 60% y-o-y in January-September 2017 to OR6.7m ($17.4m), partly a result of lower sales, and because income taxes were hiked in February from 12% to 15%, according to its chairman, Ahmed bin Yousuf bin Alawi Al Ibrahim. Oman Cement, whose after-tax profits also took a 21% hit in the period, also partly due to tax reform, said prices have been affected by intense competition, with neighbouring countries selling into the Omani market at “unrealistically low prices”.

Steel

A second core building material industry in the country – steel – has seen similarly positive overall results. Al Jazeera Steel Products, the sultanate’s main steel producer, announced in August 2017 that its sales volumes had risen by 12% in the second quarter. This helped push its half-year sales value up by 31% y-o-y, to OR46m ($119.4m). According to its chairman, Sulaiman Mohammed Shaheen Al Rubaie, a dip in the price of steel from China has also put pressure on the prices of finished products – Al Jazeera mainly sells steel tubing and structural products like reinforcing bars – prompting the firm to boost marketing efforts to support sales. “Even with a competitive environment, coupled with lower demand growth, the company managed to increase sales volumes and maintain profitability,” he said. “This was achieved predominantly due to cost optimisation and diversification in product mix.”

Capex

Demand projections have driven Oman Cement to invest further. In early 2017 it announced plans to build a cement plant in the coastal port city of Duqm. It has formed a joint venture with Raysut Cement called Al Wusta Cement Company, with construction work beginning in 2018 and production set to commence in 2020 in the port’s special economic zone (SEZ). The idea is to serve the building needs of investors setting up operations in the SEZ, as well as markets in the wider MENA region and India.

In October 2017 the parent company announced it had secured a plot of 500,000 sq metres by the zone’s authority, known as SEZAD. According to Al Wusta Cement’s chairman, Abdullah Abbas Ahmed, the plant’s design would be a departure from the gas-fired kit at existing facilities, instead making use of alternative sources of energy and focusing on a low-cost model and higher added-value products.

As of November the company was still on the hunt for consortium partners that could produce a compelling design using “new production technologies”. Al Wusta said the project is due to begin in 2018, and start producing by 2020, with an initial output of 5000 tonnes per day. This figure could gradually scale up to double, according to market needs.

Capacity Boost

Oman Cement’s expansion plans are part of a drive to boost local production. Tanfeedh, a national diversification enhancement plan launched in 2016 to accompany the country’s ninth five-year plan, calls for as many as three new plants to be built in the Duqm SEZ. Two plants are earmarked for standard Portland cement, each with a capacity of 3m tonnes a year, and one producing white cement primarily for export at a rate of 300,000 tonnes a year. Tanfeedh also calls for cement grinding plants in Duqm and Sohar. The objective of the expansion is to raise the share of cement that is produced locally, which Tanfeedh said was around 44% in 2015, or about 9m tonnes. “Currently, the demand for cement in Oman is higher than the supply from the local cement manufacturers,” Salem Abdullah Al Hajry, CEO of Oman Cement, told OBG. “This capacity gap provides a good opportunity for cement industry growth in Oman, and leaves local manufacturers with the opportunity to one day fully meet this demand.” In response, local conglomerate Al Anwar Holdings announced a tentative deal in the middle of 2017 to form a joint venture with Iranian producer Hormozgan Cement to build a grinding plant at Duqm with a capacity of 600,000-1m tonnes a year, at a cost of around OR10.5m ($27.3m).

Upgrades

Other investments are geared towards greater efficiency. In early 2017 Oman Cement floated a tender for an engineering, procurement and construction (EPC) contract to reduce bottlenecks at their plant, as outlined by a consultancy that previously examined operations for inefficiencies. As of August that year, work was nearly complete on a system upgrade on its second production line – supplied by FLS midth, a Danish engineering firm – aimed at enhancing pollution control. To boost its packing and loading capacity, in August 2017 it awarded a $4m EPC contract to China’s CNBM International Engineering Company to install a rotopacker and vacuum-type truckloading machine.

Duqm

Factories of building materials are also under way in the port city of Duqm. Of the 10 projects in the first phase of the $10.7bn China-Oman Industrial Park being built by Chinese developer Oman Wanfang, three fall in this category: one for generic building materials, another for making steel pipes and wire, and one for producing non-metal composite pipes for use in oilfields. Selected for fast-track status in the park, which is slated for completion by 2022, all three had signed land lease agreements as of October 2017 and will be operational by the end of 2018 at a combined cost of $138m, according to Ali Shah, CEO of Oman Wanfang.

Prices & Viability

Supplying building materials in Oman has remained viable business in recent years. According to a 2015 study by the Dubai Chamber of Commerce, the cost of producing cement in the country increased marginally from $37 to $38.7 per tonne over the 2011-13 period, yet gross margins also rose slightly faster in that span, from $28 to 29.8 per tonne. The price of a cu metre of concrete was $70 in 2016, while a tonne of rebar went for $650 and structural steel beams were $1300 per tonne, compared to $65, $926 and $1880, respectively, in the UAE, according to a 2016 analysis from Turner & Townsend, a UK-based consultancy.

Looking Ahead

Further investments in capacity look likely to continue given positive demand forecasts for building materials. Annual demand for cement in the Middle East and Africa region, having grown by 30% in the five years to 2014, to 467m tonnes, is forecast to have climbed by another 31% by 2019, reaching 611m tonnes, according to Statista. Meanwhile, demand for finished steel products in the Middle East, was set to rise 1.5% in 2017, to 53.9m tonnes, followed by a growth of 4.8% in 2018, according to the World Steel Association. Considering developing economies alone – excluding China – steel demand was expected to grow by 2.8% in 2017 and 4.9% in 2018, with international demand forecast to rise by 2.6% in 2017 and 3% in 2018 to 1.65bn tonnes. This outlook is supported by government infrastructure commitments across MENA. As of mid-2017 the project pipeline in Saudi Arabia alone exceeded $250bn, followed by the UAE ($184bn) and Qatar ($69bn), according to MEED figures. The GCC-wide total now stretches to $2trn, according to a 2016 tally by Deloitte. For Oman, this means a ready market for supplying materials to a building spree that is set to continue despite low oil prices. The country’s domestic market also holds potential. “The stated willingness of the government to diversify its economy away from petroleum and gas has created an extremely conducive environment for the growth of the construction sector,” according to a 2016 report by United Securities, a financial advisory services firm. “Besides, government spending and private sector investment in infrastructure-related projects have also increased, boding well for the prospects of the cement sector,” the report added.