Cementing results: Regional demand is having an impact on prices and production

Tracking the resurgence of the construction sector, and the property market across the region, Oman’s cement industry is enjoying rising profitability, and looks to ramp up production as demand increases domestically and internationally. Cement demand across the GCC is expected to grow 6-7% in 2014, up from 4-5% in 2013, according to an October 2013 report by Global Research, part of Kuwait-based Global Investment House. The report ranked Oman as one of only two countries with a “positive” outlook for the cement industry, the other being regional giant Saudi Arabia, and said demand was rising “aggressively”.

Regional Outlook

The regional market began recovering in 2012 after a contraction in 2011, and Global Research expects it to continue to grow over the coming four to five years, driven by big-ticket projects including the 2022 FIFA World Cup in Qatar and the 2020 World Expo in Dubai. Saudi Arabia, the region’s most populous country and biggest economy, is investing heavily in housing and infrastructure, much of the latter linked to an ongoing region-wide drive for economic diversification.

While Oman is a relatively small construction market, it tends to follow the trends of the region, partly due to the fact that its economy is also closely linked to oil prices, and partly due to the fact that investor sentiment towards the Gulf as a whole tends to have a considerable effect on the sultanate.

Oman also has several mega-projects in the pipeline, a relatively successful diversification strategy (with tourism and transportation at the fore), and an affordable housing programme that should help drive cement demand. The regional cement market is also highly relevant to Oman in terms of pricing (oversupply in the region has been a concern, as it has lowered the cost of imported cement) and Oman’s potential for exports (major producers are selling abroad, as are their competitors in other Gulf countries).

Sector Figures

Cement grinding capacity across GCC member states totalled 117m tonnes per year (mtpa) in 2012, with 11 mtpa having been added that year, while clinker capacity stood at 88 mtpa, according to Global Research. Following years of investment in plants, the slowdown in regional construction caused surplus capacity of 25m-30m tonnes of cement, though clinker surplus was “quite low”. With demand accelerating, the clinker surplus is expected to disappear within years, and the level of extra cement should come down to 5-10 mtpa by 2015-16. Meanwhile, plant expansions have slowed, meaning that capacity will grow by around 7.7% to 126 mtpa 2015.

Cement prices in the Gulf averaged around $65.80 per tonne in 2012, up slightly on $64.90 in 2011. In Oman itself, after six quarters of stagnation, cement prices rose in the first quarter of 2013, to $67.40 per tonne, up 3.7% on $65 a year before. Prices are forecast to continue growing, based on demand driven by public investment. The GCC’s cement manufacturers now generate higher margins than their counterparts anywhere else in the world, leveraging low input costs in the form of subsidised gas and ample reserves of limestone. Gross margins average 40-55%, compared to 15-25% for counterparts in India and China, for example. Rising prices may boost this further.

Local Players

The Omani cement market will grow by 6% annually between 2012 and 2016, to $5bn, according to a forecast by the country’s largest producer, Raysut Cement, one of two listed Omani cement firms. This follows strong growth in 2012 as the property market picked up and government spending began to come on-stream; sales rose some 20% year-on-year (y-o-y) to 4.7m tonnes from 3.9m tonnes in 2011. Local producers increased output to meet demand, with production growing 24% to 4.6m tonnes from 3.7m tonnes, pushing utilisation rations up to 75.8% in 2012 from 68.8% the previous year – good news for this capital-intensive industry.

Raysut generated net profit of OR24.5m ($63.5m), in 2012, up 64.1% on 2011. In the first half of 2013, it saw a 19.6% increase in net profit to $42.6m, despite revenues flatlining at $126.8m and cement output falling 4% to 1.96m tonnes from 2.03m tonnes in the first half of 2012. Clinker production fell 5% from 1.76m tonnes to 1.68m tonnes.

In July 2013, Oman Cement Company (OCC), the country’s second-largest manufacturer, announced plans to establish a new ready-mix concrete plant and install a new grinding mill with capacity of 150 tonnes per hour. The state has a majority stake in OCC, which has annual clinker capacity of 2.4m tonnes. A minority share is listed on the Muscat Securities Market.

OCC, which operates four cement mills, performed strongly in 2012, achieving a 37% rise in net profit to $45.5m, up from $33.2m in 2011. Revenue rose 17% to $154m from $131.7m. Growth continued in 2013, albeit at a more sedate pace, with net profit reaching $24.1m in the first half of the year, up 3% on the same period of 2012. The lower growth can be partly attributed to technical issues at one of its cement mills, which caused a month-long shutdown from mid-June. As a result, production in the first half of 2013 fell 5.23% y-o-y to 1.06m tonnes, with revenue trimmed to $71m from $72.9m. That revenue fell less than production indicates a healthy price environment.

Exports

Raysut has warned that Oman’s cement producers face “significant” competition – and thus pricing pressure, particularly from the UAE. The Emirates have overcapacity of 65%, according to Cement, a trade publication. With high fixed costs and past capital investment, Emirati producers are looking to maintain production and ship more cement abroad, and Oman, with rising demand from public investments, is a natural destination. As a result, in recent years Omani cement manufacturers have become more reliant on exports, seeking higher prices than they could demand on the domestic market.

“The company’s strategy has been to expand its market base through supplies to Yemen, East Africa and other countries,” Raysut’s chairman Ahmed Al Ibrahim said in the firm’s first-half 2013 report. “The company has met with challenges effectively by holding on to sales and enlarging the profit of the group as a whole by optimising sales in varied markets.”

With demand in the UAE now picking up again, the flow of cheaper cement onto the Omani market is likely to slow, to the benefit of local producers. This effect has not been particularly pronounced in 2013, and Global Research expects pressure on margins to continue in the short term. But if construction in the UAE continues to gain momentum, the space for Omani cement companies is likely to grow. Saudi Arabia’s recent moves to ease import restrictions on cement would also help, as UAE manufacturers look to the kingdom’s large market to export surplus output.

Outer Markets

Omani companies are not expected to invest heavily in plants in the near future, given existing overcapacity. The scope for ramping up production to its maximum 6.2 mtpa is considerable, given the revival of local demand, rising prices and the potential for exports. Oman’s current utilisation rate, as well as its geographical location, means that it is one of the best-placed countries in the region to develop exports. Local cement manufacturers have the advantage of enjoying low input costs and direct access to the Arabian Sea. North Africa is particularly promising, with its ongoing investments in infrastructure but relatively small domestic cement production. East Africa, to which Oman is more accessible than most Gulf countries, is also an enticing market.

While in the short term, rising domestic demand is likely to be the main focus of production growth, exports are also an appealing option, particularly if they can help companies diversify from markets that are over-dependent on global oil prices.

Looking Ahead

The cement industry performed well in 2012 and the first half of 2013, reflecting improvements in Oman’s construction sector, as well as in export strategies. The next few years should see domestic demand continue to rise as the government rolls out major infrastructure projects and private investors push ahead with schemes. Higher utilisation, less competition from imports and rising prices should keep margins healthy in the near future, and possibly boost them, though the pending increase of gas prices as the government eases subsidies in the longer term will affect costs. Oman has the scope to boost production by around a third without considerable capital investments, but OCC’s plans for new production lines indicates that it anticipates a future in which demand at home and abroad exceeds capacity.