Setting a foundation: Spate of local and regional projects should give cement prices a boost

The large number of ongoing or expected construction projects in Oman is positively impacting a range of industries and sectors throughout the country’s economy. The cement segment is no exception to this trend. After experiencing a period of lower prices during 2011, the industry is expected to grow steadily over the coming three to four years.

Lower cement prices in the recent past can be largely attributed to low-cost cement being imported from the UAE. The construction sector had weakened there, resulting in many UAE-based cement producers working to supply Omani projects. Consequently, this increased competition and drove down cement prices. This downward pressure has been reduced by an uptick in demand, much of which is derived from significant government spending on infrastructure projects.

New Budget

According to the Omani government’s current five-year economic plan, which runs from 2011 to 2015, over OR4.1bn ($10.7bn) – or nearly 10% of planned expenditures over the period – has been budgeted for the construction of transport infrastructure projects alone. At almost OR2.4bn ($6.25bn), airport construction projects make up the largest segment in the transport construction category, with road construction projects accounting for another OR1.23bn ($3.21bn). Other planned infrastructure spending includes more than OR450m ($1.2bn) allocated for water supply projects and OR38.4m ($100m) set aside for dam construction between 2011 and 2015.

Looking Abroad

Planned construction projects for the FIFA World Cup in Qatar will likely benefit Oman’s cement industry further as demand for cement will increase outside of the sultanate. “The growth for business in regions outside of the Muscat governorate is there,” said Surendra Kumar, managing director of KAS Construction, a firm specialising in road projects. “It is crucial to employ locals and subcontract their equipment in order to bring growth and contribute to their communities.” A number of projects expected to begin in Saudi Arabia should drive up demand for cement there as well. Alpen Capital, a Dubai-based investment bank, estimated in its most recent report on construction that around 50% of demand for building supplies in the GCC region over the next decade or so will come from projects in Qatar and Saudi Arabia alone. The increase in construction in both markets should reduce the high level of competition in Oman’s cement industry.

As competition decreases in the sultanate, Omani cement producers are expanding production capacity to meet the rising needs of local projects, as well as projects abroad. Key export markets with strong growth include Yemen and several countries in East Africa.

While average cement prices in the GCC dropped between 2010 and 2011, Alpen Capital expects a positive shift over the next several years. Indeed, the average price of Portland cement is forecasted to grow by over 6% between 2012 and 2015, from an estimated $74.20 per tonne in 2012 to $79.10 per tonne three years later. If the forecast proves accurate, average cement prices will have surpassed 2010 levels by 2015.

Major Producers

There are two major cement producers in the sultanate: Oman Cement Company (OCC) and Raysut Cement Company (RCC). Both are listed on Oman’s stock market, the Muscat Securities Exchange (MSM). Set up in 1978, OCC operates in the capital area and is owned partly by the government and partly by private investors. The firm began operations with a clinker capacity of 600,000 tonnes per year in the early 1980s and it increased capacity to 1.2m tonnes per annum in 1998. Clinker capacity was later expanded to 2.4m tonnes per annum with the commissioning of a third clinker line in 2011, according to OCC data.

The firm also operates a cement grinding mill with a daily production capacity of 3000 tonnes. This was added to the OCC production line-up in 2006.

While OCC experienced a period of declining sales over 2010 and 2011, the firm was able to reverse this trend in the first quarter of 2012. According to an April 2012 report by local broker Gulf Baadar Capital Markets (GBCM) OCC recorded revenue of nearly OR14m ($36.5m) during the first quarter of 2012 – up from OR12.9m ($33.6m) during the first three months of 2011. This represents a year-over-year growth rate of almost 9%. In terms of volume, the increase in cement sales between the two periods reached nearly 14%, with roughly 491,000 tonnes sold during the first three months of 2011 and about 558,000 tonnes sold over the corresponding period in 2012.

Rising Numbers

OCC reported positive trends for cement production, which rose by 9.5% from 491,000 tonnes in the first quarter of 2011 to over 538,000 tonnes in the first quarter of 2012, according to GBCM figures. Production capacity utilisation was 90% as of April 2012, with output from the new kiln providing 321,000 tonnes of clinker over the quarter.

One of the most significant trends for the company was a jump in cement sales to export markets. The firm sold around OR194,000 ($505,570) worth of cement to overseas buyers during the first quarter of 2011 – out of a total of around OR12.9m ($33.6m) in sales. While the vast majority of OCC cement production in the first quarter of 2012 also supplied local projects, the firm’s export sales rose to OR380,000 ($990,300), which represents an increase of almost 96% between the two periods, according to GBCM.

Capacity Boost 

Established in the early 1980s, RCC is based in the southern city of Salalah and is almost entirely owned by private investors, with the government owning a nominal share of the firm’s stock. Due to its location, RCC cement mainly supplies projects in the southern region. The firm began operations with a 210,000-tonne-capacity kiln and later increased capacity to 250,000 tonnes. A second clinker production line – with a 1700 tonnes-per-day (tpd) capacity – was added in the late 1990s. This was followed with the installation of a third line in 2005. A joint venture between German KHD International, a technology and equipment provider for cement plants, and Chinese Tianjin Cement Industry Design and Research Institute, the third production line has a capacity of 3300 tpd. Capacity was increased again in mid-2007 with the commissioning of a fourth line, which provides an additional 2200 tpd, according to RCC data.

Sales Leap

Similar to OCC, 2012 has been a positive period for RCC. Total cement sales for the firm jumped almost 22% between the first quarter of 2011 and the first quarter of 2012, from around OR20.2m ($52.6m) to over OR24.6m ($64.1m) the following year. In terms of volume, RCC sold 832,000 tonnes of cement in the first three months of 2011 and 996,500 tonnes during the same period in 2012, representing an increase of nearly 20%, according to GBCM statistics.

RCC cement production increased by 24% between 2011 and 2012, from roughly 812,000 tonnes in the first quarter of 2011 to 1.01m tonnes in the first quarter of 2012. GBCM reports that production capacity utilisation during the first six months of 2012 stood at around 87%, up from about 69% in the first half of the preceding year. A substantial drop in shipping terminal costs in addition to higher plant utilisation raised the firm’s gross profit in the second quarter of 2012.