Drop in commodity prices helps Oman's construction sector

Since at least the turn of the 21st century, the rising cost of construction materials has been a concern for many emerging markets, particularly those, like Oman, which are dependent on imports to cover a substantial proportion of demand. A dip in prices following the 2008-09 global financial crisis eased some of the pressure, albeit at a time when demand for construction materials was also sagging.

Rising Costs

As Qatar-based financial services company Alpen Capital noted in a 2015 report on the GCC construction sector, a significant rise in consumption of construction materials in large markets such as Saudi Arabia and the UAE has a knock-on effect for the rest of the region, as limited regional supply and the constraints of geography mean that the GCC countries are forced to “draw on the same pool of resources”.

The “output price index”, or cost to the client, also known as the “tender price index” in the GCC region, based on a value of 100 for 2002, rose from 99.3 in 2003 to 156.4 in 2013, according to Alpen. In Oman, the index reached 163 in 2013, indicating an increase of 63% in over little more than a decade, despite efforts to boost domestic production. Given that building materials account for 58% of project cost on average in the GCC member states, these rises have a substantial effect on contractors, developers, and if the cost is passed along, end-users.

Cement

Annual cement consumption in the GCC member states has soared from 81.5m tonnes in 2008 to 145.4m tonnes in 2014, according to Alpen, despite the impact of the global financial crisis and the fall in global oil prices on construction in the region. A dip in demand in 2010-11 saw a degree of oversupply in the region, however, with Oman and the UAE offsetting lower consumption by exporting to markets including Yemen, Iraq and North Africa.

The UAE also exported some lower-cost cement to Oman, affecting domestic producers in the sultanate. The dip was followed by a surge of demand from builders with a 14.5% compound annual growth rate (CAGR) from 2012-14, pushing regional surplus down from 27.8m tonnes per annum (mtpa) in 2012 to 12.0 mtpa in 2014. Alpen forecasts 9.9% growth in regional demand for 2015.

This is good news for Oman’s two main cement producers, Oman Cement Company (OCC) and the Raysut Cement Company, which have felt the squeeze from rising costs and competition, but have continued to invest for the long term. As of 2014, the companies had combined capacity of 6m tpa of clinker production capacity and 7.2m tpa of cement.

Oman Cement Company

OCC reported that its profit fell 40% in the first half of 2015 to OR5.4m ($13.9m), from OR9.1m ($23.6m) in the same period of 2014. It attributed this largely to the government’s move to double gas prices for industries on January 1, 2015, to OR41 ($106) from OR20.5 ($53.1) per standard cubic metre. There will now also be an automatic annual increase of 3%. The price increase is part of the government’s strategy of easing back subsidies to reduce pressure on the national budget, and to, ultimately, move prices closer towards market levels in order to limit distortions.

Sales revenue also slid slightly, to OR25.53m ($66.1m), from OR25.68m ($66.5m) in the same period of 2014. Cement production fell 2.33% to 1.01m tonnes from 1.03m tonnes.

The company said that it had handled the increase by better cost management in other areas, as well as improved sales pricing. It will continue developing a new mill with a capacity of 150 tonnes per hour, including silos and bulk dispatches, which is due to be completed by the end of 2015. OCC has also reopened a kiln that was undergoing maintenance, which should help improve its operational performance, and has undertaken an $11.3m pollution control equipment upgrade via contractor FLS midth.

Raysut Cement

Raysut Cement has also reported feeling the squeeze of higher gas prices. It posted profit of $28.5m in the first half of 2015, compared to $40.5m in the same period of 2014. The company group sold 1.9m tonnes of cement in H1 2015, down 4.87% from 1.98 tonnes in H1 2014. The company has also been affected by unrest in neighbouring Yemen, an important export market, and competition from UAE imports. However, it has managed to counter some of the impact of supply and demand shocks through better average price realisation and positioning on export markets.

The company is working on further market diversification, through establishing a subsidiary in Somalia, Barqaaqo Cement Company, in which it will take a 51% stake. It is also developing a terminal at the port of Duqm, and planning to install a 150-tonnes per hour rotary packing machine with truck loader at Salalah, to improve export efficiency.

As Deloitte noted, the regional construction material industry as a whole may continue to feel the pinch from changing economic dynamics, including rising costs, and demand cooled by the fall in the oil price. However, the global cement market is expected to continue to grow at around 5% a year over the coming years, despite Chinese construction slowing. Other Asian markets, such as India and Indonesia, are expected to take up the slack. With growth steady and capacity still growing, Deloitte does not expect price increases before 2018.

Other Materials

Steel billet prices have been particularly volatile since early 2013. Global spot prices for steel fell 40.2% in the first five months of 2015 alone, according to Deloitte. Prices of tin fell 18.7% and aluminium 2.6% in the same period, while prices of copper and zinc rose.

Oman is a net importer of steel and aluminium, with imports of OR1.3bn ($3.4bn) outweighing exports of OR765.8m ($2bn) in 2014. A range of metal manufacturers in Oman have announced plans to expand capacity in recent years, which would help insulate the sultanate somewhat from global price shocks, while cutting the cost to local developers and construction companies of importing metals.

In late 2014, India’s Jindal Steel and Power Limited (JSPL) announced plans for $2bn investment to increase its capacity in Oman to 2.5m tonnes a year within three or four years, following the commissioning of a new rebar rolling mill with 1.4 tonnes per year capacity, slated for early 2016. In December 2013, Sohar Aluminium announced plans to invest $35m to boost factory capacity over a five-year period, with an estimated 60% of output expected to go to local consumption. However, with global steel and aluminium prices slumping in 2015, concerns about global oversupply loom large, and a slowdown apparent in China, one of the world’s leading consumers, some metals investment projects may be delayed. The hike in gas prices in Oman is likely also to be a cost factor weighing on investments in the short term at least.

Demand Outlook

Despite lower prices in Deloitte forecasts, it now appears prices will rise for materials including steel, limestone and gabbro, amongst others, in the 2015-18 period in the GCC region, as major projects including railways, housing, airports and hotels and resorts push forward. Abu Dhabi’s 2030 vision, which entails substantial investments in manufacturing, as well as constructing a nuclear power station, and Qatar’s preparations for the 2022 FIFA World Cup, are expected to be important factors in driving regional demand.

That demand will not only feed into structural materials: demand for tiles in the GCC region is expected to see a compound annual growth rate of 10-12% to 2020, according to Frost & Sullivan. The GCC market for tiles was estimated at 450m to 500m sq metres in 2014, 70% of that in ceramic tiles, with nearly 40% of the tiles imported.

Oman, as a producer of ceramic tiles with substantial limestone reserves (with plans to increase limestone exports to India’s steel mills), could be well-placed to benefit, particularly given regional shortages of limestone (particularly acute in Qatar, a major investor in construction).

As a net importer of many construction materials, Oman is well-placed to benefit from lower commodity prices expected to persevere through 2016, pushing forward with developments while costs are lower – particularly at a time when pressures on the government budget and competition between contractors is mounting. The strength of the US dollar, to which the Omani riyal is pegged, is another advantage for importing contractors, and the currency is expected to rise further in 2016 as the Federal Reserve moves to normalise rates.

Once prices begin to trend upwards again, the sultanate’s cement, metals, and ceramicsmanufacturers can look to leverage the country’s geographical position and natural resources to help ramp up exports, and realise any on-hold investments.