Sun sets on cement

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Cement companies have been blamed for profiteering by supply-hungry builders across the region. But second-quarter losses among the big producers tell a different story. Arabian Business reports on the unlikely losers of the Gulf's building boom.

All is not well at RAK White Cement's production empire in the UAE sheikhdom of Ras Al Khaimah.

Two of the three gas kilns used to make the building material in the factory lie idle, while many of its 350-strong workforce occupy themselves with routine tasks instead of focusing on production.

A power shortage is crippling its output, with production at only a third of the plant's capacity. This means it's missing out on lucrative contracts - a situation reflected in its second quarter earnings. It lost $380,000 compared to a profit of $11.7m the previous year.

This at a time when producers should be looking to expand their operations to keep up with unprecedented demand across the Middle East for building materials, generated by the emerging construction boom of the Northern Emirates, where RAK White Cement is located.

"The situation is bad and the last two months have been worst," says Cheedan Elkunchwar, technical manager at RAK. "Only one third of the plant is running at the moment because of problems with a shortage of gas and power.

"We have three kilns but only one is running. It's affecting our sales as we are not able to supply the customer."

Elkunchwar warns that if the situation worsens then the company may need to consider laying off workers.

RAK White Cement is not alone among producers in the region suffering from a lack of power. A shortage in the supply of natural gas, together with pressures to keep up with strong demand, has forced some producers to instead use more expensive fuels like diesel or coal. UAE demand for cement is expected to surge to 26.2 million tonnes by 2011 according to The National Investor.

More than $10bn needs to be invested to meet soaring power demand in the state, according to US-based Tripp Lite, a manufacturer of power protection and connectivity equipment. In response to escalating demands, the UAE government has announced plans to expand its 10-gigawatt production capacity by more than 50 percent by 2017.

Analysts reckon energy makes up about 60 percent of the cost of manufacturing cement and this figure could be pushed up even higher as energy bills continue rising.

All but one of the 12 cement producers in the region which have so far posted their second quarter results have seen their second-quarter profits slide by an average of 30 percent.

Among those hit hardest are UAE-based Gulf Cement Company, whose profits dropped by 45 percent, Sharjah Cement & Industrial Development Company which experienced a 17 percent slide in profits, and Saudi Cement which posted a 9 percent decline.

Hettish Kumar, a cement analyst at Global Investment House, warns the problems for UAE producers could continue in the long-term unless the government increases the availability of gas through an improved supply network.

He says: "The problem is the gas production level, there are not sufficient distribution channels to reach plants, and the plant facilities are not in place.

"Laying a network of pipes takes time plus, if there was any shortage of gas, the plants would shut down. It will take time to build the supplies so in the meantime some producers will rely on coal supply."

Those producers who are turning to alternative fuel sources are experiencing ever slimmer profit margins too. The price of coal has risen to $150 a tonne from $80 to $90 a tonne last year.

Meanwhile, the price of diesel is estimated to have rocketed by 50 percent in the last four months.

Union Cement Company (UCC), also based in Ras Al Khaimah, has been relying on diesel and hired power generators. For the third quarter in a row, UCC, which has a UAE market share of around 15 percent, recorded a slide in its profit margin to less than 20 percent, compared with an historical average of 35 percent.

"It's difficult," says Mustafa Gorgunel, marketing manager for Union. "We are using generators to make the cement which are consuming diesel and this is rising in price.

"Cost pressures this year are very high because of increased gas and oil prices and transport. We have power shortages as well. Sometimes we have a mechanical breakdown and can't produce. It can happen every day in summer for a couple of hours.

"It's a matter of cost. Any factory produces less than its capacity when its costs are high and this is affecting productivity and cost structure."

Gorgunel's concerns are borne out by his firm's nosedive in profits - down 60 percent to $10.4m from $26.2m a year earlier. Cement producers have been able to pass on higher prices to builders in the past but that route has been blocked in Qatar, Oman and UAE as regional governments have introduced price caps.

In Qatar, the government has fixed the price of cement at $3.40 per 50 kg bag, although the material is still being sold on the black market for as much as $16.50 per bag. Illegal trading of cement prices has continued in Oman as well, despite a government cap of $78 per tonne.

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