Capacity at cement factories could outstrip demand, leading to price wars and foreign acquisitions.
Capacity at United Arab Emirates cement factories could outstrip demand in the next few years, triggering a price war and possibly foreign acquisition of cement firms, investment bank Noor Capital said on Tuesday.
Demand for cement will almost double to 26.2 million tonnes a year in 2011 as the companies and governments plough petrodollars into construction projects, Abu Dhabi-based Noor said in a note.
In that time capacity will more than double to almost 31 million tonnes, according to the note, which only counted projects that were already underway to build and expand factories.
"It is difficult to comprehend how consumption will instantly double to absorb the new capacities. As such, oversupply is likely to surface and capacity utilisation rates will dwindle," Khalid Hamza, head of research at Noor, said in the note.
"All this is set to spark off a price war among existing and new players and we could even see multinational majors stepping in , at a later stage, to eliminate excesses by consolidating players."
The growing investment in supply will squeeze margins at the UAE's 12 cement companies, which have ridden a rally in prices that took the cost of a tonne of cement from an annual average of $44 per tonne in 2003 to $76 last year.
The price spike driven by demand from the construction industry which saw its share of the UAE's gross domestic product rising to 7.2 % in 2005 from 6.5 % in 2000, the report said.
The construction boom ratcheted up cement consumption which grew at a compound annual rate of 24.7 % between 2003 and 2006 compared with 4.8 % a year in the previous decade.
"Sales volumes will continue to grow but the excessively inflated cement prices of nowadays are elected to melt down, thus, weighing on margins," the report said.
Noor expects operating margins at the three largest cement companies, which together account for 45 % of capacity, to shrink by 2011 as prices fall, energy costs rise and economies of scale disappear.
Gulf Cement's operating margins will fall to 19.9 % by 2011 from 35.8 per cent in 2006, Noor said. The stock has surged 66 % this year on expectation it would benefit from growing demand for cement.
RAK Cement's margins will drop to 19 % from 37.7 % and Union Cement's to 23 % from 31.6 % in the same period. The two stocks have risen 23 % and 26 % respectively this year.
UAE cement firms would struggle to export their excess production to countries such as Saudi Arabia, which have lower production costs, Noor said.
To keep pace with surging demand, UAE cement firms were paying more than regional market rates for energy, it said.
"To mitigate high oil costs, companies are switching into cheaper alternatives such as coal."