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Wed 31 Mar 2010 09:35 PM

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Saudi cement profit margins to decline in 2010

Report says current excess supply situation to lead to lower pricing and margin pressure.

Cement sales in Saudi Arabia are likely to rise 19 percent in 2010 but prices are expected to drop, dragging profit margins down as new entrants, combined with a partial export ban, increase market saturation, NCB Capital said.

In a report, NCB Capital, the investment arm of Saudi Arabia's biggest lender, National Commercial Bank, said: "We expect gross margins of 53.8 percent in 2010 compared to 54.3 percent in 2009."

Cement sales are expected to reach 44 million tonnes this year, the report said, as the country is undertaking multi billion dollar infrastructure projects.

It added: "Domestic cement sales volumes increased by 23 percent in 2009 and we expect this to expand a further 19 percent in 2010."

Saudi cement companies are considered among the most profitable globally as they benefit from low energy and feedstock costs.

In 2008, the government imposed an export ban to curb cement prices, which soared as producers sought more lucrative offers abroad. The ban, coinciding with the launch of new production lines, saturated the local market and led prices to fall.

There are currently 12 cement companies in the kingdom, eight of them listed on the bourse, with an annual production capacity of 48 million tonnes. Total sales volume in 2009 did not exceed 38 million tonnes, NCB said.

The report said: "We expect the ongoing excess supply situation to lead to lower pricing and ultimately to margin pressure for the incumbent cement companies ... The incumbents lost 20 percent market share through 2008 and 2009 as new companies entered the market and we expect this to continue."

Production capacity is expected to increase to 51 million tonnes this year as three new cement companies are expected to start operation.

NCB Capital said: "We believe capacity in the Saudi cement sector will continue to exceed demand. This concern is exacerbated by the ongoing conditional export ban which we believe is unlikely to be completely lifted in the short term." (Reuters)

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