Arab News reported that cement capacity in the Gulf Cooperation Council is expected to reach 120.7 million tonnes by 2013, a 13% increase from 2011, while cement demand is expected to reach 88 million tonnes in 2013, up by 6.6% from 82.5 million tonnes in 2011 and 78.3 million tonnes in 2010.
A report by Global Investment House said that capacity increase is driven mostly by Saudi Arabia where it is expected to reach 58 million tonnes while demand is expected to be at par with the capacity increase and is expected to increase by 8.3% during the period 2011-13.
The report by Global Investment House said that the UAE is expected to witness an increase in the oversupply with capacity touching 43 million tonnes per annum by 2013 and demand expected to remain in the range of 18 to 20 million tonnes per annum. It added that "We expect cement oversupply to continue till 2013. However, the oversupply situation in the GCC is likely to shrink on the back of huge spending plans announced by Saudi Arabia, Qatar and Kuwait."
Afghanistan and Iraq
The Global report pointed out that security issues have improved in Afghanistan and Iraq which is seconded by exit of international allied forces. Pace of construction remained slow in the past years but as the powers have been assigned to local people, Global said they will kick off the much needed mega projects in a drive to reduce the poverty levels and provide employment opportunities to their youth.
Hence Afghanistan and Iraq would kick off their much needed projects which would benefit their close neighbors as they very little indigenous cement production and the plants which are still producing are quite old and obsolete.
It said that "We anticipate UAE and Omani cement companies to benefit as Saudi Arabia's conditional exports remain in force."
Saudi Arabia budget
Saudi Arabia rolled out the new national budget plan for 2012 with expenditures of SAR 690 billion. Expenditure will focus on education, health care, water and sewage services and transportation. Projects worth SAR 168 billion in education sector, SAR 86.5 billion in health care, SAR 35.2 billion in transportation include building of 742 new schools, 17 new hospitals, roads totaling 4,200 kilometers and expansion of six existing airports to name a few. These new initiatives along with earlier plans would definitely scale the demand of cement higher in the country.
M&A activity
Following years of massive infrastructure development and a combination of plentiful supplies of raw material and cheap feedstock the cement sector benefited immensely and banked upon various expansionary initiatives. Ironically, most of these expansions came online at a time when the region possibly faces the worst economic slowdown in many decades.
As a result of which M&A has picked up in the sector in an effort to bring in synergies and economies of scale. Various regional companies have been acquiring companies in UAE because they are the one who have been affected the most and are available at cheaper valuations. With shrinking margins and drop in profitability in the backdrop of oversupply such activities to continue in the sector.
Focus on cost savings
Companies in GCC are likely to focus on cost saving measures such as installation of in house power plants to compensate for the decline in volume sales and realization prices and increase in transportation and freight costs. In addition, various companies have banked on horizontal and vertical integration.
Some of them have ventured into concrete block business while others have got stake in lime stone quarries, shipping companies, power plants, cement baggaging plants and port terminals etc, the report said.
Delay in projects
Key risks to the sector arise from delay in the execution of the big ticket government development plans particularly in Kuwait. Another major factor would be the imposition of trade bans. Saudi Arabia has imposed a cement export ban, which has adversely affected the revenues of various companies. Any similar move elsewhere would generate the same impact.
Outlook
The Global report said Saudi Arabia to remain in the forefront in the backdrop of huge spending plans followed by Oman & Qatar. In addition, the delay in commissioning of around 4.0 million tonnes per annum of cement capacity in Saudi Arabia in 2012 due to fuel shortages is likely to benefit large number of existing players in the form of price support.
Meanwhile in Oman, despite the inflow of cheaper cement from UAE, the cement companies would continue to benefit from the government projects which are going on in the country as both the companies are government backed. In Qatar, we anticipate demand to maintain status quo as the projects and contracts related to World Cup are yet to begin. UAE would cast its shadow on all the GCC countries as its excess capacity would continue to initiate price wars and take away their market share.
Construction sector
The lingering global financial downturn and the political uncertainty caused by this years' uprisings is reflected in the exit of several mega real estate projects from the list as developers exercise caution and put planned schemes on hold. Nevertheless there are USD 1.4 trillion of active projects in GCC in hydrocarbons, public infrastructure projects, refineries, power plants, roads, hospitals and various other segments.
Saudi Arabia continues to remain at the top with highest number of active projects followed by UAE more specifically Abu Dhabi as Dubai still reels with problems related to its debt maturities. UAE projects market continues to fall as more and more of Dubai based projects have either come online or have been completely shelved off.
The Global report said that "We believe that they are various opportunities available for construction contracting companies in Saudi Arabia, Kuwait & Qatar and these market would continue to be sought by various companies."
Backlog growth
Backlog growth which is the key driver for the top line of contracting companies has started to pick up in recent quarters driven by new order wins in Saudi Arabia. As of 2011, we anticipate backlog roughly of companies within our coverage to touch USD 13.3 billion as compared to USD 12.3 billion at the end of 2010.
The share of Saudi Arabia is set to touch 40% in 2011 from 29% in 2010 and 18% in 2009. Looking at the individual companies' backlogs, we believe that the risk of further project cancellations is behind us.
Global said in its report that going forward, growth in backlogs will largely be a function of the end sub sector and geographical exposure of individual companies.
Receivables management
At the end of Q3 2011, combined receivables of UAE construction contractors stand at AED 7.5 billion, higher by 1.3% QoQ and 21.5% YoY. Overall receivables size as percentage of sector balance sheet size stands at 53.8% as of Q3 2011. The receivables outstanding days of the sector stand at 354 days at the end of Q3 2011 as compared to 345 days at the end of Q2 2011 and 329 days in Q3 2010.
Margins to shrink
MENA region contractors margins have remained significantly higher than the international peers. These were higher as during the construction boom, developers were awarded high margin contracts. However, lately that phase has passed and now competition has emerged which has forced contractors to shift their business mix. Nevertheless margins would remain under pressure in the long run as many international contractors have entered the market.
Long term growth
Regardless of the collapse in regional real estate markets, Global said long term outlook for construction contractors remains attractive. The region displays relatively unique characteristics: decent demographics, strong state budget surpluses fueled by high oil prices, muscular sovereign wealth funds and a drive to diversify economies. Hence infrastructure and construction boom in MENA region would translate well in terms of profitability for regional contractors.
However, Global said construction market will remain fundamentally weak in the coming years as the UAE is facing issues related to oversupply and sliding real estate prices. However, there are ample opportunities for contractors in Saudi Arabia, Abu Dhabi and Qatar.
(Sourced from www.arabnews.com)
