Saudi cement firms’ sales to drop 12-15% in 2017: report

Saudi cement producers are expected to see sales decline between 12 and 15 percent year-on-year (YoY) to 47 million tons this year, amid a continued slowdown in the construction sector, Al Rajhi Capital said in a recent report.

“We expect 2017 to be a challenging year for cement companies with profits falling by 33 percent on average for the companies under our coverage,” the brokerage added.

On the supply side, clinker production is expected to fall over 12 percent YoY. Clinker production declined to 55.5 million tons in 2016, falling 2.6 percent on a yearly basis.

Pressure on selling prices will continue amid higher inventory levels, as weak market conditions, sluggish demand, excess supply and inventory pile-up have led cement producers to compete on pricing.

“We believe that selling prices may not have seen the bottom yet and expect further decline from Q1 2017,” Al Rajhi Capital said.

Higher costs also remain a key concern for cement players over the next two years in light of the Saudi government’s reform plans.

However, the impact of higher fuel prices has not yet been fully seen, as some companies still consume from existing older inventory.

Meanwhile, cement inventory levels continue to rise, due to lower sales volumes and a rise in output, which strengthens the case for cutting production. The market value of total inventories in the sector is around SAR 5.3 billion.

Commenting on the kingdom’s decision to lift export bans, the brokerage firm said, “Financial benefits from exports are limited due to transportation costs, geopolitical issues, excess supply and competitive pricing in the region.”

Saudi cement producers’ dividends are expected to see further cuts this year, hurt by weak fundamentals in the sector in the near term.

Main downsides include cost pressures, the mismatch between supply and demand, and high inventories.

Meanwhile, upside risks include implementation of the housing ministry’s initiatives and government initiatives, especially plans to boost religious tourism in Mecca and Madinah.