Cement sales volume to remain low in 2018: Al Rajhi Cap

Cement sales volume is expected to remain “modest” next year as slower construction activities continue to weigh down demand, Al Rajhi Capital said in its monthly sector report.

The brokerage firm forecast sales volume at 43 to 45 million tons, down 6 percent to 8 percent compared to 2017, due to limited expansion plans in the private sector and priority of projects to the government.

Al Rajhi Capital suggested that cutting production would be one of the realistic options for cement firms, which could choose to close old production lines that have higher cost.

“Due to current weak market conditions, we expect the government to cancel the export fees in the coming few months,” the brokerage said.

“Iraq and Yemen are considered as key markets for exports, however, transportation costs, sluggish demand and political instability in the neighboring regions, excess supply and competitive pricing in the region are the main challenges to export,” it added.

Cement sector could see more mergers as it will reduce competition, which could result in stable selling prices, the report said. Mergers can also help increase bargaining power over distributers along with leading to cost savings.

The brokerage said it also expects a slight drop in dividend payments next year, compared to 2017. Meanwhile, limited expansion plans and low leverage will lead companies to raise payout ratios.

“However, on the valuation front, we believe that most of the negative factors are priced in. Hence we are ‘neutral’ on the sector and believe the, downside risks from current prices are limited,” Al Rajhi Capital said.

The brokerage added that western, southern and northern regions face the most challenging conditions over 2018, taking into consideration production capacities and number of producers.

On the other hand, latest initiative from the Public Investment Fund (PIF) in the western region – such as NEOM, Jeddah downtown, Rou’a Al Haram and Rou’a Al Madinah – could help boost Tabuk Cement and other western region producers.

In the fourth quarter this year, Al Rajhi Capital expects selling prices to remain stable at Q3 prices, while sales volume might decline 6 percent year-on-year and increase 19 percent quarter-on-quarter due to seasonality factors.

Selling prices, meanwhile, is likely to remain modest going forward, the brokerage said.