Arabian Cement, AlSafwa Cement’s potential merger to boost combined output

The potential merger between Arabian Cement and AlSafwa Cement is expected to result in a combined production capacity of around 9.2 million tons and a market share of 15 percent, Al Rajhi Capital said in a note.

The brokerage expects the move to help cut costs in areas such as raw materials consumption, maintenance, transportation, logistics, and SG&A expenses, given that manufacturing plants of both producers are located in the Western Region and the raw material is sourced from the same areas.

“Taking into account the current weak market conditions, the fixed cost base could also be optimized through restructuring the production process. By halting some production lines that have high production costs, there could also be some cost savings,” the report said.

However, while the resulting synergies will lead to some cost savings, the merger will not substantially increase in market share or pricing power due to stiff competition and oversupply.

Gaining additional market share will be difficult as there are many players in the same region, in addition to competition from other regions’ players, Al Rajhi Capital said.

Entering other markets such as the Southern or Northern Regions will also be difficult due to high inventories in these regions as well as the high transportation costs.

Looking ahead, if the merger is successful, it may set a precedent for more such consolidation in the industry.

"In the last few quarters, selling prices in the cement sector were pressured due to lower demand coupled with high inventories. Thus, more mergers in the sector may bring stability in cement selling prices,” Al Rajhi Capital said.