Arabian Cement, Al Safwa’s potential merger may improve selling prices: Aljazira Cap

The production capacity of the new entity resulting from the potential merger between Arabian Cement and Al Safwa Cement could reach 8.2 million tons, Aljazira Capital said in a note. 

Therefore, the potential for any price increase is limited due to the high capacity.

However, the potential merger could result in reduced output due to shutting down of old production lines, improving selling prices, efficiency and profit margins, it said.

Aljazira Capital said the main concern is that the high excess capacity along with current market conditions and high competition could result in low utilization rate and lower return on assets.

The Saudi cement sector is expected to recover during 2018, with five major projects coming on line in the Western region over the next two years, creating opportunities for a higher market share, the brokerage said.

Aljazira Capital assumed two scenarios for the price control in case of a merger:

1) If the production capacity of the new company continues at 8.2 million tons, there will be no improvement in prices on the short run, as the market will absorb the entire production.

2) If the new company decides to shut down the old production lines and replace them with Al Safwa’s current production capacity, market supply would drop and the operating rate of the new lines would rise, which will result in higher selling prices and lower costs.