Cement firms bank on NEOM, Red Sea project for 2019 recovery: SICO

Cement companies in Saudi Arabia will witness an uptick in demand next year, as construction on mega projects such as NEOM and Red Sea Tourism projects gain pace, an analyst with SICO, a Bahrain-based investment bank, told Argaam.

"Demand seems to have stabilized and we are likely to hit the bottom. Project awards are picking up after being extremely subdued since 2016," said Anoop Fernandes.

However, he warned that the “near-term outlook is weak because of demand compression and excess supply.”

"There is a lot of irrationality in the way companies are approaching this weak demand phase by not reducing production sufficiently; the impact of which we see in price compression."

Pricing in the cement sector is like a "falling knife" because of the supply-demand mismatch, Fernandes noted. Cement companies, which have reported Q2 2018 results, have seen more than 30 percent year-on-year (YoY) contraction in pricing.

Hail Cement has seen an estimated 50 percent drop in pricing over the past two years.

"The sector has seen significant quarterly volatility, which is why there has been such large divergence between reported earnings and analyst expectations," he noted.

Fernandes said that Tabuk Cement and Hail Cement are seeing a pickup in sales volumes, contrary to the rest of the sector.

Tabuk’s increase in production is given to its proximity to the NEOM area though some contracts were awarded in the NEOM area earlier this year, the expert revealed.

Additionally, “supernormal” volume growth could also be a result of large price discounting though Hail Cement’s average realization stood at less than SAR 110 per ton. 

Currently, the nameplate capacity in Saudi Arabia is over 70 metric ton of clinker.

"Demand trends currently imply a utilization of under 60 percent. But, we expect demand to recover in 2019 fueled by ongoing project awards and impending government spending," Fernandes asserted.

Last month, Al Rajhi Capital had lowered Saudi Arabia's 2018 full-year cement sales estimate to 41 million tons but expected a “small improvement" as seasonality impact ends.

Sales were down 14 percent year-on-year (YoY) to around 19.3 million tons in H2 2018, the consultancy said, maintaining a "stable" outlook for the sector.