Saudi Cement Makers ‘Suffocating’ as Weak Demand Hits Profit

(Bloomberg) -- Cement producers in the Arab world’s biggest economy could be in for another year of low profits as major construction work announced by the government proves slow to get off the ground.

Combined net income for 15 listed cement companies in Saudi Arabia was $185.7 million last year, almost 90 percent lower than the $1.6 billion posted as recently as 2014, according to data compiled by Bloomberg. There are few clear indications of an improvement this year, according to analysts.

The sector is bedeviled by weak demand and increased competition, especially among producers based in western and central Saudi Arabia. A reduction in energy subsidies has added to their woes by raising transportation costs.

Saudi Cement Makers ‘Suffocating’ as Weak Demand Hits Profit

“Saudi cement makers are suffocating because of weak demand since 2016, stiff competition and low selling prices,” said Fatma Charfi, an analyst at AlphaMena in Tunis. “The budget deficit, which caused a lack of government expenditure on construction, has put the final nail in the coffin. Even the mega projects announced by the kingdom such as the Red Sea project, Neom and Riyadh Metro, are not likely to enhance the situation in the short term.”

Saudi Arabia has announced initiatives such as the $500 billion futuristic Neom city and The Red Sea Project to attract foreign investment and bolster non-oil revenue. Critics have questioned the mega-developments after previous efforts to construct industrial and financial cities struggled to take off.

Saudi Cement Co., based in the eastern petroleum hub of Dammam, recorded the largest net income among the 15 listed companies last year at about $107 million, down from the $121 million generated a year earlier. On the other hand, Tabuk Cement Co., located in the north-west of the country, was at the opposite end of the scale, with a loss of $26 million, more than four times wider than its loss in 2017.

Saudi Cement rose 0.5 percent in Riyadh on Monday, extending its gains in the past year to 13 percent. Tabuk finished unchanged, and is down 13 percent in the past 12 months.

The first signs of relief for the sector may emerge by next year, said Sameer Kattiparambil, vice president of equity research at EFG Hermes in Muscat. “We see the mega-projects starting to impact the cement demand cycle in late 2019 or early 2020.”

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