Saudi cement sales surge on govt spending

Jul 04, 2009 at 14:24

Sales increased 23 pct year-on-year in May compared to 15 pct growth rate in first four months of year -HSBC.

Government spending on new projects in Saudi Arabia is driving the growth of the kingdom's cement industry in 2009, but rising inventories and strict controls on exports still threaten the sector, HSBC Saudi Arabia said Friday in a report.

"Cement sales in KSA (Kingdom of Saudi Arabia) have been strong this year but we have been reluctant to adopt a positive stance on the sector," the bank said, adding that it expects demand for cement to "remain strong".

Local demand for cement has picked up in recent months, with sales increasing 23 percent year-on-year in May compared to the 15 percent growth rate seen in the first four months of 2009. This spike in sales is mainly driven by the rise in construction contracts, which have tripled in value this year, HSBC said.

"This pace of growth has not been replicated elsewhere in the GCC," the bank said. Saudi Arabia has stepped up spending amid the global recession and has budgeted $400 billion for new projects until 2013.

The bank noted the decline in the kingdom's foreign assets as a sign that the government is providing the financing needed to keep planned projects going even as banks restrict credit to the private sector.

But HSBC does not rate any cement companies in Saudi above 'neutral', because it sees the entry of new players into the market and the build up of inventory levels to 33 percent of annual local demand as a threat to future sales growth and earnings.

Of the five companies the bank rates, only two are projected to have a rise in net profit in the second quarter of 2009: Qassim Cement Co and Yanbu Cement Co.

The best play in the Saudi cement sector is Yamama Saudi Cement Co, according to HSBC, because it offers a potential return of 11 percent and is expected to see lower declines in net income in the second half of 2009.