JEDDAH — Oil remained elevated as geopolitical risks supported prices earlier this decade, the National Commercial Bank said in its Saudi Economic Review in August 2017. Saudi benefitted from substantial oil revenues which facilitated record fiscal expansionary policies, it added. Accordingly, mega projects nourished as the government pursued long-term sustainable development, and as cement plays a pivotal role in the construction, maintenance, repair, and renovation of building structures, the surge in local demand increased prices on the 50kg cement bag, which was later capped at a maximum SR12/bag for wholesales and SR14/bag for end users, set by the Ministry of Commerce, the report noted.

Furthermore, the Ministry of Trade banned cement exports in 2008 to accommodate local consumption. However, tumbling oil prices in 2014 had severely impacted the Saudi economy as the influx of revenues weighed on its fiscal policy. Government expenditure has since been reduced and a vast capital expenditure rationalization program will tackle a total of SR1.4 trillion worth of government projects, many of which have been placed on-hold.

During 2016, construction sector real GDP contracted by 3.3% annually as contract awards were reduced significantly. The momentum continued in the first quarter of 2017 with a decline of 3.2% Y/Y as contractors and construction companies struggled to manage cash flow needs. Domestically, there are 17 cement companies supplying the local market with a production capacity of about 65 million tons. Clinker production reached 55.5 million tons last year, dropping 2.6% on an annual basis. In the first seven months of 2017, clinker production was further reduced by 10.9% over the same period in 2016, settling at 29.3 million tons. Cement production, which is typically clinkers with additives, fell by 9.0% Y/Y in 2016 while registering a drop of 19.4% since the beginning of the year through July. The slowdown in production have been driven by weak domestic demand which fell by 9.8% in 2016 and record high clinker inventory levels reaching 28.1 million tons by the end of last year and continued to rise to 32.5 million tons by July. Further pressures on the industry emanate from rising input costs due to higher energy and fuel prices given the government’s fiscal consolidation efforts.

In order to alleviate the pressures on the local market, the Ministry of Trade approved the removal of the export ban, albeit an export tariff around SR110/ton was imposed. However, as regional cement prices remain subdued and provide no financial incentive for Saudi companies to diversify regionally, the export tariff was reduced by 50% to provide support. “In our opinion, the construction sector will continue to consolidate over the short-term as the government targets economically viable and efficient projects. Nonetheless, our long-term view remains positive as the Saudi demographic will remain supportive,” NCB said.

Furthermore, the recently announced Qidyah entertainment city, spanning 334 sq km, and Al Faisaliah city which will cover 2’540 sq km, as well as the Red Sea project with an estimated area of 34’000 sq km will spur the construction industry beyond 2020. — SG