Arqaam Capital

Lifting of export ban on cement to provide little relief for Saudi producers: Arqaam Capital

Tuesday, May 17, 2016

The much anticipated lifting of the KSA export ban on cement, which was mandated in 2008 and renewed in 2012, may allow little relief for KSA cement producers according to a research note issued by Arqaam Capital, the emerging markets investment bank.

Mohammed Kamal, Executive Director, Equity Research at Arqaam Capital said: "Export volumes would likely be capped at 20% of output and possibly subjected to an export tax. The net effect should be margins erosion, which partly dilutes the Earning Per Share growth that results from the expansion in headline sales. In isolation, exports can dilute blended EBTIDA margins to about 30% on average when transport costs are included into the equation. In our view, the cash margin per ton of exported cement can fall by 40% to SAR 60-100/ton, depending on the region it is produced in and the market exported to. The incentives to export then are the depletion of clinker inventory, or the utilisation of idle production lines." 

According to the research note, the exported cement volumes will likely be taxed an amount equivalent to the fuel subsidy they carry taking into account that the remaining subsidy of SAR 10 per ton was previously removed via reforms to industrial fuel prices. This, coupled with transport costs of at least SAR 80-100 per ton as opposed to SAR 50 per ton domestic land freight costs between regions, should lift the average cash cost per ton by 50-70% to SAR 190-260/ton, eroding the bulk of the margin differential Saudi producers enjoy over global peers.

"We estimate about 30% EBITDA margin on exported cement volumes, in-line with global averages, assuming selling prices in target markets are accommodating, and averaging SAR 300-400 per ton,' said Mohammed Kamal

 "The domestic supply situation remains difficult. Sector clinker stocks have not budged since July 2014, remaining at nearly 21million tons as of March 2016 equivalent to four months of output. This, combined with existing capacity of 70 million tons, and incoming capacity of 7 million tons due in the 2016, equates to total potential capacity of around 100 million tons. This suggests a substantial near/medium term surplus of 60%, given stalled domestic contracts and the fact that few export markets are currently viable," explained Kamal

The research report sees Yemen, Egypt, Qatar, Jordan, UAE, Bahrain, East Africa, and Iraq as potential export destinations. In the context of each market's prevailing selling prices, which range between an equivalent of SAR 230-400 per ton, the only viable export destinations would be Yemen, Iraq, and Jordan, on a Freight On Board (FOB) price basis, including export taxes. The subset that makes the cut of exporters to these regions are Southern Cement, Najran, Tabuk, Al Jouf, and Northern Cement.

"In the case of Yemenwe believe that any reconstruction effort will practically involve procurement from Southern province producers. We also see significant downside risk to selling prices in the case that Egyptian peers revert to exporting 10% of their 70 million tons operating capacity to Yemen, as they had done in the past.As a result, Najran Cement is the sole viable export play, supported by inventory eligibility and location."  He concluded.

  • Print

Latest News

  • 19DecArqaam Capital announces Closing of the Investment advised by NBK Capital Partners in Falcon Group, the owner of 4Sale, the leading online classifieds business in Kuwait [+] Read More
  • 11NovArqaam Capital Launches Fixed Maturity Sukuk Fund: Noor Bank raises 130 million USD [+] Read More
  • 16OctThe Virgin Mobile Middle East and Africa Sukuk led by Arqaam Capital won the Structured Bond/Sukuk deal of the year [+] Read More


Arqaam Capital Limited
Level 27, Index Tower
Dubai International Financial Centre
PO Box 506687 Dubai
United Arab Emirates
Tel: +971 (0)4 507 1700