Saudi cement firms begin to cut production to shore up prices

Saudi investment bank NCB Capital said that the kingdom's production of clinker fell by 12 per cent year-on-year to May 2015. Fayez Nureldine / AFP

Cement production in Saudi Arabia declined by the steepest levels on record last month as producers sought to run down stocks in a bid to shore up ­prices.

In a report on the country’s cement market, the Saudi investment bank NCB Capital said that production of clinker (a raw form of cement) fell by 12 per cent year-on-year in May.

It said the country’s biggest producer, Saudi Cement, had started to cut production in a bid to support prices that had been falling in recent months, as companies in more remote regions began undercutting in busy cities such as Riyadh and Mecca.

The NCB Capital analyst Mohamed Tomalieh said the decline in production was a deliberate attempt to shore up prices rather than a response to current market conditions.

“We believe cutting production aims to control supply and price discounts,” he said.

The cut helped to bring clinker inventory levels down to 19.4 million tonnes – down from a record high of 21.4 million tonnes in December.

The kingdom’s cement mountain has been built up partly as a result of decrees issued by the late King Abdullah to make sure the country did not run out of supplies. A cement shortage in Mecca in 2012, where the redevelopment of the Grand Mosque was taking place, led to a black market trade and soaring ­prices.

In April 2013, the king set aside US$800 million to be spent on importing supplies and building kilns to boost capacity.

However, an amnesty and subsequent crackdown on illegal migrants later that year led to hundreds of thousands of workers leaving the kingdom, causing widespread project delays.

Demand has not kept pace with supply since.

Although cement sales increased by 6.9 per cent year-on-year, this was from a low base as last year’s figures were affected by the labour shortage.

Moreover, Samba Financial Group said in its latest Saudi country report that there are “signs of a slowdown in activity” in the kingdom, as it reins in capital investment in response to lower oil prices.

“This fits with our view that the government will contain capital spending this year and next, before relaxing its stance somewhat in the 2017-20 period as oil prices begin a more sustained recovery,” it said.

“Regulatory issues are also having an influence: any ­government project with a value over 100m Saudi riyals (Dh97.9m) now needs approval from the new economic and development council before ­proceeding.”

The property market has also slowed following the introduction of a 70 per cent loan-to-value lending limit on home loans late last year.

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