DUBAI // While contractors continue to trim shopping lists as the building sector slows elsewhere in the region, business is still going strong in Saudi Arabia - which is great news for cement producers. HSBC estimates that cement sales in Saudi will rise by 22 per cent this year, helping to use up the new production capacity that affected stock prices last year. This growth is particularly beneficial for companies with excess capacity, such as Saudi Cement and Tabuk Cement, and HSBC has upgraded its ratings on the shares both companies to "overweight".
The lender predicts an upside potential of 7 per cent for Saudi Cement stock. The latest target price is 76 riyals (Dh74.43), up from the previous 71 riyals. Tabuk Cement has also been upgraded from "neutral" to "overweight", but HSBC maintains its target price at 22 riyals. For the other six cement stocks traded on Saudi Stock Exchange, the outlook remains "neutral", according to a research note by HSBC yesterday.
Regional cement producers saw their profits decline last year as the economic contraction brought the construction industry to a grinding halt. The boom period, when the GCC project market rose from US$300 billion (Dh1.1 trillion) in 2004 to $2.67tn last year, lured many new players to the industry, while existing operators invested in expanding production. The capacity in Saudi alone rose from 29 million tonnes a year in 2007 to an annual 47.4 million tonnes last year. Demand last year stood at 36.7 million tonnes.
Global Investment House (GIH) in Kuwait supports HSBC's favourable estimates, but it is sceptical about profitability. "Sales in Saudi can surely increase but that doesn't mean the profitability is also going to go up," said Hettish Karmani, a senior financial analyst at GIH. But HSBC said the Saudi government's plans to spend $400bn on infrastructure over the next five years meant the local consumption would rise, and price erosion would slow as growth in demand ate into surplus capacity.
Saudi Cement ended the day 0.4 per cent lower, while Tabuk declined 0.3 per cent yesterday, in broadly negative trade on the Saudi bourse. email@example.com