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Abu Dhabi, UAEWednesday 12 December 2018

Saudi Arabia's new city changes fortune for cement firms

The new $500 billion development is reviving an oversupplied, downtrodden local industry

Saudi Arabia's Hofuf plant produces up to 9.7 million tonnes per annum of cement using raw materials sourced from a nearby quarry. Fayez Nureldine / AFP
Saudi Arabia's Hofuf plant produces up to 9.7 million tonnes per annum of cement using raw materials sourced from a nearby quarry. Fayez Nureldine / AFP

Saudi Arabia’s plan to build an entirely new $500 billion city by the Red Sea has breathed life into the country’s beaten down cement sector.

Shares of companies such as Saudi Cement, Southern Province Cement and Yanbu Cement, the country’s biggest by market value, have all risen since the kingdom announced the plan earlier this week. The gains follow sharp declines for most of the year as investors recognize the potential for a change of fortune.

The announcement “is surely a long-term positive for the cement sector -- a sector which has been reeling under immense pressure of overcapacity, inventory pile up, cost increases and a plummeting cement price, over the past two years,” said Ankit Gupta, vice president for research at Shuaa Investment Management in Dubai.

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Three days of rising share prices bear testimony to the project’s significance. After falling 20 per cent this year through Octobert 23, Tabuk Cement has climbed 28 percent in the past three trading sessions, more than erasing its decline for the year. Saudi Cement Co., Southern Province Cement and Yanbu Cement have all advanced at least four times more than the country’s main stock gauge.

Companies such as Tabuk and Al Jouf Cement that are located in the north of the country, near to where the new city will be based, stand to benefit most given that logistics are a major cost element for cement companies, Mr Gupta said.

Still, the stocks may not be entirely out of the woods yet, according to Mr Gupta.

“It’s a bit premature to be overly optimistic about the prospects of the entire Saudi cement sector, with the sector still having over ten months of inventories and limited short-term demand catalysts,” he said.