Published: Sep 23, 2014
Source: Saudi Gazette

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Saudi Cement kilns closed on weak demand

Saudi Cement Co, the Kingdom's largest listed cement producer by market value, said it would not restart after refurbishment work two kilns at its Hofuf factory due to high inventory levels and weak demand.

The company has been hurt by soft local demand for cement this year, reporting falling year-on-year profit in the previous two quarters.

Up to August, its sales had dropped 14 percent year-on-year because of increased volumes being produced by Saudi cement firms and stagnant demand, it said in a statement on Monday.

"The feasibility of operating these two kilns shall be reconsidered whenever market conditions warrant that," the statement said.

The company expects to record annual depreciation charges of about SR7.6 million ($2 million) related to the kilns from the fourth quarter onwards.

Saudi Cement operates one more plant in the Ain Dar region in the east of the Kingdom. Its shares closed at SR124 on Sunday. They have gained about 12 percent in the past 12 months, lagging an 18 percent rise in the Saudi Arabian Cement Index over the same period. 

The slowdown in sales in the final quarter of 2013 due to the labor crisis led to an inventory pile-up, reaching a record high of 16mn tons for all cement firms in May 2014. Since cement exports are banned in the country (except for Bahrain), firms may have to further scale down production in order to clear their inventory pile-up if demand does not pick up in the near future. 

The inventory glut may also result in a sharp decline in cement prices, as companies seek to clear their respective inventories quickly, Al Rajhi Capital said in its recent industry report.

Most companies in the cement sector are unable to proceed with their expansion plans because Saudi Aramco has so far refused to approve fuel allocations to some of the proposed expansion projects. Aramco does not offer clarity on when it is likely to provide the required fuel for the same.

Overall sales volumes for cement companies dipped by about 5 percent during the January-August period of 2014 as the construction sector remained subdued. While sales volumes are expected to decline in Q3 2014 as well, we expect the margin of the slide to mitigate as the sector gradually recovers from the labor shortage crisis. Further, about 416,000 tons of cement was exported during the January-August period, representing a 86 percent y-o-y growth. Exports were led mostly by Saudi Cement, whose exports more than doubled during this period. The rising exports bodes well for the cement sector and will to some extent, salvage the operating performance of exporters

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