MUSCAT: A ban on cement exports from Saudi Arabia, which was mandated in 2008 and renewed in 2012, may allow little relief for Saudi cement producers, according to a research note issued by Arqaam Capital, the emerging markets investment bank.
“Export volumes would likely be capped at 20 per cent 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 earnings before tax, interest, depreciation and amortisation (Ebtida) margins to about 30 per cent on average when transport costs are included into the equation. In our view, the cash margin per tonne of exported cement can fall by 40 per cent to SR60-100 per tonne, 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,” said Mohammed Kamal, executive director, equity research at Arqaam Capital.
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 SR10 per tonne was previously removed via reforms to industrial fuel prices. This, coupled with transport costs of at least SR80-100 per tonne as opposed to SR50 per tonne domestic land freight costs between regions, should lift the average cash cost per tonne by 50-70 per cent to SR190-260 per tonne, eroding the bulk of the margin differential Saudi producers enjoy over global peers.
“We estimate about 30 per cent Ebitda margin on exported cement volumes, in-line with global averages, assuming selling prices in target markets are accommodating, and averaging SR300-400 per tonne,” said Mohammed Kamal
“The domestic supply situation remains difficult. Sector clinker stocks have not budged since July 2014, remaining at nearly 21million tonnes as of March 2016 equivalent to four months of output. This, combined with existing capacity of 70 million tonnes, and incoming capacity of seven million tonnes due in the 2016, equates to total potential capacity of around 100 million tonnes. This suggests a substantial near/medium term surplus of 60 per cent, 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 SR230-400 per tonne, 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 Yemen,we 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 per cent of their 70 million tonnes 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.