(MENAFN - Arab News) Heavy government spending and increased economic activity will see a strong demand for cement in 2012, according to a new report from NCB Capital.
The cement prices for all companies under the report's coverage have increased by an average of 14.1 percent due to strong demand. Demand is set to grow by 10 percent in 2012 and 8 percent in 2013, driven by increasing government spending on infrastructure projects combined with private projects.
The report expects 15.5 percent net income growth for stocks under coverage in 2012 and CAGR of 6.3 percent to 2015.
The report concentrated on Southern Cement and Saudi Cement because of their spare capacity and high stock levels that will enable them to take advantage of the strong demand and constrained supply in the Kingdom.
Cement companies, distributors and ready-mix companies have indicated in the report that market activity is shifting from the central region to the western region in the Kingdom. While fuel shortage remains the key supply constraint, demand outlook remains strong due largely to government projects.
The economics team at NCB estimates 2012 government spending to be 13 percent higher than budgeted at SR780 billion in addition to the SR120 billion allocated to build 500,000 housing units.
"We believe the elevated levels of government spending, particularly housing projects, will boost demand for cement," the report said.
Cement sales are expected to grow by 10.8 percent in 2012 to reach 52.2 million tons owing to ongoing construction projects in the Kingdom. The growth assumption for the next four years will continue to remain at elevated levels at a CAGR of 6.3 percent during the period 2011-2016. The main driver for medium-term demand growth will be government spending on infrastructure projects and housing.
Demand is shifting from the central region to the western region owing to government's redevelopment projects. The western region is now the center of mega projects such as the Haramain railway, Jeddah's new airport and major drainage and other infrastructure projects. Demand in the central region nonetheless remains strong but has stabilized.
Owing to the regional shift in demand, according to the report, prices in the western region are close to the government-set price ceiling of SR250 per ton, while in the Eastern Province prices are marginally lower at SR 244 per ton. However, Al-Jouf Cement and Arabian Cement are selling at the higher prices of SR260 after they received regulatory approval.
Cement industry players believe the reason for the ongoing higher prices faced by retail buyers is mainly due to higher costs from the transportation companies.
For example, a transportation company's truck that was able to make two trips a day to the cement factory can now only make one trip every three days due to the high demand and backlog at the local cement plant, thus increasing the cost for transportation companies. It is believed prices will remain elevated in the short run due to the supply constraints and also in the medium term due to the strong demand outlook.