Rising energy costs finally arrive

So finally, after many months of low oil prices and many years of cheap, subsidised fuel and power, the cost of energy has risen in Saudi Arabia. Whilst this country was given the most attention in the media - perhaps as the percentage increases in energy costs were extremely high - many other countries in the MENA region have also increased the cost of fuel and power as well as other utilities. One of the cement producers in the region has estimated that the increase in prices will cost their business around 40 million SAR per annum - around £8 million per annum in lost profit.

The increases themselves shouldn't be unexpected - in part due to the low oil price in conjunction with the fact that the industry is now extremely well established within the country and therefore should be in a phase of adapting to the normal forces of market competition. However, it comes at a time when the Saudi cement industry is - perhaps for the first time ever - facing real competitive pressures. For many years the market has been sold out without any real requirement for the producers to compete with each other, but a number of factors have combined to produce the current situation:

  • The drop in oil prices has led to a slowdown in government backed construction projects leading to a drop in demand
  • High clinker stocks, which stem from the significant quantity of imports of clinker and cement that were mandated in 2013, which may not have truly been required.
  • New capacity coming on stream adding additional supply into the market

Whilst not identical, the industry finally seems to be reaching a stage similar to that which was reached 30 years ago in the developed countries within Europe. Increases in energy costs in the early 1990s lead to two changes within the industry:

  • The introduction of alternative fuels to reduce the fuel cost element of the overall production cost
  • An increased focus on fixed cost - primarily the cost of labour and the cost of maintenance, split down into spare parts cost and maintenance management systems.

Whilst energy prices have increased, they are still very low compared to the rest of the world. So Saudi Arabia may not yet be ready for full scale implementation of alternative fuels; however, manufacturers should be looking at potential sources with the aim of planning ahead for full scale implementation in the near future. With the cement market appearing to be saturated, focus may now move from building more capacity to reducing production costs to maximise profit.

Fixed cost reduction requires specialists who have cement industry experience to identify the required level of personnel and where savings can be made. Whilst many multinational consulting firms may make claim to being able to complete such studies, they bring generic models used in a multitude of industries without any focus on the real challenges of operating a cement plant on a day to day basis. In many cases, limited capital investment in technology and changes to working practices can lead to significant savings on manpower. Similarly, stores stock levels can be significantly reduced by a full assessment of the criticality of the parts stocked and purchasing practices and procedures of the company. This results in a short term reduction in spare parts spend and a long term lowering of overall spend.