Date: October 2016 (1 posts)
The new competitive era.....

A new era has arrived in the Saudi Arabian Cement industry - one where the existing players will face challenges that they have never faced before. Since the inception of the original companies that produced cement in the Kingdom - companies such as Arabian Cement, Eastern Province, Saudi Cement, Yamama Cement and Yanbu Cement - through to the arrival of the newer players, one thing has been consistent: year on year increases in demand for cement.

Based on this demand, the original producers continued to increase their capacity and licenses were issued for the new entrants. But even with the new kiln lines being installed, demand was still outstripping supply and in 2013 the government mandated cement producers to import both clinker and cement to ensure that sufficient stocks were held in the Kingdom to avoid shortages. A number of producers questioned this rationale, with many of them already carrying inventories that would be considered to be excessive in the Western world. However, the edict was followed and this security stock put in place.

Moving forward a couple of years and the whole dynamic has changed. The effect of the drop in oil price has had a double effect on the cement industry in KSA. Firstly, the start of 2015 saw significant increases in the cost of both fuel and electricity. Whilst many may argue that the subsidised prices could not be maintained forever, the level of increase made significant dents in the margins all of the cement producers.

But the bigger effect has been seen on the demand side of the equation. Initially, the drop in oil price had little effect on sales; however, this is not unexpected as projects that are already underway have to be completed so a drop in sales would be expected to lag behind a drop in the economic outlook of a country. Cement producers are now seeing a drop in demand which is also compounded by the last of the new cement capacity coming on line, leading to significant drops in sales for most of the producers. This is a situation that many of the producers have never found themselves in before - fighting for sales in a contracting marketplace whilst facing higher costs. In addition, due to the scale of the plants as well as the security stock that was put in place, the drop in sales has lead to ever increasing clinker and cement stocks in the country. At the end of September the clinker stock for the Kingdom was over 25 million tonnes.

But such a scenario is not something new to the global cement industry - just something new for Saudi Arabia. Up until the 80s, cement in the UK was sold on a cost-plus basis, thereby giving the cement manufacturer no real incentive to produce cheaply. Plants were over-manned and there was a plentiful supply of British coal.  But then fuel costs increased, pricing regulation changed and all of the producers came under pressure to reduce costs - both variable and fixed. This resulted in major optimisation programmes, headcount reduction and the initial introduction of alternative fuels as just a few examples.

How cement companies address the challenges remain to be seen - and this in some ways will be influenced by the price of oil, although there will be a lag in demand picking up even if the price of oil returns to $100 tomorrow. History has shown us that the strategy of doing nothing, cutting all spending and trying to weather the storm leads to failure. Maintenance gets ignored and plant reliability decreases over a period of 2 - 3 years, and in the long term maintenance spending has to be increased. This drop in reliability often occurs when the market is picking up after a trough, leading to a lost opportunity in the market.

Cement producers should use this crisis as a catalyst for change - people become much more motivated when the challenge for survival is in front of them - and there are many opportunities to reduce costs and beat the competition. These could be internally facing programmes such a headcount reduction, maintenance cost reduction or alternative fuel or externally facing programmes such as product development and quality improvement.

The winners in this challenging market will be those who follow the path that has previously been taken to adapt to the new set of challenges by reducing costs - history has shown that those that fail to adapt generally end up with a new set of owners.