JEDDAH, 5 September 2005 — With construction booming and government incentives available for industrial projects, investing in cement companies is a hot sector these days in Saudi Arabia. However, some economic reports are cautioning these companies to prepare a long-term strategy for the eventual period of slower demand and consequently decline in this sector.

Earlier in the summer, the cement market had a shortage crisis and construction companies complained of the high prices of cement due to increase in demand and short supply.

The Ministry of Commerce and Industry reacted by temporarily reducing custom’s tariffs on imported cement to zero percent from five percent after it had lowered it initially from the usual twenty percent to five. The ministry urged cement companies to increase production and in monitored the prices in the market.

Currently there are eight cement companies in the Kingdom with a total investment of SR16.3 billion producing 22.7 million tons a year.

The month prior to these decisions, the ministry issued permits for 27 new cement projects in the Kingdom that would be able to cover the surge in demand within six months. A report issued by the ministry revealed the production capacity of the new projects — with a total investment of SR21.6 billion — would exceed 45 million tons per year.

During this period, the current eight cement companies posted an increase in mid-year net profits and their stock prices went up as a result and in anticipation of a growing demand for cement from the real estate sector. But despite the boom in construction, the real estate investment market has been dogged by a series of scams that hurt its reputation. The Ministry of Commerce has halted all permits for real estate investment projects until it and the Capital Market Authority completed the process of implementing regulations that safeguard investors’ and developers’ rights and money. This measure naturally affected the cement sector and its index suffered a decline.

Once these hurdles are cleared, the cement sector is expected to rise along with the real estate market which it is closely tied to. However, a recent report by the Gulf Organization for Industrial Consulting (GOIC) advised cement companies in the GCC member states to coordinate in advance on putting a future strategy to dispose of their surplus of cement once the market is saturated and the demand decrease.

The report points to the sharp fluctuations in this industry and the slumps it goes through and says that that the cement companies should learn from these experiences.

The region is currently enjoying a high increase in demand for cement as a result of real estate projects, budget surplus, high oil prices and low interest rates on bank loans. According to the GOIC report, the cement industry in the region witnessed tremendous growth with the total number of companies in 2004 reaching 32.

Production capacity increased from 38 million tons in 2003 to 42 million tons in 2004. In correlation to that, local consumption of cement reached 39.8 million tons in 2004 and expected to increase in the next three years.

In response, cement companies introduced plans for expansion in production capacity, which had the immediate result of lowering cement prices in the market to the benefit of contractors and real estate investors. The long-term strategy requires that these companies open new markets and rationalize their production expansion to avoid over supply.