GCC cement: the next privatization target?

The scale of the construction boom in the Gulf States is neatly encapsulated in a large table in the middle of this report, with a bottom line of $62.9 billion worth of projects currently under development.

Dubai has the biggest proportion of projects in progress with a massive $42.5 billion total, ranging from the offshore island reclamations to a light railway and new airport terminal. In Saudi Arabia the biggest project is the $1.5 billion expansion of King Abdul Aziz Airport.

Meanwhile, Qatar has its Qatar-Pearl offshore island and new airport; Bahrain its causeway to Qatar and real estate projects; Kuwait has two big island development projects; and even Oman has it's the Wave waterfront project.

All these projects will need a lot of cement, and regional producers are set to increase capacity by 24.6 million tonnes per annum over the next 24-30 months - with more than 90% of new capacity being built in the UAE and Saudi Arabia, and $3 billion of investment. HSBC expects total capacity to rise from 36 million to 60 million tonnes per annum by 2007.

The problem for cement producers is that there is a long lead time in installing capacity which takes 24-30 months to come on stream. Investments are also enormous, and the danger is that a high level of capacity only becomes available as the construction boom declines.

However, HSBC maps out several construction sector growth scenarios which examine when supply might outstrip demand. Over the past three years regional consumption of cement has grown by 13% per annum, and at a 12% growth in demand HSBC sees supply and demand in equilibrium by 2007.

On the other hand, if growth slows to 8% then an oversupply situation emerges in early 2006. But in view of the fact that new construction projects are being added to HSBC's list each day this hardly seems a likely prospect; the huge Dubai Waterfront and Palm Deira are not yet listed among projects for Dubai in the report, for example.

This HSBC report also highlights the advantages of consolidating this widely fragmented industry to reduce costs and open up the sector to foreign ownership. Indeed, the report itself is a guide for corporate bankers and does not tip cement shares.

It is true that state-owned cement shares could be easily privatized in the current market facilitating a rationalization of the sector through the mechanism of local capital markets. And perhaps the cement industry will follow telecoms and banking as the next candidate for such economic reform.

Certainly the opportunity for a complete restructuring of this often overlooked bulwark of the GCC economy is enticing for corporate bankers. This is the bread-and-butter of their own profession, but economic planners around the region would do well to read this report whose arguments are too detailed to repeat in such a short article.

But in brief a consolidated, privatised cement sector would serve the regional economy better with more stable and lower prices thanks to a more efficient use of capital and improved management.