The Saudi cement sector will continue to witness strong demand in 2012, led primarily by government projects, according to a report from NCB Capital, Saudi Arabia’s leading wealth advisor and largest asset manager.

However, ongoing fuel issues with Aramco could delay the 4.5 million tons of new capacity expected in 2012, the report said, adding that the potential supply constraint should provide strong pricing support.

The new NCB Capital report analysing the Saudi cement sector noted that there are concerns on supply due to an apparent inability by Yanbu and Southern Cement to receive increased quantities of subsidized fuel from Aramco for their new lines, leading to potential delays in the start of their operations.

“If this is the case, this would lead to a strong pricing support in 2012,” said Farouk Miah, acting head of Equity Research at NCB Capital.

“The potential demand-supply imbalance could become particularly acute in the western region where demand is expected to be high, coupled with possible supply constraints at Yanbu Cement where its new 3 million tons/year line is expected to start commercial production in the first quarter of 2012.”

NCB Capital downgraded Yamamah Cement to Neutral with a PT of SR75.6 ($20.15) due to its strong recent performance (up 33 per cent since NCB Capital’s overweight call vs. 8 per cent fall in the TASI).

At the same time, it has upgraded Yanbu to Neutral with a PT of SR61.4 due to a better pricing outlook. “Our fair value price targets for most companies have increased by an average of 8-9 per cent due to a better demand and pricing outlook,” explained Miah.

Although NCB Capital remains neutral on all names in the sector, on a relative basis, the report favors Yamamah, Saudi and Southern.

“The key reason for this is their spare capacity/ high stock levels which are key positives for a sector which may face supply constraints in the coming 12-24 months. Due to this, we believe these names should trade at a 10 per cent premium to peers which are already near 100 per cent utilization rates and have low stock,” added Miah.

NCB Capital expects an average price of SR240 per tonne in the fourth quarter of 2011 – up 4 per cent year on year (YoY) but down 3 per cent quarter on quarter. The average cost per ton is likely to decline 1 per cent YoY.

“We expect YoY growth of domestic sales at covered stocks of 5 per cent against the 9 per cent expected for 2011. For revenue and profitability, we expect the stocks under coverage to record growth of 4.6 per cent and 5.3 per cent respectively against the 13.8 per cent and 18.7 per cent expected in 2011,” highlighted Miah.

NCBC believes that government demand should drive volumes in 2012. Construction contracts worth SR95 billion were awarded in Saudi Arabia during the third quarter of 2011, more than the combined value during the first of 2011 and a 104 per cent increase over the same period of 2010.

“Feedback from cement players indicates that demand in 2011 was largely private sector led, indicating that government demand is yet to come and should support the sector in the coming few years,” said Miah.

“On average, our sales volumes estimates for 2012 have increased for most companies under coverage by 1-2 per cent, although for Saudi cement it has fallen by 2.8 per cent as we believe it will focus on margins as opposed to volume driven growth,” he concluded. – TradeArabia News Service