Saudi cement sales to drop in Q2 on weak construction activity

Saudi cement sales will decline 20 percent quarter-on-quarter in Q2 2018, as construction activities are set to remain weak due to Ramadan and Eid, Al Rajhi Capital said in its monthly sector report.

Total cement sales will reach 9.6 million tons in Q2, down 14 year-on-year, compared to 11.8 million tons in Q1, due to the continued slowdown in construction activity.

"Going forward, demand is unlikely to pick up based on the trends witnessed during the first three months of 2018. We remain cautious as the construction activities are bound to remain weak," the research firm added.

The overhang of excess inventory remains with a slight increase on a month-on-month basis, as inventory levels stand at 35.7 million tons.

According to the report, the slowdown in construction activity and prevailing high inventory levels have compelled companies to enter new regions in the Kingdom, triggering a price war.

In March, Yanbu Cement signed a one-year agreement to export one million tons of clinker and 0.5 million tons of cement starting this month. The deal is estimated to add SAR 100 million in revenue this year.

"The agreement will help the company to lower its inventory and increase cash levels which will support higher payout ratio for the year. On the other hand, we believe lower margins on this deal will not aid material earnings improvement," the report stated.

Al Rajhi Capital said it expects Yanbu Cement to renew the deal next year if local demand remains weak.

Separately, the firm maintained its "neutral" rating on the cement sector despite low demand, high inventories and the ongoing price war.