cement research

8/7/2019 Cement Research

1/58

Global Research

May 2002

Equities

Cem ent Sector


2/58

Global Investment House KSCCEquity ResearchSouk Al-Safat Bldg., 2nd FloorP.O. Box 28807 Safat13149 KuwaitTel: (965) 240 0551Fax: (965) 240 0661Email: [email protected]://www.globalinv.net

Global Investment House stock market indices can be accessedfrom the Bloomberg page GLOHand from Reuters Page GLOB

The recommendation scale used by Global is:Buy

HoldReduceSell

This material was produced by Global Investment House KSCC (Global), a firm regulated by the Central Bank of Kuwait.This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may,from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of thesecurities (securities), perform services for or solicit business from such issuer, and/or have a position or effect transactionsin the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable law or

regulation, effect transactions in the securities before this material is published to recipients.Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, butGlobal has not independently verified the contents of this document. Accordingly, no representation or warranty, express orimplied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the informa-tion and opinions contained in this document. Global accepts no liability for any loss arising from the use of this documentor its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitutionfor the exercise of independent judgement. Global shall have no responsibility or liability whatsoever in respect of any inac-curacy in or ommission from this or any other document prepared by Global for, or sent by Global to any person and any suchperson shall be responsible for conducting his own investigation and analysis of the information contained or referred to inthis document and of evaluating the merits and risks involved in the securities forming the subject matter of this or othersuch document.Opinions and estimates constitute our judgment and are subject to change without prior notice. Past performance is notindicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securi-ties, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatso-ever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person.Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be

restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions.By accepting this report you agree to be bound by the foregoing limitations.


3/58

.............................................................................................................................

...........................................................................................................................

.........................................................................................................................

...........................................................................................................................

...................................................................................................................................

..............................................................................................................................

..............................................................................................................................

..........................................................................................................................

........................................................

..........................................................................................................................................

........................................................................................................................................

.......................................................................................................................

...................................................................................................

............................................................................................................................

........................................................................................................................................................

............................................................................................................................

Table of Contents

Investment Summary

Global Cement Industry

Arabian Cement Industry

Kuwait Cement Industry

- Economic Link

- Industry Structure

- Demand & Supply

- Porters Five Forces

Comparative Analysis of the three Cement Companies

Valuation Matrix

Recommendations

Kuwait Cement Company

Kuwait Portland Cement Company

Hilal Cement Company

Appendix

Manufacturing Process

1

3

6

13

13

15

18

20

25

29

31

32

39

46

53

53


4/58

1Cement Sector

Global Research - Kuwait Global Investment House

May - 2002

Investment Summary

q After gloom for the last couple of years, the prospects of the cement sector inKuwait is looking up, and we are very optimistic that the cement companies shouldbe able to improve their turnover and profitability in current year.

q The fundamentals of the three listed local cement companies looks to be positiveespecially with most of the companies having completed their capital expenditureprograms and poised for growth & higher positive free cash flows.

q The cement sector has also benefited from the relatively high oil prices, which has ledto higher cash flows for the government treasury. Led by the improved fiscal situationthe government has announced various construction and infrastructure relatedinvestment packages, which has helped in increasing the demand for cement.

q The size of the cement industry in Kuwait currently is estimated at nearly 2.5 milliontpa (valued at approx. KD 36 mn). There are three listed companies, Kuwait CementCompany (KCC), Kuwait Portland Cement Company (KPCC) and the Hilal CementCompany (HCC) who account for nearly 90-92% of the total market share.

q Kuwait Cement Company, which now manufactures its own cement, meets about48 percent of the Kuwaits cement demand. Kuwait Portland Company producesabout 28-30 per cent of the total cement required, and Hilal Cement Companyaccounts for another 14 per cent of the total demand. The remaining market share isheld by the small traders, etc.

q We recommend a positive outlook for the cement sector in Kuwait mainly in viewof the expected improvement in the profitability and the current valuations of thesecompanies. With improved liquidity of the stocks we believe, the Kuwait PortlandCement (KPCC) and the Hilal Cement Company (HCC) stocks should be able toregister higher growth. On the other hand announcement by KIA to sell its stake inKuwait Cement Company (KCC) has generated substantial interest in thecompanys stock.

q Our top pick in the sector is KPCC, which we expect would outperform the sector.We also believe the HCC stock is fairly attractive and with improvement in itsliquidity should provide the investors with positive returns. We recommend theinvestors to hold on to their holding in the KCC stock till a clear signal is availablefrom KIA regarding the selling of its stake in the company.

Reuters Code :

KCEM.KW

PCEM.KW

HCCK.KW

Listing:

Kuwait Cement Company (KCC)

Kuwait Portland Cement Company (KPCC)

Hilal Cement Company (HCC)

Current Price :

KCC 365 fils

KPCC 910 fils

HCC 580 fils

Cement Sector

May 2002

HOLDBUYBUY


5/58

2

Global Investment HouseGlobal Research - Kuwait

May - 2002Cement Sector

Recomendation Summary:

Chart : KCC stock price movement

Chart : KPCC Price movement

Chart : HCC stock price movement

Cement Cos.

FY01

Kuwait Cement Co.

Kuwait Portland Cement Co.

Hilal Cement Co.

Price

(fils)

365

910

580

Mkt.

Cap.

(KD Mn)

136.9

64.5

19.1

ROE

(%)

11.44

21.49

19.37

P/BV

(x)

1.8

1.5

2.9

P/E

(x)

24.9

12.7

10.1

DCF per

share (fils)

224

1,109

646

Recommend

Hold

Buy

Buy

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

0.000

0.100

0.200

0.300

0.400

0.500

0.600

G en era l In du st ria l K CC

Index

Values Price in KD

Jul-

95

Oct-

95

Jan-

96

Apr-

96

Jul-

96

Oct-

96

Jan-

97

Apr-

97

Jul-

97

Oct-

97

Jan-

97

Apr-

97

Jul-

97

Oct-

97

Jan-

98

Apr-

98

Jul-

98

Oct-

98

Jan-

99

Apr-

99

Jul-

99

Oct-

99

Jan-

00

Apr-

00

Jul-

00

Oct-

00

Jan-

01

Apr-

01

Jul-

01

Oct-

01

Jan-

02

Apr-

02

Jan-

95

Apr-

95

0.000

0.200

0.400

0.600

0.800

1.000

1.200

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

Price in KD Index Values

Jul-

95

Oct-

95

Jan-

96

Apr-

96

Jul-

96

Oct-

96

Jan-

97

Apr-

97

Jul-

97

Oct-

97

Jan-

97

Apr-

97

Jul-

97

Oct-

97

Jan-

98

Apr-

98

Jul-

98

Oct-

98

Jan-

99

Apr-

99

Jul-

99

Oct-

99

Jan-

00

Apr-

00

Jul-

00

Oct-

00

Jan-

01

Apr-

01

Jul-

01

Oct-

01

Jan-

02

Apr-

02

Jan-

95

Apr-

95

KP CC Ge ne ra l In du str ia l

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

0.00

20.00

40.00

60.00

80.00

100.00

120.00

HCC General Industrial

Price in KD Index Values

30/12/98 28/2/99 28/4/99 30/6/99 31/8/99 31/10/99 29/12/99 29/2/00 30/4/00 28/6/00 30/8/00 31/10/00 26/12/00 28/2/01 30/4/01 30/6/01 29/8/01 31/10/01 31/12/01 20/2/02 30/4/02

EPS & BV are the expected year end 2002 values. Share Prices are of 8th May 2002.


6/58

3Cement Sector


May - 2002

Cement Industry - Global Cement Markets

With the economic prospects looking more positive for the years 2002 and 2003 thereis a likely-hood that the construction sector would continue the growth it has observed

since the last quarter of the year 2000. Even while there was a slowdown in the global

economy in 2001, the global construction activity has not shown significant signs ofslowdown. But with the recent economic recovery being observed in various parts of

the world and particularly in USA which has led to the talk of implementing a tighter

monetary policy has led to the investors being apprehensive of the future of the

construction sector given its close linkage with the prevailing interest rate. The fact thatthere has not been any significant slowdown in the construction activity despite the

slowdown in the global economy raises the fear that the with the current economicrecovery the potential upside for the global cement market could be restrictive.

Table 01 : World Cement Demand Growth (in mn tonnes)

The world cement demand growth is depicted in table 01. Overall for the last couple of

months US market has been resilient, while in Europe due to the economic downturn

the infrastructure works have not really picked up. At the same time with strongpopulation growth and prevailing high oil prices, the Middle East & South Asia have

seen good growth and their economies seem to be relatively insulated from thehappenings in the world economy.

Most of the international research houses project a fairly positive outlook for the

construction and cement industry for the year 2002. The global cement demand isexpected to grow at a slightly lower rate of 2.0% in 2002 compared to last years

estimated 2.7%. Taking into account the inter-regional import-export flows, nearly 111

million tons of cement were consumed in countries other than where they originated.

Cement plants are the most saturated in North America, which takes in 28 million tons of

cement produced around the world per year. Most of the global players are pursuing large

Western Europe

Eastern Europe

North America

Latin America

Middle East & South Asia

China & Hong Kong

JapanAsia Pacific

Oceania

Africa

The World

Volume

2000

197

85

118

115

233

567

70154

9

82

1,629

1996

(%)

-0.9

-8.9

5.8

-0.7

5.3

11.8

3.47.7

1.3

7.0

5.9

1997

(%)

2.1

0.1

6.2

7.3

4.8

2.7

-4.52.6

0.0

2.7

2.7

1998

(%)

3.7

3.3

10.5

4.5

3.8

1.3

-8.9-25.2

-1.3

6.1

-1.0

1999

(%)

4.3

5.0

5.2

-1.5

6.4

3.0

-1.1-3.5

5.3

6.8

2.9

2000

(%)

2.8

7.7

0.2

1.4

5.5

0.6

-1.18.0

3.5

2.3

2.6

2001E

(%)

0.0

-0.7

2.9

-2.5

0.7

6.7

-0.71.5

-9.6

4.9

2.7

2002E

(%)

-0.2

1.3

-0.4

-1.6

3.7

3.0

-1.55.2

4.1

2.6

2.0

Source : ICR and Deutsche Bank Estimates

A global slowdown in2001 has not led tosignificant slowdown in

the construction activity.

Global cement demand is

expected to grow at 2.0%in 2002.


7/58

4



scale modernization programmes to extend their capacities. Greatest number of idle

plants lie in the former Soviet Bloc countries. Continental isolation of this region limits

its export capacity and also its contribution is not substantial to the world commerce.

Asia Pacific region has the second-lowest capacity utilization rates (66%). It is

partially sustained by a substantial flow of exports which was virtually non-existent

several years ago. The bulk of these exports were created by multinationals those since

1998 have integrated their Asian acquisitions into their trading networks. The otherregions have satisfactory capacity utilization rates. African countries import a

substantial proportion of their cement requirements as they lack limestone in most parts

of the region.

As per the recent Deutsche Bank research dated April 2002, between now and 2005, it

is projected that the production capacity of the world would increase at a modest 5.5%,while the world demand is projected to grow at twice that rate, resulting in an advance

of 13.5% over the period. The overall capacity utilization rate is also expected to gain

six percentage points to reach 80% between now and 2005. Capacity utilization rates

should increase everywhere except in North America. But the trading activity is

estimated to decrease by 6% over the period, from 111 million tons to 104 million tons.

Table 02 : Estimated capacity utilization rates by region in 2000 (million tons)

Brief projections for the main cement markets by Deutsche Bank includes:

North America: The Canadian and the American markets, despite a slight recent

decline, should continue to operate at full capacity. The nearly 26% increase in the

production capacity in the region should be absorbed by persistently brisk growth indemand (2.1% annually) and a 20% reduction in the imports. With nearly 22 million

tons to be imported per year, the region should continue to consume a significantportion of the worlds surplus production and therefore, it is expected that cement

prices would remain at their current levels.

Company

Western Europe

Eastern Europe

North America

Latin America

Middle East and South Asia

China And Hong Kong

Japan

Asia Pacific

Oceania

Africa

Total

Source : ICR and Deutsche Bank Estimates

Consumption

197

87

123

114

228

565

70

154

9

85

1,632

Production

Capacity

241

201

108

168

303

715

96

267

12

87

2,197

Utilization

rate (%)

81

46

88

72

78

79

78

66

70

81

74

No. of

Kilns

2

- 5

28

- 6

- 8

3

- 4

- 23

0

14

Between now & 2005, thecement production

capacity is expected toincrease by 5.5% while

the world demand isexpected to grow by twice

that amount.

Demand has beengrowing at 2.1% annually

in North America.


8/58

5Cement Sector


May - 2002

Western Europe and Japan: The utilization rate of the European and the Japanese

producers are expected to remain high because of the withdrawal of capacity there.

Because of their policy of regularly closing down excess capacity, the decline incement demand, of roughly 0.5% to 1.0% per year, should have no meaningful impact

on the profitability levels. Therefore, it is expected that the profitability of European

and Japanese producers should remain high and they should continue to generate

substantial surplus free cash flow.

Middle East, the Indian sub-continent and Africa: The main markets in which

capacity expansion programmes are currently taking place include the Egypt,

Bangladesh, India and Iran. The utilization rates in these countries are expected to

remain high because of the steady increase in local demands. Egypt, which is the

second largest importer (5.2 million tons) in the world is expected to achieve a balance

between supply and demand in 2003-04. At the same time the overall growth indemand in Africa should open other outlets for exporters.

Asia Pacific: Sharp increase in the capacity utilization rates in Asia Pacific is

expected to provide a strong boost to the local players profitability levels, while the

production capacity is to remain unchanged between now and 2005. As per the recent

Deutsche Bank research dated April 2002, since the financial crisis, all plans to extendcapacity have been cancelled and the debt levels of the local players have been left with

no room for further development investment. In the meantime, demand has picked up

again, suggesting that manufacturers could be back to full production capacity by the

year 2005. Achieving the above would mean the manufacturers have to maintain the

exports to other regions. Better coverage of fixed costs would enable the cementcompanies to improve their operating margins, as long as , the local prices hold firm.

A similar scenario is also projected for Eastern Europe and Latin America.

Profitability of WesternEuropean & Japaneseproducers expected toremain high.

Demand slowly pickingup in the Asia pacific

region.


9/58

6



Cement Industry Arab & GCC Cement Markets

The demand for cement in the Middle East and North Africa (MENA) region isexpected to grow at about 3.5% for the year 2002. Markets like Iran, Kuwait, Syria and

Turkey are expected to register higher growth rates in the year 2002 compared to 2001.

Markets such as Oman, Saudi Arabia, Yemen, Morocco, Tunisia would have eitheralmost the same market demand or see slower growth rates. The statistics of the

Middle East Cement market is provided in table 03. It could be seen from the table 03

that the per capita demand of Cement in Kuwait is one of the highest in the region next

only to UAE and Qatar. But this has to be measured in a relative sense as thepopulation of Kuwait is very small and is not a actual reflection of the future demand

of cement in Kuwait. In absolute sense, the demand of cement in Kuwait is relativelylow compared to the other countries in the region. On a per capita basis it ranks lower

than UAE and Qatar in the region.

Table 03 : MENA Region : Cement Demand (Million Tonnes)

As we can observe from table 03, Egypt tops the list of actual consumption of cement

with nearly 27 million tonnes in the year 2000, followed by Iran with 21 million tonnes

and Saudi Arabia with 15.4million tonnes. The number of existing cement companies

are 114 and they are distributed throughout the Arab countries. Iran and Egypt rank

first and second in terms of number of cement companies with 35 & 14 companies

Countries

Egypt

Algeria

Libya

Morocco

Tunisia

Iran

Iraq

Jordan

Kuwait

Lebanon

Oman

Qatar

Syria

Saudi Arabia

UAE

Bahrain

Yemen

Turkey

MENA total

% change,year-on-year

Source : ICR , Deutsche Bank and Global Investment House estimates

2000

26.7

8.0

3.2

7.5

4.8

21.0

4.3

2.0

2.5

2.9

1.5

1.2

5.1

15.4

6.1

0.5

3.0

31.0

146.7

2001E

27.3

8.4

3.3

8.1

4.8

20.0

1.8

2.1

2.5

3.0

1.6

1.2

5.3

17.7

6.1

0.5

3.1

25.6

142.4

(2.9%)

2002F

27.9

8.8

3.4

8.5

4.9

20.6

1.8

2.1

2.7

3.1

1.7

1.2

5.5

18.9

6.1

0.5

3.1

26.5

147.3

3.5%

% Growth

20001E

2.3

5.0

3.1

7.7

1.9

-4.8

-57.6

6.7

0.0

3.8

6.7

0.0

3.0

15.1

0.0

0.0

3.3

-17.5

% Growth

20002E

2.2

5.0

3.0

5.0

1.5

3.0

0.0

0.0

7.0

3.7

4.0

2.0

4.0

6.8

0.0

0.0

1.0

3.5

Demand Per

Capita (kg)

407

287

533

268

500

287

195

317

1,111

906

625

1,917

333

777

2,542

842

178

486

Demand for Cement inKuwait estimated at2.7mtpa for the year

2002.


10/58

7Cement Sector


May - 2002

respectively. The number of cement companies in the GCC region amounts to 31 with

the Kingdom of Saudi Arabia in the lead with 8 companies. Countries in the region

which figure among the largest exporters include Saudi Arabia, UAE, Iran, Tunisia &Jordan, while the importers include Egypt, Kuwait, Algeria, Sudan & Yemen.

An analysis of the cement producing GCC countries shows that UAE and Saudi Arabia

are among the two largest producers of quality cement. The dynamics of the GCC

cement markets has been discussed separately in the next few paragraphs:

The United Arab Emirates (U.A.E)

U.A.E is one of the major producers of oil and gas in the region. The country has seen

substantial development activities and structural changes in its economy in the past

decade. It has led to increase in cement demand from 5.3 million tons in 1995 to 6.1million tons in 2001. At approx. 2,542 kilograms demand of cement consumption per

capita, U.A.E has one of the highest per capita consumption in the region. The cement

production capacities in U.A.E have increased at a higher rate than the demand. It has

lead to substantial surplus capacity in the economy as shown in the table provided

below. Cement prices in the UAE local markets rose twice in the year 2001. The initial

increase was of 15% which was followed up six months later with another increase of30 %.

Table 04: Cement Production and Consumption in the U.A.E. (million tons)

It can be seen from the table 04 above, that the overall production capacity has

increased to 11.1 million tons yet, there has not been a commensurate increase indemand for cement. It has led to the stock pile of clinker produced by the cement

companies while some of the other cement manufacturing companies have resorted toimporting clinker at cheaper prices. Currently, there are seven cement manufacturing

companies in the U.A.E and another three companies have cement grinding mills but

two of them are not in production. During 1999, the three companies in Ras Al

Khaimah namely, Union Cement, Gulf Cement and Ras Al Khaimah Cement Companyhaving nearly 3.6 million ton production capacity produced approx. 37 % of the total

cement produced in the U.A.E.

Description

Production Capacity

Actual Production

Consumption

Clinker

Particulars

Clinker

Cement

Clinker

Cement

Domestic

Exports

Import

1995

4.62

9.28

3.90

6.20

5.30

1.00

1.82

1996

4.77

9.43

4.10

5.90

5.30

0.70

1.85

1997

4.77

9.43

4.50

6.00

5.10

0.90

1.20

1998

4.77

9.43

4.20

6.20

5.50

0.70

1.80

1999

6.30

11.10

4.90

6.90

6.10

0.80

2.00

2000

(est.)

6.30

11.10

5.80

6.80

6.10

0.70

1.00

Increase in cement pricestwice in 2001 should leadto higher profitability forthe local companies.

UAE currently has sevencement manufacturingplants and three grindingmills with total capacity

of 10.67 mtpa.


11/58

8



Table 05 : Cement Capacities in the U.A.E.

Table 05, provides data on the individual production capacities of all these 10 companies.

Of these 10 companies, 2 cement companies namely, Ajman Cement Company and JebelAli Cement Mill are not operational at present. Also, the Umm Al Quwain Cement

Company is only into the grinding of cement and not into clinker production. The U.A.E

also has Ras Al Khaimah Co. for White Cement & Construction Materials which

manufactures only 450,000 metric tons of white cement. With the projected expansion in

the production capacity of Sharjah Cement Company, the total cement productioncapacity in the U.A.E is expected to reach nearly 12 million tons by 2003, to make it thesecond largest cement producer in the Gulf region after Saudi Arabia. Since the local

production is more than the local demand, the U.A.E exports a large amount of its

cement capacity to the nearby Gulf countries. African countries are gradually turning out

to be major customers as well. Exports are supported by the good container handlingfacility and the low freight and other port handling charges in the U.A.E particularly at

places like Dubai, Ras Al Khaimah, Sharjah, Fujairah, etc.

The U.A.E cement manufacturing companies are facing under utilisation of their

designed production capacities. Surplus cement available had put substantial pricing

pressure on the profitability of these cement companies, but the cement companieshave been able to get together and have increased the prices of cement last year which

should help them improve their profitability next year.

Saudi Arabia

Saudi Cement sector is one of the oldest (46 year old) sectors in the Arabian Peninsula.Currently, the Kingdom has eight cement (grey) companies operating through ten

cement plants and one white cement company. Grey cement companies produced20.73 million tons of clinker in the year 2001 against their annual production capacity

of 20.39 million tons. It is obvious from table 06, that each of the three cement majors

Name of the Company

Union Cement Company

Gulf Cement Company

Ras Al Khaimah Cement Company

The Umm Al Quwain Cement Company

Ajman Cement Company

Sharjah Cement Company

National Cement Company

Jebel Ali Cement Mill

The Al Ain Cement Factory

The Fujairah Cement Industries

Total

Cement

Production

Capacity

1.20

1.30

1.10

0.50

0.75

1.30

1.50

0.20

1.22

1.60

10.67

Location

Ras Al Khaimah

Ras Al Khaimah

Ras Al Khaimah

Near Ras Al Khaimah

15 km from Umm Al Quwain

Cement Company

Sharjah

Dubai

Jebel Ali Cement Mill

Al Ain- Abu Dhabi

Fujairah

Total cement production

capacity to reach nearly

12mtpa by 2003.

Saudi Arabia cementcompanies have 20.39

mtpa production capacity.


12/58

9Cement Sector


May - 2002

viz. Saudi Cement, Southern Cement and Yanbu Cement have a capacity of more than

10,000 tons per day of clinker production and they constitute more than 50% of total

productioncapcity.

Investments in the Kingdoms eight cement companies total over US$4 billion.

Table 06 : Saudi Cement Sector Profile

Saudi Cement and Eastern Cement are situated in the Eastern Region with plants

located in three different sites (Hufuf, AinDar & Khafji). These three plants use gas as

their fuel and have a production capacity of 6.4 million tons of clinker i.e., 31% of thetotal sector capacity. Arabian Cement and Yanbu Cement located in the Western andNorth East Region at Rabiah and Yanbu respectively. They have a combined

production capacity of 5.7 million tons of clinker i.e., 29% of the total sector capacity.

Central region has two cement companies Yamama Cement and Qassim Cement witha combined production capacity of around 4 million tons of clinker ie., nearly 20% of

the total capacity in Saudi Arabia. Southern Cement located in two different sites(Bisha and Jazan) in the Southern Region contributes nearly16% to the total capacity of

the sector. Tabuk Cement, the smallest and the latest entry to the cement sector is

located in the northern region.

The bleak demand conditions during the late 1990s unleashed severe competition among

the major Saudi players in the sector that led to frequent price wars. As per the publicinformation available, due to these price wars, the companies incurred a loss of SR2

million per month. Due to this high volatility in prices there was instability in the market

place both for the producers and consumers. In order to avert such a scenario, Saudi

Cement Co. (the biggest cement producer in Saudi Arabia) initiated a "GentlemanAgreement" with Eastern and Yamama cement that defined quotas and price levels.

Following this agreement all the companies in the Kingdom concluded similaragreements, which eased the competition and stabilized the prices. There is also an

initiative to form a joint export house to facilitate and coordinate the export of cement.

Company

Arabian Cement

Saudi Cement

Yamama Cement

Yanbu Cement

Qassim cement

Southern Cement

Eastern Cement

Tabuk Cement

Date of

Incorporation

05/01/1955

23/11/1955

24/08/1961

14/03/1977

02/08/1978

21/01/1978

07/03/1983

02/08/1994

Region

Western

Eastern

Central

Western

Central

Southern

Eastern

Northern

No. of

Sites

1

2

1

1

1

2

1

1

10

No. of

Kilns

5

10

6

4

2

3

2

1

33

Capacity

(tons per day)

8400

13825

9167

11000

4700

10800

7000

3000

67892

Capacity per

annum*

(million tons)

2.54

4.15

2.75

3.30

1.41

3.24

2.10

0.90

20.39

Fuel

Crude Oil

Gas

Crude Oil

Crude Oil

Crude Oil

Crude Oil

Gas

Crude Oil

* Assuming 300 days of ProductionSource : CCFI Database


13/58

10



As per the CCFI cement report , all cement companies in Saudi Arabia have almost the

same unique profiles such as :

q Cost structure for all cement companies are more or less similar as shown in figure

01

q Unlike the other sectors in Saudi Arabia, private sector contribution is very high

Companies like Arabian Cement, Saudi Cement and Tabuk Cement have 100%

private sector participation.q There are no major investment planned in expansion as well as in downstream

industries.q No presence in the local distribution system (continue to rely on dealer networks)

&q High dividend payout.

Figure 01: Cement Cost Structure of Companies in Saudi Arabia

Year 2001, saw higher local consumption due to buoyant construction activities, whichhelped cement companies to reduce their clinker inventory levels by 0.4 million to

around 9 million tons. But not all the companies were able to reduce their inventory

levels, only Southern Cement, Arabian Cement, Yanbu Cement and Eastern Cement

reduced their inventories. On the other hand, inventory levels increased significantlyfor companies like Saudi Cement & Yamama Cement due to higher production.

Overall the current clinker inventory level is at a very high level for the sector, whichis at around 44% of the annual production capacity. Particularly, companies like

Yamama Cement and Eastern Cement inventories are more than two-third of their

rated capacity (table 07)

Source : CCFI Database

End of year 2001 sawSaudi Clinker inventory

level decline to 9 million

tons.


14/58

11Cement Sector


May - 2002

Table 07: Clinker Stock Vs. Production Capacity of Saudi Cement

Companies (000 tons)

The export performance of the cement companies in Saudi Arabia has been

commendable in the last four years, not only in absolute term, but also in terms of

composition of total sales. Despite strong competition from UAE, Far East and Iran,

Saudi exports increased from 0.25 tons in 1994 to 4.82 tons in year 2001 and from

15.6% of total sales in 1999 to 21.4% in 2001. Most of these cement and clinkerexports were done to the GCC countries like Bahrain, Kuwait, Qatar and UAE.

Table 08: Total Export of Cement & Clinker for Saudi Cement

Companies

Oman

Oman has two cement companies namely Oman Cement Company and the Raysut

Cement Company. Prices of cement in Oman had fallen substantially in 1998 and 1999

following large imports from the U.A.E. But in the year 2001, the prices of cementincreased as a result of the decision taken by the two cement companies in Oman to try

and stop the imports from the UAE. Cement market in North Oman is larger than thatof the South, the former representing almost 80 percent of the total demand in the

country. Current local cement demand is estimated at around 1.6mtpa, as compared to

Cement Companies

Arabian Cement

Eastern Cement

Qassim Cement

Saudi Cement

Southern Cement

Tabuk Cement

Yamama Cement

Yanbu Cement

Total

Clinker Stock

888

1,468

183

797

1,594

363

2,037

1,694

9,042

Production

Capacity

2,540

2,100

1,410

4,147

3,240

900

2,750

3,300

20,387

% of Clinker

Capacity

35.0%

70.8%

13.0%

19.2%

49.2%

40.3%

74.1%

51.3%

44.4%

Source: CCFI Cement Sector report, 2002

Million tons

Arabian Cement

Eastern Cement

Qassim Cement

Saudi Cement

Southern Cement

Tabuk Cement

Yamama Cement

Yanbu Cement

Total

2000

0.410

0.321

0

2.391

0.881

0.051

0.033

0.840

4.927

2001*

0.269

0.823

0

1.741

1.092

0

0

0.893

4.818

% Change

-34.4%

156.4%

-

-27.2%

24.0%

-100.0%

-100.0%

6.3%

-2.2%

Source : CCFI Cement Sector report, 2002. * estimated

Omans cement demand

estimated at 1.6 mtpa.


15/58

12



an installed capacity of 2mtpa of Oman cement Company (producing around 1.25mtpa)

and Raysut Cement Company with a capacity of around 0.75mtpa.

After a sharp decline, demand for cement and cement products in Oman rose in 2001due to the increase in governmental expenditure and slight recovery in the construction

industry. Raysut Cement Company at Salala reported an increase in its sales via its

own export terminal at Qabous Port in Muscat. This terminal was commissioned in

June 2000 with a handling capacity of around 2,500 tpa and it meets the needs of the

companys customers in the North.

Qatar

Originally founded in 1965, Qatar National Cement Company (QNCC) is the only

cement manufacturing (monopoly) company in Qatar. QNCCs capital was increased

in 1984 with a government share of 43% and the remainder being contributed by thenational private sector. The company utilises abundant local raw materials, such as

limestone, clay and gypsum and has its production plant in Umm Bab. Currently,

QNCC produces ordinary portland cement and sulphate resistant cement from three

kilns and calcined lime and hydrated lime from two newer kilns. These products are

extensively used in the local market for construction, steel production and water

treatment. QNCC also exports its products. QNCC currently has a cement productioncapacity of 1.19mtpa and clinker production capacity of 0.915mtpa. It is currently

expanding its output through the installation of a new plant, with a production capacity

of 670,000 tons/annum.

Qatar is on the threshold of becoming a gas-driven economy, with liquefied natural gas(LNG) and condensates set to overtake oil as the biggest export earner by 2003. Theconstruction sector in Qatar continues to depend on big-ticket gas and petrochemicals

projects. A major new area of development is the expansion of power generation

capacity with work on the state's first independent power project set to start this year.

Qatar consumed nearly 1.2 million tons of cement last year and the demand for cement

this year is expected to remain almost the same as in the previous year unless anymajor construction activities take place.

Bahrain

The cement industry in Bahrain is relatively small with a total consumption of only

0.5mtpa. Most of its requirements are met through imports though it has a couple ofgrinding facilities. The demand for cement is not expected to change much in the next

couple of years unless the government kick starts substantial investments into the

constructionsector.

Qatars cement demand isestimated at 1.2mtpa


16/58

13Cement Sector


May - 2002

Cement Industry Kuwait

Economic Link of the Industry:

Cement is the preferred building material in any country which is used both directly

and indirectly as building material (in manufacturing non-reinforced blocks, reinforcedsystems, etc.). It is used extensively in household and industrial construction. Cement

sector is a significant sector of the national economy due to its unique linkages with the

construction sector and the real estate development (to a lesser extent). Since the

statistics are not adequate to study the impact of cement sector on the domesticeconomy, we have used the construction sector as the surrogate for the cement sector to

understand the impact of cement sector on the economy.

Broadly, the construction sector can be categorized into demand for householdconstruction (homes, offices, etc.) and infrastructure creation (ports, roads, power

plants, etc.). The real driver of cement demand is creation of infrastructure, whichmainly is a function of the state of the economy of the country hence cement demand in

emerging economies is much higher than developed countries where its demand hasreached a plateau.

The real estate and the construction sectors are considered a major component of the

development and economic activity of a nation and spending in this sector inducesgrowth in other sectors of the economy. To drive this point home, three indicators are

of prime importance, viz. value added by construction & real estate in GDP, public

expenditure on construction activities and the share of construction and real estatesector in the domestic cash credit facilities utilized.

In spite of its importance, the contribution of the construction sector in Kuwaits GDP(at purchasers prices) constitute mere 2.0% for the fiscal year 2000, though as a

percentage of non-oil GDP it was 7.5%. The ratio has stayed in the range of 2.5-3.2%

between 1995 to 2000. The construction sector value has stayed in the range of

KD229-243mn. While GDP declined by 15.25% in 1998 to KD7.7bn, the construction

sector activity had held its own but it subsequently declined to KD 0.23 bn (-3.4%)

while the GDP grew by 17.0% in 1999 which was mainly on account of the reductionin the government expenditure because of low oil prices while actually the oil prices

increased during the year leading to increase in GDP (mining & quarrying includingcrude petroleum & natural gas increased by 41.5% while the petroleum refineries

recorded a growth of 28 % in the year 2000 compared to 1999). Even though the

construction sector returned to positive growth during the year 2000 contributing 5% of

private sector growth, its contribution to the GDP actually declined to nearly 2%. Thegrowth in this sector augurs well for the cement sector as this sector has seen nearly

five consecutive years of negative growth between 1995 and 2000.

Construction sectorcontributed 7.5% of thenon oil GDP in the year2000.


17/58

14



Table 09: Construction, real estate expenditure (Change)

In the year 2000, the construction sector returned a positive growth of 1.6% and it is

expected that with the current oil prices and proposed governments expenditure this

rebound is expected to be followed by stronger growth in the coming years. Over the

last two fiscal years the government has announced several projects and has made large

increases in their spending, but its impact on the economic activity would be realizedonly with a lag due to the trickle down effect.

Public expenditure on construction, a major factor that propels the growth rates of

economic activity in the construction sector, shows a marginal decline of 6% from

KD383.5mn in 1995 to KD360.5mn in fiscal year 1996. Further from this slight

decline, the construction activity in public expenditure went up significantly by 9% toKD393.7mn in 1997 and another 5% to KD414mn in 1998 over the respective

previous years. The draft budget for construction activities in the Kuwaiti

governments expenditure plan for the fiscal year 2000-2001 was up by another 16% to

KD400 mn (8.63% of the total approved public expenditure budget) as compared to the

previous year. In the current proposed budget governments expenditure plan on theprojects & maintenance for the fiscal 2002/03 has been further increased to KD670mn.The significance of construction expenditure in the entire public expenditure budget is

evident in the fact that in all the years, construction activities have accounted for about

9-10% of the total public expenditure. Although outlays are high, the market witnesses

a large lag in completion of projects which does affect the overall real estatedevelopment market & sentiment.

Table 10: Development expenditure (Change)

Amount in KD Million

Construction

As % of GDP

Real Estate & Business Services

As % of GDP

GDP at purchasers value

1993

218

3.0%

613

8.5%

7,231

1994

238

3.2%

634

8.6%

7,380

1995

244

3.1%

655

8.3%

7,925

1996

241

2.6%

655

7.0%

9,303

1997

236

2.6%

690

7.6%

9,107

1998

237

3.1%

687

8.9%

7,718

1999

229

2.5%

712

7.9%

9,033

2000

233

2.0%

737

6.3%

11,590

Amount in KD Million

Public works

As % of Total Development Expenditure

Electricity & Water


Communications


Other


Development Expenditure

As % of total Public Expenditure

Total Public Expenditure

93-94

115.5

33.9%

166.6

48.9%

14.6

4.3%

43.7

12.8%

340.4

8.0%

4,240.8

94-95

153.4

40.0%

167.0

43.5%

17.1

4.5%

46.0

12.0%

383.5

9.1%

4,193.2

95-96

132.2

36.7%

179.8

49.9%

11.3

3.1%

37.2

10.3%

360.5

8.7%

4,126.5

96-97

113.1

28.7%

221.0

56.1%

13.9

3.5%

45.7

11.6%

393.7

10.1%

3,888.6

97-98

83.9

20.3%

261.6

63.2%

19.2

4.6%

49.4

11.9%

414.1

10.4%

3,977.8

98-99

73.2

19.4%

238.7

63.4%

19.0

5.0%

45.7

12.1%

376.6

9.3%

4,040.2

99-00*

70.0

20.3%

203.1

58.9%

6.4

1.9%

65.5

19.0%

345.0

8.0%

4,295.0


18/58

15Cement Sector


May - 2002

The draft budget for 2002/03 expects government expenditure to increase by KD 156

million, or 3% to KD 5.4 billion. Capital spending is expected to receive a substantial

boost in the current financial year. Given the fact that a part of last years budgetallocation was not even spent, this hike may represent a more substantial increase in

actual capital spending in this fiscal year.

Over the years, the development of bank credit in the Central Bank of Kuwait monetary

statistics reveals that the local banks in Kuwait have aggressively increased theirexposure to the construction & real estate sector, which is another indicator of the

expansion of activities in this sector. While the total credit to the private sector

increased by approx. 16.6% last year (2001), the credit offtake by the construction

industry has actually come down by approx. 14.7% to KD376.6mn after having

recorded an increase of approx. 21.4% for the whole of the year 2000. The main reason

behind it could the extra liquidity which existed in the market last year as a result of theUNCC payments and the higher oil prices. We believe the upcoming projects would in

the medium term lead to higher construction activity and hence higher credit offtake.

While the share of the construction sector in the local banks balances of cash portion

utilized from domestic credit facilities by sector has stayed in the range of 6-8.5% over

the period 1996 to 2001, the share of the real estate sector has grown from 8% in 1995to 19% in 2001. Over the year 2001, the credit to the real estate sector registered a

growth of 26%.

In terms of fresh distributions concluded with residents of Kuwait, it is evident that the

growth in loans extended to construction, real estate and personal facilities (includesloans for purchase of houses) continues unabated. The Cabinets decision to injectadditional funding into the Credit and Savings Bank through the Kuwait Development

Fund during the last quarter of the year 2001 should lead to more construction of

houses/villas and hence leading to increased demand for construction activities and

therefore cement.

Industry Structure:

Owing to the small size of the cement industry in Kuwait which currently stands at

nearly 2.5 million tpa (valued at approx. KD 36 mn ), there are only a few players in

the industry. Cement being a bulky item is a freight sensitive commodity, due to whichinternational trade is very limited and happens only between the neighbouring

countries. This is amply borne by the fact that world export of cement accounts for notmore than 0.20% of the total world production. Inspite of the above facts, Kuwait did

not have a cement factory till now due to its small market size which makes it

uneconomical for anybody to setup a cement factory, unless he has exports/supply

contracts tied up with the neighbouring countries. Therefore, Kuwait uptill now hadcompanies which were mainly involved in just importing and marketing cement in

Kuwait. But recently Kuwait Cement Company has set up its own approx. 1.8 mntonne plant which has changed the structure of the cement industry in Kuwait. Now

Kuwait has one cement manufacturing company and two cement packaging & trading

Cement industry valued atapprox. KD36mn basedon its current price.


19/58

16



companies. This has not only changed the industry structure but also the logistics of the

working of this industry. Kuwait also has several small time traders like Saheen

Al-Ghanim who import cement for mostly its own consumption and market the excesscapacity in the local markets.

Figure 02: Current estimated market share of the Local Cement Companies

Kuwait Cement Company, which now manufactures its own cement, meets about 48

percent of the Kuwaits cement demand. Kuwait Portland Company produces about28-30 per cent of the total cement required, and Hilal Cement Company accounts foranother 14 per cent of the total demand. The remaining market share is held by the

small traders, etc.

Cement is a high volume and low value commodity which involves huge transportationcost. Cement and its raw materials, namely coal and limestone are all bulky items that

make transportation difficult and uneconomical. Given this, cement plants are usuallylocated close to both, sources of raw materials and markets or one of them. In fact

transportation of cement to the markets also constitutes a major cost component.

Given the cost structure, the key indicator of sector profitability is cement prices.

Cement industry is normally characterised by the boom and bust syndrome, being a

cyclical industry. It can be categorised as a capital intensive and cyclical industry.Usually setting up of a greenfield cement plant of 1 mtpa would entail an outlay of

US$120 mn and would require a gestation period of 36-48 months.

Even though Kuwait has seen almost a continuous growth in cement demand for thelast 14 years, still its price (cement) has varied substantially (shows the demand

inelasticity for cement). In the last couple of years cement demand has remainedalmost constant while its prices declined by nearly 42% between end of 1998 and end

of 2001.

Kuwait Cement Co. which

has set up its own

production facility meetsabout 48% of the total

demand.

Cement is a cyclical and

capital intensive industry.


20/58

17Cement Sector


May - 2002

Unlike other industries, the balance between supply and demand does not have a direct

and immediate impact on cement selling prices. Prices are primarily determined by the

specific competitive conditions in each market as Cement markets are usually verymuch local in nature. Cement companies in Kuwait in the last 2 years were affected to

a large extent due to the dumping of cement from Saudi Arabia. There arre some other

players like Saheen Alghanim in the local market who import cement from the nearby

countries and used to sell them at a very low margin in Kuwait but it was only an

extension of their construction activities and did not affect the local prices to a verylarge extent. But the dumping of cement from the Kingdom led to substantial decline in

the prices as we would see in the table 11 below:

Table 11: Cement Price in Kuwait for the last 8 years (only OPC)

As a result of the dumping by Saudi Arabian cement manufacturers, the year 2001proved to be one of the worst years for the cement companies in Kuwait as it was

accompanied both by a decrease in the quantity sold by the local cement companies as

well as the decline in its prices. The profitability of the cement companies have

declined substantially as we would discuss later. But with the current news of increasein the prices of cement the future looks bright for the local cement companies

depending on the sustainability of these prices. On March 03, 2002 the local cementcompanies raised their prices by KD 2.7 or approximately 23% from a level of KD11.8

per ton to KD14.5 for bulk cement (we have not considered the increase on February

14 as it would have minimal affect if any on the performance of the cement companies

because of the subsequent decrease in the prices on March3, 2002). For the cementbags the prices of cement were increased from 630 fils to 800 fils per cement bag (50

kg). This augurs very well for the cement companies profitability in the near future.

Considering the fact that prices in the UAE increased twice last year and similar

increases were affected in Saudi Arabia and Oman as well, it was very much expected

that similar increases would happen in Kuwait as well. We believe that the cementcompanies would be able to maintain these prices for sometime until any further

structural change happens in the cement industry or the demand decreases substantiallywhich is very unlikely.

Year

1994

1995

1996

1997

1998

1999

2000

2001

2002

Avg. Price (KD/ 50 kg bag)

1.250

1.150

0.950

1.000

1.100

0.950

0.680

0.630

0.800

* Prices mentioned are that of the year end retail market.

Balance between supplyand demand does nothave a direct and

immediate impact oncement selling prices, butdepend to a large extenton the specific

competitive conditions.

Cement companiesprofitability suffered inthe last couple of yearsbecause of the decline in

the prices of cement.


21/58

18



Demand & Supply

Demand for cement is price inelastic due to lack of substitutes, also they form a verylow part of the total cost. Small imbalances in demand-supply result in

disproportionate change in cement prices. Given the commodity nature of the product

it is difficult for any single player to control the prices of cement in Kuwait. Current

price per ton is KD14.5, down considerably from KD20 in 1998. This makes the total

value of cement about KD36mn, considerably below KD46 million (approx.) in 1998.As we would see in the table below, the demand for cement has increased at a CAGR

of 7.5% since 1987, while the prices of cement have undergone significant

fluctuations.

Table 12: Cement consumption in Kuwait

The difficulty and expenses involved in its transport limits exchange and the scope for

price based adjustments and restoration between supply and demand. The assets

themselves also prevent supply from responding quickly to changes in demand, as theyhave a long life span, and it is difficult and time-consuming to obtain permits for newopenings. But there is no constraint on supply due the presence of surplus capacity in

the region. In and of itself, the overall balance between production capacity and

demand means nothing at least in the short to medium term for Kuwait. For this reason,

the cement industry is well insulated against heavy swings in either supply or demand.

Per capita consumption of cement in Kuwait is about 1,111 kg compared to 2,542 kg inthe UAE and 1,917 kg in Qatar. These statistics are to be interpreted alongwith per

capita GDP and stage of economic development. Given the emphasis on real estate and

construction sector, cement demand is expected to rise in Kuwait. We have further

analyzed the real estate sector to see what future the real estate and construction sectorholds so as to analyse the potential of demand for the cement industry.

Real estate development is one of the largest industries in Kuwait bearing significant

influence on domestic economic activities, well being of the population, employment

and investment opportunities. As we have discussed earlier the real estate &

construction sector is considered a major component of the development and economicactivity of a nation and spending in this sector induces growth in other sectors of the

economy.

Real Estate sales which suffered in 2000 and the early 2001, revived as a result of the

Year

1987

1988

1989

1992

1994

Source : Statistical Bulletin, Ministry of Commerce & "Globals" Estimates.

Demand (million tons)

0.91

0.98

1.11

0.52

1.31

Year

1995

1998

1999

2000

2001 (est.)

Demand (million tons)

1.36

2.33

2.50

2.50

2.50

Demand for cement hasgrown at a CAGR of 7.5%

since 1987.

Per capita consumption ofcement in Kuwait is about

1,111 kg compared to

2,542 kg in the UAE and1,917 kg in Qatar


22/58

19Cement Sector


May - 2002

resumption in the disbursement of new loans in January 2001 after it received a capital

injection from the government. Savings and Credit Bank (SCB) resumed its housing

loan disbursement activities in January 2001. The housing segment in the countrylargely deals with "housing for Kuwaiti nationals" This helped the real estate sales

recover by March-April. To avoid further similar disruptions, SCB would be raising

funds by issuing bonds to the extent of KD500mn to Kuwait Fund for Arab Economic

Development (KFAED). The bonds which would be issued by SCB would have a tenor

of 20 years and are to be issued over a period of 5 years, carrying a subsidized interestrate of 2%. This would be the first time that KFAED would be venturing into providing

funding inside Kuwait. The total value of loans sanctioned by SCB fell to KD160

million in 2000 from KD287 million in 1999 but it improved to KD199mn in the first

ten months of the year 2001. All this would help improve the construction market and

hence the cement consumption as well.

Resumption of the disbursement of loans by SCB helped in the recovery of the real

estate sales. Real Estate Sales (units sold) in 2001 were up by 11% compared to that in

the previous year though the value of sales remained almost the same (which shows

that prices still remain depressed). Most of the activity in the real estate market as usual

has been in the residential property sales, which was 91% of the total units sales and

78% of the total value of sales in 2001. But it was the apartment and commercialsegment which recorded the maximum gain in terms of percentage growth. The unit

sales and value of sales of the Apartments and Commercial segment grew by 29% and

51% respectively, while the value of residential sales was down.

Table 13: Real Estate Sales

Similarly, the number of building permits granted in 2001 also grew by nearly 20%

over the previous year compared to a 22.5% decline in the year 2000. Residential

construction benefited from this, as did other providers of consumer credit. The credit

to the real estate and the construction grew by approx. 19% for the year 2001 comparedto the same period last year. As per the recently released data by the Public Authority

for Civil Information (PACI), there were a total of 119.5 thousand residential homes inDecember 2001. The number of apartments reached 173.4 thousand in December 2001.

There has been an increase in the number of pending applications at Public Authority

1996

1997

1998

1999

2000

2001

Jan-02

Feb-02

Source : Ministry of Justice

Units

7,248

8,504

7,844

4,760

4,813

5,272

622

341

Value (Mn. KD)

588

716

804

572

545

495

52

30

Units

1,304

1,160

828

288

396

510

50

65

Value (Mn. KD)

220

252

228

132

93

140

12

12

Residential Property Apartments & Commercial

SCB would be raisingfunds by issuing bonds to

the extent of KD500mn toKuwait Fund for ArabEconomic Development(KFAED)

Resumption of the

disbursement of loans bySCB helped in therecovery of the real estatesales

Number of buildingpermits granted in 2001

grew by nearly 20% overthe previous year


23/58

20



for Housing Care (PAHC). As of November 2001, the number of pending applications

at PAHC had increased to 54,000. Between Januray and November 2001, PAHC

distributed 1,677 vacant residential plots in South Jahra, West Jleeb Al-Shuyoukh &South Doha and 3,020 government homes in Umm Al-Hayman, Jaber Al-Ali & East

Suaibikhat.

We believe that the demand for housing in the country is bound to increase, and at an

accelerated pace, in the years to come, an estimate well justified by the current "babyboom" profile of the Kuwaiti population. While the size of the backlog of housing

applications with PAHC ensures the present demand potential of the real estate sector,

the population profile reflects high demand for the future in the housing sector of

Kuwait. This would add substantially to existing construction activities of various large

infrastructure projects announced by the government therefore leading to the further

increase in demand. Demand for cement in Kuwait is expected to rise by approx. 8% in2002 after having remained steady for some time, due to the increase in the spending

on the housing sector and slight recovery in the construction industry which could

infact further improve the prices of cement.

Porters Five Forces

The various elements of the industry structure which we have considered while

evaluating the drivers and constraints of the cement industry includes the following

five considerations which have been discussed below. The model known as the

Porters "Five Forces" compares the different aspects of the competitive forces of the

industry and its various comparative strengths. But before we start analyzing thesefactors we will discuss some of the peculiarities of this sector. Unlike other industries,the balance between supply and demand does not have a direct and immediate impact

on cement selling prices. Prices are primarily determined by the specific competitive

conditions in each market.

Cement markets are usually very much local in nature. The difficulty and expenses

involved in its transport limits exchange and the scope for price based adjustments andrestoration between supply and demand. The assets themselves also prevent supply

from responding quickly to changes in demand, as they have a long life span, and it is

difficult and time-consuming to obtain permits for new openings. In and of itself, the

overall balance between production capacity and demand means nothing. For thisreason, the cement industry is well insulated against heavy swing in either supply or

demand.

The Asian crisis is a good example of the above statement: 40 million tons of surplus

capacity were suddenly available in just a few months and had no impact whatsoever

on prices elsewhere. "Global" has tried to look at the various competitive aspects of theKuwait Cement industry in general and sometimes have taken a view on the whole

region which is based on the Porters model.

difficulty and expensesinvolved in its transportlimits exchange and the

scope for price basedadjustments and

restoration between

supply and demand


24/58

21Cement Sector


May - 2002

Threat of New Entrants (Entry Barriers)

q Economies of Scale: Kuwait currently has only one cement plant which has aneconomic size, but looking at the current demand of cement in Kuwait, we can

safely assume that the factory will not be operating at 100% capacity in the absence

of export markets. But the factory would have to overcome some operationalproblems as the main raw material for cement production i.e, limestone has to be

imported, since Kuwait does not have limestone mines. Most of the plants in the

UAE, Saudi Arabia and Oman (only one plant belonging to Oman Cement

Company) have capacities more than 1mtpa, but none of these manufacturers hasthe power to control the market. Therefore they usually collude with each other to

maintain the prices in the region and their profitability.

q ProprietaryProduct: Cement being a commodity, there are no proprietary productsin it. But there are plants in the region which manufacture specialty cement

products.

q Brand Identity: The brand names of all the three cement companies in Kuwait arewell known in the industry circles and some of them also have good retail identity.

But extending these brand identities beyond the borders of Kuwait has not

happened. Any new player trying to enter the market has to make some marketing

efforts but in a commodity product like cement brand identity does not make muchdifference.

q Capital Requirement: Cement is a capital intensive industry as it requires almostUS$110-120mn to set up a greenfield cement factory with the construction period

being almost 2-3 years. But to enter into markets like Kuwait, one need not

necessarily set up a cement factory. Anybody can set up a storage space and startimporting and marketing cement in Kuwait. Yet it is not easy to do it since there is

no available space in the port area, which makes it necessary to import cement by

land in trucks. It gives the cement companies in Kuwait certain strength to face

outside competition because of the strategic location of their storage facilities near

the ports, though they still can get competition from independent traders who

already have available storage spaces/silos.

q Access to Distribution: Distribution channels are the most important strategic assetsof cement companies. Cement being a commodity, its distribution set up and

marketing network helps the cement companies to acquire a brand image ("top of

the mind recall") among its customers. This is the key for all the cement players

and access to any market in the region for the cement manufacturers would dependdirectly on their distribution network in those countries. All the three cement

companies in Kuwait have the advantage over their external counterparts in having

already distribution channel in place.

q Absolute Cost Advantages : Most of the Kuwaiti companies have acquired sufficient

experience in the marketing of cement and some other building materials like wood

Threat of new entrants isrestricted to some extentbecause of the capitalintensive nature of theindustry and access to

distribution channels.


25/58

22



and steel related products, but they lack experience in the manufacturing part.

Kuwaiti companies have to develop their expertise in manufacturing which would

help them go up the proprietary learning curve and help them achieve costadvantage over their competitors.

q Government Policy: Government policies have not been very favourable towards

the local cement companies in Kuwait and they have not done enough to stop the

dumping of cement products by cement companies from Saudi Arabia. On thepositive side, this has helped the cement companies to formulate their future

strategies which is based on the competitive forces.

Bargaining Power of Suppliers:

q Differentiation of Inputs: It is advantageous in Kuwait to have suppliers who cansupply the cement (raw material) to the local marketing companies at a cheaper

price. All the three local cement companies in Kuwait have their logistics worked

out and they have substantial experience in importing cement from manufacturers

all over the world (from wherever they get it the cheapest after accounting for the

transportationcosts).

q Switching Costs of Suppliers and Firms in the Industry: It is not a concern for the

local cement companies as cement is a freely available commodity and the excess

capacity in the region helps the local cement companies to negotiate and acquire

quality cement from a number of manufacturers in the region. In many instances,

the local cement companies have acquired cement from the cement manufacturersin the gulf region, therefore we can conclude that there are no switching costs ofsuppliers and firms in the industry. It is also true because of the fact that two

cement companies HCC & KPCC have very low operating leverage though it is a

different story for KCC because of their high fixed costs.

q Presence of Substitute Inputs: There are no substitute inputs for the local cement

companies (HCC & KPCC) as they buy cement and sell it here in Kuwait. Onlysubstitute inputs could be thought of in terms of having clinkers which can be

crushed and mixed to have cement which can then be sold in Kuwait. It would

require the companies to have separate grinding capacities which may not be very

beneficial cost-wise in the present conditions. KCC does not have substitutesavailable for limestones, bauxite, etc.

q Cost Relative to Total Purchases in the Industry: Considering the fact that there is a

lot of surplus capacity in the region available for purchase by the local companies,

this factor does not assume much importance. The same reasoning applies to bulk

purchases from the suppliers as well though it gives the buyers some bargainingpower with the suppliers.

q Threat of Forward Integration relative to the threat of Backward Integration by the

Firms in the Industry: One of the local cement companies Kuwait Cement

Suppliers do not have

much bargaining powerbecause of the excess

capacity present in theregion, though cartel

formations doessometimes leads to

bargaining power.


26/58

23Cement Sector


May - 2002

company has set up its own cement manufacturing plant (backward integration),

though "Global" believes that this plant might face various logistics problems. As

explained earlier foreign (regional) cement companies can set up their owndistribution network in Kuwait, but they may face a problem in terms of renting a

storage space at the Ports in Kuwait.

Bargaining Power of Buyers:

q Buyer Concentration : There is a concentration of buyers in Kuwait as it is mostly

the construction companies which make bulk purchases and bulk purchases account

for almost 60-70% of cement sales in Kuwait while the rest are accounted for by

the retail customers. But the buyers do not have much leverage in dictating the

pricing as Kuwaiti market is mostly an oligopolistic market and pricing is fixed by

the three local cement companies. This comparative advantage was recentlysomewhat diluted as a result of the dumping by the Saudi Arabian manufacturers.

q Buyer Information : There is a complete transparency in the pricing market for

cement in Kuwait and most of the bulk buyers have also the complete information

on the prices of cement in the region. But it does not affect the pricing of cement to

a very large extent due to the lack of storage facilities and transportation costsinvolved.

q Ability to Backward Integrate: Even though quite a few of the construction

companies in Kuwait have the ability and the resources to integrate backwards

because of their large sizes yet they would not venture into it because most of thesecompanies have close associations/ stakes in the three local companies (eitherdirectly or indirectly).

q Brand Identity: All the three cement companies in Kuwait are very well recognized

in the local market. But now there is a need for these brands to make a regionalidentity for themselves so as to expand their operations beyond the boundaries of

Kuwait which would improve their growth and add stability to their operations.

q Product Differences: There are no differences in the product quality among the

cement sold by the local players (at least they are not perceived to be so). Since

cement is a commodity, they are sold more as standardized products like OPC(ordinary portland cement), SRC (sulphur resistant cement), etc. worldwide and

there are no difference in terms of ordinary constructions. But for specialisedconstructions like bridges, jetties, etc. cement companies such as Lafarge sell their

own specialty cement products.


27/58

24



Threat from substitute goods: Cement does not have any substitutes that may

replace it in various construction works.

Intensity of Rivalry:

q Industry Growth : The demand for cement in Kuwait has recorded phenomenal

growth rate in the last 13 years. Since 1987, the industry has recorded an

compounded annual growth rate (CAGR) of approx. 7.5% till the year 2001. Thefuture looks bright for the Kuwaits cement industry especially with the oil prices

in the medium run not being projected to go its low levels of early 1999. The

cement industry is mainly being dependent on the construction industry, which in

Kuwait to a large extent directly or indirectly depends on governmental

expenditure on housing and infrastructure projects. With the oil prices being

projected in the range of US$18-20 in the medium run, we expect the governmentexpenditure to be increased/maintained at the current levels.

q Product Differences/ Brand Identity: As mentioned earlier there is no perceived

difference in the products of any of the three local players in the Kuwait Cement

Industry. Therefore as far as the products are concerned the three local cement

players are in the same level.

q Intermittent Over Capacity : The dumping of cement by the Saudi Arabian cement

manufacturers has changed the demand-supply equation in Kuwait. It has affected

the prices of cement sold by the local cement producers/marketing companies, but

we believe this seems to have been brought under control as result of the agreementbetween with Saudi cement companies.

q Informational Complexity: There is a complete transparency in the prices of the

cement industry because of its oligopolistic nature. Because of the nature of the

industry, any undercutting in prices of cement by any one of the players wouldseverely affect the profitability of the industry in Kuwait.

q Concentration and Balance: Even though there is no concentration of demand with

any one single player in the industry, Kuwait Cement Company is the leader of the

industry having nearly 47-49% share of the total market.

q Exit Barriers: There are no exit barriers for the cement industry in Kuwait barring

that for Kuwait Cement Company which has made substantial investments in itsnewmanufacturingcapacity.

The dumping of cement by

the Saudi Arabian cementmanufacturers has

changed thedemand-supply equation

in Kuwait.


28/58

25Cement Sector


May - 2002

Comparative Analysis of the three Cement Companies

In this section we have tried to analyse the various areas of the cement companiesoperations in order to identify their strength and weaknesses as measured from their past

results. Based on our analysis, Kuwait Portland Cement Company (KPCC) posses the

strongest financials closely followed by Hilal Cement Company (HCC) and Kuwait

Cement Companyamong the three listed companies in Kuwaiti cement companies.

Profitability Analysis

All the three cement companies operations have suffered in the past as a result of the

decline in the cement prices. The year 2001 could be attributed as the worst year sinceit saw cement prices decline to its lowest level in several years. Most of the companies

have tried to cut their cost or expanded their trading (including other building products/financial investments) activities to maintain their absolute profitability. Companies

have also resorted to financial engineering to maintain their profitability by the way ofcapitalizing their interest expenses and not recording their depreciation from the new

constructions. We believe that with the current increase in the cement prices, the profitmargins of the cement companies would substantially increase. But the increase in the

net profits would be restricted to a certain extent due to the booking of the interest

expense and higher depreciation expense. Despite all these expenses the free cash flow

of all the three cement companies are likely to grow in leaps and bounds. (For theanalysis purpose we have taken only the cost of materials for calculating the gross

profits and have taken out the depreciation as well as the manpower cost from the cost

of goods sold. The manpower cost has been consolidated as salary and has beendeducted from gross profit to calculate the operating profit)

A simple look at the profitability ratios shows that in 2001, Kuwait Cement Company(KCC) was the clear winner as it was the only company which was able to increase its

gross profit margins. But the other two cement companies saw their gross profit

margins decline mainly because of their trading in other low margin building products

though it has helped them achieve more stability in their bottom line.

Table 14: Gross Profit Margin (%)

The operating profit margins of Kuwait Cement Company (KCC) has been low

compared to those of Kuwait Portland Cement Company (KPCC) and Hilal Cement

Company (HCC). For the year 2001, the operating profit margins of KPCC and HCC

stood at 9.79% and 9.43% respectively compared to 5.48% recorded by KCC. But the

net profit margin of all the three companies has been higher than their operating profit

margins. This has been mostly as a result of the high investment income (not




1998A

29.07

34.35

31.1

1999A

29.34

33.44

35.5

2000A

20.53

26.93

22.0

2001A

23.66

23.38

18.6

2002 F

32.0

29.3

29.8

2003 F

32.0

35.8

35.1

With much of the capitalexpenditure having beencompleted free cash flowof all the three cement

companies are likely togrow.

KCC increased its grossprofit margins in 2001.

Net profit margins of thecement companies have

been higher than theiroperating profit marginsin 2001 because of theinvestment income andUNCC payments.


29/58

26



necessarily cash received) and UNCC payment (in case of KPCC). Therefore, to a

certain extent, KCC and KPCC were insulated from the change in the cement prices as

a result of the income from their huge investment potfolios. The net profit margin ofKPCC was the highest among the industry players as we can see in the table 15 below:

Table 15: Net Profit Margin (%)

But net profit does not mean much to our analysis as it is pretty misleading and gives the

impression that the KCC and KPCC have been making a lot of cash where as much ofthe increase in the investment portfolio were only increase in the value of the portfolio

(calculated as per IAS 39). Therefore, we have tried to focus on the actual cash part of the

investment income due to which we see the net profit margins of KCC and KPCC being

much lower than their 2001 incomes and it is also reflected in our projections where we

have included investment income and net profits based on their historical adjusted net

profit margins. (Adjusted for unrealized investment income and UNCC payments).

KPCC scores when we compare the return to the shareholders and we believe this is

the most important aspect of our analysis as it reflects how much the companies have

been earning on the funds provided by their shareholders. KPCC returned 21.49%

while HCC earned a 19.37% return on its equity. At the same time KCCs return onequity was 11.1%. But these returns to some extent do not present right picture forKCC and KPCC which have recorded in their pro forma statement substantial

investment income which might not have been the actual cash return.

The return on equity of KCC has been low as a result of its very large equity basewhich was raised to set up the new cement manufacturing plant. Therefore the

operating leverage of KCC is also very large as well as its financial leverage.

Table 16: ROAE (%)of the Cement Companies in Kuwait

Liquidity Analysis

All the three cement companies have very comfortable liquidity positions, but what

separates them from each other is how they have been able to manage their cash. It isthe rotation of cash as determined by its cash cycle which actually determines how well

the companies have been able to manage their cash.




1998A

-53.77

33.38

24.48

1999A

13.27

30.83

26.85

2000A

18.33

30.38

11.46

2001A

63.14

65.09

12.66

2002 F

26.08

34.30

19.98

2003 F

28.46

39.18

25.76




1998A

-21.05

24.50

45.85

1999A

3.53

19.20

28.62

2000A

4.52

16.23

16.43

2001A

11.10

21.49

19.37

2002 F

6.03

11.80

32.37

2003 F

7.94

16.45

40.01

All the cement companies

have comfortable liquidityposition.


30/58

27Cement Sector


May - 2002

Table 17: Current Ratio

A close analysis of the three cement companies shows that KCC has very highinventory and receivables levels due to which they have an operating cash cycle of 299

days. KPCC also has a very high receivables level though they have been able to

contain their inventory levels due to which their operating cash cycle is 191 days. HCC

has been able to control both its receivables and inventories due to which its operating

cycle is only 132 days. It also indicates that HCC and KPCC have been able to convert

their inventory to cash faster than KCC.

Figure 03: Length of Operating Cycle

But KCC has been able to manage its current payables in a better way which has

helped it to manage its cash better than KPCC. The payables outstanding

cement research

Documents