Saudi Arabia is the largest producer of cement in the GCC, basing a capacity of over 57 million tons by the end of 2014. The Kingdom with a 33.2 percent capacity expansion in five years also included among the top ten cement producers in the world.

Heavy infrastructural developments, including a series of economic cities lead to a high demand for cement in Saudi Arabia. Almost entire production (98.8 percent) of the sector is being consumed within the Kingdom.

Regulators proactive approaches to overcome the labor shortage, including the major challenge of transportation, but cheaper raw materials create a competitive advantage over the global cement players.

In fact, the sector is on a growth path, extending its capacity by adding new production lines to meet the rising demands in construction.

The strong project pipeline suggests that a huge potential for cement stocks is likely to remain in force over the next few years. Fundamentals of the sector indicate an optimistic outlook in the long term.

Saudi cement stocks, however, are consolidating their financial position in a remarkable performance. Production increases despite labor shortageThe cement production increased by 2.7 percent YoY and recorded 57.2 MT in full year 2014 (55.6 MT in 2013) while clinker production increased by 6.17 percent during the same period and recorded 57.59 MT.

Saudi Cement Company with its cement production of 8 MT and clinker production of 8.5 MT remained at top. The company showed a decrease of 8.5 percent in yearly cement production and 3.4 percent in clinker production as its Kilns 4 and 5 in Al-Hofuf plant were under rehabilitation.

Southern Province Cement followed it, producing a capacity of 7.77 MT in cement, an increase of 5.6 percent compared to 7.36 MT of 2013, and produced 7.38 MT clinker during 2014. The company also planned to add a couple of more lines, which will commence commercial production in fourth quarter of this year.Both companies contribute 27.6 percent to the sector s total production.

The sector has been facing a labor shortage in 2014 as the government took serious steps for the deportation of 2 million illegal expatriate laborers. However, the Kingdom opened doors further to foreign workers, offsetting the shortage impact.

Sales up 3.4 percent on production growthThe Kingdom s 14 listed cement companies generated total sales revenue of SR 13.4 billion in 2014, reflecting a year-on-year growth of 3.4 percent. Umm Al-Qura Cement Company is the recent addition on the stock market and its operations are still under starting-up stage.

However, Saudi Cement and Southern Province Cement Company represented nearly 29 percent of the consolidated sales.

Southern Cement s sales reported SR1.9 billion, an increase of 5.8 percent compared with the sales of year 2013. And Saudi Cement s sales reported SR2.02 billion but with a decrease of 7.44 percent incurred due to less production.

In terms of percentage, Hail Cement s top line grew by 124 percent to SR356 million from the SR159 million recorded in 2013. Bottom line moves to a new high The sector generates a total profit of SR6.2 billion in 2014, reflecting a year-on-year growth of 6.6 percent.

Again Saudi Cement and Southern Province Cement remained major contributors, representing a total net profit of SR2.1 billion. More than one-third of the sector s profitability is generated by both companies jointly.

Southern cements yearly net income grew by 3.9 percent. While, the cumulative effect of decreased production and sales revenue caused a decline of 4.3 percent in SACCO s net profitability. But the performance of SACCO s recent quarter is good as compared with same quarter last year.

The reason is share increase in associated companies profits. Cheaper raw materials aid higher profit margins.

The cement industry generates higher profit margins on the back of cheaper raw materials. The sector s gross margin reached to 61.5 percent by the end of 2014 (60.8 percent in 2013). Najran Cement represented the highest gross margin of 80.7 percent whereas a minimum of 38.5 percent was reported by Jouf Cement.

Net profit margin of the sector rose to 46.26 percent in 2014 compared to 44.89 percent of last year, a sustained and improved level YoY. The Qassim Cement has achieved the highest net profit margin of 57.17 percent in 2014.

Furthermore, return on shareholders equity is continuing at 20 percent approximately. And return on assets is more than 15 percent for the sector. Southern Province attained the highest level of ROE (35.3 percent) and ROA (26.9 percent) in 2014, reflecting effective management of its assets and equity. Assets grow on positive cumulative performanceTotal assets of the sector grew exceptionally to SR 40.4 billion by ending year 2014, recording a growth of 6.2 percent over the preceding year s figure of SR38 billion.

Saudi Cement Company represented the largest value of assets SR4.49 billion (SR4.37 billion in 2013), a relative sector share of 11.1 percent.

While Tabuk Cement Company topped on percentage basis, achieving 31 percent higher value of total assets in 2014 to SR1.82 billion compared to SR 1.39 billion recorded in 2013.

At Saudi stock market (Tadawul), the cement sector has been showing a tremendous performance over the last few years, returning more than 20 percent on average basis. The sector index gained more than 24 percent till mid-September 2014, supporting Tadawul s rally to hit the highest level in six-and-half years.

But, since mid-September 2014, the Saudi stocks have been facing a challenging time in response to OPEC s various strategic decisions. The sliding oil prices put significant downward pressure on these. The benchmark TASI s entire gains of 2014 vanished even turned to negative after this oil turmoil.

Cement sector index also lost 2.42 percent for 2014, closing at 6,852.7 points. The sector index weighed down by Jouf Cement and Yamamah Cement, which dipped by 20.17 percent and 16.28 percent respectively.

Furthermore, Umm Al-Qura Cement Company floated its shares on Saudi stock market during mid of 2014, offering 27.5 million shares through initial public offering (IPO) at a par value of SR10.

By the end of 2014, Al-Qura share price rose by 266 percent to SR36.57. Arabian Cement was another key gainer, marching higher more than fifty percent to SR77.57.

With the addition of Al-Qura, the capitalization of the cement sector reached to SR90.8 billion in 2014, contributing five percent to the total market capitalization.