Global Analysts Predict Ready Mix Operations in GCC Set to Grow in Coming Years

The acquisition of the Saudi Market

Global Analysts Predict Ready Mix Operations in GCC Set to Grow in Coming Years
Booming economies in GCC countries boost infrastructure and real estate developments, pressuring Ready Mix demand

Fujairah, UAE – 2 February 2015: The economics of the Ready Mix Concrete (RMC) market are more or less the same as any other traded commodity. The GCC region is no exception to the traditional supply and demand paradigm - this is no more evident than in the recent rebound of ready mix operations sweeping many high quality providers in the region. As investors’ confidence continues to return, construction activity has increased, supported by mega government-based infrastructure projects. The domino effect of this positive atmosphere impacted the building materials industry too, as demand for RMC is set to exceed 10% over the coming 2-3 years.

Looking at the largest RMC market in the GCC, Saudi Arabia is expected to host approximately half of the GCC construction projects by value till 2019; amounting to USD 1.1 trillion. Such contracts consist of those in the residential sector (30%), followed by the healthcare (20%) and education sector (10%). Projects of this nature have driven up RMC demand in Saudi Arabia by 10% since the financial crisis of 2008 and demand is expected to grow further to 15% by 2016. Furthermore, Saudi Arabia’s transport sector (aviation and rail) constitutes a significant proportion of the high-value construction contracts awarded in previous years and it is anticipated to award further contracts over the next three years. Another dimension of increased RMC demand is linked to tourism with the holy cities of Mecca and Madina expected to host major hotel constructions and other hospitality and retail developments. The table below demonstrates the range and scale of the infrastructure projects currently being undertaken in Saudi Arabia:

In the UAE it would appear that the healthy 6.9% growth of RMC production of recent years is set to rise to 8% annually in the coming years according to global analysts – mainly due to strong forecasts in the real estate and construction sectors, suggesting a continued period of exponential growth in the region.
Dubai and Abu Dhabi represent the largest share of the RMC production market with approximately two-thirds of the entire RMC market, around 25-30 companies having their presence in these two areas – equal to about 50% of the total RMC companies in the whole of UAE. Fujairah is starting to gain more importance on the RMC domain as it welcomes mega oil & gas developments worth over USD 7bn, along with their accompanying support developments of housing, social and retail services. Currently, Fujairah holds the third position behind Dubai and Abu Dhabi; see table below.

Looking at the other side of this equation, Saudi RMC companies have one of the highest utilization levels globally going as high as 90%, putting serious pressures on local RMC prices. Lately, RMC prices in Saudi Arabia have seen continuous increases forcing Saudi officials to cap them. In such a uniquely seller-leveraged market, Saudi RMC companies are amongst the most profitable of their industry globally, with net margins as high as 50% and beyond.
The situation in the UAE looks as competitive but with a vital twist; where approximately 50 players operate across the seven emirates of the United Arab Emirates. Furthermore there is an average of 182 batching plants in the UAE, with the vast majority operating as small local organisations with a single plant operating at a comparatively low production capacity. This concentration of RMC operators is focused in Dubai and Abu Dhabi, whereas other emirates; such as Fujairah who is third in RMC production behind Dubai and Abu Dhabi; open more window for profitable operations. Amongst those that have built substantial capacities lately is Oryx Industries, which today controls over 10% of total RMC operational capacities in the UAE and dominates the Eastern coast of the country. Adding to the positive outlook for Fujairah based RMC producers is that only around 3% of global production is traded across borders, meaning those producers strategically positioned are in a situation to capitalise on the booming economies of nearby countries.

Fujairah has an additional market advantage. Almost 65% of the production cost in the RMC industry is linked to products of quarries, a sector where Fujairah takes a lead regionally. For RMC companies based in Fujairah such as Oryx Industries, there can be substantial savings on material cost, improving its position in competing for demand.
The latest drop in aggregates pricing post the financial crisis have helped RMC companies in both KSA and UAE stock raw materials at lower prices, operating today at competitive operational margins.

Today, RMC markets are back on track with prices heading upward and demand pushing for further capacities to be active. Saudi and UAE RMC prices have grown by almost 10% and 20% respectively since 2010, with raw material prices yet on the lower side.

Mr. Majdi Khalaf, Vice Chairman and Group CEO of Oryx Industries referred to this encouraging situation as “a combination of effective planning, favourable market changes and a fortunate abundance of natural resources” as he described the long term positive outlook for Oryx Industries at a recent press conference. Many organizations like Oryx that are both well positioned and have ample capabilities will have preparations underway to meet the new demands. The coming months will reveal just how much operational activity will increase in Fujairah and how successfully organizations like Oryx Industries supply the new RMC demand.