Oman continues to feel a pinch of the crisis by registering a huge 13 percent fall in cement prices in the nine months of 2011, compared to the previous year and declined 19 percent since the year ended 2010, the largest decline among other Gulf Cooperation Council (GCC) peers, according to a report prepared by Global Investment House.
Omani companies are pressured by UAE cement companies which supply cement at a lower cost to the Sultanate, thus hurting margins of Omani companies and igniting price wars among them. Also, margins have diluted due to high cost of raw materials. Among the Gulf Cooperation Council (GCC) states, the Sultanate marked the largest decline of cement prices by percent at $64.4 per tonne in the first nine months of 2011, compared to $74 a tonne in the same period a year ago.
The study further pointed out that Oman Cement has increased its clinker capacity which will compete with Pioneer plant in the North and debt of the sector has increased because of recent fully debt funded acquisition. Saudi cement prices up Cement companies in Oman witnessed a 9.3 percent increase in sales revenue reaching $256.9 million. However, net profits fell 48.8 percent in the nine months of 2011, compared to the previous year to reach $55.6 million, thus pressuring net margins at 21.6 percent, compared to 46.2 percent in the nine months of 2010. In GCC, top line cement sector witnessed a 10.9 percent increase in the nine months of 2011, compared to the nine months in 2010 to reach $3.4 billion. However it announced a 3.5 percent decrease in profits.
Net profits decreased from $1.2 billion in 2010 to $1.1 billion, says the Global research note. However, the largest cement producer in the GCC, Saudi Arabia, witnessed an increase in cement prices by 5.4 percent to reach $64.6 per tonne. The price increase is mainly attributed to increased demand as reflected by higher volumes of cement sold. Also in March 2011, the Custodian of the Two Holy Mosques King Abdulla bin Abdulaziz of Saudi Arabia ordered to construct 500,000 housing units and build and expand hospitals and ordered to inject capital into specialised credit institutions to facilitate debt write-offs and increase mortgage lending. This will help shore up demand for cement as more housing units are in demand.
Net margins witnessed a 491.4bps decrease during the period due to the fact, non-core income segment declined strongly by 60.5 percent to reach $71.5 million, attributed to deteriorated capital markets which witnessed the S&P GCC index decrease of 16.2 percent in the period. On the other hand, gross margins witnessed a 160bps decrease in to reach 38.8 percent, compared to 40.4 percent.
This was due to a higher cost of sale which increased by 13.2 percent to reach $2.1 million. UAE suffers Country wise, the UAE, Oman, and Qatar continue to be pressured by declining net profits. UAE top line increased 1.2 percent to reach $688.9 million, compared to the previous year and cost increased 9 percent in the same period, bringing gross margin to an all-time low of 4.8 percent.In addition, net profit decreased 86.6 percent to reach $10.9 million in the same period, net margins are as well on a all time low at 1.6 percent, compared to the previous year.
The UAE seems to show that it hasn't reached the bottom yet as margins and profitability ratios continue to decline and continue to post new low levels. The UAE cement companies had negative operating margins each quarter. This is due to more real estate and construction activity slowdown.