Cement sector sales in 2015 are expected to witness a visible rise on the back of improved demand. Yanbu cement, the third biggest cement company in Saudi tells Upper Reach how they are positioning themselves in the market.
Qatar and the UAE are rated by various surveys as more interesting than Saudi Arabia in the construction sector, but Saudi Arabia currently has a trillion dollars worth of projects on the table, with more cement being bought than can be produced. What are your perspectives on Saudi Arabia as a construction market when you consider the GCC as a whole?
Saudi market size is the largest in the region, either from the construction market or the population . This is a country of 30 million, which is more than 60% of the entire GCC population. With the trade surplus that the government has had for a number of years, it has been able to invest substantially in the infrastructure, to modernize it, to support the diversification of the economy, and to respond to the needs of the young population. The commitment of the government is consistent, and the geopolitical position around us means that we should continue investing in our country rather than outside of it.
As for the construction sector in particular, it has of course faced a number of difficulties, whether it's the correction campaign of the illegal labor force, and then the need for "Saudization" not only in the construction sector, but in many other sectors as well. However, the need for foreign labor will continue to be there, but we have to devise a scheme to bring foreign labor on a temporary basis. It can be the allocation of foreign labor per project; I'm talking about very large projects. But we should not allow them to continue indefinitely for obvious reasons. Visas can be allocated for specific projects.
The second problem faced by the construction sector is the inadequacy of some of the contractors. They have delays, quality issues and so on, and the government had to withdraw some of the projects from them. Anyway, things are moving now, the government is putting in place new schemes, new mechanisms for allocation of projects to contractors, and that is going to be good in the long term for the construction sector.
As for the cement industry, it has been coping with the growth of the construction market sector. I believe that now we have reached a situation where we have enough production capacity in the cement industry to support the construction sector. In 2015 we reached almost 60 million tons of production capacity, and next year we'll have around 5 million or even more. By 2017 we will be more than 70 million tons, which is quite a huge capacity and almost double the production capacity of the UAE and Qatar put together.
Any further expansion in the cement industry will create problems for the industry if the demand is not matching the capacity. There is enough capacity and more in the pipeline. We are seeing now the difficulties the construction sector is facing in some regions in Saudi Arabia as a result of the problems I mentioned earlier. Price competition is emerging, especially in the Western region. There are many players in this market, it's the largest market in the country because it has four major cities: Jeddah, Mecca, Medina, and Ta'if and the highest population in the Kingdom. This is the largest market, and everybody from the new cement companies who are operating in small and vigorous markets in their areas suffer from surplus production capacity, and these quantities are dumped in the western region, which creates price competition. Most of the new cement companies were meant originally for developing remote areas as well as export.
The construction sector is largely funded by government surplus based upon the oil price, which also develops the infrastructure. That really can't go on forever. What are your views on the long term sustainability of the cement sector here as an investment? As a strategist, what's going to happen further down the line when there's not such enormous domestic demand? How sustainable is the industry?
I believe that demand will be almost matching the cement industry production, at least for the next five to seven years. Considering the government's plans for infrastructure, the population growth of Saudi Arabia, and also taking into account that it has more than 50% of its population below the age of twenty-five, this momentum is going to continue for some time.
But until we reach that time, some old production lines will be taken out of production, to match with the slow down in the growth of cement demand. Simultaneously, If the government continues to support the cement industry with local fuel pricing, then this would open the export door for a number of players in the Saudi cement market. I beleive there will be another business opportunity for the industry to work on capitalizing on the competitive advantages of the country. Hopefully when the Yemen situation comes to a peaceful resolution, there would be a chance for the Saudi producers to export to Yemen, also Egypt will be in high demand and we already got requests. But due to the export ban, the industry is not able to exploit its current substantial clinker levels. Even time will come for the government to lift the ban and there are ongoing discussions on this subject.
Do you think the industry is in good shape to adapt?
The Saudi cement industry is 60 years old and has some of the most state-of-art and large production lines in the world. Besides it enjoys a number of advantages. First, it's locally financed. And secondly, there's the availability of the raw material and fuel with local pricing making it enjoy high margins. There is also enough expertise available now in the industry, to an extent where it can support itself.
There are about 15 cement companies in the market, how do you see Yanbu Cement within those 15, where do you consider yourself to be positioned, and what's your profile? Do you consider yourselves to be a leader in terms of technology and production?
Yanbu Cement is the third largest of the 15, in terms of production, sales and revenues with current market capitalization of almost USD 3 billion. It is the leader in the Western region market. Of course, any strategies that we adopt are to keep this leadership position in the region. We are now concentrating more on improving our efficiencies and to stay lean and mean poised for changing market conditions. We are interested in getting bigger, but we are committed to being more efficient, more eco-friendly, caring more about the development of Saudi nationals in the company, increasing our "Saudization" of course is our future and commitment.
We have spent on training more than any other company of the cement sector in the kingdom, not only in our training centre, but also collaborating with agencies from abroad, to get training programs for the technical and non-technical employees of our company. We are very vigorous on this. Since I joined in 2012 we have done a complete reorganization of the company, to update our policies and operational procedures matching the best in cement industry. It has produced very good results for us when we compare our performance from 2012 until now. This year we are working on revamping our Oracle based ERP systems.
Last month an agreement was signed with Sinoma Energy, from China, to install a waste heat recovery system that is going to be the largest of its kind of the cement industry in the world, producing 34 megawatts. This is your more sustainable, environmentally-friendly project. What does this mean for the company, and what was the thinking behind this investment?
The thinking was that we needed to sell more cement by grinding more clinker, and in order to increase the availability of grinding mills, we need more electricity. We thought of a number of options to produce more electricity, whether from installing engines that burn fuel oil, or wind mills, or to make use of the heat that is already generated in our kilns and power stations. After making a feasibility study, we decided to set up Waste Heat Recovery plant. There is a lot of heat that's being produced from burning the raw meal for production of clinker, with a heat up to 1400º Celsius. That heat is generally disseminated into the air. In the WHR plant, we are capturing this waste heat and hot gases from the kiln, the cooler, and the preheater tower, which are some of the components of the production line and direct them to water boilers. These produce steam, which will drive turbines to produce electricity. The amount of hot gases and steam is so huge, that we can produce 34 megawatts clean energy, making it the largest of its kind in any cement plant in the world. This additional energy will be utilized to increase the availability of our cement grinding mills. In addition, our cement plant operation becomes more environment friendly because the carbon emission will drop by more than 100,000 tons.
The Chinese have a reputation for being quite hard to do business with, it's very commendable that you've signed such a massive deal. What is your experience working with them?
On the contrary, the Chinese entered the Saudi market in 2005 with the first line of Southern Province Cement, then the first line of Najran Cement in 2006, then Saudi Cement, followed by Yanbu Cement and so on. Since then they have gone up the learning curve of how to deal with Saudis, and Saudis have done so as well. Knowing our inclination towards working mostly with European suppliers, they know our requirements, the standards we are looking for in terms of quality, etc. They were very keen on entering the Saudi market at the beginning, and they have won a lot of contracts from the Europeans here. Regarding the waste heat recovery systems, Sinoma Energy are the number one suppliers in the world, especially when it is related to cement plants. One can find the biggest waste heat recovery system either here in the Middle East, or in the South East Asian market.
Cement companies sit behind the scenes of construction, and there are many mega projects going on right now. Are there any really interesting projects using Yanbu Cement at the moment?
The most interesting project for us right now is the expansion of the Prophet's Mosque in Medina. But the Medina market is also a target for a number of small companies, like Hail and Northern Province, so we are facing stiff competition from them. We, as the largest producer in the western region, will behave a bit like Saudi Arabia in the oil market, i.e a swing producer, to stabilize the market. We feel that it is our obligation that the market is always satisfied with the quantities, rather than trying to control the price.
That's interesting, so Yanbu has some cement in the Holy Mosque?
This is very interesting for us. We also hope we can be associated with the Jeddah metro. They are now at the design stage so we may be seen in 2016 signing of execution contract.
Regarding the education side, you have a training centre but you're not just training engineers, you are also training trainers, and not just for Yanbu Cement but for the industry. What can you tell us about this?
That has been a practice since about 1999. That training centre served both internally as a training facility for our Saudi newcomers, technicians or engineers, and also we have done quite a bit of training for other Saudi companies, and some companies from Oman and other countries. That took place for some time until last year it slowed down. I'm a member of the national Committee for Cement Companies, and we have a plan to establish a cement academy for the kingdom, with the collaboration of a European party. It will take some time, maybe a year, but all the Saudi cement companies are anxious to participate in this. It will be like training and hiring at the same time. We hire first, then we'll send them for training in this academy, and then they come back with employment contract. It is like a shared resource for the industry.
The cement academy is set to especially offer technical training. This is where we can help the "Saudization" also at the same time, because the plant technicians are the category where we have the smallest percentage of Saudis. This has to be accompanied with a number of things, like a better compensation for the people. We made a contract last year with a specialized agency. They are cement service providers, mainly for addressing operational solutions and training. They are now training our Saudi technicians and engineers. The mood has changed a lot in the plant, because people now feel that we care about them, and we are enlightening them and transferring knowledge from foreigners to Saudis.
Saudi Arabia is opening up and integrating globally, the stock exchange is opening for international investment. What are your thoughts on this development for the economy?
Personally, I think this should have happened a long time ago. The market now is well disciplined. There are laws in place now to protect the ownership of those who would like to invest with us, and also there are international standard mechanism for the resolution of any kind of legal dispute. Hopefully, that will result in the growth of this market, which took a really bad hit in 2006. However, the market as one of the largest in the region has the potential to grow more.
Internationally speaking, people usually don't have a very good understanding of Saudi Arabia, they just associate it with oil and a conservative society. What are your perspectives as an experienced business leader?
The main thing is the media, but we can't force media to come here, we have to attract people in some way or another. And we also have to open up the country for tourism more. When I go to Britain, or Germany, or Austria, I talk about how nice that country is. But people will not be able to talk about how nice is our country until they come and see it. Nobody in the media, or in the American movies, will depict us very nicely. But even comedians say nice things about us when they perform here in Saudi Arabia, or in Dubai. They come and see how normal are the people here, how nice, generous and accepting they are.