As Saudi Arabia’s new economic masterplan puts the onus on private sector-led growth, City Cement CEO, Saleh Al-Shabnan, talks about the impact of Vision 2030 on his industry and explains why his firm was ahead of the game in becoming self-sufficient
Since the formal unveiling of Vision 2030 in April 2016, Saudi and international companies have been busy appraising the implications of the economic diversification masterplan for their industries. The cement sector is no different.
Dependent on construction activity, the Saudi cement industry has been hit by the decision to reign in capital expenditure as the government tries to get to grips with a budget deficit that totaled almost $100 billion in 2015. Severely affected by the sustained slump in oil prices, Saudi Arabia was among the worst performing regional construction markets in the first half of 2016, with the kingdom awarding $4.5 billion worth of contracts – down from $19.9 billion in the same period last year, according to Middle East Economic Digest (MEED). Naturally, the cement industry has felt the knock-on effects.
Vision 2030 is the Saudi government’s plan for weaning the Kingdom off its oil addiction, generating new growth engines and increasing the economic contribution of the private sector so that the country will never again be at the mercy of commodity price fluctuations.
According to Saleh Al-Shabnan, CEO of the Tadawul-listed City Cement Company, “Vision 2030 is very much needed. It comes a bit late, but better late than never”.
Mr Al-Shabnan would have preferred a comprehensive plan for economic diversification to have been released in the “good times” when the oil price was at record highs, as this would have meant the Kingdom was better prepared to weather the current storm. Preparing for the hard times is something Mr Al-Shabnan learnt as a child growing up in rural Saudi Arabia, and he applies these harsh lessons to business.
City Cement has already invested in the production and usage of alternative fuels and is planning to invest in renewable energy sources so they are not dependent on finite government subsidies. In fact, City Cement is on target to generate 50% of its energy needs from alternative fuel and waste heat recovery sources, putting it at an advantage over some competitors who have been content to rely on government largesse in an industry associated with intensive energy use and tarnished as a source of pollution.
“City Cement is at the heart of Vision 2030,” said Mr Al-Shabnan. “The government of the Custodian of the Two Holy Mosques has provided a lot to all Saudi industries. It is now time for all industries to pull in the same direction with the government and make Vision 2030 a reality as soon as possible by adopting appropriate measures, as City Cement has done with its energy policy,” he added.
The national macroeconomic blueprint for lowering the Kingdom’s dependence on oil includes commitments to promoting industrial efficiency and developing alternative fuel sources.
“In our production process, we use Heavy Fuel Oil (HFO) as well as a mix of alternative fuels and recovered waste heat that normally radiates from kilns and goes to waste. Instead, such heat is redirected to boilers to produce super-heated steam for newly installed turbines that generate electricity. We had to make some financial sacrifices for this but it means we were ahead of the game. We went beyond imagination and now we are in a strong position if subsidies are cut and fuel prices go up,” said Mr Al-Shabnan. He added: “The use of recovered waste heat and alternative fuels from industrial, agricultural and municipal waste scores three hits in one. In addition to generating the colorific values needed by this energy hungry industry, it helps clean the environment through the disposal of all kinds of waste in an environmentally friendly way with much less emissions compared to fossil fuels, avoiding costly, temporary and ecologically unsound landfills.
“Financially, it will free equivalent quantities of petroleum fuels for the Kingdom to export at international market prices instead of selling them locally at subsidized low prices. All in all, it’s a basket of low hanging fruit to be immediately harvested from the Kingdom’s Vision 2030.”
Acknowledging that the cement industry has earned a bad name due to its traditionally energy intensive methods, the CEO said he wants his firm to lead by example.
In another demonstration of their commitment to minimizing energy use, City Cement has signed an MOU with King Abdullah City for Atomic and Renewable Energy (K.A.CARE) to develop plans for the use of solar energy at its cement plant.
Whereas once the government was happy to assume all the risk in infrastructure projects, the onus is now on private companies to spur activity in construction through PPPs. Whilst there has been a noticeable decline in the announcement of new “megaprojects” that have characterized the Saudi construction industry over the past decade, new opportunities are emerging under the Vision 2030 blueprint. For example, targets have been set for doubling the number of hotel rooms by 2020 and building 1.5 million affordable homes over the next eight years.
Despite testing conditions, City Cement reported a net profit of SAR 243.17 million in 2015, a 9.6 per cent increase over the previous year. Although profitability has declined somewhat in 2016, the firm remains in a strong position and paid out a dividend of 0.75 SAR per share for the first half of this year.
As the construction sector and related industries adapt to the shifting dynamics, City Cement’s Deputy CEO Majed Al-Osailan said the firm is carefully analyzing the market to identify opportunities.
“We are focusing on increasing our market share. Our competitive advantages include the quality of our raw materials, geographical proximity to the main markets and our lack of dependency on government subsidies,” Mr Al-Olsailan said.
City Cement’s Deputy CEO Majed Al-Osailan
Founded in 2005, City Cement operates a state-of-the-art cement plant near Marat on the old Makkah road, some 135 Km north of Riyadh, with an installed capacity of 12000 tpd cement. The firm produces Ordinary Portland Cement and Sulfate Resistant Cement that is supplied entirely to the domestic market. City Cement has been awarded the SASO Quality Mark by the Saudi Standards, Metrology and Quality Organization in recognition of its high standards.
Amongst other things, the SASO Quality Mark is supposed to enhance the competitiveness of the designated products in the world market. Earlier this year, Saudi Arabia announced it was lifting a ban on cement exports to counteract the decline in the domestic construction industry. The Saudi government imposed a ban on cement exports in 2008 to deflate prices and satisfy demand from large government-funded infrastructure projects.
Mr Al-Shabnan said firms in the sector were awaiting further details on the lifting of the export ban before deciding what opportunities this would offer to grow sales beyond the Kingdom. The CEO pointed out that the lifting of the ban would be most beneficial to cement firms working in border regions, such as those close to Yemen, Iraq and Syria, where serious rebuilding will be required when their respective conflicts are resolved. He explained that other strategic Saudi industries, such as chemicals, petrochemicals, fertilizers, metals and food, are blessed with government support for their feedstocks or fuels. “We hope that cement exports, when approved, will be treated the same as exports from other strategic Saudi industries,” Mr Al-Shabnan said.
Another key tenet of Vision 2030 is the commitment to provide more employment opportunities and ensure that Saudis have the skills and motivation to occupy jobs in the private sector, as the government focuses on trimming the bloated public sector and fostering the conditions to create 450,0000 new private sector jobs by 2020. City Cement has long been keen on nurturing young talent in a country where some 50% of the population is aged below 25.
Mr Al-Shabnan acknowledges that cement is a “harsh industry” that may not appeal to everyone looking for employment. Most employees are forced to live close to where the mines and cement mills are located, often in remote areas away from the Kingdom’s busiest metropolises.
On the plus side, however, the remote locations of many cement plants help to create job opportunities in areas that traditionally offer few employment opportunities, which means less people feel the need to migrate from their homes to large, crowded cities.
“We are trying to change the culture and the mindset,” said Mr Al-Shabnan. “We are hiring young engineers and technicians and looking to recruit female employees in areas such as HR, finance, accounting, sales and marketing. This company is run by Saudis and we are proud of that. We aim to be an aspirational choice for young Saudis and the highest scorer in the Kingdom’s Vision 2030 realization,” said Mr Al-Shabnan.