The puzzle of Oman Cement
A Gulf News report at the beginning of May showed that, ironically, cement stocks fell across in Kuwait and the UAE, because quarterly results from cement companies were disappointing. It seems that these companies are investing in the local stock exchanges as well as producing cement.
Now that Consolidated Contractors Oman, a subsidiary of the Saudi family firm, CCC, have won the contract to build the Wadi Dayqah surface dam, one would expect the demand for cement to rise even further in the Sultanate.
CCC will be working in conjunction with a subsidiary of the French construction giant, Vinci Construction (Campenon Bernard) , which has been building the plant and tunnels in the Xiaolangdi project on the Yellow River in China. CCC have built some of Oman's recharge dams. As it says on the company's main website, "we are committed to [ ] being supportive to local businesses and social activities, friendly to the environment as well as being proactive in the socio-economic environments within which we operate. Our appreciation of our clients' interests, evidenced by meeting their requirements and insuring high quality work, is the prime directive of our management."
There will be two dams. The main structure will be 74 metres thigh and will run some 400 metres across the width of the wadi, while a separate saddle dam will be 48 metres high and 370 metres long. I'm not an engineer, so I'm not able to calculate the volume of concrete required - but I think it will be a lot, and that's not taking the volume of grout into consideration.
Despite higher earnings, Oman Cement Company has been losing ground on the Muscat Securities Market. Why? Well, for one thing, cement is probably not very trendy. One market analyst suggested that "Small to medium sized investors are now concentrating on the real estate sector." Oman Observer, 11th May. Doesn't real estate construction require cement?
But there's more to it than that.
Oman Cement company was established by the government in an out of the way position on Rusayl Industrial Estate in 1978. In 1993, the government sold off 37 per cent of its stake to the public, and in 2003, the government divested a further 12 per cent of its holding, bringing its stake to 51 per cent.
The cement plant with a clinker capacity of 600,000mts per annum was commissioned in 1983 and due to increased demand for cement in the region, the plant capacity was subsequently enhanced to 1.2 million tonnes per annum in 1998, which enabled OCC to produce 1.26 million tonnes of cement. It produced 1.65 million tonnes of cement in 2004, by importing additional clinker.
A record net profit of RO18.224 million was announced for the year ended December 31, 2005. Financial reports are listed on the company's website, and the company had been moving up on the stock market until it hit a major problem in March this year. The Oman Observer of 23rd March announced that the Ministry of Oil and Gas had formally declined the gas supply for the upcoming expansion project.
Seems a bit strange when the plant stands right next to a major pipeline (oil? gas? I'm not sure), but there you are.
The company acknowledged in its latest financial report that two of its subsidiaries, Sohar Praton Concrete products SAOC (SPCP) and Al Batna Quarries Co LLC are ailing, but that it is looking for alternative sources of energy to revive its expansion plans.
A presentation on the website also shows likely cement usage in Oman to have increased from 1,441,800 tonnes in 2000 to 1,845,600 tonnes by 2010. In 2000, OCC produced 737,319 tonnes of cement, while its smaller sister company, Raysut Cement based in Salalah, produced 288,000 tonnes. The shortfall of 395,717 tonnes was imported, the bulk probably being from India.
A report in the Times of Oman in April stated that "Oman Cement produced 1.632 million metric tonnes of cement in 2005 (the same quantity projected in the presentation). The company imported 173,300mts of cement during the year to meet the increased local demand and its sales grew by 10.5 per cent to 1.820 million tonnes last year."
So why aren't investors putting more into the business? Is it actually cheaper to import cement from India, even at inflated prices? Would the time required to commission new plant exceed timescales for construction? After all, if you've got a civil engineering job to complete, it's a matter of I want cement, and I want it now.
Comments
muscati wrote:
bowsher wrote:
Gas is a problem. It is very unlikely OCC will get any gas in the short to medium term unless substantial gas discoveries are made. The government has more pressing priorities when it comes to supplying gas.
The dam is not the only project to require large quantities of cement. All the fundamentals are in place for good performance by the two cement companies. Incidentally, RCC have expanded their capacity and now OCC is the little sister, so to speak.
Stock market. Well, a few things:
1- Gas supply. The news about denial of gas to OCC hit the stock somewhat but is not the main reason for the fall.
2- Foreign investors and funds. GCC markets, notably TASI and DFM have crashed this past quarter. GCC investors had bought heavily in blue chip companies in Oman, including banks and cement companies. GCC investors have been dumping their shares like anything, amid reports of margin calls. As a result all the MSM blue chip companies' (with substantial holdings by GCC parties) market prices have suffered accordingly.
3- Government royalty. This caused some panic, but an issued clarification suggests this royalty is minor. That is, on projected profits for FY2005 OCC is expected to cough up about 1%. Actually, in the long run the royalty is good news for the cement industry and perhaps very good news for OCC and RCC. There are a lot of small-scale cement makers with quarries, and they have, reportedly, been pressing the government for license to mine more quarries - encouraged by the raising cement prices. The royalty will apply to them too and supposed to put their ambition at check as well as maintain some order in the cement industry.
4- Interest rates. A raise in interest rates always has a negative impact on the market. When divident yields are on par with interest rates, 5%, investors start to re-evaluate their risk-reward profile. Valuation of OCC prior to the correction/crash was at a yield of less than 5%.
To sum it up, there is much more to this than meets the eye and I could ramble on about the capacities of the cement makers in the GCC and the acute shortages there. And yes, investing in both OCC and RCC can't be a bad thing. Market analysts still can't find fault with either cement major.
newsbriefs wrote:
I am very grateful to have received the additional comments from both Muscati and Bowsher, which fill in the details on the cement issue considerably. Thank you both very much.
I stand corrected about CCC. The founders were all Palestinian, and the managing office (according to the website) is in Greece whilst the company is actually registered in Beirut, Lebanon. Two of the founders are still active. Hasib J Sabbagh is Chairman, and Said T Khoury is president. The board of directors appears (I stress, appears) to be comprised of their sons.
I do remember reading somewhere about a Saudi connection, but of course, I can't find it now. Interestingly, the only company reference I can find on the website of London's Financial Times is to CONSOLIDATED CONTRACTORS COMPANY W.L.L. based in Saudi Arabia, so maybe that was what led me astray. Even so, the website describes the company as an Arab concern focusing on construction in the Middle East.
mcr348 wrote:
Dear Sir,
We thank you for your email. dated Feb 13, 2008 on above subject. In this regard we are pleased to offer you as under :
Type / Specification : Ordinary Portland Cement conforming to BS-12/1978
Packing : 50 Kgs in Polypropylene bags.
Qty / Delivery : As per mutual agreement.
US$ 67.5/= FOB Pmt.
Please agree my fob price then i will provide u as per your requirement CIF or C&F Price.
Payment :Telegraphic Transfer in advance / through confirmed, acceptable, at sight letter of credit in favor of Our Co. from a bank of our choice.
Looking forward to a favorable response from your end.
With kind regards
Other,s items:Rice, Raw Cotton,Raw Leather,Cooking Oil,Sugar,Red chillies,potato.
ALSO HAVE PROVIDE U AS PER UR REQUIREMENT.
Cell: 0321-2449515
If you had called a stock broker here in Muscat in January or Feb this year Oman Cement would have definitely been one of the shares they'd recommend to you. The market was hyper over their expected announcement of a large expansion. Oman Cement's production isn't enough to feed local demand and trucks line up for up to 1 week outside their factory waiting to load. Then they announced that the government has refused to give them more gas and the stock sank. Then started to correct a little. Then two weeks ago the government announced they'll start charging them royalty on the quantities they remove from their quarries and the stock tanked again.
Meanwhile, their only competition, Raysut Cement, has seen it's price go from about 1 rial to 11 in an unbelievable run that started about two years ago. That company is on a roll. THey expanded production and are about to refurbish their original production line to make it more efficient which will add even more capacity which will catapult their output above Oman Cement.
I know a lot of investors who are still buying Oman Cement's shares thinking that the government will eventually capitulate and allow them the gas they want, in which case the stock price will soar. Interestingly, the perceived shortage of cement in the market has resulted in the price of cement going up three times from retailers even though the manufacturers haven't increased their sales price. And now Oman Cement is buyin cement from Raysut Cement to cover it's shortfall.
By the way how come you say CCC is saudi, wasn't it started by palestinian engineers and head quartered in Athens?