Gas squeeze adds pressure to UAE materials firms

Material companies have seen production costs soar, analysts say

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The curtailing of gas from Qatar is putting pressure on UAE building materials suppliers forced to switch their machines to running on oil, slashing the returns from revenues and sales.

The cost of switching from US $5 per barrel of gas to $85 per barrel of oil has added to a dwindling market for Emirati material suppliers, particularly those in cement, as the drive to run machinery on more sustainable fuels such as electricity remains a distant prospect.

“The gas supply in UAE is very small, and the gas curtailment means that companies have had to look at a switch to alternative fuels,” said Hettish Kumar, senior financial analyst at Global Investment House in Kuwait.

“There are other fuels, such as oil and electricity. In the past there were some operations running on coal, but this was totally imported and the price was very high as it was used for other companies in the Gulf.”

Ras Al Khaimah-based Gulf Cement Company is the latest company to see a jump in the costs of production, at the same time that order sizes are falling. Revenues declined almost AED43 million - AED171.1 million from AED213.8 million - for the period January to the end of March this year compared to the same period in 2009.

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At the same time its cost of sales increased from AED146 million to AED157 million and operating profit fell by more than AED50 million (AED64.7 million down to AED9.7 million). But the company’s investment showed a significant upturn, turning a loss of AED74.9 million from the first three months of last year to a profit of AED47.5 million.

Investment in real estate and equities allowed Gulf Cement Company to turn a AED57 million net profit for the first quarter after a change in emphasis in its income streams.

Kumar explains that the company gained AED47 million of this number from investments, including an AED46 million return on its portfolio of real estate and building investments, and part of the remaining figure from dividends and around AED1.8 million from cash deposits.

The overall profit has stolen a march on local rivals. Earlier this month Sharjah Cement & Industrial Development reported that almost AED100 million was taken off its sales figures, with a sales turnover of AED173 million for the first quarter, down from an AED297.5 million last year. Net profits fell to AED23.89 million from AED51.37 million.

Arkan Materials saw net profits declining from AED91 million down to AED19 million.

Kumar didn’t think there would be a significant drive for companies to be able to operate on electricity in the near future, despite the big increase in the cost of production when running on oil.

Referring to the gas shortage, he added: “Maybe this is just a first-quarter issue and the next will hold some surprises. It might be the case that there are contract negotiations.”