Southern, Eastern Province see tough third quarter

Market saturation is hitting bag price for suppliers.

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Southern Province Cement Company and Eastern Province Cement Company both saw profits fall by more than a third for the third quarter compared with the second, as a difficult market sees suppliers slip against the start of 2010 and last year’s equivalent period.

The two companies also saw falls in gross and operating profits compared to the equivalent periods last year, as declining sales and lower prices in Saudi Arabia squeeze the bottom line.

Southern Province’s net profits fell 35.6% compared to the second quarter at SR119 million, down from SR185 million, and 15% down from the SR141 million posted for the quarter last year. Net profits for nine months ending 30th September fell more than 14% to SR501 million.

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“Decline of net profit is due to decline of sales due to competition between companies in the market and increase of cost, as consequence of reduction of production due to shut down at Becha and Tehama plants, as well as the ban of the cement export by the government,” the company stated, which produces cement and clinker among other products and is based in Abha.

Eastern Province announced third-quarter net profits of SR64 million, down 38% on the previous quarter and falling 37% against the third quarter in 2009. Gross and operating profits against last year fell by between 26-28%, and net profit for the first nine month lost 11% compared to last year, at SR494 million.

The company cited a price hike for depreciation, power, and maintenance combined with a fall in the price and quantities of cement sales as chief reasons for its stuttering performance, along with exposure to the losses of its associated companies.

Saudi Arabian cement companies, of which nine are listed, are heavily incentivised to sell domestically due to the strict criteria of exporting, which includes selling cement cheaply in Saudi for every bag sold abroad. This has created a saturated market, despite the demand for the construction of economic cities and other mega-projects in the oil-rich state, which has resulted in steep falls in sales orders and a price war between producers, some of which have increased production levels to boost sales and claw back margin.

The results of Southern Province and Eastern Province are in line with their rivals, which have also posted falls in profits compared to earlier in the year and last year, although have yet to post a net loss. Yanbu Cement Company, which underwent a period of maintenance in the summer, saw net profits fall 16% to SR94 million against the second quarter, though with a fall against the third quarter last year that was less than peers, down 4.1%. The company cited “intense competition from the entry of new cement companies”.

Analysts at Securities & Investment Company told CW last week that the demand would increase in the country on the back of the mega projects, but did not expect the clamp down on exports to be lifted “any time soon”.

Southern Province shares fell 1.9% to SR64 yesterday on the Tadawul, the only bourse to trade on Saturday. Dammam-based Eastern Province fell 0.23% to SR44. The company was unavailable for comment.