Saudi Arabia: Government spending and increased economic activity will fuel strong demand for cement in 2012, according to a new report from NCB Capital.

The report, which concentrated on Southern Cement and Saudi Cement due to their spare capacity and high stock levels, indicated that cement prices increased by an average of 14.1%. Demand is anticipated to grow by 10% in 2012 and by 8% in 2013, driven by increasing government spending on infrastructure projects combined with private projects. Sales are expected to grow by 10.8% in 2012 to reach 52.2Mt.

According to the report, market activity is shifting from the central region to the western region of the country. The western region is now the centre of mega projects such as the Haramain railway, Jeddah's new airport and major drainage and other infrastructure projects. Demand in the central region nonetheless remains strong but has stabilised.

Fuel shortages remain the key supply constraint. Cement industry players believe the reason for the ongoing higher prices faced by retail buyers is mainly due to higher costs from the transportation companies. For example, a transportation company's truck that was able to make two trips a day to the cement factory can now only make one trip every three days due to the high demand and backlog at the local cement plant, thus increasing the cost for transportation companies. It is believed that prices will remain elevated in the short term due to the supply constraints and also in the medium term due to the strong demand outlook.

The economics team at NCB estimated that the 2012 government spending was 13% higher than budgeted at U$S280bn in addition to the US$32bn allocated to build 500,000 housing units. "We believe the elevated levels of government spending, particularly housing projects, will boost demand for cement," the report said.