Bouncing back: The industry is overcoming difficulties brought on by the global downturn by diversifying its strategies

Although Ras Al Khaimah’s construction sector has not yet returned to pre-economic downturn levels of growth, local materials firms are mitigating the effects of the altered market using a variety of strategies. Concentrating on core business strengths, entering new markets and working on supplying key projects abroad are some of the methods currently being employed by sector players. And while it remains too early to confirm the ultimate outcome of such strategies, the industry appears to be moving forward.

CHALLENGES: This positive outlook comes at a crucial time, as some firms in the emirate have reported less than robust performance data, which can be partly attributed to rising costs of raw materials. Fluctuating and unpredictable transport costs are causing further concern, which, in part, is due to the large role energy prices play in the overall cost structure of many construction materials firms. For example, Tareq Samaha, commercial director at the RAK Company for White Cement and Construction Materials (RAK White Cement), a locally based firm, has said energy costs comprise around 50-60% of his company’s total costs.

The price of coal has also increased, prompting firms such as Union Cement Company (UCC), another RAK-based corporation, to look for alternative fuels for production. Despite these challenges, the outlook for the sector remains relatively positive. RAK Ceramics, which continues to be the world’s largest producer of ceramic products, issued a statement in November 2011 expressing confidence in the growing strength and continuing recovery of the market.

DIVERSIFICATION: Diversification is one approach that some local construction materials companies are taking in order to address challenges such as higher costs. For example, RAK Cement Company (RAK CC), a public shareholding company that was established in the emirate in 1995, has recently obtained regulatory approval from the American Petroleum Institute to begin production of oil well cement. The firm had previously largely concentrated on producing ordinary and sulphate-resistant Portland cement and Powercrete. RAK CC is not the first company in the emirate to enter the oil well cement market. UCC began producing and supplying oil well cement in 1980 and currently partners with Germany’s HeidelbergCement Group in the production of the material. After more than three decades of operating in the industry, UCC believes that the oil well market is still promising due to growing demand for energy throughout the world. However, the industry is becoming increasingly competitive due to a decline in demand for general-purpose concrete, and UCC is therefore looking for new markets to export its oil well cement.

Similar to other firms in the construction materials industry, RAK CC has been hit by the drop in construction projects in the UAE, and the firm posted a net loss in the third-quarter of 2011. Yet the company appears to be weathering the storm, and its diversification strategy has significant potential. Indeed, in spite of RAK CC’s third-quarter results, the Global Investment House, a Kuwaiti investment firm, forecast an improved fourth quarter for the firm in October 2011.

CONSOLIDATION: Steps are being taken within the construction materials industry to re-examine current joint ventures and determine which ones to let go to focus on core business strengths. RAK Ceramics had 43 joint venture companies, but recently closed a number of under-performing ones.

At the same time, the firm has kept several joint ventures to strategically diversify its products and smooth out fluctuating transport costs. For example, RAK Ceramics maintains an important partnership with KLUDI, a German bathroom and kitchen fittings manufacturer. Since 2007, the two firms have operated a bathroom and kitchen fittings manufacturing plant in RAK that produces for the markets within the Middle East and North Africa (MENA) region.

EXPANSION: While trying not to lose sight of its core business strengths, RAK Ceramics is nevertheless expanding. The firm is currently increasing its range of product offerings with the introduction of luminous tiles. In December 2011 RAK Ceramics opened a newly finished production facility that will essentially be a large-scale workshop for the well-known French glassmaker, Jean Claude Novaro. Novaro will design a new range of tiles for RAK Ceramics, including the luminous tiles that glow for several hours after being exposed to light due to a special phosphorescent glaze. RAK Ceramics has also invested significantly in a new line of antimicrobial tiles that are capable of minimising micro-bacterial contamination.

Further expansion plans for RAK Ceramics were announced during August 2011. Laticrete RAK, a joint venture between RAK Ceramics and the American construction materials manufacturer Laticrete International, reported plans to build at least one production facility in Saudi Arabia in the near future. The company currently manufactures a number of products, including latex additives, mortars, grout, waterproofing systems, sealants and epoxy adhesives, at a factory located within the RAK Ceramics industrial complex.

The firm now aims to expand into Saudi Arabia to take advantage of the strong construction sector in the Kingdom. By producing materials locally, Laticrete RAK should be able to reduce transport costs.

The joint venture has supplied a number of key projects in the region, including the Burj Khalifa, the Dubai Metro, private palaces such as the one for RAK’s ruler, the Grand Mosque in Abu Dhabi and the King Abdullah Financial District in Riyadh.

NEW EXPORT MARKETS: Stevin Rock, a locally based quarry and rock supplier, has effectively adjusted to the changing conditions by focusing on new export markets. The firm previously supplied significant amounts of raw materials for projects in Dubai.

With Dubai hard hit by the financial downturn and the resulting slowdown in its real estate market, Stevin Rock has shifted its focus towards Abu Dhabi. This has been due in part to the emirate’s heavy ongoing investment in infrastructure for both the oil and gas segments.

Furthermore, the company has begun supplying limestone used to protect manmade islands housing offshore oil rigs. Stevin Rock now controls roughly 40% of the Abu Dhabi market and expects to earn positive returns for three years from the emirate. Much of its success in the market has come from obtaining Abu Dhabi National Oil Company certification and from its ability to keep prices low by shipping raw material out of its private harbour. Around 30% of the company’s production is used for projects in Abu Dhabi.

India has been another key export market for Stevin Rock. The company is currently the lead supplier to every steel plant in India that uses limestone. In addition to the high volume of limestone required, the Indian market provides Stevin Rock with wider margins, as buyers in India pay three times as much for limestone as local buyers. Roughly 10% of the firm’s total production is sold to the Indian market.

Stevin Rock has also focused on export opportunities in Qatar and Bahrain, where it has already been contracted to supply aggregate for sewage systems, roads and bridges. The firm supplied raw materials for the Doha International Airport and will be heavily involved in construction projects leading up to the FIFA World Cup in 2022. According to recent company data, Qatar will need around 50m tonnes of aggregate in the next five years. Stevin Rock has agreed to supply 50%.

With no local limestone quarries and a construction sector that should pick up soon, Kuwait has the potential to be another large export market. The Kuwait International Airport expansion project alone will require roughly 25m tonnes of aggregate. As of late 2011, Qatar, Bahrain and Kuwait together represented the market for about 11% of Stevin Rock’s production.

NATURAL ADVANTAGE: While building sector growth has slowed to some extent in the UAE, construction materials firms in RAK are able to capitalise on the emirate’s natural advantages. Notably, RAK has enormous aggregate reserves, which can help to streamline the production process for manufacturers. RAK White Cement, for example, is able to procure about 85% of its raw materials locally.

The emirate’s ports provide a further advantage of operating out of RAK. “Customers come to RAK’s port instead of Fujairah because we can provide a quick turnaround of aggregate supplies without long docking hours, which has had a profound effect on overall efficiencies and reducing overhead berth costs,” said Naser Bustami, group general manager at Stevin Rock.

Although the market conditions for construction materials companies in RAK have weakened, individual firms are taking steps to adapt through a variety of strategies such as diversifying, focusing on core business strengths and entering new export markets. Some companies have seen their profits reduced as the industry becomes more competitive, and challenges such as high fuel costs still cause difficulties. But these obstacles have not proven to be debilitating and the industry appears to be working around them. Indeed, the outlook over the medium term looks to be bright for the construction materials sector within RAK.

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