Though built on strong foundations, and with expansion plans in the pipeline, the cement industry of Ras Al Khaimah (RAK) could be facing leaner times as the global economic crisis puts pressure on the construction sector in the Middle East.
Of the 13 cement production facilities currently operating in the United Arab Emirates (UAE), five are based in RAK. This is mainly due to the emirate's large deposits of limestone and other minerals necessary for the manufacture of cement.
This abundance of raw materials has prompted a sixth firm to set up shop in RAK, with Star Cement, a unit of the Dubai-based ETA Ascon Star Group, announcing it has awarded contracts to three overseas firms to build a facility to process clinker, one of the main ingredients in cement.
The $200m facility, to be constructed near RAK Airport, will have an annual capacity of 2.2m tonnes, with initial production scheduled for February next year. All of the plant's output is destined to be shipped to the company's cement grinding facilities in Abu Dhabi and Ajman.
According to Ahmed Salahuddin, general manager of Star Cement, the company's objective is to cater to the increasing demand for cement in the UAE resulting from the recent construction boom.
"The existing capacity of 3.2m metric tonnes per annum caters to 18% of the demand of cement in the UAE," Salahuddin said in a press release issued on November 10, adding that the facility "will further reduce our dependency on imports of clinker, especially while the markets are volatile."
Though the construction industry in the UAE has recently thrived, many analysts are suggesting that funding will become difficult to find following the impact of the global credit crisis in the Gulf region.
A number of the region's leading developers, including property giants Emaar and Nakheel, have said they are reviewing current or planned projects in light of the recent economic downturn.
The cancellation of construction projects in the region or a rescheduling of completion dates could lower demand for cement in the local marketplace.
There are also concerns that slowing international demand for cement will prompt overseas producers to cut their prices, making it harder for RAK firms to compete. Local producers have to cope with a fixed price instituted by the UAE central government in 2007, a measure adopted to prevent profiteering due to shortages.
This has put cement producers in RAK and elsewhere in the UAE at a disadvantage, with imported cement costing $89 per tonne, compared to the $98 price set by the government. On October 29, the UAE's Economy Ministry announced it had no plans to revise the fixed price, rejecting calls from domestic producers for an increase.
Though cheaper imports could threaten local suppliers, Mustafa Gorgunel, marketing manager of Union Cement Company (UCC), remains confident that RAK cement producers will be able to compete.
"With imported cement, you never have consistent quality," Gorgunel told the local press on October 28. "Importing cement is very difficult and [supply is] not continuous, so users prefer sticking to domestic producers."
While RAK producers may have a quality advantage, cost is becoming an increasingly important factor for end users in the construction industry, and indeed for the producers themselves.
While blessed with abundant resources of raw material for producing cement, the biggest problem facing RAK's cement producers is energy, or rather the lack of it. Local shortages of natural gas have forced some cement makers to switch to imported coal to power their plants, a sometimes costly exercise due to price fluctuations, with some companies also considering using coal to maintain production.
Rising energy costs, which now account for up to 60% of cement manufacturers' expenses, have affected producers' profit margins.
Announcing its third quarter and nine month results on October 19, one of the emirate's largest producers, Ras Al Khaimah Cement Company (RAKCC), reported mixed fortunes.
While posting a massive 289% rise in net earnings for the third quarter compared to the same three month period in 2007 - $4.88m compared to $1.25m - the company reported its net profits had been hit by high costs of fuel and power generation. Net profits for the first nine months of the year were $10.9m, down 13% on the $12.6m for the first three quarters of last year, with costs up by 26%.
In a step that should ease some of the industry's most pressing problems, the emirate's government is working to boost energy and diversify supplies, with four new power stations due to come on line within three years.
In addition, though the construction industry in the UAE may slow from its current pace, the high number of projects already underway or scheduled to come on line should maintain a high level of demand, enough to see the industry through any downturn.