DESPITE SLOWDOWN IN CEMENT DEMAND, JORDAN'S PRODUCTION

UNCLAS AMMAN 002696

SIPDIS
SENSITIVE

STATE PLEASE PASS TO USTR
STATE FOR NEA/ELA and EEB/TRA

E.O. 12958: N/A
TAGS: EIND EINV JO
SUBJECT: DESPITE SLOWDOWN IN CEMENT DEMAND, JORDAN'S PRODUCTION
CAPACITY SET TO EXPAND SIGNIFICANTLY

REF: A) AMMAN 2369
B) AMMAN 2316


1. (U) Summary: After five years of 10-15% growth in cement demand
and 3.8% growth in production, domestic demand for cement in Jordan
has begun to drop due to inflation and a slow down in construction.
Despite this trend, Jordan's annual cement production is set to
double from 4.5 to 11 million tons over the next few years as three
new cement factories enter the Jordanian market. This increased
level of output would far surpass domestic needs and will be
difficult to sell regionally due to Jordan's comparatively high
cement prices. Jordan Cement with its high cost structure could
suffer more than its new competitors and any job losses in rural
areas will be politically sensitive. End Summary.

Two Cement Companies Currently Dominate the Market
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2. (U) Two companies manufacture cement in Jordan today: Jordan
Cement (97% market share) and Arab Company for White Cement (3%).
Jordan Cement (JC) was privatized in 2002 and is now majority-owned
by the French Lafarge Group. JC's CEO Salem Sousou said JC can
manufacture up to 5.1 million tons of cement annually in two plants
- one in Fuheis outside of Amman and one in Rashadiya in southern
Jordan.


3. (U) Arab Company for White Cement Industry (ACWCI) was
established in 1982 as a private company by the Jordanian and Syrian
governments to provide their markets with white cement. NOTE: White
cement is very similar in composition to traditional grey Portland
cement but its white color means it is preferred for decorative or
tinted work. END NOTE. ACWCI had four primary investors: Syrian
Jordanian Company for Industry, Syrian National Cement Corporation,
Jordan's Social Security Corporation, and Jordan Investment
Corporation. ACWCI produces 138,000 tons of white cement annually.


After a Boom, Jordan's Cement Demand Begins to Decline
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4. (U) Jordan's current annual consumption of cement is near 4.5
million tons of cement or 1,650 pounds per capita, compared to
3,300-4,400 lbs in the Gulf. Between 2003 and 2007, Gulf oil
investments, as well as the arrival of Iraqis in Jordan and domestic
economic growth led to a construction boom, which contributed to a
10-15% increase in demand for cement and 3.8% annual growth in
production. Jordan consumed all its domestic production and even
imported additional quantities to meet demand during this period.


5. (U) Rising inflation, however, has recently caused demand to
slow down and production to flatten (ref A). Sousou acknowledged
that in 2008 JC's domestic sales have declined and as a result, it
expects to export 551 thousand tons of excess capacity to Syria,
Iraq, and Sudan. He explained that most countries aim to have
domestic supply meet domestic demand because profit margins on
exported cement are low due to transportation costs.

Three Planned Plants Could More than Double Supply
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6. (SBU) Samer Berekdar, Chief Executive Officer of Saudi-owned Al
Rajhi Cement, told Econoff that for the last several years cement
has been a very profitable industry worldwide and particularly in
the Gulf. He said this profitability and Gulf liquidity explain the
large investment in new plants throughout the region, including
three in Jordan. Al Rajhi Cement is constructing the first factory
expected to come online in early 2009 with an estimated annual
capacity of 2.2 million tons of cement. Berekdar said the factory
will be located in northern Jordan and would operate at 50% capacity
in its first year. He noted that Al Rajhi has a large opportunity
to attract customers who are eager to leave Jordan Cement for better
service and possibly lower prices.


7. (U) Arabian Cement Company, a Saudi firm, is currently
constructing a $110 million factory in Qatranah about 55 miles south
of Amman. The new plant is expected to begin operations in late
2009 and could produce 2.2 million tons of cement annually. Salem
Al Zaben, CEO of Al Hasa, said his Jordanian company is also seeking

to begin construction of a cement factory in central Jordan.


8. (SBU) Sousou said that if all three plants are built, there will
be a glut of cement in Jordan, with annual output increasing from
4.5 million to possibly 11 million tons per year. Both Sousou and
Berekdar concurred it is very unlikely that Jordan would ever
require 11 million tons of cement annually. Furthermore, similar
growth in cement production regionally would make Jordanian exports
less competitive, especially given Jordan's high energy costs and
thus high cement prices.

Energy and Environmental Concerns
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9. (SBU) Energy accounts for 70% of cement production costs,
including quarrying, processing, and transportation. Al Zaben and
Berekdar both said that cement plants can run on several types of
fuel, including natural gas, heavy fuel oil, petroleum coke, oil
shale, and coal, and that the process to switch energy sources is
relatively easy. During their planning phases, both companies were
promised access to Egyptian natural gas, the cleanest energy source,
but Berekdar said GOJ made too many promises regarding natural gas
it cannot fulfill. He elaborated that Jordan now does not import
enough natural gas for power stations let alone for industrial use.



10. (SBU) While Jordan Cement operates using heavy fuel oil,
Berekdar said that his company has received permission to operate
using coal which is cheaper. Al Zaben said that his factory has not
yet received an environmental waiver that would allow him to operate
using petroleum coke. He believed the delay was due to the
controversies surrounding JC's Fuheis plant which he described as an
"environmental disaster," an accusation JC disputes. Al Zaben
clarified the Al Hasa plant would be located much further away from
a population center than the Fuheis plant. JC Fuheis Plant Manager
Hani Salah said JC would also prefer to operate using cheaper coal
or petroleum coke, but has not received permission.

Comment
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11. (SBU) Jordan's cement industry could be damaged in the next 18
months as a victim of its own success. Cement and construction are
cyclical businesses and Jordan is at the beginning of a downturn,
with slowing residential construction. While Jordanian economic
growth from 2003 to 2007 and Gulf liquidity may have justified some
additional cement production capacity, Jordan's market cannot
consume 11 million tons of cement. The future glut will lower
prices and profits, especially as other Gulf-funded plants come
online in neighboring Syria and Saudi Arabia. Jordan Cement which
has a higher cost structure than the new factories will likely
suffer first and most, with falling profits and job losses. The new
factories will also need to operate on smaller profit margins than
the 22% currently earned and used as part of their feasibility
studies. Any job cuts will be sensitive since these new cement
factories were located in rural areas where unemployment is the
highest and where the government is most eager to see economic
growth.

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