Saudi Cement Sector: Navigating Fuel Cost Storms to Unearth Hidden Value

The Saudi cement sector faces a critical juncture in 2025, as surging fuel costs and a 12-year high in cement prices test the resilience of producers. Yet within this turmoil, a clear divide emerges: companies like Al Jouf Cement and Arabian Cement, which have embraced proactive cost management strategies, are positioning themselves to outpace peers and capitalize on a demand-driven market rebound. For investors, this sector offers a compelling opportunity to buy undervalued assets before their adaptive strategies yield results.

The Fuel Cost Crisis: A Sector-Wide Challenge
Saudi Aramco's January 2025 fuel price hike—driving a 44% spike in heavy fuel oil (HFO) costs—has triggered a 10% average production cost increase across major cement producers. Al Jouf Cement, for instance, reported a 10.1% cost surge, widening its Q1 net loss despite a 7.4% revenue rise. Peers like Arabian Cement and Najran Cement faced similar 10% cost jumps, while City Cement managed a milder 7% increase through early participation in the Industrial Sector Competitiveness Program.

Strategic Mitigation: The Path to Profitability
The sector's response to this crisis reveals a sharp focus on three pillars: energy diversification, operational efficiency, and government collaboration.

1. Energy Diversification:
   Al Jouf Cement has announced plans to collaborate with Saudi authorities to reduce reliance on HFO, exploring solar and waste-derived fuels. City Cement's participation in the government-backed competitiveness program—which subsidizes energy costs for industrial firms—already shields it from full fuel price shocks. Meanwhile, Arabian Cement is reportedly investing in alternative energy partnerships to stabilize its cost base.

2. Operational Efficiency:
   Cost-cutting measures, such as optimizing kiln efficiency and reducing logistics expenses, are driving margins. Al Jouf's Q1 2025 results, though loss-making, included a 4% reduction in selling and marketing expenses, hinting at deeper cost discipline.

3. Government Backing:
   Saudi Vision 2030's emphasis on industrial efficiency and infrastructure projects has created a supportive ecosystem. Analysts at Riyad Capital note that state-backed demand for cement—driven by ongoing construction projects—could offset short-term cost pressures.

Sector-Wide Implications: Winners and Losers in Q1 2025
While the Q1 results underscore sector-wide pain, the gap between adaptive and reactive players is stark:

• Positive Outliers:
  Riyadh Cement's 13% net profit growth to SAR 79 million highlights the advantage of early cost controls and demand alignment. Qassim Cement's 12% profit rise to SAR 83 million signals similar agility.

• Laggards:
  Yanbu Cement's 51% profit drop to SAR 29 million and Southern Province Cement's 42% decline to SAR 36 million underscore the risks of delayed action.

The Investment Thesis: Buy the Dip, Bet on Adaptation
The Q1 2025 results mark a pivotal moment. While short-term losses may deter some investors, the sector's long-term fundamentals remain robust:

• Demand Surge: Cement sales rose 10% year-on-year in Q1, with April's 43% local demand spike foreshadowing sustained growth.
• Price Power: A 12-year high of SAR 14.5 per 50kg bag reflects pricing discipline ending the era of destructive competition.
• Valuation Opportunities: Companies like Al Jouf and Arabian Cement trade at depressed multiples, offering a margin of safety as their strategies mature.

Conclusion: The Reward for Resilience
The Saudi cement sector's challenges are real, but its path to recovery is clear. Companies prioritizing energy diversification, efficiency, and government partnerships are primed to outperform as fuel cost pressures ease and demand expands. For investors, now is the time to identify undervalued players—like Al Jouf and City Cement—whose proactive strategies will turn today's losses into tomorrow's gains. The sector's resilience isn't just about surviving the storm; it's about emerging stronger, with higher margins and sustainable growth.

Act now, before the market catches up to the sector's adaptive potential.