Cablegate: Saudi Cement Restrictions Rippling Through

DE RUEHMK #0565/01 2381114
P 251114Z AUG 08

C O N F I D E N T I A L SECTION 01 OF 02 MANAMA 000565



E.O. 12958: DECL: 08/25/2018

Classified By: CDA Christopher Henzel for reasons 1.4 (b) and (d)

1.(C) Summary: Saudi restrictions on the export of cement reduced Bahrain's available supply of cement by one-third, and drove prices up by 60 percent since June. As a result, the Bahraini construction sector is facing chronic delays and is losing an estimated $1.2 million per day. Real estate markets have also been affected, with both residential and commercial sectors reporting rent increases of more than 10 percent in July. The shortage will take between one and two years to be fully resolved and may have delivered a shock to Bahrain,s overheated real-estate boom. End summary.

2.(C) Background: Saudi Arabia reportedly subsidizes cement production, and for years much of this subsidized cement was exported to Bahrain. During the first week of June Saudi Arabia implemented restrictions on the export of cement. Most Bahraini contractors believe that the export restrictions were a sign that the SAG was tired of subsidizing Bahrain's construction industry. However, Bahrain Finance Asst. Undersecretary Yousif Humood told econoff August 20 that the GOB believes the export restrictions were not targeted at Bahrain, but were put in place to remove foreign demand from Saudi Arabia,s domestic cement market and thus suppress domestic prices.

3.(U) Prior to the restrictions, Bahrain was importing

2.3 million tons per year, or about 70 percent of its annual demand for

3.3 million tons of cement, from Saudi Arabia. The sole Bahraini cement company, Star Cement, only has the capacity to produce 400,000 tons per year with future plans to expand to 500,000 tons. Bahrain has no raw materials to produce its own cement and Star Cement imports all of its source materials from either the UAE, Turkey, or India. A second domestic cement company, Falcon Cement, has announced plans to build a 370,000 ton/year plant, but has had its plans put on hold due to local opposition to the proposed location. End background. Cement Supplies Uncertain -- Disruptions Certain --------------------------------------------- ---

4.(C) In June, following a temporary Saudi cessation of cement exports, Bahraini concrete plants shut down completely due to lack of cement supplies, prompting Bahrain PM Khalifa bin Salman Al Khalifa and FM Khalid Al Khalifa to petition Saudi FM Saud Al-Faisal and Interior Minister Nayef bin Abdul Aziz to release cement exports to Bahrain. Saudi Arabia subsequently modified its export controls, setting an export quota of 25,000 tons per week for Bahrain -- about one-half of previous levels.

5.(C) In Bahrain, cement prices surged by 60 percent between June 1 and August 20 as the market reacted to the reduction in supply. Perhaps even more damaging than the price increase are the costs associated with construction delays. Dr. Jassim Hussein -) an opposition MP, economist, and one-time writer for The Economist, told econoff Aug 12 that he had just completed a case study showing that the Bahraini construction sector was losing $1.2 million per day as a result of construction delays. Additionally he showed real estate data indicating both residential and commercial rent increases of more than 10 percent in Manama since the cement crisis began.

6.(C) Public construction projects are suffering from the same shortages that affect the private sector. On August 23, local daily Al-Ayam reported that the Ministry of Works has placed a significant number of public projects on hold due to shortages of both cement and funds. The escalation in cement prices has reportedly caused severe budget shortfalls at the Ministry, and the Works Minister is negotiating with the Ministry of Finance to make emergency funds available in order to prevent existing projects coming to a halt. Finance Asst U/S Yousif Humood told econoff that the Ministry of Commerce has successfully negotiated new contracts for cement from the UAE and Turkey, but that it will likely be one to two years before the market finds a new equilibrium and supplies can fully meet current demand.

7.(C) Comment: The Bahraini construction boom is partly due to the availability of artificially low-priced materials and an influx of foreign investment from oil producing neighbors. With many of the projects being built on spec, heavily leveraged, and contracted under assumptions of readily availabile and low-priced steel and cement, there will likely need to be a significant restructuring of construction-related debt as construction companies face MANAMA 00000565 002 OF 002 increasingly large materials bills and late penalties. Already the Ministry of Labor has reported a surge in complaints of unpaid wages, and the local banks have adjusted construction loan rates upward to reflect the increase in risk. Additionally, the cement shortage may have exposed the lack of market fundamentals in the hot real estate sector and could lead to the local bursting of what many have called an oil-funded bubble. ********************************************* ******** Visit Embassy Manama's Classified Website: XXXXXXXXXXXX********************************************* ******** HENZEL

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