VZCZCXRO7827
PP RUEHDE RUEHDIR
DE RUEHMK #0565/01 2381114
ZNY CCCCC ZZH
P 251114Z AUG 08
FM AMEMBASSY MANAMA
TO RUEHC/SECSTATE WASHDC PRIORITY 8076
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUEHGB/AMEMBASSY BAGHDAD PRIORITY 0282
RHBVAKS/COMUSNAVCENT PRIORITY
RHMFISS/HQ USCENTCOM MACDILL AFB FL PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 MANAMA 000565
SIPDIS
BAGHDAD FOR AMBASSADOR ERELI
E.O. 12958: DECL: 08/25/2018
TAGS: ECON SA BA
SUBJECT: SAUDI CEMENT RESTRICTIONS RIPPLING THROUGH
BAHRAINI ECONOMY
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.
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