CEMENT SECTOR IN PALESTINE

During the past years, Palestine had witnessed a huge development in the construction and real
estate industry which had a positive impact on the industrial sector and its contribution to the
Palestinian Gross Domestic Product (GDP). The manufacturing sector is one of the main pillars of
the industrial sector in general and the cement sector in specific in terms of its contribution to the
value added. Trading cement is one of the main businesses in Palestine due to the huge demand.

Cement is one of the main elements in the concert manufacturing, in addition to that cement is also
the main input in the real estate, construction, maintenance and infrastructure projects.

Cement industry presents a real reflection to the constant growth in the building and construction
sector. Accordingly, the demand on cement have a positive relationship with the factors that have
an impact on the building and construction sector like population distribution and growth, political
stability, income level and investments in infrastructure and large projects. Till the end of 2017,
cement is not produced locally, and it is imported from several countries like Israel, Jordan,
Turkey, Greece and Egypt. It should be mentioned that there are no limits on the imported
quantities from Israel while there is limits when importing from the Arab countries through Al
Karameh border.

The cement industry had witnessed huge development in the past years after the changes in this
sector which resulted in the ending of the monopolistic competition in cement sector in Palestine.
Palestinian cement sector includes 17 registered companies that works in cement trading. Due to
the development in this sector the trucks that are used to transport bulk cement increased from 32
to 110 trucks during 2017.

In 2017, the size of cement industry reached around 2.8 million ton of bulk and bagged cement.
It’s expected that the Palestinian demand on cement will increase to 2.9 million ton by 2020. By
2028, the demand is expected to reach 3.7 million ton with an annual growth rate of 3%.
 PORTER’S FIVE FORCES ANALYSIS

Porter’s Five Forces model is a framework that evaluates industry attractiveness by exploring
through the rivalry of existing firms, the threat of new entrants, and the threat of substitute
products, the bargaining power of customers and the bargaining power of suppliers. Another force
will be added to this analysis which is the relative power of other stakeholders.
The model of Porter's Five Forces model proposes a systematic strategic thinking to determine a
sector competitive intensity and attractiveness. This analysis is usually adopted in order to evaluate
the profitability and future of companies operating in a specific sector.

Threat of New Entrants

High Initial Investment

Cement industry is a high capital-intensive industry with long development period, which means
that a new company that is willing to enter this market would have extremely deep financial
resources in order to establish a new cement plant.

The cost of establishing a new cement plant based on the information published by Sanad
Construction Resources Company which aim to establish the first Cement Factory in Palestine is
around $310 million, this investment size is very huge and it not easy for other investor to go ahead
in establishing a new cement factory.
Economies of Scale
Cement production is one of main industries that is characterized by large economies of scale, in
order for companies that want to be efficient in the sector it should have a sustainable low-cost
position and to be able to control costs it should reach an economy of scale.

Currently no Palestinian company is producing cement, but Sanad is working on establishing the
cement plant with a production capacity of 1.3 million ton annually which presents around 46%
of the Palestinian current demand on cement. From another hand, currently Sanad is controlling
the sector cement by having agreements with the Israeli producer of cement that make them able
to import 1.7 million ton which presents 60% of the local market size while all other companies in
West Bank can import only 400,000 ton annually.
Distribution Channel

Companies need to but large investment in trucks that are used to distribute cement, usually the
companies have their own trucks (currently there is around 110 trucks in this sector and most of
them are owned by Sanad subsidiary logistic companies), cement distribution require high
operating cost including fuel, maintenance and others.
Sanad had established two logistics firms which are Bulk Express for the transport of bulk cement
and Amyal Express for the transportation of bagged cement. Accordingly, all the distribution
activities related to Sanad are outsourced to those two companies, this business model enabled
Sanad to reach every location in Palestine.
Legal Barriers

There are many rules and regulations that govern such an important sector. A company must be
responsible for the valuable resources it handles. This can be a significant obstacle for new entrants
into the cement industry. These legal barriers can be costly and time consuming for a firm that is
trying to earn profits quickly and efficiently.

Barriers in the cement industry also includes the limits on the imported quantities from the Arab
countries and other countries.

Rivalry among Existing Firms

Competitive Position

Generally, the cement industry is unique from other industries due to the high demand for cement
and due to sector fluctuations according to the economic and political situations in Palestine.

The number of companies that work in this industry is very small which reach 17 companies by
the end of 2017 with one main large company that is controlling the market.

Sanad – the main cement importer in Palestine- mentioned that the Palestinian cement market is
open for importing and competition but in reality Sanad controls the market and the prices, since
its market share of cement is 60% of the total market (Based on Sanad annual report it sold 1.7
million ton in 2017 while the whole market size is 2.8 million ton).

In 2016, Sanad increased the prices of cement by around NIS 20 per ton not including VAT, and
this presents it is ability to lead and control the market.
Industry Growth

The current market size of cement is 2.8 million ton with a total value of around $300 million, the
market size is expected to increase to 2.9 million ton by 2020. By 2028, the demand is expected to
reach 3.7 million ton with an annual growth rate of 3%.
Product Characteristic

Cement is undifferentiated product, but it could vary from one company to another in terms of
quality and after sales services.
Threat of Substitute Products

In Palestine, cement is the one of the main materials is used for almost all types of building and
construction work. Cement in addition to another four materials which is bricks, tiles, artificial
stone, and cement manholes.

Accordingly, the cement is consider to be a unique product that faces limited competition from
substitute products.

The Bargaining Power of Buyers

Most of the cement in Palestine is consumed by housing sector, construction firms, companies
build larges buildings and offices, etc. These buyers bargaining power is not high since they
purchase limited quantities which presents small amount of the total production of the cement
companies.
If the buyer is government, large contractor, or large infrastructure projects, their bargaining power
to reduce the price since it purchases undifferentiated product will be higher.

The Bargaining Power of Suppliers

Most of the cements in Palestine is imported from Israel while around 18% of the cement is
imported from Jordan.

The Israeli exporter of cement (Nasher) in addition to the Jordanian producers issue a list with the
cement prices for the coming year, after that the Palestinian importers try to negotiate those prices.

Since most of the companies import small quantities their bargaining power is low, but a company
like Sanad which import large amounts from Israel that presents around 25% of Nasher sales it has
higher bargaining power.

The Relative Power of Other Stakeholders

Government and it is institutes control this sector through laws and regulations, in addition to that
the Palestinian Standards Institutions play a great role in monitoring the quality of the products
and in asserting that it follows the Palestinian standards.

Local community also had a great power in this industry, previously in 2016 Sanad was planning
to establish the plant near Tulkarem and Nablus, people living in villages near to that location had
protested against the establishment of plant due to health and environmental issues and their power
made Sanad look for new location for the Plant.

Other unions and associations include Palestinian Construction Industries Union and Palestinian
Concrete Society.
 The following diagram summarizes Porter’s Five Forces Analysis and determines the strength of each force.

Threat of New Rivalry among Threat of The Relative

The Bargaining The Bargaining
Entrants Substitute Power of
Existing Firms Power of Buyers Power of Suppliers
Products OtherStakeholders
(Moderate) (High) (Low to Modorate) (High)
(Low) (High)
•High initial •Small number of •Cement is one of •Most of buyers are •Most of the •High power from
investment. companies working the main inputs in small and purchase companies working governmntal
in the industry the construction low quantities. in this industry institutions and
•High capital- sector. purchase limited unions.
intensive industry. •One main and large •Limited number of quantities of
player that runs and •No substitue large buyers have a cement and have •Local community
control the market prodcuts bargining power low bargining present a great
•Large economy of power.
scale. over price. force in this
•Good industry industry
growth rate •One key player
•High legal barriers. have higher ability
to negotiate with
•Undifferentiated suppliers.
products
 REFERENCES

Annual Report, Sanad Construction Resources Company, 2017.

Cement Industry in Palestine, Palestine News and Info Agency. Retrieved from
http://www.wafainfo.ps/atemplate.aspx?id=3104#

Interview with Mr. Louai Qawas – Sanad CEO, Al Hadath. Retrived from
https://www.alhadath.ps/article/207

Projects, Sanad. Retrieved from http://www.sanad.ps/en/category/5/1/Projects