Ukraine War: Deep Economic Impacts on Saudi Financial Market

The Russian-Ukrainian conflict began in 2014 with Russia's annexation of Crimea and the intensification of battles in the Donbas region of eastern Ukraine. This escalation was not merely a border dispute but resulted from complex historical and geopolitical accumulations involving identity conflicts, power rivalries between Russia and the West, and mutual security concerns. However, the most significant shift occurred on February 24, 2022, when Russia announced the start of a large-scale military operation against Ukraine, transforming the confrontation into a comprehensive war with international dimensions. The war was not limited to military operations but was accompanied by unprecedented economic and financial sanctions from the West against Russia. These sanctions included freezing bank assets, banning technical exports, and reducing Russian oil and gas imports, leading to profound changes in the global energy structure and creating an environment of uncertainty in international markets. Ukraine became a testing ground for the wills of major powers, with the United States and the European Union supporting Ukraine militarily and economically, while Russia sought to bolster its influence in the region. This new reality resulted in a wave of migrations, rising energy and food prices, and disruptions in global trade. Given the strategic importance of Russia and Ukraine as major suppliers of energy, grains, and minerals, the conflict has become a global pressure factor, prompting countries to reassess their economic and security strategies, including Saudi Arabia. This historical and geopolitical context largely explains the magnitude of the economic impacts that we will review in the following sections.

The Ukraine war represents a significant turning point in global energy markets, revealing the fragility of heavy reliance on Russian and Ukrainian energy sources. With the outbreak of the war, crude oil prices surged sharply, with Brent crude exceeding $100 per barrel in a short time during 2022. This increase was driven by fears of disruptions to Russian supplies due to Western sanctions, along with potential disruptions in oil and gas shipments through Ukrainian territory. As a result, European countries engaged in a frantic search for alternatives to Russian gas, increasing demand for liquefied natural gas (LNG) from Gulf countries and North America, raising prices to record levels. Saudi Arabia was not insulated from this impact, benefiting from rising prices to enhance its oil revenues, providing it with a financial surplus that supported infrastructure projects and economic development. On the other hand, price volatility increased global inflation risks and raised the cost of imports, especially energy-intensive goods such as cement and petrochemicals. Notably, the decline in Russian oil supplies prompted OPEC+ to reassess production policies, with Saudi Arabia playing a pivotal role in achieving market balance and price stabilization. The war also imposed technical challenges on supply chains, sparked discussions about energy security, and highlighted the importance of diversifying sources. Overall, the Ukraine war has solidified the importance of energy as a strategic factor in economics and politics, reshaping the map of international interactions in this vital sector.

The Saudi economy, as one of the largest energy-dependent economies in the region, has experienced varied effects due to the Ukraine war. On the positive side, the rise in crude oil prices led to a significant increase in government revenues, with the Kingdom recording unprecedented budget surpluses in 2022 and the first half of 2023. This surplus has accelerated Vision 2030 programs and increased spending on massive infrastructure projects such as NEOM, the Red Sea project, and city expansions. However, the flip side has been rising inflation rates, as the cost of raw material imports, food, and energy increased, reflecting on prices in the local market. Sectors such as construction and petrochemicals faced challenges related to fuel price volatility and rising shipping costs due to global supply chain disruptions. Although the Saudi government has taken measures to support price stability through industrial fuel support policies, companies continue to face margin pressures. Additionally, the war has prompted policymakers to accelerate economic diversification plans and reduce reliance on oil, aligning with Vision 2030. Overall, the war highlights the renewed importance of economic diversification in the Kingdom, demonstrating that over-reliance on energy can make the economy vulnerable to geopolitical shocks, as seen with Ukraine. Consequently, Saudi financial policies have become more dynamic in addressing global fluctuations while maintaining sustainable domestic growth.

The escalation of the war in Ukraine has led to significant disruptions in global supply chains, particularly in maritime and land shipping of raw materials. Saudi Arabia, which relies on importing some industrial and food inputs, has been clearly affected by these disruptions. The construction and building sector has been one of the most impacted, given its reliance on energy-intensive materials such as cement, steel, and copper, all of which have seen sharp price increases globally. Transportation and maritime shipping costs have risen due to higher fuel prices, along with delays in shipments due to the closure of some ports or rerouting away from conflict areas. These conditions have increased the importance of strengthening local supply chains, as Saudi construction companies have begun seeking local alternatives for raw materials or signing long-term contracts with local and international suppliers to mitigate disruption risks. On the other hand, these challenges have increased the operational costs for cement companies, affecting their profit margins and forcing them to revise their production and marketing plans. Conversely, massive government projects have provided a form of protection for local demand for construction materials, as the Kingdom continues to implement its development projects despite global conditions. This balance between global pressures and local support has made the Saudi construction sector more resilient, but it has also revealed the need to develop effective long-term risk management strategies.

Hail Cement Company was established as one of the leading Saudi cement producers, located in the Hail region to meet the growing demand for construction materials in northern Saudi Arabia and its surroundings. Since its listing on the Saudi stock market (Tadawul), the company has played a pivotal role in supporting both government and private construction projects, contributing to diversifying local cement supplies. In recent years, Hail Cement has entered a new era following its acquisition by Qassim Cement Company, which has enhanced its operational and marketing capabilities and provided it with a more stable financial base. The company boasts an annual production of approximately 1-2 million tons of cement and employs modern technologies to improve efficiency and reduce energy consumption. Hail Cement competes with major companies such as Qassim Cement, Eastern Cement, and Yamama Cement, but retains a strategic advantage in covering northern regions of the Kingdom and regional projects. Financially, the company has improved its credit rating following the merger with Qassim, as its credit risks have decreased and its ability to meet financial obligations has improved. The company also seeks to expand its operations by exploring export opportunities to regional markets, especially given the increasing demand for cement in the Middle East and North Africa. In summary, Hail Cement serves as a fundamental pillar in the Saudi construction sector, and monitoring its financial and operational performance is essential for understanding the dynamics of the sector amid global changes.

Hail Cement Company witnessed a notable decline in its net profits of approximately 19% year-on-year in the first quarter of 2024, according to local financial reports. This decline is attributed to several combined factors, primarily the rising costs of energy and raw materials due to the repercussions of the Ukraine war, along with ongoing fluctuations in selling prices in the local market. Despite this decline, the company maintains strong operational capacity, continuing to operate its facilities with an annual production capacity ranging between 1 and 2 million tons of cement. Management has shown an increasing interest in improving operational efficiency and reducing energy consumption, evident from efforts to rationalize spending and attempt to offset pressures on profit margins. On the other hand, financial indicators suggest that the company's price-to-earnings ratio (P/E) has risen during this period due to declining profits, typically ranging between 15 and 20 times for Saudi cement companies, but it has temporarily increased in Hail Cement with the quarterly profitability decline. As for dividends, the company has traditionally provided an annual yield exceeding 6% of the share price before 2024, but forecasts indicate a potential reduction in dividends if profit pressures persist. Overall, recent financial data reflects the challenges of the current operating environment and highlights the importance of monitoring the full annual results for 2024 to assess the company's ability to adapt and recover amid fluctuating global conditions.

Hail Cement's share has experienced notable fluctuations in 2024, influenced by local and global market conditions. The share price ranged between 27 and 33 Saudi Riyals, according to market performance and sector changes. Assuming that the number of issued shares is approximately 100 million, it can be estimated that the company's market value hovers around 3 billion Saudi Riyals. Regarding the price-to-earnings ratio (P/E), this indicator has been significantly affected by the decline in quarterly profits, exceeding the traditional sector averages, which typically range around 15-20 times. The rising P/E ratio indicates increased risks if profit declines continue, and it also reflects investor caution in the current market environment. As for cash distributions, the company has provided annual cash yields ranging between 6% and 7% of the share value in previous years, but this percentage may change in 2024 depending on actual profitability levels. It should be emphasized that these data are approximate and rely on secondary sources; therefore, it is always advisable to refer to official financial reports or the Tadawul website for the latest figures. These indicators reflect the ongoing need to monitor the company's financial performance amid the major economic changes imposed by the Ukraine war.

The Saudi cement sector is one of the strategic sectors that plays a pivotal role in supporting infrastructure projects and urban development. The sector includes more than ten major factories, including Qassim Cement, Yamama Cement, Eastern Cement, and Hail Cement. Competition in this sector depends on several factors, including the ability to control production costs, proximity to major construction projects, and production volume that grants companies economies of scale. In recent years, the sector has faced significant challenges due to market saturation and changing demand patterns; however, massive state projects such as NEOM and the Red Sea project have re-stimulated local demand for cement. With the outbreak of the Ukraine war, the sector witnessed rising energy and raw material costs, putting pressure on profit margins. Nevertheless, Saudi companies have partially benefited from industrial fuel support policies that alleviated some burdens. The merger of Hail Cement with Qassim has enhanced its competitiveness, providing cost savings and increasing bargaining power with suppliers. Some companies are exploring export opportunities to regional markets to offset local production surpluses and capitalize on increasing global demand. Overall, the future of the sector hinges on the realization of state projects, stability in energy prices, and companies' ability to control costs and improve operational efficiency.

Hail Cement competes in a crowded market that includes some of the largest cement companies in the Kingdom, such as Qassim Cement (the parent company after the acquisition), Eastern Cement, Yamama Cement, City Cement, and Najran Cement, among others. Each competitor has a unique operational and geographical base; for example, Yamama Cement and Qassim Cement dominate a significant share of the central and northern regions, while Eastern Cement serves the eastern region, and City Cement covers the western coast. In this competitive landscape, small and medium-sized companies like Hail Cement rely on strategic advantages such as proximity to regional projects, the ability to provide customized solutions for local customers, and quick response to market needs. After its merger with Qassim, Hail Cement has become part of a larger entity capable of achieving economies of scale and reducing costs, as well as enhancing bargaining power with suppliers and customers. Competition in the sector faces challenges related to rising energy costs, fluctuating local demand, and pricing pressures resulting from oversupply during certain periods. Nevertheless, operational integration among major companies and the trend towards exporting surplus to regional markets provide opportunities to enhance financial sustainability and improve returns. This reality serves as a continuous impetus for Saudi cement companies to develop their operational strategies and expand into new markets.

The repercussions of the Ukraine war have prompted Saudi Arabia to accelerate its efforts towards economic diversification and reduce reliance on oil, in line with Vision 2030. The war has highlighted the fragility of economies dependent on a single source of income, as fluctuations in energy prices and rising import costs have underscored the importance of developing new industrial and service sectors. Government policies have focused on supporting non-oil sectors, such as manufacturing, tourism, and logistics services, in addition to enhancing the construction and infrastructure sector. Cement companies, including Hail Cement, are part of this trend, as there is an increasing reliance on local products in executing major projects such as NEOM, Qiddiya, and housing projects. The government has also supported supply chain localization programs and provided incentives for investment in modern technologies that enhance production efficiency and reduce energy consumption. The importance of this shift is underscored by the challenges posed by the war, as diversifying national income sources has become a strategic necessity to ensure economic stability and respond to external shocks. Preliminary indicators show that the Kingdom has made tangible progress in this area, with expectations of accelerated growth in non-oil sectors in the coming years.

In 2024, Hail Cement Company witnessed a series of significant developments, most notably the completion of the operational merger with Qassim Cement Company, the new parent company. Announcements were made regarding significant cost savings resulting from operational and administrative integration, which reflected positively on the financial situation of both companies combined. In terms of financial results, data for the first quarter of 2024 showed a 19% decline in net profits compared to the same period last year, due to rising production costs and pressures on selling prices. Despite these challenges, the company is working on programs to increase production efficiency, reduce waste, and improve energy management. On another front, studies have begun to enter regional export markets, especially in light of the growing demand for cement in the Middle East and North Africa. In an important organizational development, the company received approval from the Capital Market Authority for the official listing of the Qassim Group (including Hail Cement activities) on the main market, enhancing financial data transparency and supporting investor confidence. These developments reflect the company's direction towards strengthening its local and regional presence while continuing to focus on cost management and keeping pace with changing market demands.

Forecasts indicate that the Saudi cement sector will witness significant growth opportunities in the coming years, driven by the implementation of massive government infrastructure projects and increasing local demand for construction materials. With the ongoing Vision 2030 programs, projects such as NEOM and the Red Sea project emerge as key demand drivers for cement and related products. On the other hand, risks related to rising energy costs, fluctuations in raw material prices, and changes in international trade policies remain, especially amid ongoing global geopolitical tensions. This environment allows Saudi cement companies, including Hail Cement, to enhance their operational efficiency, develop more flexible production lines, and expand their presence in regional and international markets. It is essential for companies to continue investing in energy-efficient production technologies, modernizing management practices, and adopting effective export strategies to reduce reliance solely on the local market. At the same time, monitoring government policies related to industrial fuel support, tariffs, and export facilitation is crucial, as they have a direct impact on the sector's competitiveness. Overall, the Saudi cement sector reflects a mix of opportunities and risks in the post-war phase, with the necessity for continuous adaptation to achieve sustainable growth.

The Ukraine war has highlighted the importance of Saudi companies adopting advanced strategies in risk management and sustainability, especially in sensitive sectors like cement. The war revealed the extent to which companies are exposed to external shocks, such as fluctuations in energy prices, supply chain disruptions, and changes in international policies. Leading companies, such as Hail Cement, have responded to these challenges by developing cost management programs, improving production efficiency, and adopting technological solutions that reduce reliance on traditional fuels. Some companies have also diversified their raw material sources and built long-term relationships with local and international suppliers to enhance supply chain resilience. In terms of sustainability, there has been a growing interest in reducing carbon emissions and adopting clean production standards, aligning with global and local trends towards a green economy. In light of these lessons, Saudi companies are increasingly recognizing the importance of investing in developing advanced human and technological capacities and adopting flexible financial policies that enable rapid adaptation to changes. Collaboration with government entities, monitoring international developments, and regularly updating strategic plans are critical elements to ensure performance sustainability and growth in a volatile environment.