Cement Makers Pin Hope On Stimulus Package

07.03.2009
 

7 March 2009

 

Listed cement companies appear to be doing well based on their latest quarterly results but analysts and industry association agree that it could be quite a different scenario this year.

 

Cement producers, like its construction peers, are counting on the Government stimulus packages to provide growth.

 

There is also the issue of rising costs for the industry.

 

While there is hope that quick project implementation could help boost the industry in the second-half year, analysts and the industry association, however, expect demand to likely rise only in early 2010.

 

Cement and Concrete Association of Malaysia executive director Grace Okuda says the 5% electricity tariff reduction effective March 1 will not be enough to reduce the cost of production for the industry.

 

The demand for cement is expected to drop this year as the construction sector slows down. Cement producers are still absorbing the 26% electricity tariff hike announced in August last year, Okuda says.

 

"The industry was hard hit by the hike as it is a major user of energy and a 5% reduction is not much compared with the previous hike," she says. Agreeing with similar sentiments by stock analysts, Okuda says: "We expect cement demand to drop in 2009."

 

However, if the implementations of the Government's stimulus packages are quick, it could help boost cement demand for the year, she says. Okuda also confirms that construction activity has slowed down.

 

An analyst with a bank-backed brokerage says her firm has a "trading buy" on the construction and related sectors, in the hope of a higher amount from the mini-budget stimulus package to be announced on March 10.

 

Cement makers such as Lafarge Malayan Cement Bhd are waiting for the Government package despite the fact that it exports 30% of production.

 

"But the RM7bil stimulus package announced earlier is not enough to help the construction sector and thus, the cement manufacturers," she says.

 

The next package will have to be bigger to boost demand for cement, the analyst adds. AmResearch analyst Mak Hoy Ken says even with the fiscal pump-priming, there will be an "implementation lag". "A boost in demand will be seen by the first month of next year," he says.

 

Mak points out that unlike steel, cement prices has only recently (in the past six months) shot up, which further put a dampener on demand.

 

Following the liberalisation of the sector on June 5 last year, there have been two rounds of price hikes for cement by 15% to 20% in June and about 8% in August the same year due to an unprecedented 63% hike in diesel price and 26% rise in electricity tariffs respectively.

 

Cement price currently stands at about RM275 per tonne from RM220 in early 2007.

 

However, rebates are often given to customers for the sale of cement, so the real price is hard to determine, Mak adds.

 

The country's largest cement manufacturer, LaFarge Malayan Cement, reported a 79.5% jump in pre-tax profit to RM129.4mil for its fourth quarter ended Dec 31 compared with the previous corresponding period.

 

The company, in its Feb 18 announcement, said the huge gain was mainly attributable to higher revenue, lower maintenance costs due to the timing of scheduled plant shutdown as well as the non-recurring gain on the sale of certified emission reductions of RM29.6mil.

 

Smaller but also main board-listed Tasek Corp Bhd did not report year-on-year quarterly performance due to a change in financial year-end but posted a pre-tax profit of RM28.3mil for the fourth quarter ended Dec 31 on a revenue of RM143.2mil.

 

Tasek recorded a slight rise of 0.2% in revenue to RM143.25mil in the fourth quarter compared with RM142.96mil in the preceeding quarter.

 

However, pre-tax profit fell to RM28.3mil against RM34.1mil in the third quarter, "affected by lower demand for local cement and higher operating costs," the company said in its Feb 23 announcement.

 

YTL Cement Bhd, a major local cement producer which analysts estimated as being larger than Tasek but smaller than LaFarge, posted 11.3% growth in pre-tax profit to RM69.9mil and 55.9% jump in revenue to RM492mil for its second quarter ended Dec 31 compared with a year ago.

 

"The increase in revenue and pre-tax profit were substantially attributed to overseas operations and better selling prices," it said.