Hazy Days May Be Over For Cement Firms

21.11.2005
 

21 November 2005

 

By Elaine Ang

 

THIS year has been a difficult year for most of the local cement manufacturers due to price competition, a contraction of the construction industry and higher production costs (coal and fuel).

 

Except for YTL Cement Bhd, three major players - Lafarge Malayan Cement Bhd, Cement Industries of Malaysia Bhd and Tasek Corp Bhd - were in the red for the first half of the year.

 

However, cement manufacturers have one less worry on their minds now.

 

The price war, which has plagued the industry since early this year, is believed to be over with the price of cement rebounding to about RM180 per tonne currently from an average of RM166 per tonne earlier. 

 

The price war is believed to have been sparked by Lafarge Malayan Cement and YTL Cement offering rebates to capture a larger slice of the market. 

 

A Singapore-based stockbroking firm said in a research note: "The price war ceased as suddenly as it started. A strong dose of normalcy has returned."

 

Analysts are expecting the stabilising prices to drive earnings for the cement players in the second half of the year and into 2006.

 

This is evident in Tasek's results for the first quarter ended Sept 30. The group registered a net profit of RM7mil for the quarter compared with a net loss of RM15.2mil in the previous quarter.

 

Although this was 23.4% lower than the net profit quarter-on-quarter, analysts are optimistic of better days ahead for the beleaguered cement players.

 


Analysts say local building materials players should be looking at a better year in 2006.

 

However, MIDF Securities Sdn Bhd noted that despite the recovering price of cement in the last few months, there was no guarantee that it would continue to remain so.

 

"We do not expect a rosy scenario for the coming quarters when cement prices are expected to stabilise. 

 

"Improvements can only be expected if cement players finally reach an agreement and keep to the gentleman's truce," it said.

 

The stockbroking firm added that many concrete manufacturers were caught off guard and cement buyers were not too happy with the rapid increase in price. 

 

"Although cement manufacturers welcomed the price increase with hopes that it would settle near the ceiling price of RM198 per tonne (government-controlled price), local demand would take some time to increase as buyers adjust their costs," it said.

 

In addition, analysts still view the industry with caution due to low demand as a result of a soft construction sector. 

 

Growth of the cement industry is directly correlated with gross domestic product (GDP) and construction sector growth. In Budget 2006, the Government projected a GDP growth of 5.5%. 

 

The Singapore-based stockbroking firm expects demand for cement to remain weak with a 3% contraction in 2005 and growing at a small 3% in 2006, when the impetus from the Ninth Malaysia Plan is felt. 

 

Margins are also being squeezed from higher production costs.

 

An industry observer noted that whilst managements of the cement players were working relentlessly to improve operational efficiency, such efforts would be overwhelmed by rapid cost increases. 

 

"Efficiency improvement alone is insufficient to drive return on assets significantly beyond the current levels. It is a structural weakness arising from a revenue-controlled environment. 

 

"The ceiling price of cement in Malaysia is controlled at RM198 per tonne since 1995. Hence, we would not be surprised if cement manufacturers start to lobby for an increase in the controlled price of cement," he said.

 

Avenue Securities Sdn Bhd is upgrading its "underweight" view on the building materials sector to "neutral". 

 

"As construction activities are expected to pick up after more than two years in the doldrums, demand for building material products are finally expected to catch up with its supply. 

 

"We expect selling prices for building materials (steel and cement) to stabilise in the medium term, thus improving margins," it said. 

 

Avenue noted that, barring any unforeseen external shocks, local building materials players should be looking at a better year in 2006.

 

"We believe the current good news will likely continue with Budget 2006 and the Ninth Malaysia Plan the main drivers," the stockbroking firm said.