Innovate To Cope With Rising Costs


29 June 2006

Feeling the pinch of rising prices, Lafarge Malayan Cement president and CEO Alain Crouy speaks of the industry's request for a review of the ceiling price for cement.   Vigorous internal improvements have enabled the company to weather the changes; it also looks forward to a slight upturn in domestic demand. 


Impact of rising interest rates on your company   


The increase in interest rates has no significant direct impact on our overall interest cost due to our low gearing and a significant portion of our borrowings being fixed-rate loans. 


The rising interest rates could affect housing starts, which could in turn affect demand for building materials including cement. However, after two consecutive years of decline, we are optimistic that the domestic cement market could show a slight growth this year. 


Impact of appreciating ringgit on your company 

Our export proceeds will be lower while our cost of imports such as coal and gypsum will be cheaper.   As we have net US dollar inflows, the appreciating ringgit will lower our net proceeds.   However, better export prices in 2006 will compensate for the weaker US dollar.   We have also hedged portions of our export proceeds earlier in the year.   Overall, we will not see much impact on our 2006 results. 

Issues and challenges facing the world economy this year 

Not being an expert on the world economy, my feeling is that the rising costs of energy and raw materials and the potential rise in inflation and interest costs are a concern for the global economy.   The slowing down of the US economy together with the weakening of the US dollar could affect the economic growth of some export-oriented economies.   The challenge will then be to sustain growth in an environment of higher inflation productivity gains. 


How do you see the Malaysian economy performing this year? 

Malaysia reported an annual growth of 5.3% in the first quarter of 2006.  


With the recent launch of the Ninth Malaysia Plan (9MP) and the Government's strong determination towards efficient implementation, the 6% Gross Domestic Product growth forecast still looks achievable.  


Higher interest rates and inflation might slightly dampen consumer spending and demand for houses but the Malaysian economy should be able to absorb the negative impact of higher oil prices better than other economies in the region as we are still a net oil exporter. 


How is your company coping with the trends in the world and local economy? 

Although the company has recovered from the losses incurred in the first half of last year, 2006 will continue to be challenging.   We are optimistic of the prospects of the domestic cement market for this year, which we hope, could grow by 3% to 5% after two consecutive negative years.  However, the company and the cement industry have been suffering in the past years.  


We have no choice but to absorb more than 30% increase in our costs since the last ceiling price review in 1995.  


Among the cost increases are in coal prices, which rose by more than 60% in the last three years (more than RM100mil impact to the industry) and over the last one year, in transportation rates because of the increase in diesel prices (a RM40mil impact to the industry).  


More recently, the Government's approval of a 12% tariff increase for Tenaga Nasional Bhd translated to an actual 14% increase or a whopping RM64mil to the cement industry.  


The current price level, which is one of the lowest in the Asean region, is threatening the sustainability of the Malaysian cement industry.  


The unjustified level of return on investment will prohibit the industry from reinvesting in new capacities and keeping pace with the domestic demand growth as the country continues to develop through the 9MP toward 2020. There could be potential supply constraints in the years to come. 


As part of our anticipation for a more market-driven economy promoted by the Government, as well as the need to sustain its competitiveness, the cement industry has submitted an application to the Domestic Trade and Consumer Affairs Ministry for a review of the ceiling price. 


The cost of cement represents only about 5% of the cost of an average house.  


An increase in the price of cement will therefore have a limited impact on the construction and housing industries.  
It will, however, allow the cement industry to put more resources into the development of better products and services to improve the efficiency and productivity of the construction sector. 


Meanwhile, Lafarge Cement will have to cope with rising costs through even more vigorous internal improvements although much has already been done in the past to counter the eroding margins.  


We will also continue to focus on improving the quality and differentiation of the products and services we offer to customers.