Lafarge May Raise Grinding Capacity


7 April 2008


LAFARGE Malayan Cement Bhd is studying the possibility of increasing its grinding capacity in the near term despite concerns of a slowdown in the local construction industry.


President and chief executive officer Alan Crouy said the cement manufacturer had allocated up to RM80mil in capital expenditure for its financial year ending Dec 31.


Currently, Lafarge has about eight million tonnes of clinker capacity and close to 13 million tonnes of grinding capacity spread over four plants in Peninsular Malaysia.


Crouy said the firm was still optimistic of a continued demand growth in the local cement industry this year.


This is despite possible hiccups in the implementation of several Ninth Malaysia Plan (9MP) construction projects following a change in some state governments.


"However, if the domestic construction activities do experience a slowdown, we will compensate by increasing export volumes," he told StarBiz.


The firm's overseas prospects are buoyed by the expansion of Singapore's construction sector with the development of two major integrated resort projects.


Earlier this year, analysts cited the rollout of property and infrastructure projects under the 9MP as one of the main catalysts for Lafarge's earnings growth.


"But after the general election, we have turned a little cautious and do not expect such robust demand," said one analyst.


"We expect cement off take from 9MP projects to remain small this year.


"And with the uncertainty over implementation, our 2008 local cement demand growth forecast for the industry and Lafarge is trimmed to 3% from 5%," Aseambankers said in a report. In addition, rising production costs remain a concern for the company.


"With significant increases in prices of major production inputs such as coal and fuel, our operating margins could be affected as we currently are not able to compensate fully these rising costs with productivity improvements," Crouy said. "We, together with the industry, will continue to pursue for a revision of the current cement ceiling price as well as for the implementation of the Automatic Pricing Mechanism."


The new mechanism is said to allow more flexibility for the manufacturers to pass on cost increases to customers as it will take into account the cost of major production inputs.


The average cement price in Peninsular Malaysia now is about RM12 per 50kg bag or RM217 to RM231 per tonne.
Analysts predict a l0% price hike in the second half of this year which they say should help manufacturers cope with the rising production costs.


"Without the price hike, operating margins could drop by an estimated 2% and earnings per share could contract by 15% in FY08 and 11% in FY09, assuming a potential further 15% rise in coal costs and weakening of the US dollar," Aseambankers said. It has forecast net profits of RM292.2mil for FY08 and RM315mil for FY09.