Local Demand For Cement To Rebound

05.06.2006
 

5 June 2006

 

By Elaine Ang

 

LACKLUSTRE, sluggish, boring - these are some of the adjectives used by many in the investment fraternity to describe the building materials industry. 

 

They had valid reasons for being so unenthusiastic about the industry, which had been plagued by one problem after another. 

 

The main reason being that the construction sector - the driving force behind growth in the building materials industry - has been in the doldrums since the Asian financial crisis in 1997. 

 

This was also compounded by price wars in the cement industry, a collapse in steel prices last year and rising production costs, the most recent being the electricity tariff hike which took effect last Thursday.  
 


So what else could go wrong for the industry?  

 

Nothing else, hopes an industry observer. 

 

"Things could be looking up for the building materials industry, especially the cement and steel players. The Ninth Malaysia Plan (9MP) is a light at the end of the tunnel," he said. 

 

Lafarge Malayan Cement Bhd (LMC) chief executive officer and president Alain Crouy expects domestic demand to rebound this year with the start of the implementation of the 9MP.  

 

Crouy noted that the Government's strong determination to ensure the effective execution of the 9MP should augur well for the future of the cement industry. 

 

"The cement industry is well prepared to take full advantage of a growing domestic market to improve and sustain its results. Judging from our first-quarter performance this year, things are definitely looking brighter for LMC and for the industry.  

 

"Market demand and prices have stabilised since the second half of last year and are likely to be sustainable going forward," he told StarBiz in an e-mail reply. 

 

Crouy said the improvement in export prices in the last two years due to the tightening of supply in the international cement market had given the company the opportunity to add on to revenue and profit.  

 

"LMC is also looking to increase export volumes with a higher output in 2006 by improving the productivity of our plants. As export prices continue to improve from last year's level, export margins will improve as well," he said. 

 

Nomura Malaysia Sdn Bhd analyst Loong Chee Wei has forecasted cement demand to grow 3% to 5% this year. 

 

He concurred that domestic prospects for cement companies should improve on the back of the expected recovery in cement demand when the 9MP kicked off in the second half of the year as well as the return of pricing power to the cement producers following the consolidation of the industry over the past few years.  

 

"The cement companies suffered losses last year due to a price war, which started in the first quarter of last year.  

 

"We believe the risk of another price war is reduced due to the painful lessons, rising production cost and a stronger understanding among the cement players to maintain price stability," he said. 

 

LMC is believed to have the biggest market share at 44%. This is followed by YTL Cement Bhd (24%), Cement Industries of Malaysia Bhd (16%) and Tasek Corp Bhd (13%). 

 

Despite brighter prospects, Crouy stressed that the cement industry's key challenge was to absorb the significant increases in production and logistics costs over the last two years.  

 

According to the Cement & Concrete Association of Malaysia, the energy-intensive cement industry would, under the new electricity tariff structure, face a 14% rise in electricity rates, translating into an additional RM64mil a year in energy costs. 

 

This comes after about 30% increases in production costs from 1995 to 2005, contributed mainly by a major climb in coal price and logistic costs. 

 

"We gather that the industry has jointly submitted a request to the Government to raise the ceiling cement price. An increase in the ceiling price will boost earnings substantially.  

 

"But we believe even without a ceiling price increase, the cement companies will remain profitable provided a price war does not recur.  

 

"Some reasons that allow cement companies to sustain profitability despite higher costs are lower finance cost as most have low gearing or in a net cash position and have economies of scale following the consolidation of the industry," Nomura's Loong said. 

 

In order to expand their earnings base, local cement players are also eyeing the regional market. 

 

Tasek Corp Bhd is said to be looking at domestic and regional expansion in new cement-related operations over the next five years. 

 

Last year, YTL Cement Bhd acquired a 21% stake in ailing Jurong Cement Ltd, Singapore, for RM19.4mil. Indonesia is another prospect for the company since the YTL group has a power plant there and has expressed its interest in the country's infrastructure projects. 

 

Cement Industries of Malaysia Bhd (CIMA) has also voiced its intention to become a regional player. It was also reported that CIMA was in discussions with French cement maker Vicat Group, which is said to be interested in purchasing the former's assets. 

 

CIMA sees the possible partnership with Vicat as an opportunity to expand its business to the region. Loong agreed that there were opportunities for the local cement players to expand regionally, especially in Indonesia, as supply had tightened due to rising demand.  

 

"For exports, Lafarge Malayan Cement is the most competitive in Malaysia as it has its own bulk terminal and is able to tap on Lafarge group's regional network. Other players will face higher costs exporting its products and only make marginal profits," he said. 

 

Steel players are also looking at ways to boost revenue and prepare for the anticipated increased demand from the 9MP. To save costs and improve margins, Ornasteel Holdings Bhd is

 

Choo Bee Metal Industries Bhd plans to invest RM5mil for machinery enhancement at its factory this year in Pengkalan, Perak, in addition to the RM40mil the group invested in December last year to expand one of its existing plants.  

 

Hiap Teck Venture Bhd's new steel mill is also expected to boost the company's financial performance amid brisk demand from the construction industry for its premium structural hollow section steel pipes.