Uncertain outlook for cement industry
Published on: Monday, April 13, 2015

Kuala Lumpur: The cement industry is predominantly dependent on activities in the construction sector.So when the Government unveils the 11th Malaysian Plan (11MP) in the second quarter of 2015 (May 2015) that includes key mega projects like the MRT Line 2, LRT Line 3, the Warisan Merdeka Tower project and the Sungai Besi Ulu-Kelang Elevated Expressway, cement industry players will stand to benefit.

However, the concern now is the weak ringgit and the low oil prices, and its bearing on the Government's development expenditure.

Also the property market is expected to be moderate this year due to tight fiscal policies on mortgage lending and the 6 per cent goods and services tax imposed on building materials like cement.

While the cement industry is a cyclical business, an industry source says it is a volume game for cement players.

"You can't get into the industry without volume and subsequently you can't get out of it easily.

"The continued infrastructure investments in the 11MP could give the construction industry a positive outlook, but the question is how soon would these projects be implemented?" he says, adding that other risks in the industry include increase in energy, particularly coal and electricity prices as well as intense competition among industry players.

Taking this into consideration, he does not think the sector's outlook would be resilient.

The decline in oil price may be a dampener for the industry and reduction in capital expenditure (capex) spending is likely.

He opined that the possibility of decline in Government's revenue would be partially offset by removal of subsidies.

With building material prices such as steel seen to be declining and cement producers under pressure to hold their cement price due to overcapacity, construction companies have locked in lower construction materials cost ahead of the goods and services tax (GST).

The second quarter of last year saw a majority of the country's top cement manufacturers raising their cement prices by 7 per cent to 9 per cent, with Holcim (M) Sdn Bhd taking the lead followed by Lafarge Malaysia Bhd, Tasek Corp Bhd and Hume Cement Sdn Bhd.

An overview of the industry shows that most players are relatively conservative in revealing their prices and expansion plans.

Grace Okuda, the executive director of Cement and Concrete Association, says the outlook of the industry remains positive this year due to the ongoing infrastructural projects announced by the Government in Budget 2015.

"Our analysis shows that the industry has sufficient capacity to meet the additional demand in cement.

"We are however uncertain of the outlook for 2016 and beyond, but if all projects announced are implemented as scheduled, the demand for cement would continue to remain robust," says Okuda, who does not wish to comment on pricing and the overall impact of GST on the industry.

Towards the second quarter of last year cement manufacturers were raising prices in the challenging and competitive landscape, and many were ramping up their capacities, which industry sources said could lead to an oversupply situation.

StarBizWeek's report on Aug 9 last year revealed that Lafarge's cement production capacity was about 12.95 million tonnes, followed by YTL Cement at 5.95 million tonnes, CIMA at 3.4 million tonnes, Tasek Corp at 2.3 million tonnes and both Hume Cement and Holcim Malaysia at 2 million tonnes each.

Maybank Investment Bank Research's recent report said the average selling price was competitive with the new capacity from CIMA last year and incoming capacity from YTL Cement in the second quarter of this year.

The research house expected industry growth of about 5 per cent this year, compared with 8 per cent to 9 per cent in 2014.

It said Lafarge Malaysia's cement plant expansion was on track, which would see an additional 5 per cent to the group's total capacity by the end of this year.

Lafarge Malaysia is the co-exclusive concrete supplier for Rapid and other Petronas-related projects at Pengerang valued at RM254mil over five years.

Maybank IB said given that Lafarge's earnings in 2014 were partially affected by production issues, which resulted in lower volume sold and higher repair/maintenance costs, it expected earnings to improve this year when production resumed.

"We reduce our financial year 2015 (FY15) earnings per share (EPS) by 11 per cent as we lower our market share assumption this year by 1 percentage point to 38 per cent, in view of new capacity from YTL Cement," it said, adding that its FY16 and FY17 EPS remained unchanged.

While the research house also expected the merger exercise between Lafarge-Holcim to be completed by June this year, it said the integration exercise for the Malaysia units could commence thereafter, with immediate earnings enhancement of about 5 per cent. The enlarged group could benefit from a stronger network in Johor in the long term. It maintained its "hold" call on the stock with a target price of RM9.30.

Meanwhile, MIDF Research maintains its "neutral" call on Lafarge Malaysia, noting that Lafarge Malaysia Cement's FY14 earnings came in below MIDF's and consensus estimates.

It says Lafarge's earnings before interest, taxation, depreciation and amortisation and profit after tax, amortisation and minority interests margins shrank by 18.4 per cent and 9.3 per cent.

Adding to keen competition, it says the decline in Lafarge's fourth quarter FY14 results were mainly due to increase in operating expenses following an increase in electricity tariff last year, fuel subsidy removal and plant maintenance costs.

It believes the current overcapacity in cement production in the country (with a total current installed capacity of 29.8 million tonnes will continue to impact the average selling price of cement and Lafarge's bottom line.

Meanwhile, Tasek Corp in its 2014 annual report said it was cautiously optimistic of its outlook this year, although for the financial year ended Dec 31, 2014, it reported 13.7 per cent higher revenue of RM656mil on the back of an 11.9 per cent increase in profit attributable to shareholders to RM105mil. Its earnings per share climbed to 86.46 sen from 77.29 sen in the previous year.

It attributed the improved performance to strong demand in the domestic market in the first half of last year, high sales revenue and better pricing. However, in the third and fourth quarters of 2014, despite registering higher net revenue, profits were lower than the corresponding quarters in the previous year due to intense pricing competition.

Generally, the domestic demand for cement is anticipated to be healthy this year, but if the players are continuously facing the risks of stiff pricing competition, overcapacity, increase in coal prices and other tariffs, can they sustain their earnings growth in the long term?


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