Challenging times for cement companies
Industry’s outlook gloomy due to overcapacity, lacklustre demand
THE prolonged cement price war amid overcapacity and subdued demand is weighing on cement companies in Malaysia as they fight for earnings growth this year.
The gloomy outlook is further dampened by the new government’s election pledge to review mega infrastructure projects that could lead to delays or even cancellations.
Hence, analysts expect cement prices to remain under pressure in the near term.
Back in 2013 to 2016, there was a series of capacity expansions undertaken by local cement producers such as Hume Industries Bhd, Cement Industries of Malaysia Bhd (CIMA) and YTL Cement Bhd.
In total, 4.5 million tonnes of new clinker capacity added a further 25% capacity to the industry.
On the other hand, the annual domestic cement demand growth contracted further by 8% from 6% in 2016, after recording positive growth of 4%-5% per annum the year before.
This has intensified price competition among cement producers as they battle for market share.
One such company facing these headwinds is Lafarge Malaysia Bhd, Malaysia’s largest cement player with a market share of almost 40%.
Analysts are concerned with Lafarge Malaysia’s prospects as it is the sole cement supplier for the East Coast Rail Link (ECRL) project.
Its subsidiary, Lafarge Cement Sdn Bhd, secured a RM270mil contract in March this year to supply cement to all eight packages of ECRL project until Dec 31, 2019.
Lafarge Malaysia president and chief executive officer Mario Gross tells StarBizWeek that “the ECRL project is only one of a number of projects we are supplying to.
“Furthermore, project supply is only a part of our overall business, as we supply to all construction of buildings, infrastructure, homes and mixed developments.”
He points out that the company has a proven track record in supplying to large scale and complex projects.
It also offers project owners confidence in securing quality supply and the highest health and safety standards at construction sites.
On the industry’s prospects, Gross admits that the local cement industry has been impacted by slowing demand in residential and commercial projects.
He describes 2018 will be another challenging year and “the cement market is expected to make only a slow recovery.”
Therefore, Lafarge Malaysia welcome the government’s business friendly commitment as it gives added confidence to foreign investors and will foster a more vibrant business landscape in Malaysia.
“We strongly believe that there will be continued investment in infrastructure where needed,” adds Gross.
AllianceDBS Research in its report said the competitive pressures in the local cement industry are unlikely to ease in 2018 due to excess capacity.
Domestic cement demand is expected to remain sluggish post GE14, after contracting by 8% in 2017, it adds.
Overcapacity has been the main concern for the industry after major players expanded their capacities in the last couple of years.
At the same time, annual domestic demand growth has been insufficient to absorb the expanded capacity, which resulted in falling net selling prices.
AllianceDBS Research says it previously expected a better FY2018 for Lafarge Malaysia, mainly driven by increasing demand from infrastructure projects especially after it secured a RM270mil cement supply contract for ECRL projects.
“Now that all mega projects including ECRL are going to be reviewed, we expect cement demand to contract further (FY2017: down 8%) as there is a high chance of these projects being delayed or cancelled,” adds the research unit.
Kenanga Research says the troubled outlook for Lafarge Malaysia could linger in FY2018. It says the reviews on major infrastructure projects is negative for Lafarge Malaysia as “the ECRL contract would be a good recurring source of income amidst the weak sector backdrop.
“All in, we anticipate the price war to continue due to the overall subdued cement demand outlook on the back of industry overcapacity,” explains the research unit. Based on channel checks, the current cement rebates of about 50% are higher than Q1 2018 cement rebates of about 30% to 40%.
The higher rebates are due to weak demand from residential and commercial property segment, and slow infrastructure construction progress exacerbated by on-going overcapacity issue. Based on the current rebates trend, Kenanga Research expects Lafarge Malaysia to remain in the red in Q2 2018.
The research unit has an underperform call on Lafarge Malaysia which is justifiable given: i) this is the 5th quarterly loss that Lafarge Malaysia had registered since listing, (ii) this is the 7th consecutive quarter it stopped dividends, which it had consistently paid out every quarter since FY2010, (iii) deteriorating balance sheet, and (iv) we are expecting FY18 losses tobe worse than FY2017.
However, the risks to its call include higher-than-expected cement prices, lower-than-expected raw material and energy costs, and stronger-than-expected cement demand.
Maybank Investment Bank Research says that average selling prices (ASP) for cement have yet to show signs of recovery.
It concurs that the industry cement demand this year may not significantly improve if “the new Government’s review of mega infrastructure projects results in posssible delays.”
Maybank IB points out the attempted ASP hike of about 20% in bag cement conducted last March 2018 was unsuccessful due to the hesitance of one key player. “Although we initially expected cement demand to improve in the second half of this year, this may not materialise if the new government puts mega infrastructure projects under review.”