Demand-supply gap to persist in cement sector

Cement sector
Maintain neutral: The sector is expected to witness a stagnant growth especially in the supply of premix cement and ordinary Portland cement. A widening demand to supply gap may result in the moderation of the average utilisation capacity of cement manufacturers from 25.5 tonnes per year in financial year 2015 (FY15) to 23.5 tonnes per year in FY16 from a total integrated capacity of 29.8 tonnes per year. Moreover, the year-to-date average utilisation rate of the 11 integrated cement manufacturers in Malaysia (inclusive of Aalborg cement plant in Ipoh) has decreased to 85% in 2015 from 95% in 2014. 

Additionally, the weakening sectoral growth will be further worsened by the increase of in-house premix cement and concrete plants by the construction companies, such as IJM Corp Bhd and Gamuda Bhd, in order to reduce costs and control the concrete’s mixture quality, and intense pricing, product rivalries and entrance of various dry mix products.

The cost of production will reduce with the declining trend in iron ore (US$57.4 [RM248] per tonne, -34.15% year-on-year [y-o-y] in The Steel Index) and coal (US$55.89 per tonne, -16.61% y-o-y in the Australia Newcastle Thermal Coal Index) commodities, and increased supply of replacement raw material in Malaysia such as fly ash from Jimah, Manjung, Tanjung Bin and Kapar power plants. The downtrend in global coal and iron ore indices is indicative of the increased supply contributed by the United States, Mongolia, China, Brazil, Australia, South Africa and India. The cratered commodities’ prices are due to the stocking up of inventories by steel mills in China as well as power plants in India. 

Hence, we lowered our estimate for the average selling price of cement to a range of RM241 per tonne to RM250 per tonne for the financial year ending Dec 31, 2016 (FY16), from RM270 per tonne in FY15, due to the declining price of raw materials. Altogether, earnings are expected to remain sluggish. We reaffirm our “neutral” stance on both the sector and Lafarge Malaysia Bhd with an unchanged TP of RM9.15 per share.

This article was first published in The Edge Financial Daily, Dec 15, 2015. Tap here to subscribe for your personal copy.