Prospects for the Malaysia cement sector is expected to remain positive for the next two years given the narrowing demand-supply gap in 2011 and the year after.
Based on RHB Research Institute Sdn Bhd’s (RHB Research) six per cent growth forecast for domestic cement consumption, demand was likely to grow from 16Mt in 2010 to about 18Mt by 2012.
On the other hand, industry capacity would remain constant at about 20Mt over the next two years in the absence of expansion by players. This means that the industry’s excess capacity over domestic consumption would shrink from 4Mt in 2010 to only 2Mt by 2012.
However, the research firm remained cautious about the sector’s prospect in 2013, as industry capacity would likely increase by as much as 25 per cent to 25Mt due to the expansion by YTL Cement Bhd (YTL Cement), Cement Industries of Malaysia (CIMA) and Hume Cement Sdn Bhd (Hume Cement).
Against RHB Research’s 19Mt forecast for domestic cement consumption in 2013, the industry’s excess capacity over domestic consumption would widen from 2Mt in 2012 to 6Mt in the year after.
“Our base assumption is a six per cent growth rate in 2011 for domestic cement demand to 17Mt, underpinned by a key on-going large-scale infrastructure projects and robust property development activities,” said the research firm.
It further pointed out that for 2012 and 2013, domestic cement demand would grow by six per cent YoY to 18Mt and 19Mt respectively, driven by other major public infrastructure projects particularly the MYR40bn MRT project.
“There would be no new capacity addition in 2011 and 2012. However, assuming the expansion plans of YTL Cement, CIMA and Hume Cement were to go ahead, the industry’s total capacity would go up by a whopping 25 per cent by mid-2013.
“On the back of the narrowing demand-supply gap over the next two years, we foresee less intense competition and hence better pricing power for players,” said RHB Research.
“A better pricing power translates to better margins and profitability as well as ability to pass on higher input costs such as thermal coal and electricity tariff.” It already appeared that cement producers had been able to do so as evidenced in the six per cent increase in domestic cement prices since March 2011 to cover higher thermal coal costs.
The research firm believed that cement producers would also likely be able to pass on the electricity tariff hike by raising the effective selling prices.
Moving forward, RHB Research also foresaw that the increase in domestic cement demand was likely to prompt the players to cut the razor-thin cement export business, channeling the volume to the much more profitable domestic market.
“In our view, overcapacity in the industry appears inevitable by 2013 as we believe the growth in domestic cement demand will not be sufficient to absorb the additional capacity. This could potentially lead to a price war, likely to be initiated by YTL Cement in order to gain market share, while Lafarge will be compelled to respond in order to defend its No.1 market position,” said the research firm.