The cement price increase of Bt200-300/ton initiated by Siam City Cement (SCCC) and TPI Polene (TPIPL) had expanded to a range of Bt200-500/ton by the third week of August based on our conversation with a number of companies. However, the rebate range has also widened to Bt100-500/t from Bt50-300/t.
Thus, at this point the impact of the price increase is not yet clear. Equally unclear is whether the price increase will hold. The largest player has seen marginal improvement in price from the 2Q09 average, when it saw price cutting. Caveats to price increase scenario - In our Aug 11 report, we noted that both the wholesale and retail prices were on the downtrend and we continue to doubt whether demand conditions can absorb the higher prices. We also posit that if cement demand is driven solely by public sector projects, price hikes might not be sustainable.
Follow up on demand - June domestic cement sales showed an unexpected growth of 5%YoY, breaking the monthly declines seen since Jun08. Industry players have turned slightly optimistic, and SCC in its analyst meeting was guiding for a flat 2H YoY. Working with these assumptions, the 2009 demand contraction would be about 10%YoY, much lower than our projection of -16%.
However, talks with some of the players reveal that from July up to mid-August, volume demand was down by about 3-8%YoY. Commercial construction, 20-25% of total demand, dropped between 10-12%YoY in July while public sector and residential demand fell 3-5%YoY. The small construction works relating to the fiscal stimulus program have started to slow down in anticipation of the next disbursement.
Implication to cement companies - The wide discount range is an indicator of a highly competitive environment. The concern is that if the volume continues to deteriorate, there could be more intense price competition into Oct/Nov. This has happened before and the price recovery could take about two quarters. What this means is that average selling prices may not rise next year as expected. And if prices of energy inputs do go up, which is the reasoning behind the current price increase, margins could be pressured even with the benefits from the cost savings programs.
Short term impact not yet clear but not as rosy - Had the volume recovery in June been sustained in Jul/Aug, cement companies would have been able to report a better second half this year, but this is viewed as an unlikely outcome. With volume still down but prices slightly better, the picture for cement profitability in 3Q09 is not yet clear. One good thing about the situation is that the price of energy inputs, although showing some signs of increasing, remained largely muted. In Aug 11 report, we ran an earnings sensitivity under a scenario of price increases (Bt200-300/ton) in 2010. At the time, we preferred to leave the numbers as upside potential to earnings as we had doubts of the success of the price increase.
Source: SCB Securities