A plunge in cement sales volume, both locally and abroad, is expected to be the major issue pressuring the Thai cement sector in 2009. KGI’s economist forecasts Thailand’s GDP to contract 2.0% this year notably weighed down by the fall in investment and export components. Domestic and export cement sales volume are estimated to drop 10.0% and 15.0% in 2009. As a result of the high base effect, local and export cement sales volume are expected to contract 10.0-15.0% YoY and 20.0-30.0% YoY, respectively, in 1H09 before dropping at a decelerated pace in 2H09.
Poor investment sentiment, weighed down by the global economic slowdown as well as local political tension, suggests that private cement demand will remain tepid. Meanwhile, construction area permitted (consisting of residential, commercial, and industrial sectors) is on a declining trend, reaching only 890K sq. metres in January 2009, the lowest level seen since August 2002. As construction area permitted is the leading indicator for cement sales for the next six months with a correlation of 0.7, the dismal figure implies domestic cement sales are likely to edge down further in the next couple of quarters.
On January 13, 2009, Thailand’s Cabinet approved the first stimulus package from the 2009 budget worth Bt116.7bn. Of the eighteen categories, only four (water resource management, police housing, rural road construction, health stations) are related to investment projects. In addition, these investments are worth only Bt6.4bn (5.5% of the total budget), so they seem insignificant to spur domestic cement demand. This is because during a deep recession, the government is prone to announce urgent stimulus plans that focus on consumption in order to boost the economy in the near term rather than investment that would take time to materialize.
On March 25, 2009, Economic Ministers approved the second stimulus package worth Bt1.57trn in 2010-12. Of this, Bt486bn, Bt510bn, and Bt570bn will be gradually invested each year over the next three years. Though more than 70.0% of the total budget will be invested in infrastructure projects, it is still far in the future as the reimbursement will not take place until October 2009 at the earliest (the beginning of the 2010 budget fiscal year). With the lack of private cement demand, minimal cement usage from public projects in the near term would mean domestic cement demand would be even more disappointing in 2Q09-3Q09.
Domestic cement sales are poised to soften QoQ in 2Q09 due to seasonal effect. Domestic demand typically weakens in the second quarter as long holidays hamper construction activity throughout the period. In 2004-2008, local cement sales volume during the second quarter weakened 8.0-15.0% QoQ on average. Minimal private and public investment would lead to 2Q09 being even worse than normal.
Domestic and export cement prices are set to continue to stabilize in the near future. Domestic cement prices have been stable since mid-2008 as cement producers in the oligopoly market tried to maintain prices to alleviate the negative impact from the dip in local sales volume. In the meantime, export cement prices were almost unchanged, as the pressure from the reduction in the cement export selling price was somewhat offset by a decline in transportation costs.
(KGI Securities (Thailand)