During January-April 2008, domestic cement sales volumes in Thailand dropped to 9.2Mt, down 5.0% YoY, due to the unappealing investment sentiment of the private and commercial sectors, coupled with the lack of new government investment projects, according to analysts at KGI Securities.
Local cement sales volume growth is expected to remain tepid in the near-term, as the recent drop in the Business Sentiment Index (BSI) of 4.3 points MoM in April, the current political stalemate, and inflation concerns indicate poor investment sentiment is here to stay for the next few months. Besides, domestic demand is typically muted during the third quarter due to the rainy season. Thus, KGI don’t expect much change in cement sales volume from 2Q08.
Domestic cement sales volume growth in 2008 was trimmed to 2.0% from 5.0% following the sluggish domestic cement sales YTD and the anticipation of weak demand in the near term. Local cement sales are expected to bounce back in late 2008 due to the approaching high season in the fourth quarter. In addition, the positive sentiment from the mega projects in 2009 will take place throughout the period.
In 4M08, export cement sales volume dropped to 4.97mn tons, down 3.3% YoY, as Siam City Cement (SCCC, Bt202, OP) slashed its 2008 export volume by around 2-3mn tons after closing two kilns (accounted for 10.0-15.0% of Thailand’s cement export volume). Other cement producers continue to export cement at the same rate as last year. Given the cut in production capacity and high base for cement export volume during May - December 2007, Thailand’s export volume growth is expected to come down further throughout the rest of the year. Forecast for export cement sales volume is maintained to decline 10.0% YoY in 2008.
When costs first began to soar in 2007, weak cement sales volume and an unadjusted cement selling price led to cement margins contracting. However, this year, though cement demand has remained weak, the recent increase in cement selling price should outstrip the rise in fuel costs, implying cement margins will expand. Since the beginning of 2008, all cement producers have increased their domestic cement selling prices (excluding rebates) more than 20.0% YoY. The average cement export selling price has also been raised to US$41 per ton in April 2008, up 24.0% YoY. Combined with the recent depreciation of the baht against the US dollar, this would help underpin margins from cement exports as well.
Though the cement sector seems to be hurt by the continued escalation of fuel costs, especially coal (accounting for 35.0% of cement production cost), the impact on cement producers would not be as bad as the market expected. Rising costs will be offset by a new round of cement price adjustments, as evidenced by the previous price increase. SCCC recently asked the Ministry of Commerce to raise domestic cement selling prices by another 8.0-10.0% on top of the previous price increase. Thanks to the cost pass-through abilities of cement producers, rising costs should have a minimal impact on the cement industry.
Among cement groups, pure cement producers like SCCC is preferred as they are likely to benefit the most from rising cement prices. SCCC’s earnings growth is expected to be the best among its peers in 2008.
Other conglomerate producers, Siam Cement (SCC, Bt195, N) and TPI Polene (TPIPL, Bt6.10, U), would only partially gain from the revival in cement as their cement units account for only 20.0% and 85.0% of their total earnings, respectively.
After suffering surging costs, unadjusted cement selling prices and sluggish domestic demand for the last few years, the recent increase in the local cement selling price is the first positive sign for the industry this year. Moreover, cement producers expect the selling price to rise further, in tandem with rising costs. Thus, cement margin is anticipated to expand in 2008. If domestic cement demand recovers, it would be another positive factor to underpin earnings improvement for the cement industry. A rating of Neutral on the cement sector is maintained with SCCC as top pick.
KGI Securities (Thailand): 27 June 2008