In contrast to the depressed domestic demand throughout 2007, domestic cement sales are likely to recover in 1Q08, backed by it being the peak season for demand. Domestic cement demand is expected to turnaround and grow 5% to 29.5mn tons in 2008 for a few reasons.
i) Low cement sales base in 2007. Following the tepid investment environment in 2007, domestic cement demand showed a decline of 4% YoY to 17.0mn tons in 11M07. This abnormally low base should pave the way for decent cement sales growth in 2008.
ii) Return of private investment following improved local confidence. The Business Sentiment Index (BSI) recently bounced back in anticipation of an improved economy following the recent election. Combined with easing political tension and stretched capacity utilization, private investment is poised to accelerate in 2008. This has been affirmed by the Bank of Thailand and Finance Ministry which forecast private investment to grow 8.5% and 5.3%, respectively, in 2008.
iii) Mass transit construction in late 2008. Construction of at least three mass transit lines in 2008 will help to propel domestic cement demand.
Nevertheless, cement usage won’t begin until 2H08 at the earliest, and then there will be huge orders from 2009 onward. Thus, we expect no significant demand from mega-projects in the near term.
Domestic cement demand is expected to gradually recover in 1H08 with the positive investment sentiment and recover considerable in 2H08, fuelled by the mega projects. 2008 domestic cement sales growth forecast of 5% is quite in-line with the assumptions of the cement operators. Siam Cement (SCC), Siam City Cement (SCCC), and TPI Polene (TPIPL) estimate domestic cement sales growth of 0-5%, 0%, and more than 5%, respectively.
While domestic demand is set to recover, Thailand’s export cement sales volume is forecasted to decline 10% YoY to 16.7mn tons in 2008. This is mainly due to a dip in SCCC’s export volume. To reduce the adverse affects of the baht appreciation against the US dollar and unadjusted export selling prices from the surge in freight rates, SCCC will reduce its 2008 export volume by around 2-3mn tons from its two kiln closure (accounted for 10-15% of Thailand’s cement export volume). Other cement operators (SCC and TPIPL), have no export expansion plans to SCCC’s earlier export destinations as the poor cement export margin is unappealing. Instead, they aim to maintain their cement export volumes to sustain capacity utilization to cover fixed production costs.
The slowdown in US construction activity following the sub-prime fiasco does not concern Thai producers. This is evidenced by Thailand’s cement export value flourishing to US$564mn, up 18.5% YoY, in 11M07 as vigorous demand in Asia and Europe outpaced the decline in US demand. Based on Thailand’s cement export value, the US market rank dropped to 5th in 11M07 from the lead position in 11M06. Thus, even though US demand will likely continue to decelerate, analysts do not expect it will to have a considerable impact on Thailand’s cement industry.
Following the negative growth throughout 2007, domestic cement demand is forecast to recover in 1Q08, backed by it being the peak season for demand.
With an abnormally low base and improved domestic confidence, local analysts see Thailand’s domestic cement demand growing 5% this year. Meanwhile,
Thailand’s export cement volume is expected to decline 10% in 2008, dragged down by SCCC’s export volume reduction. Cement margin is forecast to be maintained as the improved domestic demand and selling price offset the rise in energy costs.