Strong demand for Malaysian building materials

Strong demand for Malaysian building materials
Published: 10 January 2008

CIMB Equities Research is maintaining its overweight stance on the construction sector as it sees 2008 as the start of the implementation of
the Ninth Malaysian Plan after the award of some RM22 billion worth of projects in 2007 reports Malaysia’s The Edge news.

It anticipated construction activities to pick up at a growth rate of 6%, which is the highest since 1997. It believed local demand for building materials would also enjoy strong growth.

“We estimate 6% growth for long steel products in 2008, and about 5% growth for cement demand,” news sources said.

In terms of supply, across the board, utilisation rates in the steel industry were still low at about 60%. This would ensure sufficient supply. However, utilisation in the cement industry was significantly higher at about 80%.

“In the event of tight supply, manufacturers are likely to switch from supplying to the export markets to supplying locally where margins are
better. We expect local prices for both cement and steel to remain firm, if not trend higher.”

CIMB Research said it was expecting the government to meeting early this week to discuss several issues including an Automatic Price Mechanism (APM) for the cement industry. The government had reportedly approved the APM, effective Jan 1, 2008. “Given the rising cost of coal, fuel and transportation charges over the past couple of years, we believe that implementation of the APM will push up cement ceiling price,”

For exposure under the cement sector, it recommended LafargeMalayan Cement (outperform). For Lafarge, a 10% increase in the ceiling price would raise
its FY08-09 earnings estimates by 30% to 35%, assuming no change in demand. Other beneficiaries of the potential hike in cement prices are YTL Cement
(not rated), which is the second largest cement manufacturer, followed by CIMA (not rated) and Tasek (not rated).