The government of Malaysia has introduced automatic pricing mechanism to improve transparency between building materials manufacturers and end-users.
THE implementation of the automatic pricing mechanism (APM) for cement last week is an important measure to improve transparency between building material manufacturers and end-users, given the active construction activities in Malaysia.
Under the new structure, the ceiling price of cement would be reviewed and re-priced quarterly after taking into consideration the input costs of cement manufacturers.
Industry analysts expect demand for cement to be 65% to 70% of total cement industry capacity, with the stable cement price averaging RM215 to RM217 per tonne compared with last year’s average of about RM190 per tonne.
The current average price in Peninsular Malaysia is about RM12 for a 50kg bag or RM217 to RM231 per tonne.
Analysts said a better utilisation rate this year would offset cement manufacturers’ operational costs incurred in the usage of electricity, fuel, paper bags and raw materials, which represent about 40% of the cost increase.
A file picture of Lafarge Malayan Cement factory in Sungai Siput. Analysts expect cement demand to be 65% to 70% of total industry capacity, with the stable price averaging RM215 to RM217 per tonne compared with last year’s average of about RM190 per tonne.
The controlled ceiling price has remained unchanged at RM198 per tonne for 11 years from 1995 to December 2006. The Government raised the ceiling price by 3% to 10% for Peninsular Malaysia on Dec 22, 2006.
An analyst at a local brokerage said the domestic cement industry was highly dependent on the construction sector, its main end-user. “The APM will further align the selling price of cement with the increase in costs absorbed by industry players since 1995.
“While details of the APM are still sketchy, I believe it will increase transparency and allow a more open trading environment where selling prices are adjusted frequently to reflect market forces,” he added.
Standard & Poor’s (S&P), in a recent report, said the APM bode well for the overall industry, allowing a quicker response to market forces.
In the first half last year, cement volume sales contracted slightly due to supply issues, given the closure of several cement plants for maintenance.
The supply situation improved in the second half 2007 but news of a cement shortage cropped up, leading to an 8% to 25% increase in the price of a 50kg bag of cement.
Brokerages have recently re-rated upwards the outlook for the cement sector, which has seen earnings drop some 70% from the peak of the 1999-2000 price war and another one in the first half of 2006.
The cement sector also took a beating when the construction sector contracted in 2004 and 2005.
In Malaysia, Lafarge Malayan Cement Bhd is believed to have the biggest market share of about 44%, YTL Cement Bhd 24%, Cement Industries of Malaysia Bhd (CIMA) 6% and Tasek Corp Bhd 13%.
Aseambankers, in its preliminary first quarter 2008 outlook, said an important fiscal stimulus this year would be the commencement of several mega projects under the Ninth Malaysia Plan (9MP).
These included the recently awarded RM12.5bil double-tracking rail project covering the Ipoh-Padang Besar stretch, RM9bn Pahang-Selangor Water Transfer project, RM9bil Bakun undersea cable project and RM3bil Second Penang Bridge.
There is also rising momentum in infrastructure projects in the newly launched regional economic development corridors.
The brokerage expects “titanic” growth for building materials players in Malaysia with the anticipated commencement of the 9MP this year.
Growing export opportunities in Singapore, a highly lucrative market, will also significantly boost building material producers’ bottom line this year.
Aseambankers’ favourite in the cement sector is Lafarge, given its dominance in the domestic market.
Inter-Pacific Research’s list of beneficiaries in the cement sector includes Lafarge and YTL Cement. It expects growth for the construction, building materials and steel industries to be driven by rail, water, oil and gas and regional developments.
An industry analyst said the outlook for the cement sector was positive, as the sector was a safe proxy to the 9MP.
This is also based on cement pricing fundamentals, given the introduction of the APM and the industry’s oligopolistic market structure.
On Lafarge, CIMB Research is upbeat on the prospects for the country’s cement industry leader, as it stands to gain from the anticipated increase in the average selling price.
Other factors to boost its prospects include the implementation of 9MP projects and firm international demand and selling prices.
S&P is maintaining a “buy” on CIMA, the smallest among Malaysia’s top three cement players.
It said CIMA made a remarkable turnaround in the third quarter ended Sept 30, 2007 after posting a loss in the corresponding quarter of 2006.
“With no sign of a price war on the horizon, CIMA will remain profitable in the fourth quarter ending Dec 31, 2007, although net profit will be flat due to the festive season,” S&P said.
CIMA was a potential beneficiary of the Penang and Johor infrastructure play, being the only Government-linked company in the cement sector, it added.
Despite the bright outlook for the sector, the key investment risks are execution and timing of the 9MP projects, the companies’ ability to divert production from export sales to domestic sales, a renewed price war and higher-than-expected increase in production costs.