According to cement sales agents, the top three cement makers, Siam Cement (SCC), Siam City Cement (SCCC) and TPI Polene (TPIPL), have announced an increase in ex-factory price by Bt200-220/tonne or around 11% effective early this week. This has come about quickly and is higher than forecast where is expected this increase next year and prices increasing by around Bt50-100/tonne. This increase is higher due to energy costs, especially for coal, along with electricity and diesel oil, which have all negatively affected costs. Energy accounts for 40-45% of total cement production costs.
The increase in cement prices will not affect market shares. The top three cement makers, SCC, SCCC and TPIPL, will see earnings improve next year from the increase. SCCC has 67% of total sales in the domestic market, while TPIPL has 65% of total sales. SCC has only 17% of total sales and 23% of operating profit coming from domestic cement sales. Therefore, SCCC and TPIPL will receive the greater benefit from this domestic cement price increase.
The gross margins (excluding depreciation) for cement at SCC, SCCC and TPIPL were around 30-32% in 3Q07. If assuming that all things are equal, the 11% increase in cement price will improve the gross margins to around 38-45%.
This year cement demand is expected to see a 5-10% fall in demand. However, next year cement demand will improve by 5-10% as the new government is expected to push infrastructure projects and the cement price rise will support cement business performance. Both SCCC and TPIPL share prices have been down much below fair values. Therefore, recommendations have been upgraded for both SCCC (Fair value Bt290) and TPIPL (Fair value Bt16) to BUY, while a BUY recommendation is maintained on SCC (Fair value Bt300).