Japanese cement sector outlook ’stable’

The general outlook for the Japanese cement sector continues to be stable, comments Moody’s Investors Service in a new report. The Moody’s-rated sector companies’ capital structure improvement is set to continue, it notes; however, the pace may slow due to ongoing challenges in the operating environment, and risks associated with overseas expansion are growing in importance.

Remarkable improvements in sector operating performance in the fiscal year to March 2006 are unlikely, notes the report, "Japanese Cement Industry Outlook," since the cement companies will be impeded by continuing weak demand in the domestic cement market and increasing prices of coal. However, the report also observes that cement companies’ profit margins and cash flow are likely to stabilize in the intermediate term.

"Moody’s-rated companies’ domestic cement operations contribute a large portion of their total sales and profit," the report describes. "However, the domestic cement market has been shrinking since 1990 due to Japan’s continuing economic stagnation."

The rated companies’ sales have therefore decreased, especially in recent years, although they have maintained their operating profit margins through ongoing cement price increases and intensive cost reductions. As a result of their efforts, the cement business has been their largest cash flow contributor. Moody’s expects this to continue, allowing the companies to continue reducing their debts.

Reacting to likely shrinkage of the domestic market in coming years, Japanese cement companies are looking to expand their businesses in growing overseas markets to increase and stabilize intermediate-term sales and profit. Since this is one of the companies’ primary growth strategies, Moody’s expects their overseas exposures to continue to rise over the intermediate term.

"This expansion will widen opportunities to increase revenues, although contributions to overall cash flow from overseas businesses will not be substantial in the coming several years," the report says.