Pent-up demand expected to boost cement sector

Malaysia’s currently sluggish cement sector should pick up in the long term, riding on pent-up demand due to construction delays in the last 12 months. CM Libra said the current downbeat outlook of the domestic cement industry will be lifted by the robust property sector and several infrastructure projects in store under the Ninth Malaysian Plan (2006-2010).

"The plan should provide fresh impetus to the construction sector as Malaysia still requires substantial infrastructure and development money for the urban and rural areas," said the research house. It added in the short term, cement demand will remain weak owing to the sluggish construction sector partly due to the labour shortage following the Government’s efforts to legalise illegal foreign workers.

"Despite the less-than- rosy short-term demand outlook, we believe there would be better demand outlook in the medium term," ECM said in a research note. It said cement demand has probably bottomed and will recover gradually and estimates domestic cement sales to grow by 3 per cent this year and more than double to 5 per cent next year.  "This will raise overall industry capacity utilisation to 85 per cent from 2004’s 83 per cent," ECM Libra said.

It said the key factors that will drive a gradual recovery of cement demand are pent-up demand for cement owing to the construction delays in the last 12 months and a robust property sector outlook. "Although property development projects are less cement-intensive, we expect the increasing number of property development projects to drive cement demand. "Strong property sales were observed in the first half of 2004. Due to the property delays, developers will likely have to speed up their activities in the second half as they have to deliver properties within two to three years."  ECM Libra said the current round of price war will subside once cement players attain pricing power when the industry capacity utilisation rate hits up to 90 per cent which it believes should be achieved by end-2005. The research house also expects YTL Cement to benefit and targets its share price to hit RM3.20 from the current RM2.79.