Cement sector to remain subdued in near term
Ho Chung Teng 
For the first half-year, Lafarge posted a net loss of RM93.02 mil against a net profit of RM39 mil a year earlier

Fierce competition, depressed cement prices and lack of near-term catalysts are hurting cement producers. As a result, earnings of some companies’ cement units have contracted as much as 53%. It looks like most manufacturers will probably have to wait longer to see a significant recovery.

YTL Corp Bhd is one of the worst hit. Affin Hwang Investment Bank Bhd analyst Ng Chi Hoong says the contribution from the company’s cement segment plunged more than 53%. The research house adds that the sharply lower contribution was a “negative surprise” as it has not foreseen cement oversupply to worsen significantly.

In the last eight quarters, the cement sector has been facing multiple headwinds such as oversupply and low demand, contributing to low prices. A cement distributor tells FocusM that cement manufacturers have resorted to slashing prices to maintain volume, worsening the fierce price war.

They use rebates to get customers while maintaining their retail price. “Manufacturers are giving rebates of up to RM8.50 per 50kg bag,” admits a cement distributor. A 50kg bag retails at about RM20.

Besides YTL Corp, there are four other listed cement-related players – Cahya Mata Sarawak Bhd (CMS), Hume Industries Bhd, Lafarge Malaysia Bhd and Tasek Corp Bhd. With the exception of CMS, these companies have seen their cement units reporting declining earnings since 2014.

For the first half-year, Lafarge, the largest player, posted a net loss of RM93.02 mil against a net profit of RM39 mil a year earlier. YTL Corp’s cement division, YTL Cement Bhd, saw its pre-tax profit for Q4 ended June 30, slump 83.05% to RM18.91 mil from RM111.57 mil in the previous corresponding period.

Hume Industries’ net profit for Q1FY18 ended Sept 30 fell to RM449,000 from RM8.02 mil a year earlier, despite higher revenue of RM161.78 mil. The company said despite higher sales, lower selling prices and higher operating costs affected its performance.

CMS is the only company that bucked the trend. For Q2FY17 ended June 30, its cement segment’s pre-tax profit rose marginally to RM32.57 mil from RM32.07, despite lower revenue of RM119.03 mil from RM140.4 mil a year earlier.

iFast Financial research analyst Jerry Lee says the manufacturers’ disappointing results were due mainly to lower average selling price of cement. Industry sales volume is expected to shrink up to 5% this year from 6% last year. The situation is further exacerbated by oversupply as major players have been ramping up production.


No clear catalyst

In Budget 2018, the government allocated RM210 bil for infrastructure development projects, with about 73% of it for rail projects, namely, the High Speed Rail (HSR) and the East Coast Rail Link (ECRL). While the huge allocation may bring some cheer to construction companies, cement players are likely to face tough times moving forward.

He says there is no clear catalyst to spur the industry in the recent budget as the government has allocated only RM46 bil for development purposes.

“The allocation remains unchanged from Budget 2017, while that for operating expenditure grew by about 9% year-on-year.”

In the short term, JF Apex Securities Bhd research head Lee Chung Cheng says catalysts and investors’ sentiment on cement companies will mainly be on their earnings, rather than thematic plays.

The sector, he adds, will remain challenging. “It might recover in the second half of 2018 or 2019 onwards with the takeoff of ECRL and HSR. However, it will take time to absorb the excess capacity.”

Based on year-to-date share prices, Hume Industries saw the biggest drop of 20.47%, closing at RM2.33 on Nov 22, followed by YTL Corp which fell 20% to RM1.20.


When will situation bottom out?

The manufacturers’ tight situation might change for the better by year-end. “Nevertheless, we still believe the sector is likely to bottom out by the end of the year, as incremental demand from the infrastructure and property segment will help absorb part of the overcapacity,” says Affin Hwang’s Ng.

However, other analysts are not that optimistic. Some say there might be a silver lining in the second half of next year and beyond, backed by infrastructure projects taking off along with better demand for properties.

JF Apex’s Lee believes the sector will remain challenging for some time.

iFast’s Lee concurs, saying most projects mentioned in Budget 2018, such as ECRL and HSR, are not new. “Hence, we believe the impact from these mega projects as well as the government’s efforts to increase affordable housing have been priced in earlier.”

However, if the projects can be carried out smoothly without any delay, he is optimistic the companies will see better financial performance.

“Nevertheless, at this juncture, we believe the prospect for the sector remains challenging given the higher operating cost (higher coal price and the possibility of electricity tariff hike next year) and also the slowdown in the property sector.”


Higher operating costs

With the absence of near-term catalysts, the sector will remain in a period of uncertainty. Compounding the problem are manufacturers’ rising production costs.

“To make matters worse, higher operating cost is also a knotty issue for the players as coal price has surged by more than 80% over the past one and half years,” says iFast’s Lee. Lafarge reportedly said recently higher fuel and electricity costs will further hurt the sector.

American coal prices have been rising this year, hitting US$59.85 (RM245.66) per ton on Nov 24, from US$48.05 in January.

As for electricity tariff, the government has agreed to maintain the rebate of 1.52 sen per kWH until year-end. Industry analysts expect an upward tariff revision in January in tandem with higher global commodity prices.

Interestingly, CMS attributed its marginal profit to lower clinker production cost per ton due to cheaper coal price and higher clinker production volume. “The purchased clinker price was also lower in Q2FY17 compared with Q2FY16. This lower clinker cost was translated to lower cement production cost per ton. This had mitigated the lower cement sales volume,” it said.

This article first appeared in Focus Malaysia Issue 261.