Are better times ahead for Lafarge Malaysia Cement?

ICR highlighted the plight of Lafarge Malaysia this week as the company reported a 3Q17 loss of US$10.3m with expectations of no return to profit until FY18. However, the LafargeHolcim-owned subsidiary was not the only producer to face challenging times. Tasek Corp Bhd reported a 75 per cent YoY fall in 3Q net profit to MYR1.89m from MYR7.56m in 3Q16. Quarterly revenues decreased 1.7 per cent YoY to MYR146.55m. Meanwhile, Cahya Mata Sarawak Bhd (CMS) also reported lower 3Q revenues, which were down by a modest 2.3 per cent YoY to MYR347.97m, but on the other hand increased net profits (attributable to ordinary equity holders) by 5.7 per cent YoY to MYR62.04m. 

These results reflect the difficult time experienced lately by the Malaysian cement industry where domestic demand has been weakening, having fallen from 22.02Mt in 2015 to 19.44Mt one year later, according to The Global Cement Report, 12th Edition. Annual cement demand is forecast to drop a further eight per cent in 2017, further undermining domestic utilisation rates and falling significantly below the country's 38Mta production base. So, going forward, what is in store in terms of profitability for the country’s cement producers?

Infrastructure key to higher demand
There are high hopes for a recovery in the cement market with Maybank International Bank Research pointing towards a rise in domestic consumption by as much as five per cent annually in 2018-19. This expansion is supported by the Malaysian government, which is investing MYR10.8bn into high-speed rail and affordable housing projects as part of its 11th Malaysia Plan. Investments include large infrastructure projects such as the Klang Valley Mass Rapid Transit Line 2 (KVMRT2), Light Rail Transit (LRT 3) and the East Coast Rail Line (ECRL), although most of these projects will not be implemented until 2H18. Furthermore, the Chinese Belt and Road initiative is encouraging Chinese companies to invest in transport and industrial projects. As a result, BMI Research forecasts a 6.3 per cent expansion of the Malaysian construction industry between 2017-21.

Recovery in the property market?
Lafarge Malaysia also has a positive outlook in terms of the housing market. "There has been a visible slowdown in the property market, but urbanisation rate is growing and Malaysia has a young population, thus creating a strong need for affordable housing. Therefore, in the mid-term, we hope the property market will improve," said Thierry Legrand, Lafarge Malaysia president and CEO.

In addition, the Real Estate and Housing Developers' Association president, Datuk Seri Fateh Iskandar Mohamed, has called for the upcoming Budget 2018 to introduce more flexible schemes for first-time buyers because there are not enough affordable houses being built and prices are currently out of reach for many workers. If successful, this should provide an extra boost to the construction industry.

Focus on efficiency
As a result of the improving demand scenario, Maybank expects capacity utilisation rates to rise to as high as 67-70 per cent by 2018-19. Meanwhile, Lafarge Malaysia is focussing on cost optimisation as it awaits a recovery in cement volumes and prices.

Part of the plan is to reduce shipments from its Langkawi facility and rechannel them to the 1.3Mta Kanthan plant, which will cut transport costs for the central and southern markets, say CIMB market analysts. The Kanthan plant is reportedly operating at only 50 per cent at present, therefore has substantial available surplus. The debottlenecking projects in Kanthan and Rawang plants will also supply Lafarge Malaysia with an additional grinding capacity of 1.6Mta.

Room for further price increases?
Further cement price hikes are also an option for the domestic cement industry but most producers have tried two cement and one bulk price rise in 3Q17 and the scope for additional price increases may be somewhat limited. Moreover, the average selling price for a 50kg bag of cement has been falling since September and CEIC Data states that it is currently set at around MYR18.40/bag (MYR367/t). In March and April the price had been nudging towards the MYR19.50/bag mark. However, some movement in the market could come as blended cements are predicted to see volume growth of six per cent in 2018, according to Maybank.