This week the potential for further consolidation in South Korea's cement market was heightened when Asia Today reported that Hahn & Co Cement Holdings could be looking to sell its 77.44 per cent majority share ownership in Ssangyong Cement later this year. The latest development in South Korea's cement sector consolidation comes amid increasingly challenging market conditions.
Falling cement demand
South Korea's cement demand fell by 11 per cent in 2018, according to analysts Mirae Asset, leaving domestic cement consumption at a level of 45.8Mt. The domestic cement market has seen a slowdown following a decline in housing presales and a forecast 10 per cent YoY decrease in the apartment presale volume to 292,000 units in 2018.
Falling shipments of cement are expected to increase pricing pressures on cement manufacturers. Since 2016 cement prices have been stable but rose to KRW72,000/t (US$64.10/t) in 2018. New price hikes are a possibility despite challenging market conditions as producers look to support their falling earnings on the back of declining cement demand. Ssangyong Cement has already pushed through a KRW5000/t price hike in October 2018 while shipments improved, helped by exports in 4Q18.
Increasing production costs
In addition, production costs such as raw material and fuel expenses have been rising, putting further upward pressure on prices. Bituminous coal prices have significantly increased and producers have been implementing cost-saving investments to prepare for harder times.
Ssangyong Cement has been investing in the conversion of synthetic resin scraps to fuel and will spend KRW82.8bn through 2020 on this process, according to Mirae Asset. Furthermore, in the summer of 2018, the company installed a 43.5MWh waste heat power generator with an energy storage system (ESS) at its Donghae cement plant. The decision to install an ESS was a preemptive move to buttress the company's bottomline with cost-saving measures when the cement industry enters a downturn cycle, reported Pulse.
In January ATEC announced that it was supplying two Rocket Mills for Ssangyong Cement's Donghae and Yeongwol cement plants to shred municipal and industrial waste so that solid fuels could be fed to the calciners at both plants.
Increased competition spurs market consolidation
However, increased competition is a likely scenario for the 2H19 and this is why attention is turning to further industry consolidation. The trend has already been set with Sampyo Cement acquiring Tongyang Cement in 2015, LK Investment Partners acquiring an 84.56 per cent share in Hyundai Cement in 2017 and Asia Cement acquiring Halla Cement in January 2018. The sale of the majority stake of Sssangyong Cement is but the latest step in the consolidation of the country's cement industry.
Saangyong Cement operates four integrated cement plants with 14 kilns and three grinding plants in South Korea. The portfolio includes the Donghae plant, which is one of the biggest in the world with a clinker capacity of 11.2Mta, and Daehan Cement, which was acquired in 3Q17. Daehan Cement is a slag cement producer and it produces 1.3Mta of cement, giving Ssangyong Cement a 34 per cent share in South Korea's slag cement market with its other operations at Ssangyong Slag & Materials and Hankook Slag & Materials. This has given Ssangyong Cement favourable revenues, helped by the fact that slag cement is 10 per cent cheaper to produce than OPC in South Korea. In the 4Q18 the company reported revenues of KRW430.9bn, up 3.6 per cent YoY, and saw its operating profit increase by 35.7bn YoY to KRW94.2bn.
A full review of South Korea's cement market is provided by LEK Consulting in ICR's March issue.