Intensifying price rebates?As we understand, sluggish demand (as seasonal lull was aggravated by lingering construction labour setback) and high stock levels have triggered an intense price war among cement companies in December 2002, which lasted up to mid-January. The price rebate jumped from an average RM20 per tonne, or about 10% for bulk and bag cement, to as high as RM33 per tonne, or 17% at the height of the price war in early January. Such aggressiveness had not been seen in the past two years.
As demand slowed, it was not surprising that cement players started to cut back production from August 2002, hitting a trough in September. As of November 2002, industry output was still some 6%–7% lower than before the labour crunch, and about 6% below November 2001.
Better times ahead? While the average rebate is believed to have returned to around RM20 per tonne since late January, a more meaningful pick-up in demand is only expected from March onwards. This is when construction projects resume after the Chinese New Year break, coinciding with improving labour situation on the back of new legal foreign workers. As the government is expected to announce another infrastructure stimulus package soon, cement demand should be back on the recovery track by the second quarter.
Removal of price ceiling under Afta? Against the above background, the recent proposal to lift the price ceiling for cement (following the advent of the Asean Free Trade Area on Jan 1) is really not meaningful as local cement is already being sold at a discount. If any, the risk is on the downside as Afta will increase, rather than reduce, competition.
Muted impact. Overall though, we do not expect a significant influx of cement imports under Afta for several reasons. First, major local cement companies like Malayan Cement (80 sen) are no less competitive than regional producers. At the same time, local cement price is not materially different from that in other Asean countries after incorporating transport costs.
Second, one should also consider the regional network of major cement players which forms an “invisible barrier” to check excessive competition. As an example, Lafarge SA, which owns 61% of Malayan Cement, is also a leading player in Indonesia and the Philippines.
As such, any attempts by, say, an Indonesian player to flood the Malaysian market may trigger retaliation from Lafarge SA on their home front, negating any positive impact of the export move. Third, and perhaps most important, export prices to non-Asean countries have continued to firm, by about 10% in the last six months, making it more attractive for Asean producers to compete in non-Asean countries.
Expect worsening October to December results. As for the October–December 2002 results, indications are now worse than earlier expected, in view of the sharp price rebate as earlier highlighted. We are likely to see lower earnings across the board between July to September and October to December, and much more than the usual seasonal downturn.
For more reports, click on www.surf88.com
Did you find this article insightful?