PETALING JAYA: Cement prices are expected to go up by the end of the year, following early signs of recovery that have come about as a result of the acquisition of Lafarge Malaysia Bhd by YTL Cement Bhd.
Demand for cement is also seen to be picking up in the fourth quarter, as mega-infrastructure projects such as LRT3 and the East Coast Rail Link which have been approved are ready to start work.
According to UOB Kay Hian, based on its channel checks, cement prices could be raised by about 10% in the fourth quarter of 2019 (4Q19) to RM220 per tonne and go up further to RM250 per tonne in 2020 as the price war between players will likely ease as a result of industry consolidation.
YTL had launched a takeover of Lafarge Malaysia in May and now owns a 77% stake in the latter. They control more than half of the cement market.
Following that deal, there was a significant drop in Lafarge Malaysia’s operating cost in its 2Q19 even though cement prices have yet to be revised upwards.
Cement in Malaysia is currently priced at RM190 per tonne. In June this year, cement manufacturers had looked to increase prices of cement by 40%, citing high operating costs. But that decision was reversed after businesses raised concerns over the planned steep price hike.
A marginal price hike on a gradual basis would be more acceptable, according to analysts, given that construction companies were already grappling with cost increases such as from higher electricity tariffs over the past few years.
Back to Lafarge Malaysia, it narrowed its core net loss to RM46.4mil in 2Q19 as compared with RM77.1mil in the same period a year ago after cost declined substantially.
For the April-June period, Lafarge Malaysia’s cost of sales declined by 6.4% quarter-on-quarter (q-o-q) and 13.1% year-on-year (y-o-y). Selling and distribution expenses declined by 19.5% q-o-q and 30.9% y-o-y, while administrative expenses dropped by 12.0% q-o-q and 39.5% y-o-y, UOBKayHian noted in its recent report.
“We expect a gradual price hike to be the next agenda after YTL successfully brings down Lafarge’s operating cost, ” the research firm said.
On the other hand, if prices of cement remain unchanged, the second-half of financial year 2019 (2H19) will be the barometer to measure Lafarge Malaysia’s progress on cost management.
Alliance DBS in a recent report said it expects the company, which is proposing a name change to Malayan Cement Bhd, to further narrow its losses in 2H19 on the back of better cost control.
Analysts also expect the outlook for competitor HUME INDUSTRIES BHD to improve along with better sector prospects as cement demand picks up.
Hume posted a net loss of RM27.87mil in its fourth quarter ended June 30.
If cement prices are raised to RM220 per tonne, they are close to the breakeven point of Hume, according to UOBKayHian.
“For FY20, we have assumed a cement average selling price of RM250 per tonne and we forecast Hume to report earnings of RM38.8mil, ” it added.
Shares in Lafarge Malaysia closed four sen down to RM3.39, while Hume was up four sen to RM1.12 last Friday.