Demand for cement in Thailand is expected to increase in the next few years based on signs of a recovery in the private construction sector, according to a report by Fitch Ratings.
Cement use should be driven by an increase in residential property development, mass transit extensions and a plethora of new commercial building projects, including several large mixed-use projects in key Bangkok areas.
Fitch predicts high-single-digit percentage growth in demand in 2019.
Cement sales figures from the Office of Industrial Economics for the third quarter of 2018 showed the first positive growth in 10 quarters at 3.7% year-on-year, with further growth of 2.8% year-on-year in the fourth quarter.
Demand for cement remained low for the entire year with 0.8% year-on-year growth in 2018, attributed to a 2% contraction in domestic sales in the first half. This was despite a recovery in private construction in the first quarter.
Cement demand largely moves in line with private construction activity, which contributes more than 60% of Thailand’s cement usage. Private construction has been slow since the first quarter of 2018, but cement usage lagged demand growth, only gaining starting in the third quarter.
The higher projected demand in 2019 should not only boost sales volume, but also increase prices and profitability. Fitch expects the profit margins of cement and building materials businesses to gradually improve over the next three years.
Domestic oversupply and a profitability gap between domestic sales and exports are driving local cement producers to expand regionally. While other operating markets have also seen challenging conditions as in Thailand, diverse cash flow sources could help reduce cash flow volatility across the business cycle and single-market concentration risks over the medium to longer term.
Cement producers had limited ability to pass on cost increases in 2014-2017 to consumers because of surging coal prices from fierce competition and weak demand. Pressure on profit margins was intensified because the public sector was the main buyer, and cement producers normally see lower prices when selling to the government than to the private sector. Products sold to the government are also of poorer quality and diversity.
Cement sales increasingly relied on the public sector over the past four years, which was the only driver of growth in Thailand’s construction activity, with the government using infrastructure projects to boost economic growth.
Fitch expects this trend to continue in 2019. More than 3 trillion baht in government megaprojects will be spent from 2018-2026, with a priority on expanding the mass transit system.
Siam Cement Plc (SCC) and Siam City Cement Plc (SCCC) have expanded regionally to capture additional demand and reduce single-market concentration risks, while TPI Polene Plc (TPIPL) has focused on the domestic market.
Since 2015, SCC has diversified its cement plants across Southeast Asia, including Cambodia, Laos, Myanmar, Vietnam and Indonesia. Its total capacity outside Thailand is 10.5 million tonnes per annum (mtpa), 31% of its total cement capacity.
SCCC, via acquisitions and a non-consolidated joint venture in 2016-18, increased its cement capacity to 26.3 mtpa across Thailand, Bangladesh, Sri Lanka, Vietnam and Cambodia.
