Jalan2Economic: Cement price adjustment: Volumes to remain healthy

By Teguh Hartanto
Deputy Head of Research
Bahana Securities

Although the upcoming April’s fuel price hike is unfavorable for the cement industry as transportation accounts for 16 percent of cost of goods sold, existing cement producers have the flexibility to adjust their ex-factory cement prices accordingly, paving the way for prevention in margin contraction. Note that cement only accounts for around 12 to 15 percent of the total costs to build a house. Hence, higher cement prices tend to be less sensitive to volumes.

Nevertheless, we foresee slower growth pace in 2012 and beyond with estimated annual growth rate of between eight to eleven percent, following surging demand for domestic consumption with growth of 17.7 percent in 2011. We note, however, that our expected 2012 cement volume growth is still more robust compared to the past 10 year-historical volume growth of around six percent.

The Indonesian Cement Association recently revealed year-to-date domestic production of 8.12 million tons or up 19.4 percent year-on-year, moving in line with our full year 2012 cement volumes of 53 million tons, which is up 11 percent year-on-year. Although the daily adjusted volumes in February alone displayed some slow down, February 2012’s total volumes increased 23.9% year-o-year to reach 4.1 million tons.

Domestic future cement consumption would depend on: 1) GDP growth, 2) interest rates and 3) infrastructure development. On the latter, bear in mind that despite low cement consumption for toll road developments, the multiplier effect for cement usage is tremendous as massive construction would occur in the surrounding areas. This coupled with Indonesia’s low cement consumption per capita, at around 172 kilograms per capita in 2010 compared to other countries (exhibit 1) and rising GDP per capita (exhibit 2) would ensure continued strong domestic cement consumption going forward.

Low 2011 loan to GDP ratio at around 30% combined with low levels of interest rates should allow credits to continue growing. Additionally, the low interest environment to finance projects would help support investment realization ahead. These factors would help support the outlook for the cement industry.

Interesting to note that two-thirds of cement consumption are utilized by the property sector while the remaining one-third is accounted for infrastructure, industrial and other property related sectors.

On the supply side, we expect additional 33m tons capacity over the next five years coming from the incumbents. While we anticipate foreign cement players to enter the market, three to five years of development (from green field) would be required.

By company, Indocement Tunggal Prakarsa plans to add new grinding mill with additional 2.0 million tons of capacity in 2013, on top of 5.0 million capacity stemming from its new facilities in the next five years.

On Semen Gresik’s (SMGR), delays in its new plants in Tuban and Tonasa with total annual capacity of five million tons are only temporary with the Tuban plant scheduled to start producing in third quarter this year, followed by Tonasa in the fourth quarter of 2012.

Overall, we maintain our sector Overweight on continued healthy domestic cement demand and positive sentiment stemming from the upcoming land clearing bill. Meanwhile, any major hikes in costs would simply be passed on to the consumers.

*You can read this complete articles at The Jakarta Post today (March 29, 2012)