Apr 28, 2010

Theme-play`Cement : LAFARGE and TASEK

Malaysia Cement : Raising prices for higher coal costs
According to Business Times, Tasek will be raising cement price by 10% on 1 May to compensate for higher coal costs. This news is a surprise as we did not expect cement prices to be increased, at least not until demand conditions improve. Although price hikes are usually viewed as positive for the sector, we are neutral on the price increase as we are cautious about the impact on cement players given that demand is still weak, leading to high rebates, especially during 1Q10. But newsflow on pump-priming is buoying cement manufacturers’ hope that demand will pick up about 5% this year, led by stronger growth in 2H. Given the absence of strong catalysts for the sector, we maintain our NEUTRAL call. For exposure to pump-priming, we prefer a direct exposure to the contractors.

Maintain NEUTRAL.  Although price hikes are usually viewed as positive for the sector, we are neutral on the price increase as we are cautious about the impact on the cement players under our coverage, Lafarge and  Tasek. Demand has not fully recovered and remains subdued at the start of 2Q10, raising questions on the sustainability of the high prices. We concur with the cement players’ view that  the higher prices may not hold unless demand picks up.  As coal prices  breached our US$92/tonne forecast for 2010 and reached as high as US$99/tonne this year, we are not changing our earnings forecasts as the rise in coal and other costs could offset the higher selling prices. Given the absence of strong catalysts for the sector, we maintain our NEUTRAL call. For exposure to pump-priming, we prefer a direct exposure to the contractors.

CIMB Research