As demand for building materials trends up, it is no surprise that cement players are mulling capacity expansion to cater for future needs.

According to sources, Cement Industries of Malaysia Bhd (Cima) is looking to possibly expand its facilities down south. It was reported last year that Cima was planning an additional line at its Bahau facility in Negeri Sembilan and had set aside RM800 million for the expansion.

However, given that Cima was privatised by the UEM Group in 2008, it has kept a tight lid on such plans. Cima could not be contacted for comment.

“There had already been talk that Cima was looking to expand its facilities on the south side. This would take advantage of the potential growth boom in Iskandar Malaysia. Benefits for Cima will depend on whether it expands its grinder or clinker producing facilities,” says an industry source.

Clinker is a raw material for cement production while grinding is part of the cement manufacturing process. In the case of the former, the main issue in the country, according to analysts, is overcapacity.

“There is always the risk of a company failing to read the cycle, which will result in overcapacity. And if it cannot sell off its product in time, it would not generate enough to compensate for the depreciation costs incurred from its new facilities, ultimately hurting the balance sheet,” says an analyst.
This could prove an issue for parent UEM as it plans the next stage of its evolution following the streamlining of its structure.

According to 2009 news reports, Cima had planned for an expansion of its clinker facilities, which would have seen a doubling in output. In addition to its factory in Negeri Sembilan, Cima also has a plant in Bukit Ketri, Perlis. 

At the time, reports had placed Cima’s clinker production capacity at 2.9 million tonnes per annum, while its cement production capacity stood at 3.4 million tonnes per annum. According to Cima’s website, its cement output remains the same.

Even though overcapacity has always been a concern for the industry, the main issue, according to analysts, is quantum. The good news is that the industry expects to see a pickup in activity over the next 12 months.

“During the 1H2010, the demand was flattish to negative. But most of the players are expecting 2011 to be a much better year as a number of cornerstone infrastructure projects are expected to see implementation,” says the analyst.

Cement prices have also been climbing recently, but analysts say this is to compensate for the rising cost of coal. Most are not expecting prices to increase drastically in the near future.

Will the proposed expansions come in time to catch the right cycle? According to reports last year, Cima had received two proposals for the expansion of its clinker facilities. The first was from China National Materials Co for a 5,000-tonne per day capacity plant, while the second was from South Korea’s Halla Corp for a 4,000-tonne per day plant.

Cima is not alone in its plans to boost capacity. LaFarge Malayan Cement Bhd, the country’s largest cement producer, is also pondering expansion of its facilities ahead of the rush, says a source.

Then in September, the other main player YTL Cement Bhd acquired the 35.16% it did not own in Perak-Hanjoong Simen Sdn Bhd. The latter has a plant capacity of three million tonnes per annum for clinker and 3.4 million tonnes per annum for cement.

Still, there is a cautionary tale in the push for expansion. Perak-Hanjoong is an example of a cement producer that grew too fast on borrowed funds.
The company was once the second-largest integrated cement producer in the country, with its original plant boasting a cement and clinker production capacity of 1.6 million tonnes and 1.4 million tonnes per annum, respectively.

Its second plant upped the ante with a cement production capacity of 1.8 million tonnes per annum and a clinker production capacity of 1.8 million tonnes a year. Two years after its second plant started up, Perak-Hanjoong was bought over by YTL Cement. 

Given the nature of cement and the cost of moving it, export prospects are slim if there is an oversupply in the country.

“Unlike steel, which can be exported, the cement business is very much a domestic game. If there turns out to be an oversupply, the options to sell to other markets are limited, with Singapore being the only other possibility,” says an industry observer.

But things could work out if producers time their expansion well. One analyst opines that if the cement companies start building their facilities now, they would have completed their expansion in time to catch the cycle.

“Most are expecting demand to only truly take off this time next year so, it would be an opportune time to expand. A year is a feasible period to build up capacity,” says an analyst.

At this point, however, all three players are still tight-lipped about any potential expansion plans. As such, the sector will bear watching as the new year looms.

This article appeared in Corporate page, The Edge Malaysia, Issue 831, Nov 8-14, 2010