This article first appeared in The Edge Malaysia Weekly on August 21, 2023 - August 27, 2023

RECENT news of a revival of major infrastructure projects, such as the Kuala Lumpur-Singapore High-Speed Rail (HSR), Johor Bahru-Singapore Rapid Transit System (RTS), Bayan Lepas Light Rail Transit (LRT) and Mass Rapid Transit 3 (MRT3) has lifted sentiment in the property and construction markets. Building material players, particularly cement makers, are seen to be key beneficiaries of the revival, say analysts and market observers.

In recent months, talk has surfaced of a further consolidation in the cement industry. In February, UEM Group Bhd, a subsidiary of Khazanah Nasional Bhd, was reported to be working with financial advisers on a potential sale of its wholly-owned subsidiary Cement Industries of Malaysia Bhd (CIMA) for about RM1 billion.

Sources tell The Edge that UEM Group has been approached by a public-listed company for the potential acquisition of CIMA, but that they are still at the early stage of talks.

“UEM Group has been approached by a buyer and it is now undertaking a valuation exercise for its cement manufacturing asset,” a source says.

However, another source says UEM Group is not “very keen” to sell CIMA at the present time.

UEM Group declined to comment, when contacted.

Last month, UEM Group set up a new unit, UEM Lestra Bhd, to grow its green assets and operations with an initial investment of RM7 billion. It also recently signed a memorandum of understanding (MoU) to undertake a mega solar farm project with a 1Gw capacity as part of 10 initiatives under Phase 1 of the National Energy Transition Roadmap (NETR).

Thus, it would not be a surprise if UEM Group were to dispose of some of its existing assets or businesses to support its new venture.

The last merger and acquisition in the cement industry took place in 2019 when Malayan Cement Bhd, formerly Lafarge Malaysia Bhd, emerged as the country’s largest cement producer with a market share of more than 60%.

Subsequently, in 2021, YTL Cement Bhd had bought a 51% stake in Malayan Cement for RM1.63 billion cash or RM3.75 per share from Associated International Cement Ltd (AICL). Subsequently, YTL Cement launched a mandatory offer to buy the rest of the shares in Malayan Cement, raising its stake to almost 77%. Today, YTL Corp owns 78.6% of Malayan Cement.

Malayan Cement has an annual total production capacity of 25.1 million tonnes, followed by CIMA at 7.2 million tonnes, Hume Cement Industries Bhd at 3.6 million tonnes and Tasek Corp Bhd at 2.3 million tonnes. In Sabah and Sarawak, the cement industry is dominated by Cement Industries (Sabah) Sdn Bhd and Cahya Mata Sarawak Bhd respectively.

According to industry sources, Malayan Cement and Hume Cement have been gaining investor interest of late despite utilisation and demand remaining subdued. Malayan Cement saw its share price surge almost 18% or 63 sen to an intraday high of RM4.10 last Friday before closing at RM3.87. Its share price has risen 83% year to date (YTD).

Meanwhile, Hume Cement saw its share price touch a six-year high of RM1.96 last Friday. Investors who had bought Hume shares in January would have doubled their investment, which is better than Bursa Malaysia’s main index performance, which is down 3.3% YTD.

Both Malayan Cement and Hume Cement have posted stellar quarterly results of late, after being in the doldrums for more than three years.

In the third quarter ended March 31, 2023, Malayan Cement’s net profit tripled to RM63.28 million from RM18.24 million a year earlier on the back of a 25% jump in revenue to RM990.7 million from RM794.89 million previously. The group attributed the top-line and bottom-line growth to an improvement in sales volume and average selling prices.

Meanwhile, Hume Cement’s net profit surged to RM27.01 million in the third quarter ended March 31, 2023 from RM1.92 million a year earlier on higher selling prices, which was offset by the increase in input prices, especially of coal and electricity.

MIDF Research analyst Royce Tan reckons that the cement industry is gaining momentum not only because of the upcoming mega infrastructure projects here but also due to the potential development of Indonesia’s new planned capital, Nusantara, which will spur developments in Sabah and Sarawak.

“In Budget 2023, the government announced plans to develop towns bordering Kalimantan, Indonesia, including the upgrading of roads and infrastructure. This will in turn see more projects coming up in Sabah and Sarawak in the coming years.

“We expect strong demand for cement in the near future, especially in Sarawak, and the state government has already taken steps to strengthen its cement supply with the inking of MoUs with YTL Cement and Thailand’s SCG International,” Tan tells The Edge, adding that there will also be a spillover of demand from the developments in Nusantara.

In the tabling of Budget 2023, the government announced a development allocation of RM6.5 billion for Sabah and RM5.6 billion for Sarawak.

It is also going to expedite the implementation of the Sabah Pan Borneo Highway and Sarawak-Sabah Link Road, spanning more than 1,000km, at a total cost of RM20 billion.

Sarawak Premier Tan Sri Abang Johari Tun Openg reportedly said demand for cement in Sarawak has surged on the back of a total of 960 projects with a combined value of RM46 billion that have been allocated under the state’s infrastructure development.

These infrastructure projects, which are in various stages of completion, include the Pan Borneo Highway, Sarawak’s Second Trunk Road and Coastal Road, Sarawak-Sabah Link Road, Trans Borneo Highway and those undertaken by Integrated Regional Samarahan Development Agency, Regional Corridor Development Authority and Projek Rakyat.

It is worth noting that Cahya Mata, which is now the sole cement manufacturer in Sarawak, recently announced the construction of a new clinker line estimated to cost RM750 million and to be completed in June 2025.

Tan says the new clinker plant will enable Cahya Mata to better manage its operating cost and improve its margins. In the past, the group was reliant on imported clinker, which comprises 60% to 90% of raw materials used in cement manufacturing.

“Our view is that two scenarios are at play here. One, Cahya Mata is ramping up its production to meet the expected rise in demand for cement in view of the development plans in store for Sarawak and as it taps new markets, especially Nusantara.

“The other scenario is that the group is trying to do away with imported clinker as much as possible. When we visited the integrated plant in Mambong, management guided that Cahya Mata’s cement plants have the capacity to produce 2.75 million tonnes annually and that plant utilisation is only 54.5%, sufficient to meet Sarawak’s demand for 1.5 million to 1.6 million tonnes a year.”

Tan believes Cahya Mata has a geographical and logistical advantage as the sole cement manufacturer in Sarawak.

According to an industry source, newcomers to Sarawak’s cement industry could be hit by high transport costs.

“It is not so easy to penetrate the Sarawak market. It will require billions of ringgit to build a plant here and the transport cost will make them non-competitive.

“At the present time, demand for cement in Sarawak is at equilibrium. There are new developments going on in the state but we are not seeing a spike in demand,” the source says, adding that companies in the peninsula could be facing overcapacity and looking for new markets to sell their products.

According to CGS-CIMB Research, cement prices in Sabah and Sarawak are 15% higher than in the peninsula. It reckons that Malayan Cement can be price competitive even after factoring in higher transport costs.

“In our view, the prospects for the cement industry are brighter post-4Q2023 once there is clarity on MRT3, Bayan Lepas LRT and HSR, which have a combined value of about RM90 billion.

“Assuming cement accounts for 5% of total construction cost, we estimate this could result in additional demand of RM4.5 billion over the next five to six years. There should be upside to our FY2024 and FY2025 volume growth forecasts of 5% for both years,” the research house says in an Aug 14 report.

A market observer points out that there is too much capacity in the cement market, where many of its players are operating at 60% utilisation.

“That is the challenge, to maintain utilisation and keep economies of scale. Also, many of the mega buildings, such as The Tun Razak Exchange and Menara 118 are already built. The next infrastructure projects have not been announced yet. It will take a while for demand to come in,” a senior executive with a cement company says.

“Players are enjoying higher selling prices but the current demand may not be sustainable. I think the market is reacting to more projects coming in following the completion of the six state elections,” he adds. 

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