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Thursday, October 11, 2012

Alert: Sanguine Views Moderated by Capacity Constraints

Citigroup : Cement

Indonesia Cement

 Major producers upbeat on outlook; Semen Gresik remains our top pick.

Our recent conversation with major cement producers suggests that they are at their most upbeat in the past 18 months. Not only has cement volume growth been much better than their earlier expectations, this year has seen sizable cement price hikes after tepid hikes in the previous two years. Our top pick remains Semen Gresik (SMGR.JK; Rp14,800; 1) as the ongoing market share gain should continue well into 2013E as the industry’s capacity constraints worsen.

n 2013E growth capped by capacity. With very strong growth in the past two years (18% in 2011 and c.13% in 2012E), the industry’s capacity utilization has increased substantially. This should cap growth in 2013, the robust demand notwithstanding, as we expect the utilization (excluding exports) to rise to 98% in 2013 from 94% in 2011. Moreover, the incipient slowdown in landed residential volumes on stricter mortgage requirements would be largely felt in 2013. Against this backdrop, we expect cement volume growth to slow to c.10% in 2013.

n Capacity constraints supportive for price. The domestic cement price is poised to grow 7-8% in 2012, after logging a 6% rise in 8M12. Much of the price hike this year was facilitated by Holcim Indonesia ’s shrinking capacity even as it reduces its exports. We expect a 6% price increase in 2013, supported by still healthy demand and the industry’s shrinking capacity.

n Foreign entrants facing delays. Despite much fanfare earlier on its aggressive plans, little progress have been made, with none of the projects having started construction. The biggest constraints would be securing various licenses (central and local government licenses, environmental clearance, etc) and local community approvals for constructing green-field cement projects.

n Rupiah weakness mitigated lower coal price. We expect continued margin improvement in 3Q12 on a c. 2% price increase and lower coal prices. However, rupiah weakness (has depreciated c. 2% since end of June) would mitigate the lower coal prices (3% lower than the end of June’s level).

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