Recent aluminium price gains underpinned by the recovery in aluminium consuming industries will support the sector’s recovery
by AFIQ AZIZ / pic by MUHD AMIN NAHARUL
THE cement sector in Peninsular Malaysia is expected to turn a new corner as construction activities and new property launches gradually resume following the easing in movement restrictions, said AmInvestment Bank Bhd (AmInvest) in a research note yesterday.
Its analyst Jeremie Yap said the cement players are also reverting to more rational competition following a shakeout in 2019.
He added that recent aluminium price gains underpinned by the recovery in aluminium consuming industries, particularly the automobile sector in China, would further support the industry in 2021.
“We project the average net cement selling price in Peninsular Malaysia to rise by 8% to RM260 per tonne in 2021 forecast (2021F) (versus an estimated RM240 per tonne in 2020),” said Yap.
The analyst added that the conditions are conducive for a price hike with the emergence of a price leader in the market (controlling close to 60% of total industry clinker capacity) following YTL Cement Bhd’s acquisition of Malayan Cement Bhd in 2019, as well as the easing supply pressure after Malayan Cement and Cement Industries of Malaysia Bhd shut down one clinker plant each, effectively removing annual clinker capacity totalling two million tonnes equivalent to 8% of industry clinker capacity from the market.
“Meanwhile, we project cement consumption in Peninsular Malaysia to only improve by 5% to 4.4 million tonnes in 2021F (from 4.2 million tonnes estimated in 2020) driven by the gradual resumption of construction activities (of ongoing projects) and new property launches,” he added.
The research outfit also does not foresee any rollout of new public mega-infrastructure projects by the government, namely the Mass Rapid Transit Line 3 (scaled down to RM21 billion) and the Kuala Lumpur-Singapore high-speed rail (HSR) (scaled down to RM68 billion) over the immediate term given the high national debt.
He projects a 15% rise in average aluminium price to US$2,050 (RM8,282) per tonne in 2021 (against US$1,780 per tonne estimated for 2020) driven largely by the robust recovery in the automotive market in China.
The domestically driven industry drove China into a net importer of aluminium in July and August 2020, bringing down the aluminium inventory at the London Metal Exchange.
China is the largest producer and consumer of aluminium in the world with a global share in excess of 50%.
S&P Global Inc projects China’s light vehicle sales to expand between 4% and 6% in 2021F, and between 2% and 4% in 2022F.
“The icing on the cake was the high-end segment (30% year-on-year increase) actually outpacing the mass market in 2020. We may upgrade our ‘Neutral’ call on the sector to ‘Overweight’ if prices exceed our assumptions on the premises where cement price increases due to the rollout of public mega infrastructure projects and higher aluminium price due to the stronger than expected recovery in the global economy.
He added that the research bank may downgrade the sector to ‘Neutral’ if the much anticipated recovery in both local and global economies fails to materialise.
AmInvest’s top pick for the sector is Malayan Cement (‘Buy’ with a fair value of RM3.36).
“At its current share price, the market is effectively valuing Malayan Cement at a 30% discount to its replacement cost (based on the replacement cost for clinker capacity of US$120 per tonne).
“We believe this is unjustified given that it is turning around with rational competition among players after the recent industry consolidation. We believe our valuation for Malayan Cement, based on a 10% discount to replacement cost, is more appropriate,” said Yap.