Cement in Short Supply

The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.  

 

Cement in short supply owing to peak season demand and investment in alternative fuel-based facilities

Over the past decade, clinker output has failed to surpass 50mn tons pa, with the kiln utilization rate averaging as low as 74%. Considering annual clinker production capacity, it looks difficult for the cement sector to face tight supply. But, since March, news of a supply shortage has emerged. Cement companies have invested in alternative fuel-based facilities in order to cut GHG emissions as part of their ESG management efforts. But, kilns cannot operate while alternative fuel-based facilities are being installed. They are also inoperable during regular maintenance in the winter. Last winter, cement companies began undertaking regular maintenance and installation of alternative fuel-based facilities at the same time, and the process has been delayed. Accordingly, with monthly cement demand estimated at over 4mn tons in the spring, cement supply disruptions have occurred.

Expect rising demand, price hike, and facility investment effects

While cement demand from SOC projects remains steady, demand fluctuates depending on residential and commercial real estate factors. Given that housing starts are projected to exceed 600,000 units in 2021, cement demand is likely to climb above 48.5mn tons. With housing starts beginning to rise from 2H20 and construction companies in need of speeding up their construction work due to delays caused by Covid-19, domestic cement demand should increase rapidly. We also note that cement companies have agreed on price hikes. Amid a growing need for a stable supply of ready mix concrete (remicon), the price hikes by cement companies and a delay in maintenance work have caused supply disruptions. Remicon firms, standing in between construction and cement companies, are in a difficult position as they are expected to handle cement supply disruptions and price hikes while also providing a stable supply of remicon. Meanwhile, Ssangyong C&E, having already completed its first phase of investment in alternative fuel-based facilities, has started to enjoy the effects of the investment from 2020. Currently, the company has a total of four alternative fuel-based facilities in operation, having started them January, July, August, and October of last year, respectively.

Earnings to improve in earnest from 2H21

From 2H21, cement demand and prices are likely to rise, and cost saving effects are expected from the operation of alternative fuel-based facilities. These three positives should combine to drive up earnings at cement players from 2H21. Over the past five years, the average OPM for Ssangyong C&E, Asia Cement, and Sampyo Cement has improved more than 11%p q-q in 2Q. In 2021, their OPM is projected to jump to 15.9%, with their OP set to return to 2017 levels.

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