With domestic consumption sluggish or shrinking, Southeast Asia’s cement producers are expanding abroad in hopes of finding new revenue streams in countries where infrastructure needs are driving more demand.
Siam City Cement Plc. (SCCC), Thailand’s second-largest producer, is a good example. Controlled by the Ratanarak family, the founders of Bank of Ayudhya (BAY), SCCC last month signed an agreement to acquire Holcim (Lanka) Ltd. (HLL) from a unit of LafargeHolcim for $374 million.
The acquisition followed the Thai company’s purchase of all shares of Cemex Thailand and Cemex Cement (Bangladesh) earlier this year for $53 million. The Sri Lanka transaction is expected to close before September 30. SCCC will use a one-year credit facility from Bank of Tokyo-Mitsubishi UFJ, the majority shareholder of BAY, to finance the transaction.
According to SCCC’s filing to the Stock Exchange of Thailand, HLL is the only clinker manufacturer operating a fully integrated cement plant with a capacity of 1.3 million tonnes per year in Puttalam, with access to the only operational limestone deposit in Sri Lanka. HLL also operates a cement grinding facility in Galle with annual capacity of 1 million tonnes and manages terminals in three local ports with combined capacity of 1.6 million tonnes a year.
The transaction makes SCCC the market leader in Sri Lanka, with further synergy benefits resulting from shared services, procurement with volume pooling, and a secured clinker export channel.
“An opportunity to build a regional network [is also expected], allowing us to optimize trading across multiple regional assets and diversify to secure cashflow generation, while also capturing future growth in these markets,” SCCC said in a statement.
“Sri Lanka has a solid domestic demand projection. Furthermore, over the long term, there will also be new opportunities to transfer advanced construction know-how to capitalize on lower construction maturity, for instance, the company’s ready-mix and bulk distribution model and [the wood substitute] Conwood.”
With total asset value equivalent to 4.55 billion baht as of 2015, HLL reported revenue of 5.7 billion baht, up from 4.7 billion the year before.
Given its current capacity of 1.6 million tons per year, LafargeHolcim controls 44 percent of Sri Lanka’s total cement output of 3.6 million tons.
Some industry observers have questioned the deal, saying the price is too expensive. SCCC CEO Siva Mahasandana declined to comment to Asia Focus, while other executives of the company could not be reached.
Some analysts, however, say Sri Lanka’s need for infrastructure points to substantial cement demand growth in the future.
Currently, SCCC operates a cement plant in Sarabui with annual production capacity of 14.5 million tons and more than 4,000 workers. It also has operations in Indonesia and Cambodia. In 2003 it acquired two lightweight concrete block production plants in Singburi and Ratchaburi from Superblock Plc.
“SCCC has invested slightly in the past couple of years but began to expand more aggressively this year,” said Napat Siworapongpun, an analyst with Asiawealth Securities, adding that a low debt-to-equity ratio gives SCCC the financial flexibility to expand capacity.
“We view this as a positive move by SCCC to be more aggressive in business expansion. Sri Lanka needs more infrastructure so there is room to grow in cement consumption,” Napat said.
While Sri Lanka is relatively a small player, its per-capita cement consumption is similar to that of India, according to the Global Cement Directory 2016. Both markets have room for expansion. India has 310 million tonnes per year of capacity and with a population of 1.25 billion, a per-capita capacity of around 250 kilograms. Sri Lanka has 3.6 million tonnes of capacity and 20.2 million inhabitants, or 200 kilogram per capita or capacity.
“There is clearly room for growth in both of these figures and further projects could yet be on the horizon for Sri Lanka,” Napat said.
While SCCC is looking beyond Southeast Asia, the top local producer Siam Cement Group (SCG) continues to strengthen its presence across Asean. It completed capacity expansions in Cambodia and Indonesia last year, and expects to finish building its Myanmar plant in the current quarter, while a plant in Lao PDR should be operational in early 2017.
SCG has cement-production capacity of 23 million tonnes in Thailand. The four Asean projects by next year will add 6.3 million, bringing regional capacity to nearly 30 million tonnes, President and CEO Roongrote Rungsiyopash said recently.
The group has also been in talks to acquire cement assets in Vietnam, where demand has been growing by double digits this year along with that in Cambodia and Laos. Demand growth in Myanmar is slowing down this year but is likely to pick up with a double-digit growth in 2017, Roongrote said.
“We see a bright future for markets across the region with steady growth rates,” he said. “Especially in Vietnam, demand for building materials has risen on the back of a booming construction industry, with several infrastructure, residential and industrial projects under development, as the country has become a key production base for the world.”
Cambodia also continues to see steady industrial growth, while work on government megaprojects is helping fuel an economic upturn in Indonesia.
In Thailand, however, SCG has revised down its cement consumption forecast from 3-percent to 5-percent growth over 2015 to only 1 percent or even flat, given sluggish private investment. The group sells about 16 million tonnes of cement in Thailand and exports 4.5 million tonnes to Asean countries.
LafargeHolcim, meanwhile, said proceeds from the sale of HLL would be used to further reduce its debts. The Sri Lanka sale follows the divestment of Lafarge’s Indian operations to Nirma Ltd. announced in mid-July to comply with competition regulations when the two European giants merged.
After the merger announcement, Switzerland-based Holcim sold its entire 27.5-percent stake in SCCC to Singapore-based Jardine Cycle & Carriage Ltd. in 2015. SCCC posted total revenue of 31.5 billion baht last year, down from 32.2 billion in 2014, with net profit declining to 4.6 billion from 5.1 billion.
With combined net sales of 29.5 billion Swiss francs last year, LafargeHolcim employs 115,000 people with operations in 90 countries.
Image credits: Bloomberg News