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Published on July 31, 2007

Siam Cement's second-quarter core profit was down 23 per cent year on year and 29 per cent quarter on quarter to Bt5.8 billion, due to across-the-board weakness.

Despite the poor core results, its quarterly net profit was up 15 per cent year on year and 7 per cent quarter on quarter, thanks to extra before-tax gains of Bt3.6 billion from the divestment of non-core asset Siam Yamato Steel and Aromatics (Thailand).

Management believes domestic cement consumption could decline 8-10 per cent this year, while petrochemical margins should be under pressure from new supplies from Taiwan's new cracker No 3 and the start-up of two new plants in Iran during this quarter.

However, Siam Cement expects domestic demand for its products to recover next year, given the delay in both private and public investment this year.

The broker predicts cement demand will expand 5 per cent year on year in 2008 and 7 per cent in 2009, supported by a reviving economy.

Siam Cement's management remained cautious about this year's second-half outlook, due to the slow-down in the Thai economy, which should affect the company's domestic sales, especially cement and building products.

Second quarter domestic cement sales volume dropped 9 per cent year on year and 13 per cent quarter on quarter to only 2.4 million tonnes, worse than the 8-per-cent year-on-year decline in the country's cement consumption.

Siam Cement expects its sales volume to shrink 8-10 per cent this year on weak demand from the private and public sectors.

The company's forecast is worse than the broker's expectation of a 5-per-cent year-on-year contraction this year.

With the pessimistic volume forecast, cement producers will try to raise prices to compensate for higher energy and production costs.

However, the broker does not expect a big increase in Siam Cement's gross margins, because oil and coal prices are expected to stay high for another few years.

Management indicated that average coal prices for next year could rise US$5 to $10 (Bt169 to Bt337)per tonne from this year's $55 per tonne.

Despite strong prices and margins in the first half of this year, the broker expects petrochemical margins to ease in the next few years, due to additional capacity from the Middle East, Taiwan and China.

The spread between high-density polyethylene and naphtha has narrowed from $681 per tonne in the first quarter to $611 a tonne in the second, due to high naphtha prices.

As more than 50 per cent of Siam Cement's net profit comes from its petrochemical business, a decline in petrochemical margins would have a significant effect on its profits.