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Published on November 15, 2007

Siam City Cement (SCCC), Thailand's second-largest cement-maker, will shut down two old kilns next year, due to increasing energy costs and weak domestic demand in the absence of mega-projects.

The company's export profits have also been hit by the stronger baht.

The shutdown of the kilns will require the company to shed some of its 2,500 staff. The loss of the kilns' capacity of 2.25 million tonnes per annum will reduce the company's capacity to 12.25 million tonnes.

"I don't know how long the kilns will be shut down. It could be two years, but the negative factors could change [during that period]," said managing director Marcel Smit.

A company source said Thailand's cement capacity was 55 million tonnes per annum but that only 60-70 per cent of that was actually produced. SCCC produces 27 per cent of the output. The source did not say how many workers would lose their jobs. An early-retirement programme will start later this month.

"This will not affect our sales revenue next year," the source said, adding that shutdowns were common among cement-makers. The kilns to be closed are old and energy-consuming. Meanwhile, the early-retirement programme will give the company an opportunity to restructure its workforce.

Deputy Industry Minister Piyabutr Cholvijarn said the company's action could indicate further economic problems, given that the cement industry was always hit first in any downturn.

SCCC said in an internal circulation that the economy had been declining since last year, particularly property development and construction, aside from the delays to several mega-projects. However, it had kept running at full capacity to maintain the current workforce and export excess output. Due to the stronger baht, exports generate zero profits while the company suffers from higher production costs.

The Bank of Thailand said monthly domestic cement sales had been suffering negative growth since early this year. The Siam Cement Group (SCG), the country's largest cement-maker, has also experienced trouble. In the third quarter, its cement operating profit was down 21 per cent year on year, because despite higher production and transport costs, the company could not raise its product prices.

Both SCG and SCCC recently embarked on power projects to reduce energy costs. SCG invested Bt3.4 billion in a 70-megawatt plant, hoping to bring down electricity costs by more than Bt1 billion a year.

In its equity research, while saying SCCC's biomass plant should reduce its production costs 3.5 per cent, the Trinity Securities Group said coal prices would be a great risk factor for the company. SCCC's energy costs account for 70 per cent of its production costs, and half of that is spent on coal.

Since early this year, SCCC's average cement price has been Bt1,700 per tonne, relatively close to the level last year.

In the third quarter, SCCC posted a net profit of only Bt733 million, down 22 per cent quarter on quarter and 26 per cent year on year. Kim Eng Securities (Thailand) said the figure was below the company's forecast of Bt933 million, attributing the low results to weak demand forcing SCCC to focus on lower-margin exports.

SCCC's gross margin was down to only 24.5 per cent, from 29.2 per cent in the previous quarter and 30.7 per cent in the same period last year.

"Fourth-quarter earnings prospects are expected to continue to be weak on negative growth in cement demand and higher energy costs. However, next year should see clearer signs of a recovery in construction from the low 2007 base and on a relatively improved general economic and political outlook. Mega-infrastructure projects are expected to resume once a new government is formed. We also expect cement prices to rise about Bt50 to Bt100 per tonne," Kim Eng said in its report.

Kim Eng has revised downwards SCCC's earnings, by 11 per cent this year and 4 per cent next year to Bt3.5 billion and Bt4.3 billion, respectively. In 2005 and 2006, the company's net profits were Bt4.06 billion and Bt3.86 billion, respectively.

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