Although the cement supply surplus is a main news headline recently, Vietnam would have a lack of cement from 2014 financing the country infrastructure developments. This is because there have been 17 cement projects suspended indefinitely while most of existing local plants are now in financially distressed situation and on the edge of bankruptcy due to its high leverage on borrowed capital and soaring energy costs. In addition, the cement story in Vietnam should be evaluated carefully. The supply surplus is in the North (Hanoi area) only. In HCMC area, the situation is totally different because total capacity only meets a third of total consumption. Total cement consumption in 2011 is 15.8mn tons but factories only produced 5.3mn tons in capacity.
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Sector Growth: Before a slight drop of 1.9% in 2011, total country cement consumption CAGR achieved 11.3% for the period of 2001-2005 and 9.4% for the period of 2006-2010. Economic slowdown has a significant impact on the construction industry, leading to cement demand contraction in 2012. Total actual cement consumption in 1H2012 is just 24.2mn tons (23.5mn tons domestic and 0.7mn tons exported), according to Vietnam Cement Association (“VNCA”). It is an estimate of VNCA that total cement consumption for the whole year 2012 will be 47.5mn tons, representing 3.6% consumption decline compared to the actual cement consumption in 2010 (49.26mn tons). Production hubs are located in the North of Vietnam with total 45mn tons in capacity while its total consumption in 2011 is just 22.8mn tons.
Sector Concentration: Vietnam cement is characterized with three groups of players, i.e. Vietnam Cement Industry Corporation (VICEM) with 32% in term of total sales volume from its 11 members companies; foreign players including Holcim, Chinfon and LUKS Vietnam occupying 30% of market share. The remaining 48% is contributed by many local private companies, of which notable players are The Vissai (located in Ninh Binh province), Cong Thanh Cement (located in Thanh Hoa province) and Vietnam Cement Management Ltd (located in Quang Binh province).
Price and Competition: Cement is no longer included in the price basket for CPI index calculation but it is subject to the so called “Price Stability Program” of the Government. Implementing this scheme, the Government exercises the control over cement price indirectly via VICEM. As the largest single player VICEM has a big influence on cement price by managing the cement/clinker supplies between local markets. All price adjustments proposed by VICEM and other cement companies must be agreed by the Price Management Department of Ministry of Finance.
Major policy developments: Main regulation document on this sector is the Cement Master Plan issued under Decision 1488 by the Prime Minister in Aug 2011. The Government imposed very strict conditions for new cement license in terms of capacity size, technical performance and financial capability. To cope with soaring energy costs, the policy also requires that by 2015 all plants must apply the Waste Heat Gas Generator (“WHGG”) to meet at least 20% of its electricity consumption.
Sector Financial Performance: Our data showed that historical EBITDA margin on average for 20 public cement companies in Vietnam is at 15.3% in 2008, 14.9% in 2009, 13.3% in 2010 and 19.0% in 2011. Except for the high margin in 2011 is due to the extraordinary improvement at Ha Tien 1 and Bim Son Cement, these profitability ratios are relatively low compared to the 20% average margin of global players. Vietnam cement producers are struggling with their soaring financial costs from the high interest rates and the foreign exchange loss. There are 5 cement plants, namely Dong Banh, Ha Long, Thai Nguyen, Tam Diep and Hoang Mai, currently in default for their foreign loans of USD577mn.
Increased energy costs: Over the last five years, the price of Coal 4A supplied by Vinacomin, the only domestic coal seller in Vietnam, has increased 5.5 times from VND380,000 (USD19) to VND2,087,000 (USD100) per ton and the price of electricity supplied by EVN has increased 1.45 times, from VND948 to VND1,369 per Kwh. The ratio of energy costs over cost of sales in 2010 at But Son cement is 48% and Thang Long Cement is 41%.
Sector Consolidation: We are observing active consolidation tendency than ever in cement sector of Vietnam. In this situation where many cement producers are facing financial distressed, consolidation is just a matter of timing to obtain the economy of scale for this sector in both production and logistics. Notable active acquirers are some local cement companies with strong financial position, e.g. The Vissai, Cong Thanh, Vietnam Cement Management Ltd and foreign investors, e.g. Anhui (from China), Cresik (from Indonesia), to name a few.