PPC/F&S note caution amid fragile recovery

Posted On Wednesday, 12 May 2010 02:00 Published by eProp Commercial News
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PPC CEO Paul Stuiver says that the group is concerned about the outlook for cement demand in the second half amid an uncertain economic recovery.

Paul StuiverDespite a 'good set of results' boosted by its Lime and Aggregates divisions, Pretoria Portland Cement (PPC) CEO Paul Stuiver said on Tuesday that the group was concerned about the outlook for cement demand in the second half amid an uncertain economic recovery.

On Tuesday PPC released results for the six months ended march 2010, revealing a 5% increase in Group revenue to R3.421 billion and EBITDA increased by 4% to R1.296 billion.

Demand for cement in South Africa and Botswana continued to decline due to the after effects of the economic slowdown.

Operating profit from the Cement division declined by 2.8%, but grew by 158.1% from the Lime division and 19.2% from the Aggregates division.

Lime volumes improved by more than 30% as demand from the steel and alloys markets continued to recover.

PPC maintained its interim dividend at 45 cents per share.

CEO Paul Stuiver said: "PPC has produced a good set of results by increasing revenue, profitability and operating cash flow in a difficult economic environment.

"While the contributions from our Zimbabwean cement operations and the Lime and Aggregates divisions improved significantly, South African cement demand continued to decline and we remain concerned over the outlook for cement demand in the second half".

PPC said its cement volumes in South Africa and Botswana declined by 15%, mainly due to a continued decline in residential building activity and a lack of new construction and infrastructure projects.

And looking ahead Frost & Sullivan, the Growth Partnership Company said that the rising cost of energy, insufficient transport infrastructure and an ongoing slowdown in residential building construction presented PPC with major challenges.

Industrial analyst at F&S, Litiya Matakala said: "The increasing cost of energy is a major challenge for cement manufacturers in South Africa.

"Energy costs account for a substantial proportion of the total cost of producing cement.

"As a result, the operating margins of cement producers are increasingly under pressure, as diesel, coal and electricity costs rise."

Eskom's planned tariff hike is only expected to exacerbate this situation.

In addition, as the global economy recovers, demand for steam coal is expected to rise, potentially leading to further price increases, Frost & Sullivan said.

Stuiver said: "Although electricity account for only 5% of our costs, it is the indirect effect that will have an impact on us."

F&S said the number of residential building plans passed by municipalities in South Africa had been in decline since 2005, with a sharp decrease in 2008 and 2009.

"The high cost of borrowing, rising inflation and the fall in house prices have culminated into this sharp decrease and the economic recession has worsened the situation," Matakala said.

As this market segment represents between 55 and 60 per cent of total cement sales in South Africa, the fall in house plans passed and completed has had a huge impact on demand. Frost & Sullivan said it expects this situation to continue for the whole of this year, with the earliest recovery expected in 2011.

"Government's commitment to building low-cost housing is critical to the recovery of this market segment," Matakala said.

"The recovery of the South African economy and the availability of affordable credit to finance house purchases are also necessary for the housing market to recover fully."

PPC said the steel industry's positive outlook for the steel and alloy volumes during the remainder of 2010 should result in a continued strong performance by the Lime division, albeit at a slower rate than experienced during the first half.

Overall however, Struiver said economic indicators are currently mixed and economic recovery in the region appears fragile and uncertain.

The South African government's commitment to infrastructural development is encouraging but commencement of new construction projects is taking longer than anticipated.

This, together with the effects of the World Cup, makes the forecasting of cement demand during the remainder of 2010 extremely difficult.

However it is likely that South African cement demand during 2010 will be lower than during 2009.

The contribution of PPC Zimbabwe is also difficult to forecast as the situation in the country remains transient, he said.

Cement pricing is expected to remain under pressure for the remainder of the year with excess industry capacity and a strong local currency limiting pricing power.

"Under these circumstances we will continue to focus on operational performance and the running of our most efficient production units to minimise the impact of reduced volume and increasing energy costs," Stuiver said.

Frost & Sullivan is more upbeat. Despite challenges, the South African cement market shows great potential over the period 2011 to 2015.

Increased infrastructural spending by the Government, a high number of planned projects by public corporations, planned Government expenditure on low-cost housing and the revival of the residential building construction are likely to spur demand, it said.

"The development of low-cost housing over the period 2009 to 2015 is expected to be the single largest demand driver for cement in South Africa," said Matakala.

"With the Government planning to deliver an estimated 630 000 housing units per annum between 2010 and 2015, cement suppliers are assured of a high and steady demand."


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