Investment Highlights

• We upgrade the building material sector to NEUTRAL from UNDERWEIGHT. We see a mixed picture for the sector. We believe the cement sector in Peninsular Malaysia has turned the corner, with more rational competition among the players following a major industry shakeout in 2019. For aluminium, we do not expect a V-shaped recovery in prices despite the gradual recovery in its consuming industries, given the build-up in inventory during the pandemic (as it is very costly to shut down and restart aluminium smelting plants). Meanwhile, despite the weak demand, local steel prices will at least hold up as local producers export the excess supply.

• Cement prices in Peninsular Malaysia to hold despite weak demand. Despite weaker demand due to the impact of the Covid-19 pandemic on construction productivity, and a tepid new infrastructure and building job flow in 2H20F (see our write-up on construction for details), we expect cement prices in Peninsular Malaysia to hold steady (i.e. not to fall) at RM250/tonne in 2H20F (cement prices have been rising steadily from RM200/tonne in 1H19 to RM235/tonne in 2H19 and RM250/tonne in 1H20). We believe this is because of: (1) the emergence of a price leader in the market (with a combined market share of close to 60% in terms of clinker capacity) following YTL Cement’s acquisition of Malayan Cement in 2019; and (2) industry supply pressure having significantly eased with the recent shutdown of one clinker plant each by Malayan Cement and peer CIMA, that has effectively put clinker capacity totalling 2mil tonne per annum (8% of total industry clinker capacity) offline. On the back of low construction productivity and limited new infrastructure and building contracts in 2H20F, we project cement consumption in Peninsular Malaysia to decline by 30% to 10.5mil tonnes in 2020F (from 15mil tonnes estimated in 2019).

• We project cement consumption to improve by 30% to 13.7mil tonnes in 2021F, assuming construction players are able to bring their productivity up back to close to pre-pandemic levels. Despite its significant pricing power, we believe the price leader will toe the line and only raise cement prices slightly to RM260/tonne in 2021F (in order not to invite backlash from cement consuming industries and intervention from the government, as what happened in 2019).

• Consuming industries back online but inventory build-up caps aluminium prices. We only project a mild recovery in aluminium price to US$1,600 in 2H2020, vs. US$1,528/tonne in 2Q2020. On one hand, aluminium consuming industries are coming back online as economies reopen (such as the largest segment, i.e. automotive and aviation, that consume 26% of global production, see Exhibit 5). According to news reports, Detroit’s Big Three i.e. General Motors, Ford and Fiat Chrysler, have gradually restarted their US factories since mid-June 2020 (even though they are operating at levels substantially below those prior to the pandemic). On the other hand, there is a build-up of aluminium inventory as smelters globally have continued to produce throughout the pandemic (despite a freeze in demand during the lockdowns) as it is very costly to shut down and restart aluminium smelting plants (as a sudden stoppage of furnaces would lead to the chilling and solidifying of hot metal, causing permanent damage). This has led to a huge inventory build-up, as reflected in a 23% increase in global aluminium stockpile to 13.3mil tonnes in end-1Q 2020, from 10.6mil tonnes in 4Q 2019 (Exhibit 6).

• We project aluminium prices to improve slightly to US$1,700/tonne in 2021F, assuming that rising demand from aluminum consuming industries (as their operations normalise) will gradually run down the aluminium inventory build-up.

Source: AmInvest Research - 13 Jul 2020