PETALING JAYA: The price war in the cement industry could intensify should there not be much of a recovery in demand following the reduction in infrastructure projects following the 14th General Election (GE14).

According to CIMB Research, this is a potential negative for the earnings outlook of cement companies in the second half of the year.

“This makes it unlikely for any cement company to initiate a price hike to cover rising operating costs.

“For cement players, margins could remain under pressure,” the research house said.

CIMB Research said due to this, it has revised its 2018 forecast industry cement consumption growth of 3% to a 3% contraction at 17.3 million tonnes.

It noted that cement consumption contracted 8% year-on-year in 2017 compared to a 6% decline in 2016.

Following this, the research house also expects demand for steel products in the second half to be negatively affected as well.

“Industrial players’ expectations of a ramp-up in production capacity of steel products required for rail projects could be muted in the second half of 2018.

“In terms of rail demand, output of steel products would mainly be absorbed by the ongoing RM9bil LRT3 and the RM32bil MRT2 Line, which we expect to enter steel-intensive phases over the next one to two years,” it said.

CIMB Research has downgraded the building materials industry to an “underweight” from “neutral.”

It said that earnings risks for cement players would sustain in the second half, more so for Lafarge Malaysia Bhd .

“We maintain a reduce call on Lafarge.

“In line with the downgrade of the construction sector, we cut the building materials industry to an underweight from neutral.

“Key upside risks include a recovery of the scaled-down contracts in 2019,” it noted.

“Our earlier expectations of a recovery in cement demand, driven by cement-intensive phases of large-scale infrastructure projects that were expected to regain momentum after the GE14 no longer hold,” it said.

CIMB Research further explained that although the domestic cement sector has come off its peak capital expenditure cycle for capacity expansion, it did not think the oversupply situation would reverse in the upcoming second half season.