The Government drew up Vietnam Cement Development Plan towards 2030 under the Decision 1488 in August 2011 based on an important assumption that Vietnam would keep the GDP growth rate of at least 7% per year. Many new licenses had been granted under this plan even before this Development Plan. Unfortunately, the economy slowdown starting from 2011 has been making the surplus story becoming worse in the short run.
The cement consumption in 2012 declined by 10% to the level of 45.2mn tons from the peak of 50.2mn tons in 2010. The high inflation and high interest rate in period 2011-2012 as well as difficulties in state budget revenue also pushed the input prices such as coal, gas and electricity up, causing more burdens to cement plants. Besides, due to lack of capital, many large projects in construction and infrastructure sectors have been suspended or even cancelled. Reviewing all key projects in infrastructure development planned for period 2010 – 2020, we estimate that only 53% of projects can be implemented in time, in which priority is given to road and bridge projects.
Surplus Supply: While cement demand continues to be weak in 2012 and 2013, capacity increased rather quickly. In 2012, total sector capacity was 68.5mn tons while total consumption was just 45.2mn tons, equivalent to 67% capacity. However, the situation became even worse in 2013 with capacity rising up by 11% to 75.9mn tons, meaning domestic demand consumes only 60% of total capacity. Therefore, although export is not a profitable business, many cement plants have to push up export volume to maintain production. Even with export, the utilization rate dropped from the level of 95% in 2011 to 83% in 2012 and to only 79% in 2013. In the worst case scenario, we forecast that over-supply in cement sector will last until 2020. However, the South (HCMC area) continues to suffer the shortage in cement supply, and it is estimated to continue at least for the next 5 years.
Export Surge: Export volume increased by 50% to 9mn tons in 2012 from 6mn tons in 2011. In the first 7M/2013, Vietnam exports 2.6mn tons of cement and 5.7mn tons of clinker. However, the average FOB price of clinker is only USD 40-42 per ton, USD 10-12 per ton lower than the average regional price and even much lower than the domestic price. Most of cement plants step up export to cover variable costs and absorb part of fixed costs. However, not all cement plants can export due to weak logistics and high transportation costs given their location and access to convenient seaports.
Sector Concentration: VICEM and foreign-owned players still lead Vietnam cement market. In 2012, VICEM increased its market share to 35% from 32% in 2011 while the market share of foreign-owned player reduced from 30% in 2011 to 28% in 2012. Other private and associate producers continue to hold 37% market share. The South is a very concentrated market with the top 3 players taking 73% market share. The rate in the Central and the North is 57% and 17% respectively.
Price and Competition: Government continues to indirectly control cement price through VICEM. Meanwhile, Vietnam cement plants have weak competitiveness due to high manufacturing costs and low profit margin. The reasons are low capacity utilization, limitation in using alternative fuel/materials to reduce cost, high unit investment cost, late development and high debt. Comparing to peer countries, Vietnam cement industry develops later than Thailand by 10 years and later than China by 20 years. Therefore, while regional peers almost finish depreciation and payback loans, Vietnamese plants are still struggling with high depreciation and high loan interest in this period.
Increased Energy Costs: Comparing with cement groups in region, Vietnam cement plants have higher energy consumption with coal/fuel accounting for 48% of total production costs, following by electricity with 16%. Using alternative fuel and materials to reduce cost is still unpopular in Vietnam. Therefore, despite increase in cement prices, the increase in coal, gas and electricity prices for the past years has eroded profits of cement plants. Moreover, EVN has proposed to apply higher electricity prices to steel and cement sectors, and if the government approves the proposal, we believe that the possibility of financially default or bankruptcy of some cement plants will come earlier.
Sector Financial Performance: 20 listed cement companies have an average EBITDA of 15.8% in 2012 based on their audited financial statements under local reporting standards, much lower than their regional peers. In 2012, Vietnam cement plants also have high debt ratio with average D/E ratio of 20 listed cement companies being 3.9 times. In 2012, 2/3 listed companies incurred loss or broke even; the remaining got only small profit.
Sector Policy Demand: Decision 1488/QD-TT requires that, by 2015, all cement plants having capacity of equal or more than 2,500 ton clinker per day have to apply the Waste Heat Gas Generator system (WHGG) to save at least 20% electricity consumption. However, except for Holcim and Ha Tien 2, we have not seen any cement plants investing in the system at the moment. Most of cement plants are facing financial difficulties due to high debt and weak domestic demand, so they can not invest in the system by themselves. Meanwhile, commercial banks are not eager to lend more, except for ADB’s financing support to VICEM still in the working out. We believe that there will be an extension from the Government in this compliance matter.
Sector Consolidation: Most recently, Cam Pha Cement JSC, a subsidiary of Vinaconex, has been acquired 70% by Viettel, a State-owned and military-run enterprise, with total deal value of $127 million. The deal is a way to get rid of cement business in the consolidated accounts of Vinaconex, a public company that has been in financial difficulties. In 2012, there were 2 domestic and 1 inbound M&A deals in the cement sector.
In addition to M&A opportunities in the private sector, foreign investors are also eying on the members of VICEM who are subject to equitization or reducing State ownership as part of VICEM restructuring plan by the Government. Under the plan, VICEM, the parent company, and its 3 wholly owned limited liability subsidiaries will be equitized. In which, VICEM will reduce government ownership to 75% and divest part of ownership at companies where it does not hold the majority of ownership. However, successful M&A deals require not only efforts from both sides but also support from the government, especially in mineral exploitation rights, which are currently viewed as the most challenging issue in doing deals in the sector.