Investors were elated on news that Eagle Cement Corp. is listing at the Philippine Stock Exchange (PSE).
The company—majority owned and managed by the family of San Miguel Corp. President and COO Ramon S. Ang—breathes a whiff of fresh air into the cement industry, as the cement firm promises to plow back all the proceeds back as investments, a stark contrast to last year’s P25-billion initial public offering (IPO) of Cemex Holdings Philippines Inc.
It was sort of a disappointment for many, some of the investors said, as most of the proceeds were used to pay off loans, some to local banks, but a chunk was used to retire its debts to its parent firm’s unit, New Sunward Holding B.V.
Meanwhile, the proceeds of Eagle Cement’s P9.2-billion IPO will be used to partly fund its P12.5-billion new cement plant in Cebu City, an essential project in an industry that now imports products to meet local demand.
Share dumping
Weeks after news of Eagle Cement’s IPO broke out, investors started dumping shares of other listed cement firms. Cemex, which listed only in July last year, was already trading below its IPO price of P10.75, and is now trading at P7.63 per share. The stock earlier went as high as P12.96 per share.
Share price of Holcim Philippines Inc. is also falling at the news of Ang’s cement firm’s listing. From a 52-week high of P17.30, it is now trading at P16.60 apiece. Holcim, which corners a third of the market previously planned to spend as much as $550 million to construct a manufacturing plant in Bulacan. The Swiss company, however, decided to shelve the plan and instead import the shortfall.
In 2015 the parent firm of Holcim and French rival Lafarge, which also operates in the Philippines and its shares also listed at the PSE through Lafarge Republic Inc., decided to merge, creating the world’s largest cement firm.
That combination pushed Holcim Philippines to put its expansion efforts to bid for some of Lafarge Republic assets. The rest of the assets were taken by the Aboitiz-led joint venture with Dutch firm Cement Roadstone Holdings Inc., now known as Republic Cement and Building Materials Inc. Lafarge Republic then voluntarily delisted from the PSE.
Shake-up
The shake-up in the country’s cement-industry players, meanwhile, further exacerbated the necessary expansion of the cement-manufacturing facilities in the country, as the Philippine economy expands.
The top four industry players—Holcim, Cemex, CRH-Aboitiz and Eagle Cement—account for between 80 percent and 82 percent of total clinker and cement domestic production, respectively.
Clinker is a significant raw material to manufacture cement.
According to an Eagle Cement official, the top three players imported a total of 4 million tons of cement last year. The figure was 13 times more than the 314,000 metric tons of imports of traders in 2015, according to data of Cement Manufacturers’ Association of the Philippines Inc. (Cemap). Eagle Cement is not a member of Cemap.
“Unlike our competition, their plants are all running at full capacity. The only way for them to keep growing is to import. They are lucky if prices increase, so their profits will also increase. But what will happen if prices [of cement] fall?” the official said.
Demand growth
According to its prospectus, Eagle Cement expects the Philippine cement industry to grow by an additional 11.5 million tons until 2025, from its current demand of 26.82 million tons, prompting either an expansion of the current plant capacity or import more to fill the gap.
As of December 2016, the Philippines has an estimated annual clinker and cement capacity of 20.6 million and 28.63 million tons, respectively, based on nameplate capacities of integrated cement-manufacturing and grinding plants in the country, it said.
Judging from the nameplate capacities of clinker and cement production and the increased importation activity of existing players, it suggests that domestic producers may have reached full-capacity utilization on both clinker and cement that prompts them to import products from abroad.
“In theory, the domestic supply of clinker and cement…should be adequate to satisfy domestic demand. Mismatch between domestic supply and demand is primarily attributable to lower-than-estimated effective capacity of existing plants, especially for old manufacturing plants that are in need of repair and refurbishment,” it said.
“With the exception of Eagle Cement, Goodfound [Cement Corp.] and Mabuhay [Filcement Inc.] plants, the remaining plants have an average age of more than 20 years. This may result to lower clinker-to-cement ratio compared to the industry average of 0.80 times,” it added. Goodfound has a cement plant in Albay in the Bicol region, and Mabuhay has facilities in Cebu.
The prospectus said the effective capacity of the domestic clinker and cement supply in the Philippines is only at 16.83 million tons and 23.12 million tons, respectively.
“In 2016 almost all of the domestic manufacturers imported either clinker or cement and given that margins on local production are higher than on imported products, it would normally be expected that manufacturers would maximize local clinker production,” it added.
“The apparent discrepancy, therefore, between the quoted capacity of around 20-MT clinker and actual production of around 17 MT might lead to some doubt as to the real capability of the domestic industry to achieve the stated capacity levels. If this is the case, then there will be an additional supply shortfall that would have to be met by extra imports or new investments,” the prospectus added.
Catching up
Cement demand in the Philippines has grown a compounded 4.8 percent between 2000 and 2015 at 24.4 million MT, from 12 million MT, with consumption expected to increase as the economy grows. Over the period, the Philippine economy grew a compounded 5.1 percent.
According to its study, the Philippines still has one of the lowest per-capita cement consumption in comparison with its regional counterparts. In 2014 demand for cement in the Philippines was seen at 21.3 million tons, or approximately 212 kilograms per capita. This places the Philippines below almost all its neighbors in the 10-member Asean and at less than half the quantity per capita of countries such as Vietnam, Thailand and Malaysia.
While most of the existing players are busy operating plants at full capacity, and importing to cover the shortfall, Eagle Cement is still expanding its Bulacan plant, first operated in 2010, with its third line expected to be operational by the first quarter next year.
Its two plant lines can produce 5.1 million MT per year.
Its Cebu plant, meanwhile, will generate an additional 2 million MT per year of cement by 2020. The plant will include construction of a manufacturing plant, a distribution center and marine terminals in Southern Luzon, the Visayas and Mindanao regions.
The project cost includes procurement of various construction-related materials and services, as well 31 as the purchase of the properties where the plant will be built.
The company also recently broke ground for its terminal in Davao, but Eagle Cement said it is already looking at its second one in Mindanao. “We want to establish physical presence on all of the markets in the Visayas and Mindanao,” the Eagle Cement official said.
Construction of the Cebu cement plant is estimated to commence within the fourth quarter of 2017 and is expected to be completed by the first quarter of 2020. Eagle Cement’s IPO involved an offer of 575 million shares at an offer price of up to P16 per share.
Its offer consists of 500 million primary shares as initial offer and another 75 million secondary covering oversubscription options. All of its shares will be sold to domestic investors.
It appointed China Bank Capital Corp., PNB Capital and Investment Corp. and SB Capital Investment Corp. as joint issue managers, joint lead underwriters and joint bookrunners.
The company may list at the PSE later next month, and only starting then will the investors know if the Ang family’s promises can cement their good future.
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