Indonesian cement demand fell by 10% y/y in March: Indonesian
cement consumption in March (2.66 mt) fell 10% y/y, bringing 1Q FY09
volume contraction to 5.8% y/y. This is the weakest 1Q performance since 1999, when 1Q demand contracted by 8.1% y/y. Demand was weak across the country, with particularly surprising weakness in central & East Java. We suspect that apparently healthy volumes in Sulawesi may be slightly overstated by dispatches that are finding their way to Java.
• Poor sequential momentum a concern: Sequentially, demand grew by 1.2% m/m. We do not take much cheer in the m/m stability, given seasonal factors. In every one of the previous 7 years, demand in March grew by over 10% m/m, and the lack of momentum in 2009 is worrying to us, even considering that an extended wet season may have played a part.
• We continue to be worried about the threat to price stability: At close to $100/T, high cement prices are attracting the interest of the fair trade commission. Cement manufacturers raised prices in January on optimism that election spending would boost demand. March volumes belie that expectation and reinforce our concern that price stability could break down in coming months if demand stays slack.
• We remain unconvinced about the sector stocks: Cement companies in Indonesia tend to exhibit somewhat defensive performance. Over the last quarter, INTP has been a slight underperformer relative to the JCI while SMGR has moved in line with the index. Recently however, we have received some interest in the names as candidates for rotational buying into cyclicals. We are unconvinced of their merit at this time, believing that the cyclical positioning is poor (volumes still accelerating on the downside), and valuations are not compellingly cheap at an EV/T of $100-110.
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