A classic pattern of emerging market development, aside from the obvious rapid economic growth, is rising wealth accumulation and spending, leading to urbanisation, city expansion, and increased construction budgets, among others. One of major sectors benefiting from such trends is construction materials.
Notably, Asean construction materials players have enjoyed 10% annual revenue growth, while realising 4% annual earnings growth in the past five years. Growth has been similarly impressive in Thailand, fuelled by construction activities and a real-estate boom, raising intriguing questions: will growth be short-lived, and what should players do in response?
Major growth drivers are both local and regional. Domestic cement demand, for example, has enjoyed nearly double-digit growth annually in 2013. Three factors are contributing to the rise in consumption. First, the high-rise residential real estate boom in Bangkok has created robust consumption of cement and steel for building structures.
Second, urbanisation upcountry is pushing further demand in construction to serve local consumers. Rising wealth has provided a significant push, mainly a result of increased minimum wages and income from the agricultural sector. Population migration also creates demand uplift in major provinces that are hubs for education and labour markets.
Notable hubs include Khon Kaen in the Northeast, Chon Buri in the East, and Chiang Mai in the North. These provinces have either prominent regional education institutions, or established labour markets to serve industrial estates, spurring city development to serve the needs of those domestic migrants.
Third, Thailand has been attracting sizable investment flows, with FDI as high as $9 billion per year, two-fifths of which is from Japanese investors, mainly in manufacturing. These investments create demand for factory construction and residential real estate to serve expatriates, driving up construction material consumption. Also, the fact that industrial estates are witnessing peaks in occupancy rate creates a significant demand thrust for new factory spaces, triggering another wave of investment to build new estates.
As for the region, the CLM (Cambodia, Laos and Myanmar) countries are a new growth frontier generating demand for bricks and mortar. The urban populations in Laos, Myanmar and Cambodia are 34%, 33% and 20% of the total respectively. Their growth has been rising at 55%, 17% and 18% respectively over the last decade. Thailand has been benefiting from such a trend, as witnessed from exports of construction material products.
Notably, 15% of cement production in Thailand is being exported, mostly to CLM markets through cross-border trade. Overall exports to CLM countries have grown by an annual average of 18% in the past four years. These countries will continue to urbanise and grow (GDP rose 6.2% in Cambodia, 8.4% in Laos and 6% in Myanmar last year), creating an attractive space for Thai companies to tap into.
Despite the threat from a technical recession in Thailand, growth in the construction materials sector will not be short-lived. The urbanisation trend in Thailand will continue to drive consumption, and provincial development will emerge as an important growth driver.
Even if we examine the prevailing growth trends, the economy in the provinces is growing at a faster rate than in Bangkok. Three-quarters of Thailand’s GDP in 2020 will be generated from the provinces, up from two-thirds currently.
Along this growth pattern, urbanisation will bring about notable changes at the provincial level, spurring construction to build supply for key sectors such as real estate, retail and manufacturing, and raising demand for home improvements by local residents, lifting consumption of construction materials.
Most importantly, a key demand catalyst is public investment in infrastructure. Establishing transport backbones that connect major provinces will create a new wave of growth. Approximately 80% of the 2-trillion-baht infrastructure investment budget will be directed toward construction over seven years, so construction materials producers will benefit directly.
EIC estimates that the infrastructure construction budget will lead to additional cement consumption growth of 1% annually. Further, megaproject investments will create collateral benefits, uplifting the construction materials sector growth by an additional annual rate of 1.4% per year until 2020.
Our notion of collateral benefits refers to value created in adjacent sectors that indirectly benefit from infrastructure investments. Take the example of Japan and its launch of Shinkansen. Osaka, a main destination that was linked with Tokyo, urbanised rapidly after the initial Shinkansen launch. Land plots along major high-speed rail lines have been developed into residential areas, offices and retail spaces, generating significant commercial value. As an indirect effect, such development also created additional demand for construction materials.
For opportunities in CLM, the creation of te Asean Economic Community and various infrastructure investments under the Greater Mekong Sub-region (GMS) plan will create sizable opportunities. As part of the GMS plan, North-South and East-West economic corridors will be created as a network of roads to link the Asean region, while Thailand will be at the focal point of this road network. Demand for construction material products will grow as construction progresses.
Additionally, according to World Cement, the cement industry in the CLM markets is experiencing shortfalls of 4 million tonnes combined annually. Thailand is currently a major cement supplier to these markets; an extensive road network and improved logistics will allow Thai companies to further penetrate these markets.
The aforementioned developments create a very attractive space for construction materials producers to seize growth opportunities. For the domestic market, players must capitalise on local urbanisation trends, and acquire distribution capabilities in provincial areas to sell products in high-growth domestic markets.
For the CLM market, players can adopt two distinctive strategies. First, they can use Thailand as a production base and export products to their destinations. This is appropriate when sales volumes in target markets remain small. Downside risks can also be best managed due to limited cash outlays. Second, they can expand internationally and set up plants in target markets.
Notable Thai players have already embarked on this journey. Sian Cement Group is at the forefront of investing in Asean, and the conglomerate has stepped into Myanmar and Cambodia, among other countries, to manufacture cement to serve robust demand.
Urbanisation offers the next growth thrust that will shape the future of the construction materials business. Robust opportunities lie in high-growth provincial markets, especially along key infrastructure investment routes, where rapid development can be realised.
Also, Asean markets that are currently on a growth trajectory will continue to be attractive. So, the winning strategy is to align products to serve these rising markets of the future.
EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, please visit www.scbeic.com or contact eic@scb.co.th