INDUSTRY

The boom in building

Busrin Treerapongpichit

Demand continues to grow in spite of a slowdown in the property sector.

ALTHOUGH THE property sector lost some growth momentum in the first quarter of 2004 due to the expiry of tax incentives for homebuyers and tighter reins on housing loans, the building and furnishing materials industry is expected to maintain growth of 10% until next year.

The local property sector has been a leader in the recovery from the 1997-98 crisis and has rebounded especially strongly in the past three years. The tax breaks for homebuyers were among the few economic measures for which the Minister Thaksin Shinawatra government cannot claim credit _ they were initiated by the former Democrat administration of Chuan Leekpai.

To breathe new life into the sluggish industry, the 3.3% specific business tax, an indirect tax levied on certain businesses that are exempt from paying value-added tax, was slashed to 0.11%, while the 2% real estate transaction fee was cut to 0.01%.

Naturally, the building and construction materials sector has been a major beneficiary of the rebound. The Thaksin government decided to extend the tax incentives in 2002 to keep the growth momentum but decided to end the tax breaks at the end of 2003.

In the first half of this year, demand for building and furnishing materials grew by 15% despite the slowdown in the property sector. Demand for major materials such as roof tiles grew by 30% while that of ceramic wall and floor tiles increased by 14%.

This is because a large portion of the demand did not come from new houses and buildings but rather from the need for decoration of the large number of houses that had been sold over the past two years, according to Kajohndet Sangsuban, president of Cementhai Building Products Co, a unit of the Siam Cement Group industrial conglomerate.

Siam Cement Industry, the group's cement flagship, made waves in June when it announced plans to lift capacity by 50% _ the first expansion by a cement producer since before 1997.

Mr Kajohndet said demand from property projects in the medium- to long terms remained strong although it would likely shift from high-end to medium-end housing projects. This demand is projected to keep the 10% annual growth of the building materials industry on track until next year.

He said the strong growth in the industry over the past three years had been driven largely by the government's low-cost Ua-arthorn housing projects and the tax breaks. In addition, low interest rates for mortgage loans further boosted demand in the sector.

Mr Kajohndet said sales of most building material products would rise as long as the real estate sector continued to do well. However, some negative factors have emerged that have threatened to derail that growth. For example, China's efforts to put brakes on its economy could lead to a drop in demand for steel.

The price of billet, a raw material used in construction steel products, has fallen to US$300 a tonne from an average of $400 in the first quarter, partly due to China's new policy that includes limits on new construction projects and loan curbs.

According to National Finance and Securities, China's economic slowdown is not expected to have much impact on Thai industries. China's demand for building materials is not expected to fall so suddenly or significantly, as the country still needs primary products to serve its overall development.

Despite the positive outlook, the Thaksin government should take proper steps to prevent bubbles and to ensure a sustainable recovery of the industrial sector. Fair income distribution should also be taken into consideration instead of a single-minded focus on growth or gross domestic product alone.

Meanwhile, producers of building materials should also be cautious about capacity expansion to avoid creating an oversupply, which was among the major problems faced by the industry during the crisis.