Sector could feel the heat from falling market sentiment and higher production costs

The construction materials sector recorded disappointing sales in the first half of this year as an unexpected fall in highend housing projects outweighed the positive effects from the government's expenditure on infrastructure projects.

"Firsthalf sales were below expectations because the demand from the highend housing segment dropped," said Kajohndet Sangsuban, president of Cementhai Building Products Co, a unit of the Siam Cement, the country's largest industrial conglomerate.

He expects SCC's building construction unit will post a 10% gain in sales for the first half of this year, compared to the same period last year. It recorded a 15% yearonyear increase in sales in the first half of 2004.

The decline in demand from the highend market has definitely affected sales of premiumgrade building and furnishing products, such as Cotto, the group's premiumgrade ceramic tile and sanitaryware line.

Kajohndet "The decline in sentiment will adversely affect the sector in the second half."

"We targeted sales for Cotto products to increase by 10% earlier this year, but the increase has been only 67% in the first six months," Mr Kajohndet said.

Fortunately, demand from some sectors including middleincome housing and city condominiums, which had been forecast to decline, continues to rise, offsetting the loss in revenue form the highend sector.

"Earlier, we were concerned that speculation could drive the market similar to the experience prior to the crisis in 1997, but a survey showed us that it is based on real demand," he said.

According to an internal survey by SCC, the percent of vacant new residential units now stands at 25%, which means that the 75% of the new residential units have been sold to the real residents.

Mr Kajohndet predicts the decline in overall market sentiment will adversely affect the sector in the second half of the year. But segments that are expected to buck the trend and continue to grow are cement and construction steel, aided by the government's economic policy.

To sustain the strong growth momentum, the government has budgeted 1.7 trillion baht for investments in massive infrastructure projects through 2009. This in turn has helped drive constructionrelated stocks higher.

Among the hot stocks in the sector are Siam Cement [SCC], Siam City Cement [SCCC], Millennium Steel [MS] and Bangsaphan Barmill [BSBM].

However, foreign investors have expressed some scepticism about the implementation of the megaprojects, making it necessary for the projects to get off the ground to calm concerns.

According to a report by SCB Securities, the industry will be affected slightly by the delay in starting the bid process for megaprojects in the short term.

The report said the megaprojects would boost the industry's earning results in the long term, which it noted would also benefit form the government's plans to reduce the consumption.

However, despite the general positive outlook, some negative factors have emerged that threaten to derail growth.

First, the sharp increase in global oil prices combined with the government's policy to end the dieselprice subsidy will definitely increase transport costs.

With every 30% increase in the diesel price, the industry's production costs go up 1%. Fuel represents around 20% to 25% of total production costs for the construction material businesses.

According to Chanthana Sukumanont, senior vicepresident of Siam City Cement Plc, the country's second largest cement maker, total energy costs of the company have risen 15% on average due to the 20% increase in diesel prices.

Local demand for cement this year is expected to rise by 1215% from 28 million tonnes in 2004. The country's total production of cement last year stood at 54 million tonnes with 75% of production capacity utilised.

Ms Chanthana said rising interest rates this year would likely lead to slowing demand from homebuyers, which could rein in cement consumption.

Most major players agreed that Thailand's economic slowdown is not expected to have much impact in the short term in the view that the country will still need construction materials to serve infrastructure development.

However, Mr Kajohndet warned that producers should also be cautious about capacity expansion to avoid creating an oversupply.

"All of us need to focus on boosting economies of scale, which will help us ease the impact of energy costs, but on the other hand, competition in the market is tough, making huge investments too risky," he said.