The Philippines: Cementing growth

A rising tide of investments in infrastructure development, combined with higher spending by the private sector, is set to drive the robust expansion of the construction sector, and in particular, the cement production segment. However, prices could be pushed up by rising demand as a number of large new infrastructure projects are rolled out.

In late February, the Department of Budget and Management released its economic growth forecasts for this year and next. GDP is expected to expand by between 6.6% and 7.6% in 2013 and by 7.4% and 8.6% in 2014, with industry – including construction – leading the charge.

Indeed, one of the biggest winners from the growth in 2012 was the Philippines’ cement sector. According to the Cement Manufacturers Association (CEMAP), demand for cement rose by 18% in 2012, the sharpest increase in 15 years. While prospects for the industry are seen as good for 2013 as well, the rate of growth is expected to be below that of 2012, with expansion of up to 10%.

In early 2013, Ernesto Ordoñez, president of the CEMAP, said higher spending from the government on infrastructure developments would boost turnover.

Increased investments in building developments are also expected to fuel the sector’s expansion this year. Lafarge Republic, for example, one of the Philippines’ largest cement companies, is engaged in an aggressive expansion strategy to increase capacity within each of its manufacturing plants and subsidiaries to supply an additional 200,000 tonnes of cement per year in Luzon, 650,000 tonnes per year in Visayas and another 100,000 tonnes per year in Mindanao in 2013.

“Given the rapid growth in construction investment, the outlook for the cement industry is positive, and most players are engaged in expansion plans to meet the growing demand for cement, aggregates, and concrete,” Don Lee, president of Lafarge Holdings, told OBG."

It appears increased state investments have already impacted cement producers, with several of the largest companies in the sector posting strong earnings for 2012. At the end of February 2012 results for one of the biggest, Holcim, showed sales up by 21%, following a fall of 5% the previous year. The company’s net income rose from the 2011 figure of around $50m to $89m, an increase of just under 80%.

Eduardo Sahagun, CEO of Holcim, said strong construction activity in both the public and private sectors drove growth. “The cement industry has been growing at an average of 4% to 5% for the past 10 years,” he told OBG. “Since most infrastructure was brought to a standstill due to the new incoming government, the industry grew at 1% in 2011 as opposed to 7% in 2010. However, 2012 was a catch up year that saw exceptional growth of 20%.”

Another leading firm, Southeast Asia Cement Holdings (Seacem) reported to the Philippines Stock Exchange on February 11 that its year-end profits for 2012 were $92m, more than eight times its 2011 result of $11m.

While the results are positive, there could be a downside for the economy. There are concerns that shortages could push up prices, which in turn could drive up inflation. The Bangko Sentral ng Pilipinas (BSP), the central bank, has moved to dispel these concerns, saying any price increase could be indicative of a surge in growth in the building sector.

On March 2, Diwa Guinigundo, the deputy governor of BSP, said inflation was well in hand, being at the lower end of the 2.8-3.7% range targeted by the reserve for February, despite the rising costs of cement. “Prices of commodities are generally stable, with slight price increases for cement. The increase in cement prices should not be viewed negatively, as this signals renewed business activities in the construction sector,” Guinigundo said.

To some degree, this supply-side pressure could be eased by a planned increase in production. Looking to consolidate on the strong performances of 2012, most of the Philippines’ leading cement producers have announced plans to expand production capacity, either bringing dormant plants back on line or opening new facilities.

One other concern will be the government’s ability to maintain a steady flow of new developments. The state has committed to infrastructure projects worth $11bn in 2013, which it intends to increase to $16.74bn by 2015. However, the government has struggled to roll out large-scale developments in a timely manner in the past, with delays over planning and approval processes and funding allocations postponing start-ups and pushing back completion dates.

If the government can streamline its own contribution, it is likely the construction industry will be able to meet the higher demands placed upon it by the investment programme, while also serving the private sector’s needs, which will provide the infrastructure needed to enable more efficient growth of other key segments of the economy such as agriculture and tourism.

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