Industry players argue that with demand uncertain due to the slow economy, a move by the cement producer to up its capacity could add pressures to domestic cement prices which range from RM280 to RM320 per tonne. At the moment, there is a tacit agreement among the three major cement players — LaFarge Malayan Cement Bhd, YTL Cement Bhd and CIMA — not to undercut each other. This is to ensure they stay profitable. CIMA, which is unlisted, is 99.93% owned by UEM Group Bhd.

Last week, The Edge reported that CIMA was planning an additional line at its plant in Bahau to produce clinker, a raw material for cement production. According to sources, the company was evaluating proposals by bidders and had set aside RM800 million for the expansion plan.

One proposal by China’s China National Materials Co (Sinoma) is to build a plant for CIMA with a capacity of 5,000 tonnes a day, for an annual capacity of 1.8 million tonnes, while the other proposal by South Korea’s Halla Corp, is for the building of a smaller production capacity of 4,000 tonnes a day, or 1.46 million tonnes annually. Industry players have estimated the cost for a plant with such a capacity to be between RM550 million to RM650 million, much lower than CIMA’s budget of RM800 million.

As the country’s third largest cement producer, CIMA’s cement plants in Bukit Ketri, Perlis and Bahau have a combined clinker production capacity of 2.9 million tonnes and a cement production capacity of 3.4 million tonnes annually. If its planned expansion goes through, its clinker production capacity would almost double.

“If CIMA increases production capacity and if demand in Malaysia is uncertain, it is possible they will end up exporting the cement to Singapore,” says an industry official.

“However, cement prices in Singapore are low compared to Malaysian prices, at around S$85 a tonne currently (RM203.85). If CIMA expands at the wrong time, low prices and excess capacity will impact its balance sheet. It could also drive down prices in Malaysia,” adds the official.

Current clinker capacity in Malaysia is around 18 million tonnes annually but demand is only about 14 million tonnes, according to industry players. The grinding capacity is about 27 million tonnes, which means there is already excess production capacity.

“Cement is not a product that can be exported easily due to cost and competition. It will be costly and Singapore is CIMA’s best destination. But it is not going to be easy,” says the official.

According to him, it is an open secret that cement prices here are controlled by the big cement manufacturers.

The official also says that historically, cement plants which embark on huge expansion via borrowings are setting themselves up for a fall. He points to examples such as Perak-Hanjoong Simen Sdn Bhd and Kedah Cement Holdings Bhd that were taken over after the companies expanded via borrowings.

Unlisted Perak-Hanjoong, which was once the second largest integrated cement producer in the country, was bought over by YTL Cement in July 2004 for RM75.25 million cash. Two years earlier, the company completed and began operating its second cement plant, with a production capacity of 1.8 million tonnes per annum and clinker production capacity of 1.8 million tonnes annually. Its first cement plant had cement and clinker production capacities of 1.6 million tonnes and 1.4 million tonnes per annum, respectively.

A similar fate was seen at Kedah Cement Holdings Bhd which is now owned by Lafarge Malayan Cement Bhd. According to Kedah Cement’s 2001 annual report — the last available before it was delisted — the company’s borrowings stood at RM1.03 billion as at the end of 2000. It is believed the company had raked up large debts in its expansion drive.

It is understood that CIMA intends to raise RM650 million, which indicates it will go in the same direction as Perak-Hanjoong and Kedah Cement in financing the planned expansion. The expansion, industry officials say, is not new and had been a subject of speculation within the industry for a few years now.

As at June 30, 2008, the last available results before its privatisation by UEM group, CIMA’s cash and bank balances had dwindled to RM35 million from RM100 million the year before. Following its privatisation by UEM last year, it is learnt that CIMA replaced its entire board of directors.

It is learnt that CIMA’s reorganised board now comprises a three-man team, comprising prominent lawyer Abd Kadir Md Kassim as chairman, ex-banker Datuk Seri Ismail Shahudin, and Che Halin Mohd Hashim, who is also managing director. Abd Kadir and Ismail both sit on the board of UEM group. Abd Kadir had formerly served on the board of Time dotcom Bhd, and also heads legal firm Kadir, Andri & Partners, which had been involved in the Synergy Drive merger. Ismail, meanwhile, was formerly executive director of Malayan Banking Bhd and was chairman of the board at Bank Muamalat Malaysia Bhd.

It could be that UEM group is looking to tighten its hold on CIMA, perhaps in an effort to steer it away from a possible wrongly-timed expansion.

Neither CIMA or UEM group could be reached for comment.

CIMA is fortunate to have the backing of a strong shareholder in UEM, which means that should its expansion be ill-timed, it has some cushion. But then, UEM could find itself stuck with a liability, especially after taking it private.

This article appeared in the Corporate page, The Edge Malaysia, Issue 754, May 11-17, 2009.