In the past, the demand for cement has been a key indicator of economic growth. The use of cement indicates that the economy was on a positive growth trajectory, driven by public and private investments in infrastructure and various real estate projects. However, during the COVID-19 crisis, the cement industry is facing severe impacts. Could this be a signal of a World Great Depression or an impending global economic downturn?

Today (April 16), Nakhon Luang Cement Public Company Limited announced that it will close the production line of Plant 1 in Saraburi due to the severe impact of COVID-19, along with a mutual agreement for a voluntary exit program in 2020.

“As all employees are already aware, the COVID-19 outbreak has significantly affected our business, leading to a substantial decrease in cement orders from customers. We anticipate that the demand for cement will continue to decline.

The management team has carefully considered the situation and determined that it is essential to reduce production capacity by closing Plant 1 entirely from May 1, 2020, onwards. Consequently, the company will need to reduce the workforce in Plant 1 and all supporting departments starting from the closure date.

To minimize the impact on our employees, the company has decided to implement a voluntary exit program for employees of Plant 1 and supporting departments who wish to participate in this program first.

If the company deems it necessary to further reduce the workforce, we will provide opportunities for production employees in other Saraburi operations to join the program under the company’s criteria.”

The closure of Nakhon Luang Cement's Plant 1, which produces clinker for export, incurs high costs and has low production capacity. Meanwhile, Plants 2 and 3, which are the main cement production facilities, will remain operational, allowing customers to continue receiving and ordering cement without disruption.

 

Fitch Maintains Nakhon Luang Cement's Credit Rating at 'A(tha)' with a Negative Outlook

Meanwhile, Fitch Ratings (Thailand) Limited has announced that it maintains the negative outlook for Nakhon Luang Cement Public Company Limited (SCCC) and has affirmed the company's long-term National Rating at 'A(tha)'.

It also affirmed the long-term National Rating of the unsecured and subordinated bonds at 'A(tha)' and the short-term National Rating at 'F1(tha)'.

Given the economic conditions and market challenges posed by the COVID-19 pandemic, Fitch believes that the spread of the virus in Thailand and the Asia-Pacific region will continue to be severe in the coming months, putting pressure on the macroeconomic environment of affected countries and leading to a decline in business activities, including construction, in 2020. Fitch estimates that the impact on SCCC will be limited in 2020, with a recovery expected in 2021.

However, the decline in revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) during a time of high debt ratios may require the company an additional year to reduce its debt ratio to a level consistent with its credit rating.

Debt Ratio Risks
Fitch expects SCCC's adjusted net leverage to remain high at approximately 2.6-3.2 times by the end of 2020-2021 (compared to 3.0 times at the end of 2019), assuming that the company's EBITDA will decrease by about 10% in 2020 and return to normal levels in 2021.

SCCC's debt ratio has increased since 2016 due to several acquisitions, peaking at 4.6 times at the end of 2017. The company has demonstrated its intention to reduce its debt ratio by cutting capital expenditures and dividend payments, as well as implementing various measures to increase cash flow from operations. Fitch expects SCCC to refrain from significant business expansion and to maintain spending and investment discipline over the next two years.

EBITDA Decline in 2020 – Fitch estimates that SCCC's revenue will decline by 4-6% in 2020, while the EBITDA margin will drop to 17.5% from 18.5% in 2019. Fitch anticipates a recovery in performance in 2021, as both public and private construction activities are likely to be affected by the COVID-19 outbreak.

 

Did You Know? Nakhon Luang Cement Public Company Limited (SCCC) is the second-largest cement producer in Thailand, with a market share of 29% based on sales.

In 2019, the company managed to maintain its market position amid new production capacity entering the market and increased domestic competition over the past 3-4 years, leveraging its brand reputation and flexibility in pricing.

Additionally, Nakhon Luang Cement has a strong market position in the region, being the largest cement producer and the only clinker producer in Sri Lanka, with a market share of 33%, and the second-largest cement producer in southern Vietnam, with a market share of 21% in 2019.

The company has diversified its business across several Asian countries, including Sri Lanka, Vietnam, Bangladesh, and Cambodia (through joint ventures), with external cement production accounting for 36% of Nakhon Luang Cement's total cement production capacity (excluding joint ventures in Cambodia), while foreign revenue accounted for 47% of total revenue in 2019.

 

Source: Fitch Ratings (Thailand) Limited

Khaosod