Recently, the Malaysia Competition Commission said it would pay special attention to the cement industry. The commission said it had taken note of recent price increases by cement and concrete producers and had worked with the Ministry of Domestic Trade and Consumer Affairs. Separately, the Commission also said it was well aware of the recent merger of YTL and Lafarge, which led to a more concentrated market both upstream and downstream.
This came after at least one unnamed cement producer announced a 40% price hike in mid-June 2019, causing panic among end users, which was reported by local media. The Malaysian Cement and Concrete Association, when asked about the matter, defended the price increase because of the rising cost of various inputs. To be fair, the Malaysian Competition Commission acknowledged in a report released in 2017 that the industry was facing price pressures due to input costs. The
government is now involved, with the head of trade and consumer affairs saying that producers have agreed not to raise prices and that any future planned price adjustments will first be "discussed" with regulators, allowing the situation to stabilize. Subsequently, Malaysian Finance Minister Lim Guan Eng called for an investigation into prices in eastern Malaysia to determine whether cartel-like behavior had caused the price of Sarawak cement to rise. Prices in the state are "significantly" higher than in Peninsular Malaysia, he noted. In response, CMS Cement CEO Sulaiman directly hit back at the claim, blaming industry mergers and acquisitions in Peninsular Malaysia and saying the company has no plans to raise prices in the near future. Sulaiman mentioned that any potential investigation into the price differential between Peninsular Malaysia and Sarawak would indicate that the cement producer has not raised prices since early 2016. "We welcome the investigation for two reasons. First, it will show that the price difference is purely due to the recent fierce price war, which has also led to industry mergers and acquisitions in Peninsular Malaysia," Sulaiman said. "Second, an investigation of this nature will also show once and for all that Sarawak is not, and has never been, a monopolist in the cement industry."
As the Malaysian Competition Commission kindly pointed out, the whole furore came about a month after LafargeHolcim divested its local subsidiary to YTL. The committee approved YTL's acquisition of Lafarge Malaysia, knowing that YTL would own more than half of Malaysia's production capacity. Given this, it is not surprising that the committee wants to appear tough in the face of even a hint of market misconduct, whether or not it is real.
As the Malaysian Competition Commission hinted in its statement, the local cement industry has excess capacity. Moreover, domestic demand has been shrinking since 2015. According to the latest data, Malaysia has 11 integrated cement plants with a capacity of 27.1 million tons per year. Production reached a high of 24.7 million tons in 2015 and fell to 18.8 million tons in 2017. Data from the Malaysian Cement and Concrete Association shows a worse picture, with the industry capacity utilization rate of only 59% in 2016, when the combined grinding capacity is taken into account. At the end of 2018, Lafarge Malaysia's revenue declined, with a pre-tax loss of $97.7 million. Shortly afterwards, Lafarge announced that it would withdraw from the cement market in the country and neighboring Singapore.
In theory, YTL's acquisition was supposed to solve Malaysia's overcapacity problem, as it would either gain synergies by merging the two companies or close some of its factories. Of course, the system seems to be working to some extent, as the proposed 40% price hike is not happening. However, if the government responds to voters rather than market, it could extend the capacity and demand gap indefinitely. In this case, Lafarge's decision to withdraw from Southeast Asia may have been prescient.
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