The Department of Trade and
Industry is aiming to make the cement industry more competitive. As
a form of tax regulation, they have imposed a "provisional
safeguard duty" on imported cement to avoid placing local cement
producers at a disadvantage when competing with international
The DTI has imposed a 4.0% tariff
or an additional of PHP 8.40 per 40-kg bag on the selling price to
the cement importers, a safeguard measure to give the domestic
players a level playing field against the importers. The duty was
based on DTI's investigation which established the elements of a
surge in supply which may injure the local cement industry.
According to the Cement
Manufacturers' Association of the Philippines' (CeMAP), the
extensive importation of affordable cement from neighboring
countries can stunt the growth of the local industry. In 2017,
imported cement reached more than 3 million metric tons from just
3,558 metric tons in 2013. Market share of imports grew from 0.02%
in 2013 to 15% in 2017. This trend has been having an adverse
effect on the domestic cement industry with manufacturers
experiencing a 49% decrease in income in 2017.
The government believes that with
the sudden surge in imports, there's an indication of dumping as
cement imports are priced significantly lower than the domestically
produced cement, which could hurt the overall local industry.
Demand driving price
With the Build, Build, Build
program in full swing, infrastructure outlays are expected to
increase from 4.7% of GDP in 2019 to 7.0% in 2022. So far, 44 out
of the 75 major projects are already in full swing. Infrastructure
spending has reached PHP 728.1 billion in the eleven months of
2018, 49.7% higher YoY. We can expect demand to be sustained in the
coming years which may put pressure on the local cement
Meanwhile, expansion of real estate
developers in both residential and commercial segments should also
help sustain demand growth in cement consumption. Listed developers
are expanding their recurring income and residential developments
as they continue to earmark record levels of their capex program.
In 2018, developers spent approximately PHP 434.9 billion - an
increase of 14.3% YoY.
Despite imports taking a larger
chunk of cement supply, data from the Philippine Statistics
Authority (PSA) shows that the Construction Materials Wholesale
Price Index (CMWPI) has been on the uptrend despite consumer prices
easing due to cooling oil prices and a more stable foreign exchange
rate. As such, this indicates higher demand is causing the rise in
cement prices. We note a faster growth of the CMWPI in 4Q/2018 was
driven by the surge in construction spending which totaled PHP
1,358.8 billion, or 21.7% higher YoY compared to 7.9% YoY in
Real estate sector can absorb costs in the
With construction costs increasing, we expect the real estate
sector to absorb it with ease in the short run. High-end
residential prices in Metro Manila are in a rebound with 4Q/2018
prices improving by 9.3% YoY compared to 8.2% YoY in 4Q/2017.
Absorption rates for high-end residential units are still high with
limited new launches in the pipeline.
In addition, office rents are also expected to accelerate this
2019 after registering average rental growth of 5.0% YoY in 2018.
The tight vacancies in key submarkets, such as Makati CBD, BGC, and
the Bay Area, have driven overall rental growth in the capital. The
rise of the Philippine Offshore Gaming Sector (POGO) and the
sustained demand from the offshoring and outsourcing (O&O)
sector have buoyed the office sector in the past three years.
Headline inflation has eased at the start of the year, and the
Bangko Sentral ng Pilipinas (BSP) has indicated that this has given
them some headroom to ease interest rates. However, with
expectations of another slew of rate hikes from the US Federal
Reserve (US Fed) in 2019, it is likely the BSP may have to follow
the US Fed's movement. Consequently, we should also anticipate
yield spreads for both office and residential segments to contract
as interest rates rise.
Tariffs may hurt returns
Given that cement prices are still climbing despite the flood of
cement imports, we are of the view that local cement production is
not keeping up with the accelerating demand from both public and
private construction activity. Conditions like these indicate that
there is a production deficit from the local cement industry, and
in order to plug this gap, cement importation is vital to control
prices. As such, we believe that a cement tariff is unnecessary to
control inflation as it limits the entry of affordable cement that
could relieve demand pressure. Lastly, this may exacerbate current
price conditions if left to persist.
The real estate sector may manage to absorb the rise in costs in
the short run due to the favorable demand for office and
residential space. However, we do not discount the possibility that
returns in the long run may be affected by unabated escalation of
construction costs. Returns are likely to be hardest hit for
projects currently under construction which will likely balloon
capex budgets. In order to compensate this, developers may be
compelled to pass on the costs to potential occupiers and