Riding the wave of urbanization: the next growth thrust in construction materials

ผู้เขียน: EIC | Economic Intelligence Center

A classic pattern of emerging market development, aside from the obvious rapid economic growth, is rising wealth accumulation and spending, leading to urbanization, city expansion, and increased construction budgets, among others. One of major sectors benefitting from such trends is construction materials. Notably, Asean construction material players enjoy 10% annual revenue growth, while realizing 4% annual earnings growth in the past 5 years. Growth has also been similarly impressive in Thailand, as fueled by construction activities and real estate boom, raising intriguing questions: will growth become short-lived, and what should players do in response to this?

Major growth drivers are both local and regional. Construction materials in Thailand have been growing healthily, with domestic cement demand enjoying nearly double digit growth annually in 2013. Three factors are attributing to the rise in consumption in Thailand. First, residential real estate boom in Bangkok creates robust consumption of cement and steel for building structures. Such boom has, for the most part, been a result of emerging vertical living mainly along mass transit routes, slashing commute time.

Second, urbanization in upcountry is pushing for further demand in construction to serve local consumers. Rising wealth has provided a significant push, mainly a result of increased minimum wages and income from agricultural sector. Population migration also creates demand uplift in major provinces that are "hubs" for education and labor markets. Notable hubs include Khon-Kaen in the northeast, Chonburi in the east, and Chiang Mai in the north. These provinces have either prominent regional education institutions, or established labor markets to serve industrial estates, spurring city development to serve the needs of those domestic migrants.

Third, Thailand has been attracting sizable investment flows into the country, with FDI as high as $9 billion per year; two-fifths of which is from Japanese investors who invests significantly in manufacturing sector. These investments create demand for factory construction, and residential real estate to serve expatriates, driving up construction material consumption. Also, the fact that industrial estates in most regions are witnessing peaks in occupancy rate creates a significant demand thrust for new factory spaces, triggering another wave of investment to build new industrial estates.

As for the region, CLM (Cambodia, Laos and Myanmar), the adjacent neighbors of Thailand, is a new growth frontier that generates demand for bricks and mortars. Urban population in Laos, Myanmar and Cambodia are 34%, 33% and 20% of total population respectively. Growth of urban population has been rising at a rate of 55%, 17% and 18% respectively during the last decade. Thailand has been benefitting from such trend, as witnessed from exports of construction material products. Notably, 15% of cement production in Thailand has been channeled to export markets, mostly to CLM through cross-border trades. Activities along border crossings have picked up fast, as indicated from increased exports to CLM countries at an annual growth rate of 18% in the past 4 years. CLM will continue to urbanize and grow, and GDP growth in 2012 has been at 6.2%, 8.4% and 6% in CLM respectively, creating attractive space for Thai companies to tap into.

Despite the threat from a technical recession in Thailand, growth in construction material sector will not become short-lived. Urbanization trend in Thailand will continue to drive consumption, and provincial development will emerge as an important growth driver. Even if we examine the prevailing growth trends, economy in the provinces is growing at a faster rate than Bangkok. Three-quarters of Thailand's GDP in 2020 will be generated from the provinces, up from two-thirds currently. Along this growth pattern, urbanization will bring about notable changes at provincial level, boosting construction to build supply for key sectors like real estate, retail, and manufacturing, and raising demand for home improvements of local residents, boosting consumption of construction materials.

Most importantly, key demand catalyst is public investments in infrastructures. Establishing transportation backbones that connect major provinces throughout the country will create a new wave of growth. Approximately 80% of two-trillion Baht infrastructure investment budget will be directed towards construction over the span of 7 years, so construction material producers will directly benefit. EIC estimates that infrastructural construction budget leads to additional cement consumption growth of 1% annually. Further, such mega-project investment will create collateral benefits, uplifting construction material sectoral growth by an additional annual rate of 1.4% per year until 2020.

Our notion of collateral benefits refers to value created in adjacent sectors that indirectly benefit from infrastructure investments. Take the example of Japan and its launch of Shinkansen. Osaka, a main destination that was linked up with Tokyo, rapidly urbanized after the initial Shinkansen launch. Land plots along major high-speed rail stations have been developed into residential areas, offices and retail spaces, generating significant commercial value. As an indirect effect, such development also created additional demand for construction materials.

For opportunities in CLM, the opening up of AEC and various infrastructure investments per Greater Mekong Sub-region (GMS) plan will create sizable opportunities. As part of GMS plan, north-south and east-west economic corridors will be created as a network of roads to connect and link up Asean continent, while Thailand will be at the focal point of this road network. Demand for construction material products will grow as construction progresses. Additionally, according to World Cement, cement industry in CLM markets is experiencing shortfalls of 4 million tonnes combined annually. Thailand is currently a major cement supplier to CLM; extensive road network and improved logistics will allow Thai companies to further penetrate these markets.

The aforementioned developments create a very attractive space for construction material producers to seize growth opportunities. For domestic market, players must capitalize on local urbanization trend, and acquire distribution capabilities in provincial areas to sell products in high-growth domestic markets. For CLM market, players can adopt two distinctive strategies. First, use Thailand as production base and export products to selling destination. This approach is appropriate when sales volume in target markets remains small. Downside risks can also be best managed due to limited cash outlays. Second, expand internationally and set-up plants in target markets. Notable Thai players have already embarked on this journey. SCG is at the forefront of investing in Asean, and the conglomerate has stepped into Myanmar and Cambodia, among other countries, to manufacture cement to serve robust demand in those markets.

Urbanization offers the next growth thrust that shapes the future of construction material business. Robust opportunities lie in high-growth provincial markets, especially along key infrastructure investment routes, where rapid development can be realized. Also, Asean markets that are currently on growth trajectory will continue to be attractive. So, the winning game is to align products to serve these rising markets of the future.