China Cement Industry Forecast for 2008 – 2010

China’s cement production is forecast to grow by 10% per year between 2008 and 2010. Due to the regulatory guidance to “remove old capacity before establishing capacity”, the growth of new cement production capacity could somehow way to decline in the coming years and could even lead to supply shortages in some regional markets at some point. General cement prices are expected to rise steadily, due to factors such as the supply and demand structure, higher coal and electricity costs. The organic growth of the cement industry should be able to generate satisfactory operating results in the coming years.

The Chinese government ordered the phase-out of 250 million tons of obsolete cement production capacity by 2010, so industry consolidation is expected to accelerate and industry market shares and profits to become even more concentrated. in solid companies. Therefore, there will be additional value created by acquisition opportunities as a result of industry consolidation.

Organic growth yielded satisfactory results

The progress of industrialization and urbanization in China should continue to expand the demand for cement products. Due to the domestic price increase of cement and the removal of export discounts for cement products in July 2007, China experienced a 10% decrease in cement exports in the second half of 2007 compared to the period previous comparable (pcp). The impact of the removal of export discounts has only been here for about half a year, so it will become clearer after the full year of 2008. Analysts forecast China’s net cement exports to remain at 40 million tons between 2008 and 2010. Taking both domestic and export demand for cement into account, China’s cement industry will see 10% annual growth in demand over the next three years.

On the other hand, cement supply growth may slow down in China. China’s cement industry is estimated to have completed US$7.2 billion worth of fixed asset investments in 2007. The industry’s investment growth in 2007, which was 7.78% higher than in 2006, was driven by factors including the change in the cement product mix, the accelerated phase-out of capacity, and the pressure of energy conservation and emissions reduction mandates.

Considering the “knock out before lay” regulatory arrangement on adding new capacity for dry-processed cement, the growth of dry-processed cement capacity in China is expected to grow by 10%, 9%, and 8 % between 2008 and 2010. The removal of old capacities may even create periodic supply shortages in some regional markets in the short term. But the balance between supply and demand should be restored by 2010, as the existing 250mt of obsolete capacity is phased out of the Chinese market.

Currently, 60% of the world cement market is concentrated in the hands of the top 50 cement manufacturers worldwide. However, the low concentration of China’s industry at the domestic level has become the main reason for market price volatility and low-end price competition, and such a low capacity size on average will also make it difficult for use of production at scale. Therefore, as a result of the elimination of obsolete capacity, investment in organic capacity and external acquisition, the concentration of China’s cement industry can be improved to 18.1% and 19.6% in 2008 and 2009. respectively.

Improved industry concentration can lead to scaling efficiency. On the one hand, as the barrier to entry increases and the size of locally produced cement production equipment increases, many large-scale cement production lines will be established, which could improve production efficiency. And the localization of cement equipment can also reduce fixed cost and break-even points for Chinese cement companies. On the other hand, the improvement in the concentration of the industry can also improve the bargaining power of the main cement producers vis-à-vis suppliers and customers, thus expanding the profit margins of the industry.

Industry Consolidation Reorganization Value

The Chinese cement market is a highly competitive market and cement is a commodity with consistent quality across the board. When staffing and technology levels are at a similar level, price competition will become the main method of competition. Therefore, the commercial nature of cement has determined that expansion of scale will be the driving force for cement manufacturers in order to achieve advantageous competitive positioning.

Take the example of Anhui Conch Cement Co Ltd, the largest cement producer in China. The Chizhou, Anhui province-based cement company went from producing 2 million tons of cement clinker in 1996 to producing 59 million tons of clinker and 65 million tons of cement in 2006, through series mergers, acquisitions, and expansion of scale. Conch Cement has been the largest producer in China for 10 consecutive years, and is also the largest cement and clinker supplier in Asia and the fourth largest globally.

Mandatory removal of obsolete capacity can help to effectively improve industry concentration. The minimum scale threshold required by industry regulators could markedly improve unit capacity (of production lines), providing a technological basis for industry concentration. The mandate to phase out 250 million tons of obsolete cement capacity by 2010 will undoubtedly encourage industry consolidation, which in turn will accelerate industry concentration.

Although it is difficult to pinpoint specific targets, agreements and timing, the industry shakeup in the Chinese cement market can reasonably be expected to intensify in the near future. Major regional producers may strengthen their positions through mergers and acquisitions, and the Chinese cement industry will eventually be dominated by a few regional leaders. On the one hand, the strong cement producers will try to “unite” with the small and medium-sized players from the surrounding regions, with the aim of becoming regional leaders. On the other hand, multinational cement giants will establish their presence in selective market points in China, putting pressure on domestic cement producers to engage in more M&A activities to secure regional market shares. Since China’s cement industry still has a low degree of concentration, the synergistic benefits of industry consolidation could be quite noticeable in the 2008-2010 period. Therefore, industry consolidation can effectively contribute to the results of cement producers, in addition to the growth of their organic capacity.