Shao Jun: Analysis of 2013 Chinese Cement Market

Byzhangli

Updated Thu, 26 Sep 2013 00:00:00 GMT

On September16-18, 2013, INTERCEM Asia Conference was held in Bangkok, Thailand, and the meeting attracted up to 250 delegates from almost 40 countries. Over the course of the three days, delegates engaged in unique networking opportunities and participated actively in conference sessions and discussions with leading international industry experts. Shao Jun, CEO of China Cement Net, was invited and gave a speech on Analysis of 2013 China Cement Market.

Below is his speech :

There are mainly three parts in my report:

1、Production, price and profit situation of Chinese cement market;

2、Supply/Demand analysis and outlook of Chinese cement market;

3、Development opportunities in China cement industry.

2013, China's economic growth rate has shown a significant slowdown, and total fixed asset investment growth is far from satisfactory, however, stimulating consumer demand in the downstream areas of cement is remarkable, making this year China's cement output growth rate compared to last year has been greatly improved. Due to sharp decline cost and more obvious contradiction between supply and demand and other factors, in 2013 China's cement prices to the lowest level since the financial crisis.

Specific point of view:

From January to July in 2013, China's total cement production was 1.306 billion tons, an increase of 9.57%; clinker production was 765 million tons, an increase of 4.21%. By contrast, last year the national total cement output of 1.183 billion tons, year on year growth of 5.3%. From the current situation, the level growth of cement and clinker this year than last year overall.  

Price, compared to the data in the same period this year, the national average price of cement has been the lowest level since the financial crisis, but the resilience is better. In just the past August,the market price of cement in China's major cement consumption areas,such as East,MiddleSouth,driven national average price rebound.By the end of August, the National P.O42.5 bulk cement price was about 296 yuan/ton. 4 yuan/ton slightly higher than July. In comparison, by the end of August in 2012 the price is 298 yuan/ton, to September began to pick up. Optimism that this year China's cement market inflection point season one month earlier than last year.

However, since the end of 2011, China's coal prices continued to fall. For example the closing price of DatongYouhun coal inQinhuangdaoport, its 2012 price was 850 yuan/ton, to the end of August this year, has dropped to 600 yuan/ton, a decline of nearly 30%. Converted to per ton cement production cost of cement enterprises, there should be 20-30 yuan/ton decline in space. For this reason, despite the Chinese cement industry in 2013 suffered a more severe decline in the market price, but corporate profits has not significantly affected.

First half of 2013, China's cement manufacturing industry realized main business income of 428.1 billion yuan, total profit of 22.4 billion yuan, respectively, an increase of 6.58% and 0.96%. It should be noted that, due in 2011 China's cement industry has made an unexpectedly high returns, since 2012, until March of this year, the cement industry, long-term growth rate of gross profit to higher levels of negative growth.

It is worth mentioning that, in China, in recent years, the cement industry has gradually increased return on investment, better than all the building materials industry and industrial industries. from2010 to 2012, the cement industry ROE reached 6.8%, 7.5% and 7%, compared to the same period of the entire Chinese industrial sector ROE were 6.7%, 6.5% and 6.2%.

Next, I'll discuss with everyone the 2013 Chinese cement industry supply and demand situation, and China Cement Net judgment and forecast.

From January to July in 2013, the national total investment in fixed assets amounted to 22.17 trillion yuan, year of year growth up 20.10%, fell by 0.3% over same period of last year. However, this situation with the accelerated growth of cement consumption does not match the reality, this is mainly because investment in manufacturing has fallen sharply drag and interference. From January to July, China's manufacturing industry total investment of 7.7 trillion yuan, accounting for the total investment in fixed assets of 35%, year on year growth rate fell to 17.08%, compared with the same period last year and the year before were down 7.77 and 14.72 percentage points.

However, the real demand for cement infrastructure construction, real estate market and the needs of rural markets performed well this year. They three in the Chinese cement demand structure accounted for about 4:3:3.

From January to July, China Infrastructure Investment totaled 4.48 trillionyuan, an increase of 24% in year-of-year growth, over the same period last year increased by 14.5%. Construction of public facilities which grew 28.51%, better than from March 2010 to the end of 2012. Investment in transport, especially rail transport infrastructure strong. In addition, water environment also has a good performance. Only electric gas and water development and water transport investment weak.

It is foreseeable that, despite the Chinese central government has repeatedly stressed that the current policy focus is still adjusting structure, promoting reform, and promote the transformation and upgrading, but also showed steady growth is the basis of structural adjustment. With the economic downturn has been increasing concerns about the situation, the lower limit of the government sector, the bottom line of thinking demonstrated. Consideration for employment insurance, 7.5% is lower, for doubling the national income in 2020 to consider, 7.0% is the bottom line. However, there is no doubt that local governments are not waiting for the bottom line appears, even the arrival of the lower limit can not be tolerated. It is understood that all the provinces are being developed to maintain growth steady growth or investment roadmap.

Real estate development and investment from January to July total of 4.43 trillion, up 20.5% of year on year growth, increase of 5.1% compared with same period of last year, situation even better in the second half than the first half year. Through real estate sales area and construction area and other indicators, the real estate market prospects can look forward to. In addition, a second-tier cities, difficult to drop and easy to rise performance, we anticipatethereal estate investment growth rate probability remained at 20% at the end of year.

In addition, this year, parts of China, especially the eastern and central parts of the rural market demand increased significantly. From March to May east region had a strong performance, thanks in large part to stimulate the local rural market demand. In China, the rural market is mainly consumer P.C32.5 bagged cement-based, while the urban market is mainly dominated bulk cement consumption P.O42.5 through in recent years (especially in this years) of constantly rising cement clinker ratio point of view, China's rural market demand growth potential is also really good.

The supply side, under the effect of the Chinese government and relevant departments, China's new clinker and cement production capacity has decreased, and out of production policy in recent years is also relatively tight grasp.

From January to July in 2013, a total of 31 clinker production line put into operation, the cumulative annual designed production capacity of about 39 million tons. By contrast, from January to July in 2012 a total of 69 production lines, corresponding to the clinker production capacity of about 97 million tons. From a regional point of view, From January to July the biggest impact is northwest and southwest regions, including Xinjiang and Guizhou were put into seven and four production lines.

Preliminary estimates, from August to December this year China will have production capacity of about 8200-8300 tons, the biggest impact is still the northwest and southwest regions. Overall,forecast2013 annual clinker production capacity of China will add 120-130 million tons, less than 160 million tons in 2012. In addition, according to MIIT by the end of July released 19 industries and eliminate backward production capacity list shows that the cement industry this year is expected to at least eliminate backward cement production capacity of 92,754,000 tons. If the implementation in place, the annual net new clinker production capacity of about 70 million tons.

Our China Cement Net has a China Cement Research Institute specializing in providing study and consulting services on cement industry chain to China's cement industry, enterprises and related departments. According to analysts in our China Cement Research Institute, China's cement output in 2013 may range from 2.35 billion to 2.48 billion ton, and its year-on-year growth rate is probable to reach double-digit again. If the growth rate is 10%, then the final output will be 2.43 billion ton. As for the aspect of capacity, ignoring the factor that cement clinker ratio may increase, on the basis of 3 billion tons of cement production capacity by the end of 2012, net newly increased cement production capacity in 2013 is about 115 million ton, and the final cement production capacity in 2013 may reach about 3.12 billion ton. If so, the production capacity utilization rate of the cement industry in 2013 will greatly increase to nearly 78%. In fact, if we calculate by the actual clinker productivity, the situation will be slightly more severe.

To sum up, I think there is still certain growth room for China's cement industry in the next few months, and cement price is expected to continue to change in the seasonal cycle as before. This judgment is mainly based on the fact that the driver of demand growth is greater than the pressure of supply increase. Of course, the specific situation of each region varies, for example, in the northeastern region, the short demand season together with the late operationstart at the beginning of the year make the whole year being under pressure; And in the northwestern Xinjiang region, with extraordinarily newly-increased production capacity and the much too early coming of winter demand off-season, the corporations’ situation are surely not so good.

China is a big cement country whose cement output in 2012 accounted for about 60% of global cement output, and it can be expected that in the next few years, China's cement market size will continue to expand. At the same time, China's large-scale cement enterprises, and enterprises related to engineering equipment and construction are also actively going abroad. We are on the road of being a world cement giant. And the development of China's cement industry has attracted the eyes of the world.

First of all, the market of China’s central and western regions are promising

In China, the majority of people within the industry basically think that the past "golden ten years" of development of China's cement industry has ended, and people in the cement industry have had a higher sense of crisis. However, I personally think that the inflection point of China’s cement industry will not come immediately. The Chinese government is actively promoting the new urbanization strategy, and for China's relatively under-developed western regions, urbanization construction often means demand for steel and cement.

According to UN statistics, China's urbanization rate in 2012 is 53%, and there is quite large gap compared with developed countries whose urbanization rate is about 80%. In fact, there are two ways to measure the urbanization level of our country - resident population and household registered population. In terms of the household registered population, China's urbanization rate in 2011 is only 35% which is far below the average level of middle-income countries’ 49% by the World Bank statistics. In the relatively backward central and western regions in China, the urbanization rate is much lower than that of the eastern region, and for these areas, there is still large development space for the construction of infrastructure and real estate, as well as growth potential of cement demand. At present, China's cement enterprises has concentrated their capacity more in these less developed areas, including those concrete producers who as I know have good development vision. They have started to reduce their development in those first-tier cities and started to enter the lower-tier cities.

Second, there is still great growth space for industrial concentration 

Contrary to foreign developed countries, the concentration degree of China's cement industry is quite low. By the end of 2012, there were still over 3900 cement companies in China whose average annual cement production capacity are below 800 thousand ton if calculated under the total cement production capacity of 3 billion ton. We China Cement Net will launch a list of "top 100 China enterprises on clinker production capacity" every year, and enterprises with an annual clinker output of 2 million ton can be listed in. According to the statists of our China Cement Net, during the five years from 2008 to 2012, the capacity concentration rate of China's top ten cement enterprises increased from 23% to 47%; the capacity concentration rate of the top five cement enterprises increased from 17% to 36%; and the capacity concentration rate of the top three cement company increased from 13% to 29%. So it can be seen that the concentration rate in the market of large-scale cement enterprises increased rapidly, but the absolute concentration level is still not high.

Then, it’s not so feasible for large-scale cement enterprises to improve its market control power through increasing new capacity. And mergers and acquisitions has become the inevitable trend for the development of the industry. China National Building Materials Group is a case in point, it expanded its company scale through mergers and acquisitions, and has now become an enterprise who has the largest cement capacity in China and even in the whole world. Besides, many large-scale enterprises, like Conch, Huarun and Huaxin, have speeded up their pace of mergers and acquisitions. Many powerful cement companies who used to be content to operate only in parts of the country have started merger and reorganization as well.

Third, China's cement industry is transforming itself to be environment-friendly 

Now, people and industries across China are emphasizing the importance of transformation and upgrading, and so is the cement industry. China's cement industry is actively seeking to change its original image of "dirty, chaotic, and poor", and try to change itself into an environmental-friendly enterprise. It not only emphasizes the importance that cement enterprises should pay attention to energy saving and pollution prevention, but also the importance that they should help to solve the environmental pollution problems caused by the construction process of China urbanization and industrialization, such as the co-processing of city living garbage, industrial solid wastes and city sludge.

In recent years, China's cement industry has made some remarkable achievements and  gained some experience in terms of co-processing wastes by using cement kilns. It has gradually established a set of co-processing technology system which can be widely promoted now. Beijing Cement Plant began to process wastes through a 2000 tons cement clinker kiln in 1995, and since then, 18 years have passed, many cement enterprises like Conch, BBMG Coporation, Huaxin Cement, China Resources Cement, Sinoma, Lafarge, Yatai Group and Tongli Cement, are all processing garbage, sludge, toxic and hazardous wastes by cement kilns. By the first half of 2011, China has put into operation 20 production lines of about 19 companies, and projects under construction are up to about over 130.

Fourthly, the electronic commerce in cement industry is still making progress

When it comes to the topic of transformation and upgrading, the electronic commerce must be mentioned. China's e-commerce industry is developing quite well, so is the electronic commerce in the cement industry. According to statistics, fixed trading volume of fire-resistant and abrasion-resistant materials and spare parts of cement enterprises in China each year are about 30 to 50 billion yuan, while most enterprises are still using the traditional procurement mode which is small in procurement scale, high in cost, and complex in process and thus resulting in many problems like large amount of stocks, procurement difficulties of spare partsfor emergency, etc. Advanced Internet technologies are used by ChinaCement Spare Parts Net to effectively solve not only the above problems, but also promote the optimization ofcement enterprises’ operating and managing mode, and enhance the comprehensive strength of enterprises.

Membership of China Cement Spare Parts Net covers 80% of cement companies, and 60% equipment companies. The site has 80 thousand effective registered members, 1500 paid senior members, and 500 advertising enterprises. The site has also 55 board chairman unit of cement company, and 130 senior consultant expert teams.

China Cement Spare Parts Net will further promote the construction of Information Platform, Trading Platform and Data Center, and continuously improve its service of construction which includes procurement, transactions, payment, warehousing, logistics, and database query. It will strive to build a globally complete B2B commercial chain service mode, and become an authoritative maker of industry standard.

For the majority of overseas customers, we China Cement Spare Net can also provide many services. For example, procurement agent of a full set of equipment and spare parts; and equipment operation services of warehouse management, equipment repair and goods transfer, etc.

In addition to the above three aspects, there are many other developing opportunities for China's cement enterprises, for example, the extension of industry chain, e-commerce and informatization construction in the industry, and they are all hot topics of the industry in recent years. As China's most influential portal in cement industry, China Cement Net has also made positive efforts in promoting the progress and development of the industry.