China’s Cement Industry Forecast For 2008 – 2010

China's Cement Industry Forecast For 2008 - 2010

China’s cement output is predicted to increase 10% annually between 2008 and the year 2010. In light of the guidance from the regulator of “eliminating existing capacity prior to establishing capacity”, the growth of the new capacity for cement production will likely slow down in the next few years, and it could even cause supply shortages in some markets in the region at some point. Prices for cement are predicted to increase steadily because of factors like demand-supply structure, the higher cost of coal and electricity consumption. The organic growth of the cement industry will be able to provide satisfactory operational performance in the next couple of years.

It is believed that the Chinese government has ordered the removal in excess of 250 million tons of obsolete cement production capacity before the year 2010. It is therefore expected that the pace of consolidation in the industry will increase, and market share and profits in the industry will be further concentrated on solid businesses. This means that there will be a higher potential for value creation through acquisitions due to industry consolidation.

Organic growth has delivered satisfactory results.

Industrialisation and urbanisation growth in China is expected to continue to grow the consumption of cement. Due to the rise in the cement prices in China and the elimination of export rebates for cement products in the month of July, China has experienced a loss of 10% in exports of cement in the second quarter of 2007 in comparison to the similar prior periods (PCP). The effect of the elimination of export rebates has been in effect for half of a year, but it will be more apparent after the entire calendar year in 2008. Analysts predict that China’s cement exports will continue to be at around 40 % of the tons it exported between 2008 and 2010. With regard to both the domestic and export demand for cement China’s cement industry is expected to witness a 10% increase in demand over 3 years.

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However, cement supply growth could slow in China. According to estimates, in 2007, the Chinese cement industry has completed US$7.2 billion in fixed investment in assets 2007. The increase in investment in 2007 that was 7.78 per cent from 2006, was due to factors such as the changing mix of cement products, the rapid elimination of old capacity and the pressures from energy conservation and emission reduction requirements.

In consideration of the “eliminating prior to the establishment of” regulation on the addition of additional capacity to dry-processed concrete, the capacity expansion of dry-processed cement in China is anticipated to increase by 10 per cent, 9% and 8.8% between the years 2008 and the year 2010. The removal of the old capacity could lead to intermittent shortages in supply in certain regions in the near time. However, the balance of supply and balance between demand and supply is expected to be restored by 2010, when the current 250 million tonnes of old capacity slowly disappears out of China. Chinese market.

Presently sixty per cent of the world cement market is on the shoulders of those who are among the 50 top cement producers globally. But China’s lack of industrial concentration in the domestic market is the primary reason for the market’s fluctuations and lower-end price competition, and the average capacity will limit the use of production scale. As an outcome of the elimination of old capacities, a capacity that is organically derived from investments and external acquisitions, China’s cement industry’s concentration can be raised to 18.1 per cent and 19.6 per cent in the years 2008 and in 2009, respectively.

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The increased concentration of industry could lead to increased scale efficiency. One way is that with there being a higher barrier to entry and locally produced cement production equipment grows, it is likely that there will be many large-scale cement production lines being built which will increase the efficiency of production. The localization of cement equipment can lower fixed costs and breaking points for Chinese cement firms. However, the increased concentration of industry could also boost the bargaining capabilities against suppliers and clients, which could increase profits for the industry.

Reorganisation benefits from industry consolidation

There is a Chinese cement market that has a highly competitive one, and cement can be described as a product that has a uniform quality across the entire board. When the staffing and technological capabilities are to the same degree, price competition will be the main competitive method. This is why the nature of the commodity of cement has led to scaling expansion will be the primary driver for cement producers in order to gain a favourable position in the market.

Let us look at the example of Anhui Conch Cement Co Ltd, the largest cement producer in China. It is a Chizhou, Anhui Province-based cement company that grew from producing the equivalent of 2 million tons of cement clinker back in 1996 to produce 59 million tonnes of Clinker and 65 million tonnes of cement as of 2006. Thanks to serial mergers and acquisitions and the expansion of its scale. Conch Cement has been the biggest producer in China for the past 10 years, and it is also the largest provider of cement and Clinker across Asia and the fourth-largest globally.

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The requirement to eliminate outdated capacity can help to increase the concentration of industry. The minimal scale threshold set by industry regulators can significantly increase the per-unit (of manufacturing lines) capacity, thereby providing the technological foundation needed to increase concentration in the industry. The goal of removing the equivalent of 250 million tonnes obsolete cement capacity by the year 2010 will certainly boost industry consolidation, which could further accelerate the process of concentration in the industry.

While it’s difficult to identify specific targets or deals and timeframes, it can be expected that shifts within the Chinese cement market will increase in the near future. Regional producers with a strong reputation may be able to consolidate their position through acquisitions and mergers and acquisitions, and it is likely that the Chinese cement market will soon be controlled by a few regional chiefs. On the one hand, the strongest cement producers will attempt to “unite” with smaller and medium players in the surrounding regions with the aim to become regional leaders. On the other hand, cement giants of a global scale will increase their presence in a few areas of the market in China while urging local cement producers to participate in more M&A initiatives to gain market share in regional markets. Because China’s Chinese cement market is with a relatively low level of concentration, the synergetic benefits of industry consolidation might be noticeable between the years 2008 and 2010. Thus, industry consolidation could have the potential to contribute to the bottom line and also the growth of their capacity in organic form.



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