China’s cement output is forecast to grow 10% per annum between 2008 and 2010. Due to the regulatory guidance of “eliminating old capacity before establishing capacity”, growth of new cement production capacity may somehow slow down in the next few years, and it may already consequence in supply shortage in some regional markets at some stage. Overall cement prices are expected to climb steadily upwards, due to factors such as supply-need structure, higher costs of coal and electricity input. Organic growth of the cement industry should be able to deliver satisfactory operating results in the coming years.
The Chinese government has mandated the elimination of 250 million tons of outdated cement production capacity by 2010, so it is expected that industry consolidation will accelerate and market shares and industry profits will be further concentrated to strong companies. consequently, there will be additional value produced by acquisition opportunities as a consequence of industry consolidation.
Organic growth delivered satisfactory results
The industrialisation and urbanisation progress in China should continue to expand the need for cement products. Due to the rising cement price domestically and the removal of export rebates on cement product in July 2007, China had experienced a 10% decline in cement exports in the second half of 2007 over past comparable period (pcp). The impact from the removal of export rebates has only been here for about half a year, so it will become clearer after the complete year of 2008. Analysts are forecasting that China’s net cement export will be maintained at 40 million tons between 2008 and 2010. Taking into account both domestic and export cement demands, China’s cement industry shall see a 10% pa growth in need in the next three years.
however, cement supply growth may slow down in China. It is estimated that the Chinese cement industry had completed US$7.2 billion worth of fixed asset investments in 2007. The industry’s investment growth in 2007, which was up 7.78% from 2006, was prompted by factors including changing cement product mix, accelerated elimination of outdated capacity and pressure from energy saving and emission reducing mandates.
Taking into account the “eliminating before establishing” regulatory arrangement on adding new capacity for dry-processed cement, capacity growth of dry-processed cement in China is expected to grow 10%, 9% and 8% between 2008 and 2010. The elimination of old capacities may already create regular supply shortage in some regional markets in the short term. But the supply and need balance should be restored towards 2010 as the existing 250 million tons of outdated capacity little by little retires from the Chinese market.
At present, 60% of the global cement market is concentrated in the hands of the top 50 cement manufacturers worldwide. However, China’s low industry concentration domestically has become the main reason for market price volatility and low-end price competition, and such averagely low capacity size will also hinder the utilisation of extent production. consequently, as a consequence of elimination of outdated capacity, organic capacity investment and external acquisition, China’s cement industry concentration can be improved to 18.1% and 19.6% in 2008 and 2009 respectively.
The improvement in industry concentration can rule to extent efficacy. On one hand, as entry obstacle getting higher and locally-produced cement production equipment getting larger, there will be many large extent cement production lines being established, which could enhance production efficiency. And the localisation of cement equipment may also reduce the fixed cost and breakeven points for Chinese cement companies. however, the improvement in industry concentration may also enhance leading cement producers’ bargaining strength against suppliers and customers, consequently expanding industry profit margins.
Reorganisation value from industry consolidation
The Chinese cement market is a highly competitive market, and cement is a commodity with homogeneous quality across the board. When staffing and technological levels are at a similar level, price competition will become the main competing method. consequently, the commodity character of cement has determined that extent expansion will be the driving force for cement manufacturers, in order to unprotected to advantageous competitive positioning.
Take the example of Anhui Conch Cement Co Ltd, China’s largest cement producer. The Chizhou, Anhui Province-based cement company had grown 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, by method of serial mergers, acquisitions and extent expansion. Conch Cement has been the largest producers in China for 10 consecutive years, and it is also the largest supplier of cement and clinker in Asia and the fourth largest globally.
Mandatory elimination of outdated capacity may help effectively enhance industry concentration. The minimum extent threshold required by industry regulators could notably enhance per unit (of production lines) capacity, providing a technological foundation for industry concentration. The mandate of eliminating 250 million tons of outdated cement capacity by 2010 will no doubt encourage industry consolidation, which will in turn accelerate industry concentration.
Although it is difficult to point out specific targets, deals and timing, it can be reasonably expected that industry reshuffling in the Chinese cement market will strengthen in the near future. Leading regional producers may be able to strengthen their locaiongs via mergers and acquisitions, and the Chinese cement industry will ultimately be dominated by a few regional leaders. On one hand, strong cement players will try to “unite” with small and medium players in surrounding regions, with the objective of becoming regional leaders. however, multinational cement giants will establish their presence in selective market spots in China, pressuring domestic cement producers to include in more M&A activities to obtain regional market shares. As the Chinese cement industry is nevertheless having a low degree of concentration, synergetic benefits from industry consolidation could be quite notable in the period of 2008 and 2010. consequently, industry consolidation may be able to effectively contribute to cement producers’ bottom lines, in addition to their organic capacity growth.