Rail & Infrastructure

From the ground up

Growing demand for cement belies an industry badly in need of consolidation

Looking for concrete solutions

It might best be described as turning a crisis into an opportunity. Beichuan was a town that was utterly destroyed by last May’s Sichuan earthquake. A new town is being built in its place – but by Chinese standards it will be no ordinary place. The design – which was vetted by Wen Jiabao, the prime minister – aims to create a new model. Forget the monotony of most Chinese urban areas, in New Beichuan most homes will be only three minutes walk from a park.

Beichuan also offers an opportunity to China’s beleaguered cement makers. The reconstruction of the town – and those other parts of Sichuan that were devastated – will require large quantities of their core product.

The government has estimated that Sichuan will need to build 1.57 million houses; and reinforce another 1.4 million. 9,145 schools will have to be rebuilt.

The cost? Sichuan’s vice-governor, Wei Hong reckons the reconstruction will clear Rmb1.7 trillion ($248 billion). With this opportunity firmly in mind, China’s cement firms have shifted much of their investment from the coastal provinces to the nation’s Southwest. Shenzhen-listed Tangshan Jidong Cement has invested in two production facilities in the Sichuan area. Huaxin Cement plans to raise Rmb4 billion to fund its own expansion there; and China’s largest cement maker, Anhui Conch has reported it will invest Rmb1.2 billion to expand cement volumes in Sichuan.

China has 261 cement makers, and thanks to cut-price competition amongst the smaller players, industry prices fell by 11% in the first two months of the year.

The major players hope that Sichuan’s reconstruction will help boost volumes and stabilise prices. They have also invested a good deal of hope in the government’s national stimulus plan – where an estimated Rmb1 trillion will be spent on new transport infrastructure.

China’s cement output was 1.38 billion tonnes in 2008, up 5.2% from 2007, according to the National Bureau of Statistics. Guo Wenlong, a researcher affiliated with the National Development and Reform Commission estimates that volumes should grow a further 6.3% this year.

The big question is whether these additional sources of demand – Sichuan and transport infrastructure – will be enough to offset the decline in housing construction. Based on analysts’ forecasts, the country still has 14 months of excess residential housing to work off. With many property developers already highly leveraged, new construction of apartments looks likely to fall dramatically.

The only bright spot for the cement firms (again) is the government, which has promised to build 9.9 million units of low cost housing over the next three years. This may further depress real estate prices – by adding to the supply glut – but they will still require cement.

So a positive outlook overall?

The answer is a heavily qualified yes. That’s because not unlike the real estate sector, the cement industry needs rationalising. The industry’s concentration ratio – the market share of the four largest firms – is 80% in most developed economies, but in China it is only 30%.

The problem with this? “The industry is plagued with the phenomenon of small scale firms using poor equipment, in irrational locations,” says Zhang Jianxing, the executive director of Southern Cement. Zhang estimates that almost a third of China’s cement was made by low grade equipment that should have been mothballed long ago. And the presence of so many marginal players turning out product of limited quality does more than make much of the industry uncompetitive: “It leads to poor energy consumption per unit of output, heavy pollution, and pressurises the environment.”

After the government has finished consolidating the steel industry, perhaps the nation’s cement producers could be next…


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