Economy

No concrete solutions

China’s cement industry is in crisis, facing massive overcapacity

CHINA-ECONOMY/GROWTH

There’s a lot more where that came from... in fact, far too much of it

The term ‘skyscraper’ wasn’t originally used in an architectural context. As the author Neal Bascomb points out in his book Higher, it can be traced back to the winning horse at the 1789 Epsom Derby. “The word went on to refer to high-standing horses,” he writes, “then later to the triangular sail raised at the top of a ship’s mast to catch a strong wind.” It was only in 1889 that the Americans started using it to describe their tallest buildings.

Today megatower mania is concentrated in China, home to more than half of skyscraper construction worldwide. Last month the Shanghai Tower in Pudong topped out at 2,074 feet, taking the mantle as China’s tallest building. It won’t hold the title for long if Sky City in Changsha – forecast to become the world’s tallest tower at 2,740 feet (see WiC155) – gets permission to go ahead.

All these new skyscrapers, plus the broader urbanisation trend that WiC has discussed elsewhere sound like good news for cement makers. But as magazine China Entrepreneur notes, the industry is on far from a solid footing. Just like steel, (see Talking Point in WiC208) it is struggling with chronic overcapacity and falling prices.

Chinese producers are expected to churn out 2.3 billion tonnes of cement this year, or roughly two thirds of global output. Simply put, this is more than the economy can presently absorb. As an anecdotal example, China Entrepreneur de scribes a large cement plant in Zaozhuang, a city in Shandong province. Outside, four trucks are waiting to load up. “It is no exaggeration to describe the scene as deserted,” the publication observes. “Two years ago there would have been nearly 200 trucks lining up each day.”

The problem is that Zaozhuang has dozens of smaller cement producers and at least 10 larger firms. The outcome is 30 million tonnes of supply for only 10 million tonnes of demand, says Ge Quanwei, vice-president of one of the biggest local cement makers (the one with just four trucks waiting outside). In better times his cement was selling for Rmb350 ($57.1) per tonne, Ge recalls, but now the market price is about Rmb230, or close to cost.

“There is too much supply and the competition to sell is intense. We are sacrificing profit for survival,” Ge bemoans.

Zaozhuang’s case exemplifies a wider crisis. But how did supply and demand get so out of whack?

Culprit one: a decade-long boom in property and infrastructure construction which over-egged investment in the sector. But culprit two is the ambitions of local government bureaucrats. The economics of cement are shaped by its limited sales ‘radius’. Expensive to truck large distances, it has to be consumed nearby, meaning there is already pressure for each locality to have its own production. But Song Zhiping, who runs the country’s biggest cement firm, state-owned China Building Materials Group, says local governments have made things much worse.

Imagine that County A had invested in a cement factory, Song says, while County B is buying County A’s cement. That means County B gets no tax revenues, so it also wants to build a plant, encouraging a producer with an offer of free land, bank guarantees and so forth. Once the plant opens, County B is happy as its industrial taxes are up. But now there are two cement factories in a market that hasn’t necessarily changed in size.

Over the past four years the central government has been trying to limit the kind of commercial behaviour that Song describes by blocking bank lending to the sector and pressuring outdated plants to close.

But local governments have got around the restrictions in creative ways, including breaking up larger projects into smaller parcels, and thus staying below the investment thresholds at which centralised approval is supposed to be sought to build new plants.

Despite the talk of a clampdown on new plants, 800 million tonnes of capacity has come into the market in the last four years – most of it with a nod from local bureaucrats. Song estimates that this accounts for almost all of the excess production ailing the industry. “The promotion of local interests is the root cause of cement oversupply,” he told China Entrepreneur.


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