China’s cement production is forecast to grow by 10% annually between 2008 and 2010. Due to the regulatory guidance of “eliminating old capacity before establishing capacity”, the growth of new cement production capacity could in some way decline in the coming years and could even lead to supply shortages in some regional markets at some point. Overall cement prices are expected to rise steadily, due to factors such as the structure of supply and demand, higher coal and electricity costs. The organic growth of the cement industry should be able to generate satisfactory operating results in the coming years.
The Chinese government has ordered the elimination of 250 million tons of obsolete cement production capacity by 2010, so industry consolidation is expected to accelerate and market shares and industry profits to be further concentrated. in solid companies. Therefore, there will be additional value created by acquisition opportunities as a result of industry consolidation.
Organic growth yielded satisfactory results
The progress of industrialization and urbanization in China should continue to expand the demand for cement products. Due to the increase in the price of cement domestically and the removal of export rebates for cement products in July 2007, China experienced a 10% decrease in cement exports in the second half of 2007 compared to the previous period. previous comparable (pcp). The impact of the elimination of export rebates has only been here for about half a year, so it will become clearer after the full year of 2008. Analysts forecast that China’s net export of cement will remain at 40 million tons between 2008 and 2010. Considering both domestic and export demand for cement, China’s cement industry will see 10% annual growth in demand over the next three years.
On the other hand, cement supply growth may slow in China. It is estimated that China’s cement industry completed fixed asset investment worth US$7.2 billion in 2007. The industry’s investment growth in 2007, which was 7.78% higher than in 2006, was driven by factors including the change in cement product mix, accelerated capacity phase-out, and pressure from energy-saving and emissions-reduction mandates.
Taking into account the “eliminate before establishing” regulatory arrangement on the addition of new capacity for dry processed cement, the growth of dry processed cement capacity in China is expected to grow by 10%, 9% and 8 % between 2008 and 2010. The elimination of Old capacities may even create periodic supply shortages in some regional markets in the short term. But the balance between supply and demand should be restored by 2010, as the existing 250m tonnes of aging capacity is gradually withdrawn from the Chinese market.
Currently, 60% of the world cement market is concentrated in the hands of the 50 main cement manufacturers worldwide. However, the low concentration of China’s industry at the national level has become the main reason for market price volatility and low-end price competition, and such a low capacity size on average will also make it difficult to use of scale production. Therefore, as a result of the elimination of obsolete capacity, investment in organic capacity and external acquisition, the concentration of China’s cement industry can be improved to 18.1% and 19.6% in 2008 and 2009. respectively.
Improvement in industry concentration can lead to scale efficiency. On the one hand, as the barrier to entry rises and the size of locally produced cement production equipment increases, many large-scale cement production lines will be established, which could improve production efficiency. And the localization of cement equipment can also reduce the fixed cost and break-even points for Chinese cement companies. On the other hand, the improvement in the concentration of the industry can also improve the bargaining power of the main cement producers vis-à-vis suppliers and customers, thus expanding the profit margins of the industry.
Industry Consolidation Reorganization Value
The Chinese cement market is a highly competitive market and cement is a commodity with consistent quality across the board. When staffing and technology levels are at a similar level, price competition will become the primary method of competition. Therefore, the commercial nature of cement has determined that scale expansion will be the driving force for cement manufacturers, in order to achieve advantageous competitive positioning.
Take the example of Anhui Conch Cement Co Ltd, the largest cement producer in China. The Chizhou, Anhui Province-based cement company had gone 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, through serial mergers, acquisitions and scale expansion. Conch Cement has been the largest producer in China for 10 consecutive years, and is also the largest supplier of cement and clinker in Asia and fourth in the world.
The mandatory elimination of obsolete capacity can help effectively improve the concentration of the industry. The minimum scale threshold required by industry regulators could markedly improve capacity per unit (of production lines), providing a technological basis for industry concentration. The mandate to eliminate 250 million tons of obsolete cement capacity by 2010 will undoubtedly encourage industry consolidation, which in turn will accelerate industry concentration.
Although it is difficult to pinpoint specific targets, agreements and timing, it can be reasonably expected that the industry shake-up in the Chinese cement market will intensify in the near future. Major regional producers can strengthen their positions through mergers and acquisitions, and the Chinese cement industry will eventually be dominated by a few regional leaders. On the one hand, the strong cement producers will try to “unite” with the small and medium players from the surrounding regions, with the aim of becoming regional leaders. On the other hand, multinational cement giants will establish their presence in selective markets in China, pressuring domestic cement producers to engage in more M&A activities to secure regional market shares. Since China’s cement industry still has a low degree of concentration, the synergistic benefits of industry consolidation could be quite remarkable in the period of 2008 and 2010. Therefore, industry consolidation can effectively contribute to the results of cement producers, in addition to the growth of its organic capacity.
