China: cracks begin to appear
With a downturn looming, major cement companies in China are using various strategies to weather the tough times, such as consolidation and a push for greener technologies.
Today, cement production capacity per capita in southwest China is one of the highest in the world. Overcapacity in cement production, because of China's sizzling economy and its heavy investments in infrastructure, has spread across the country at a time when the economy has shown strong signals of cooling down.
Lei Qianzhi, president of the China Cement Association – which represents as many as 3800 cement producers and more than 2.9bnt of cement production capacity in China, says these are among the most stressful times for the world's largest cement industry since he began working in the sector 40 years ago. It's become especially tough, he says, after the central government lowered this year's GDP growth target to a new low of 7.5% in March.
Fuelled by the boom in housing and infrastructure investments, Lei says, cement demand in China had been growing by double digits each year over the past decade, in line with the economy's annual average growth rate of 10.7%.
However, with China shifting its economic driving force from exports and infrastructure building to domestic consumption, demand for cement will likely start falling, but the question is when will the downturn start and how big will the slump be?
Ian Riley, the head of the China division for Holcim, expects market demand to peak by 2015. The company is a major shareholder, with around 42%, of Huaxin Cement Co, a leading cement supplier in Central China and one of the oldest cement makers in China.
"The cumulative consumption in China's developed eastern areas is already very high compared with the global average in developed countries," says Riley, also vice-president of strategy and development with Huaxin.
In a March report by a team led by Tao Dong, regional chief economist at Credit Suisse, the global demand that was triggered by China's demand has already peaked.
The expected decline in demand is one of several reasons why Deutsche Bank expects a hard landing for China's cement industry this year.
In a report titled “Global Cement Trends 2012-15”, published in December, Deutsche Bank pointed out that apart from the drop in the cement market, a spike in the number of new production lines will also aggravate the teetering industry. It projects cement capacity to depreciate just above 82% in 2012, down from 99% in 2000.
With as many as 216 production lines under construction in 2012, Lei says that the cement market in China is certainly looking gloomier, but it's not the "end of the story."
"I see more opportunities rather than challenges from tough times. Mergers and acquisitions will be more frequent, the production concentration ratio will increase, which will help China's cement industry shift from focusing on quantity to quality," he says.
One strategy for the industry is mergers. The number of cement producers in China has decreased from 5000 to 3800 over the past two to three years due to mergers and acquisitions (M&As).
The top 10 cement makers in China have a 25% lock on production capacity in the nation, up from 15% in 2005. The top makers are expected to have a 35% market share by 2015, according to the 12th Five-Year Plan (2011-15) for China's cement industry released by the Ministry of Industry and Information Technology.
"Through M&As, major players are able to control a huge production capacity. By getting rid of the outdated capacity and smartly reducing the actual production volume, cement can be sold at a better price. Price wars will not be as frequent among major players," says Sun Tieshi, vice-president of the China Building Material Federation.
Meanwhile, Western players in the nation's cement industry are focusing on the sustainable development in the construction industry to get ahead.
Sang Kang, CEO of Lafarge Shui On Cement, a joint venture between France-based Lafarge Group and Hong Kong-based SOCAM Development Ltd, says the company will look to accelerate its development in sustainable construction in China. Faced with overcapacity, he says, companies that can upgrade their production modes can better survive a downturn.
Holcim Group, on the other hand, is using co-processing technology – a process that treats waste and garbage and uses the treated materials as fuel and raw materials to make cement. It hopes this recycling move can help grow Huaxin Cement's business in China.
"We have experienced 30% growth in sales for eight years in a row. I think the growth rate of 30% is still possible especially with the further development of co-processing in China," Riley says.
The Chinese government sees the cement industry as a potentially large solution to solving problems in getting rid of municipal waste, which can be treated and converted into fuel and be replaced as coal to produce cement.
Riley says some of Holcim's projects in Europe use 100% alternative fuels made from treated waste.
"I think we can make it at least 50% in China. The vision we have in the future is that we can clean up the environment while at the same time produce reliable building materials," says Riley, who adds that Huaxin had four plants processing garbage to produce cement-making fuels as of last year.
"Though it is a mature technology in Europe, local governments in China are still conservative," he says. "But in China, the starting part is always quite slow, then all of the sudden it just goes very, very quickly. Within 10 years we will expect (the majority of) our plants to use co-processing," he says.
