China's changing dynamics

The dynamics between small and large players in the Chinese cement industry could all change next year on the back of a number of new policies led by a change in tax rebate policies and more stringent environmental regulation, a new report by BNP Paribas has stated. Going forward, larger producers who can meet the higher environmental standards are sent to benefit from the changes.

Changes to tax policy
A change to a tax rebate policy, currently enjoyed by producers of low-quality cement, is likely to be one of the key catalysts for change next year. The BNP report states that the larger cement producers, which typically use more modern NSP technology and produce a higher grade PO42.5 type cement, have endured a tough year due to competition from smaller units that produce low-grade PC32.5 cement and receive a VAT rebate, which offsets the cost disadvantage the high-grade cement producers.

Currently the rebate is given to those using more than 30 per cent slag as raw materials, which is usually limited to low-grade cement as technical standards to not allow more than 20 per cent content in high-grade product. However, China's Ministry of Finance and the State Administration of Taxation have recently announced that to be eligible for the rebate in future, producers will have to meet certain emissions standards. ??BNP believes that many companies will be unable to qualify for the new rebate, and that the smallest five per cent of NSP producers as well as standalone grinding units may be forced to close. If the rebate on PC32.5 were to be reduced, together with lifting the building standard, the margin difference could shift from smaller cement producers to larger ones, the report argues.

Tighter emissions control
Stricter NOx and dust emissions standards are also likely to come into play by the end of this year or the beginning of 2014, further targeting smaller producers. Many provincial governments have already announced specific deadlines for deNOx installations of no later than the end of 2015 or 2016 and are offering subsidies to encourage the upgrade. With most small lines having to rely on SNCR technology, this will place an additional burden on production costs and therefore likely result in the closure of inefficient capacity. ? 

Redressing the balance
Top of the government's reform list for some time has been indeed addressing the burden of overcapacity, which has led to lower pricing and reduced profitability for Chinese enterprises. More determined efforts by provincial governments to tackle industrial overcapacity are now in evidence, and last month Beijing sent a stern message about the implementation of a key State Council document that provided  "guiding opinions" on solving the capacity issue. The ministries underscored the increasing urgency of containing the risks of the longstanding issue stating that "Local governments will be held accountable on this issue".

Thanks to stricter approval processes and higher entry barriers, BNP is confident that NSP capacity growth will slow from 7.6 per cent in 2013 to four per cent in 2014. With the closure of backup capacity, just one per cent growth in net capacity is expected in 2014.

The decline in new capacity is likely to lead to a rise in utilisation rates from 77 per cent in 2013 to 81 per cent next year, with larger players gaining at the expense of smaller producers. An increase in PO42.5 following the tax rebate changes should also drive up clinker utilisation rates as it requires 80 per cent or more of clinker, while PC32.5 only needs 50 per cent, therefore favouring producers of high-grade cement.

Cement demand, meanwhile, is slowing and is widely assumed to be climbing to its peak within the next five years. For 2013, BNP expects cement demand growth of 5.9 per cent, thereafter slowing to 5.6 per cent in 2014, followed by negative growth the year after. Real estate, infrastructure and rural development will be among the key drivers of growth. Real estate is expected to account for around 25 per cent of consumption in 2014, according to BNP’s estimates. However, momentum will ease given the high 2013 comparison base. The infrastructure segment, which slowed this year, is likely to be driven by environmental and municipal building. Railway construction, meanwhile, is expected to be flat this year, followed by a decline in 2014.