Displaying items by tag: Overcapacity

China has admitted once again that its cement industry is plagued by over-capacity. State news agency Xinhua came clean this week as it reported that 103 production lines have been closed for the winter months.

The principal reason given for the winter shutdown was prevention of air pollution with resolution of overcapacity presented as a handy secondary. With long term plans in place to reduce overcapacity through industry mergers, demolitions and bans on new plants this is one more offshoot from the very public problems that smog and industrial pollution has given the Chinese government.

The policy follows a similar shutdown in China's far-western state of Xinjian that has been implemented since 1 November 2014. Xinjian is away from China's main cement production heartland in the south and east of the country. The idea here is to stagger winter production from cement kilns that use coal to avoid flue gas emissions rising when coal consumption for heating also rises. Since cement consumption by the construction industry is lower in the winter, a stoppage at this time of year should affect the cement producers less. Proposals have also been made to include Inner Mongolia and Hebei into the scheme.

The three provinces in question now - Heilongjiang, Liaoning and Jilin – represent 80Mt/yr or 6% of China's total cement production capacity from 28 cement plants, according to the Global Cement Directory 2014. This is broadly in line with the proportion of national population the three provinces hold.

Back in 2012 the National Development and Reform Commission suggested that national cement capacity utilisation was 69%. Local media in China have been reporting that currently Xinjian uses 60%. Western commentators reckon that China uses only 50% of the cement industry's total production capacity. By contrast India, the world's second biggest cement producer after China, has been lamenting this year that capacity utilisation had fallen below 70%. Worldwide, excluding China, capacity utilisation rates have been estimated to be just below 70% in 2014.

Plummeting particulate matter counts are great for Beijing's cyclists and their continued goodwill towards the government. However, the implications are bad for the producers who are affected and the associated industries. As one Chinese equipment manufacturer commented on Global Cement's LinkedIn Group, "...many small manufacturers of cement plants in China will go bankrupt." Unfortunately this too is also in line with the country's strategy to reign in its cement industry through industry consolidation. It may yet turn out sunny for the state planners... once the smog clears.

'Below expectations' was the headline message from Holcim's half-year results this week. Canada, Mexico and Morocco were all singled out as problem areas for Holcim but surely India represents the biggest headache for the debt-reducing multinational.

How badly its bottom line was hit by India in particular, Holcim declined to say. Overall its entire Asia Pacific region saw sales volumes of cement fall by 3.7% to 37.8Mt to 36.4Mt for the first six months of 2013. In 2012, India represented over half of the group's Asia Pacific installed cement production capacity. This suggests that the actual drop in sales in India was probably at least 6%, more if the other countries in the territory did better than in 2012. Overall profits for the Asia Pacific region fell by 14% to US$650m. What we do know is that Holcim announced major restructuring to its businesses in India in late July 2013 to cut costs.

The other major cement producers in India have fared similarly badly. UltraTech's first quarter profit, for the period ending on 30 June 2013, fell by 13.5% to US$111m. Its revenue fell by 2% to US$820m. Jaiprakash Associates also reported a 2% dip in its cement sector revenue to US$247m in the quarter ending on 30 June 2013. Profits fell by 24% to US$27m. India Cements' sales revenue rose by 3% to US$196m. Yet its operating profit fell too, by 41% to US$19.8m.

Both Holcim and India Cements blamed falling cement prices in the south of India. India Cements directly mentioned overcapacity. The only explanation UltraTech offered for its poor performance was rising input and logistics costs.

Problems in India are not unexpected. Overcapacity has loomed over the Indian cement industry for some time as the race for growth far overtook the increase in demand. In the wider economy, India hit its lowest gross domestic product increase in a decade, 'just 5%', for the financial year ending on 31 March 2013. Meanwhile the Indian Rupee fell to a record low of 61 against the US Dollar in late June 2013. Not good news at all for any cement producers looking to offset energy or raw materials costs from abroad.

As predicted in our overview of the Indian cement industry back in February 2013, the smaller cement producers are now likely to get picked off by the larger firms as capacity utilisation falls and fuel costs rise. It is interesting to compare this free-market led cement industry consolidation to the state-directed one happening in China.

The Indian media are certainly wise to this with reports and speculation on endless takeover rumours. One example of this is the Irish building materials conglomerate Cement Roadstone Holdings's (CRH) decision to purchase Sree Jayajothi Cements that was announced in early August 2013. However with CRH itself having just reported that it made a loss in the first half of 2013 it may be regretting that it finally has a presence in the south of India.

Last week's news that Sinoma is considering European acquisitions may seem a little odd considering that Sinoma saw its profit halve in 2012. Yet the Chinese cement equipment builder and cement producer's income (US$3.42bn) puts it level with the likes of European producers, like Italcementi (US$5.75bn) and Buzzi Unicem (US$3.58bn), and the company still made a sizeable profit (US$123m).

Now what really seems odd is the amount by which each of the major Chinese cement producers' profits fell in 2012. Each of the top five producers by capacity, including Sinoma, saw their profits decrease by 40% to 50%. CNBM 'forgot' to report its profit drop but in November 2012 it recorded a 40% fall. Anhui Conch Cement's profit fell by 45.6% to US$1.03bn. Jidong Cement hasn't released any figures but was expecting a 50% drop in late October 2012. China Resources' profit fell by 44.4% to US$300m. Compare that with the diversity of profits reported by the top five European cement producers.

As has been clearly signposted by the Chinese government, the country is overproducing cement. Just how much we can't be sure but the Ministry of Industry and Information Technology declared that 220Mt/yr of 'obsolete' capacity was eliminated in 2012. The country's entire output was placed at 2.18Bt in official figures.

Outmoded capacity is being shut down and industry consolidation encouraged for the main players. Given the state-owned nature of Chinese heavy industry some level of coordination between bad results is to be expected. To give readers an idea of the challenge facing Chinese central planners, Anhui Conch added 28.3Mt/yr of additional cement production capacity in 2012. This is equivalent to the entire capacity of Nigeria or Germany!

Of interest here are China's cement export figures that the government's General Administration of Customs recently released. Exports hit a peak of 33Mt in 2007 and then declined by 68% to 11Mt in 2011. In 2012 they increased slightly to 12Mt. That's 20Mt of cement not leaving the country any more. Plus, the 'Shenzhen sea-sand in concrete scandal' can't be helping the industry's reputation abroad either.

Also of note last week, a Kyrgyzstan minister proposed restricting imports of Chinese cement to his country. Cement produced at Chinese-owned plants will be much harder to block. The next prong of the Chinese plan to tackle its cement industry is direct overseas expansion and this is what we're seeing from the likes of Sinoma and Anhui Conch. Sinoma, as mentioned above, appears to have cash to spend and in 2012 Anhui Conch began its first international project in Indonesia.