China prices soar due to energy cuts

China prices soar due to energy cuts
Published: 03 December 2010

Cement prices in China have risen to record highs as curbs on electricity supplies by local governments affect output.  The production disruption, despite being temporary, has seen the average price of cement reached CNY400/t (US$60/t). In some regions such as the east of the country, prices have rocketed to CNY500/t (US$75/t). The east is reported to have seen overall price increases of some 40% since August.

To achieve energy-saving targets for the 11th Five-Year Plan (2006-2010), Zhejiang, Jiangsu, Shandong, Guangxi and a dozen other provinces and regions adopted stringent measures to lower energy consumption. “The soaring prices are mainly due to a supply reduction caused by power restrictions,” said Liu Zuoyi, deputy secretary-general of the China Cement Association.

Energy-control measures in the eastern province of Zhejian have resulted in prices increasing five times between July and August and are presently 20-30% higher than in 2Q10.  Shandong Shanshui Cement Group, the largest producer in Shandong province (China’s largest cement manufacturing region) said it has had to raise prices seven times within a month to CNY420/t (US$63/t) from CNY340/t (US$51/t) – up 25%. Meanwhile, market leader Anhui Conch launched a nationwide price hike of between CNY10-50 (US$1.5-7.5) during September and October.

While the fourth quarter is usually the high season for cement sales in eastern and southern China, the current shortfall is expected to continue over the next month and prices are to remain at high levels. Exacerbating the problem is a shortage of diesel which has affected transportation and cement deliveries, Liu said.

n terms of coal consumption, Citigroup has recently said it expects China’s net coal imports to jump from an estimated 143Mt in 2010 to 233Mt in 2011 – a staggering 63%. Booming demand from power, steel and cement producers will boost China’s domestic coal demand by 7.3% next year from a year ago, while supplies will increase by only 4.8% to 3.38bnt. Any surge in China’s coal imports would not only drive international coal prices sharply higher, but could also lift freight rates as buyers are bound to source new supplies from further afield. Citigroup also said booming demand was expected to bring an 8% increase in China’s coal contract prices in 2011.

State-owned, China Resource Cement Holdings (CRC) said coal expenses represented approximately 42% of the cost of sales for cement in 2009 (46.3% in 2008). The company is exploring further possibilities to lower its coal cost through technology upgrades and expanding its sourcing channels with a view to keeping coal outlays at the lowest level. The implementation of measures to lower electricity consumption and the use of residual heat recovery generators is also helping the producer achieve cost savings.

Fundamentals for the cement industry still remain strong as the Chinese economy is growing rapidly and spending on new construction and infrastructure projects are increasing the need for cement. More domestic demand is seen coming from China’s new five year economic plan (2011-15). To benefit from this trend, earlier this week CRC announced ambitious plans to double its production capacity and by 2012 have the world’s biggest cement plant. The firm’s plant in Fengkai in Guangdong province started operation last year with a capacity of 4Mt. The company aims to bring that amount to 8Mta in January and by 2012, it says the plant would have capacity of 12Mta.