Cement prices across China have been rising since end of August. According to a report by Deutsche Bank, this round of post-summer price rebound started roughly one month earlier than the market had expected. More remarkably, the price hike occured in all regions, signifying a sector-wide recovery. Deutsche Bank believe the price hike is driven by both demand pickup and supply discipline: On the demand side , 4Q is usually the high season for cement consumption. This year, the demand is likely to be magnified by the orders from the government-sponsored infrastructure projects. These projects started in 1Q/2Q09 and their demand for cement usually kicks in 1-2 quarters later (i.e. 4Q09).
Deutsche Bank said real estate construction projects may add in its view further upside to the cement demand given that the new construction GFA in August grew by 24% YoY and14% MoM to 81Mm2.
On the supply side, the new industry policy (EntryConditions for the Cement Industry (Draft for Comment)), if finalized and enforced before 4Q, would in Deutsche Bank’s view effectively mitigate, if not remove, the overcapacity overhang on the industry. Large players are encouraged to consolidate their respective regional markets, implying stronger pricing power for them. Conch has been taking the lead in raising benchmark prices in East and Central China where overcapacity kept cement producers from raising ASPs.
Deutsche Bank expect large cement players, especially Conch, CNBM and Sinoma, to have strong 4Q09 performances as a result of the improved competitive landscape in East and Central China, higher ASPs, and low earnings base of 4Q08.