The Ministry of Industry and Information Technology of the People’s Republic of China issued Entry Conditions for the Cement Industry (Draft for Comment) on 7 September 2009. According to a Deutsche Bank report, this is the first concrete policy to tackle the cement industry’s overcapacity.
Key points include: - For provinces with new dry-process capacity accounting for >70% of the total capacity, new capacity each year must not exceed 10% of its total cement production in the previous year. In Deutsche Bank’s view, nine provinces affected, mostly in East China (Jiangsu, Zhejiang, Anhui, Shanghai).
For provinces with per capita clinker capacity 1000kg, no new capacity will be approved. Anhui (1265kg/capita) and Zhejiang (1353kg/capita) are the only two provinces in this category in Deutsche Bank’s view.
For provinces with per capita clinker capacity <1,000kg, the volume of new capacity must equal that of the closed-down old capacity - To encourage the industry consolidation and support the large companies’
post-acquisition reorganization on medium-to-small companies
Deutsche Bank think that Conch and CNBM are likely the largest beneficiaries of the new policy because:
- The severe overcapacity in East China is likely to be eased, a strong support to the ASPs in the short term.
- The barriers for new entrants and supportive policies for large players (e.g. tax break etc.) mean both companies may consolidate and dominate their respective regional markets. Consequently better economy of scale and larger pricing power may lead to margins expansion in the long run.
Deutsche Bank also expect Sinoma to benefit because (1) Northwest China has no issue of overcapacity and (2) there is still plenty of room for new NDP capacity growth in all the provinces except Anhui and Zhejiang.