The huge projected demand for cement needed for reconstruction following the Wenchuan earthquake is expected to strain supplies from sources in the neighboring areas. Some supplies are likely to be shipped from other regions to meet the initial shortfall but the high cost of transportation would render that uneconomical in the longer-term, industry experts said.
"It may take some time for Sichuan’s cement producers to boost output, and during the interim, we may see some price increases," said Jiang Kongliang, a specialist on building materials at Haitong Securities in Shanghai.
Although none of the cement producers in Sichuan have been hit hard by the earthquake, stepping up production might be difficult given the nature of the industry. One of the cement manufacturers located closest to the epicenter, Sichuan Golden Summit, sustained only minor damages to its production facilities, according to its public statement to the Shanghai Stock Exchange. Golden Summit, one of the largest cement producers in the region, has an average yearly output of 2.3Mt. Its output in 2007 totalled 1.9Mt.
But even for a highly modernised manufacturer like Golden Summit, boosting capacity is a time-consuming task involving not only the expansion of the company’s facilities but also external factors that are beyond its control.
"A cement manufacturer’s output capacity is roughly fixed and will remain unchanged within a certain period of time because it’s a time-consuming process to increase production as many factors, such as power supply and upstream resources, need to be considered before expanding production," said a manager at Golden Summit.
"It usually takes at least one year to build a new cement assembly line," he added.
Golden Summit confirmed the company has no plans to expand its production capacity.
Recent figures show cement sales in Sichuan province reached 62.14 Mt in 2007, accounting for 4.5 per cent of the nation’s total. Most of the demand in the province was met by supplies from regional producers, analysts said.
"The cost of transportation increases by ¥50 with each additional 100km in distance," said Luo Guo at Orient Securities. "That is to say, at the current price level, a cement producer can derive no profit for delivery to users located beyond 200km from its factory."
Domestic price of 42.5 OPC in May averaged at ¥320/t, up 3.8 per cent from a month ago.
Because of high transportation cost, the projected demand for the reconstruction will unlikely be met by cement from around the country. For that reason again, any disruption in the price pattern would be limited only to the affected region.