Firm warns of slump; as cement profits fall

Firm warns of slump; as cement profits fall
Published: 05 September 2005

The mainland’s cement sector should brace for a slump in the next two years in the wake of anti-inflation measures, China Resources Cement Holdings says.  
 
Expressing the group’s pessimism on the near-term prospects for the sector was vice-chairman and general manager Shi Shanbo, who cut the cement maker’s full-year sales target after a 96.36 per cent slump in net profit to US$1.53m in the six months to June.  
 
He said the industry could slip into losses after recording a 76.5 per cent decline in profit to CNY1.7bn in the first half.  
 
Entering a cyclical downturn, it had fallen foul of inflation measures, which caused Guangdong’s fixed-asset investment growth to slow by 9.7 percentage points to 16.2 per cent in the first half and Guangxi’s by 6.4 percentage points to 28.4 per cent, he said.  
 
"The macroeconomic measures have stalled many construction projects and, hence, slowed demand growth for cement," he said. "The industry will enter a cyclical trough in the next two years, one of its most difficult periods."  
 
Mr Shi added that the group was aiming to sell 3.3Mt to 3.5Mt of cement this year, down from its original target of at least 4Mt.  
 
Neither was he positive about the outlook for cement prices, which dipped seven per cent in Guangdong on average in the first half.  
 
Mr Shi predicted that the market would face a 10 per cent drop in the average selling price in the next two years, squeezed by tough competition and rising fuel costs.  
 
China Resources, like other cement makers, saw its coal costs jump 41 per cent in the first half as China’s coal supply remained tight. 
 
Its electricity costs were also 7 per cent higher after power producers raised tariffs to pass part of their coal costs on to end users.  
 
As a result, the group’s profit margins on cement production contracted 11 percentage points to 14 per cent, while those on concrete shrank 5 percentage points to 22.6 per cent in the first half.  
 
"The sector will undergo consolidation and the survivors will be firms that successfully reduce their fuel and transport costs," Mr Shi said. Despite the gloomy outlook, China Resources hopes to boost market share by raising capacity.  
 
"Although the sector is entering its doldrums, we still see it viable over the long term," Mr Shi said.