China Resources Cement Holdings plans to inject 419 million yuan into a joint-venture cement plant in Guangxi province to boost output amid growing demand in the Pearl River Delta region. The capital injection, which aims at doubling the joint venture’s annual production capacity to 3.8Mt of cement, would allow the company to raise its interest in the project 17.5 per cent to 91 per cent, sources said. The deal underscores the group’s ambition to capture a bigger segment of the growing cement market in the hinterland.
It also follows its decision to buy a 73.5 per cent stake in the joint venture in December last year from its unlisted parent, China Resources (Holdings). This is despite China discouraging fixed-asset investment in the cement-making sector, as well as in the steel, glass and aluminium industries, as part of the country’s measures to combat inflation. "The factory’s output can’t keep up with demand at all," another source said. "Unlike the volatile market in the Yangtze River Delta region, consumption growth in China Resources’ core Pearl River Delta market is relatively stable, especially for higher grade cement." The source added that cement use in the Pearl River Delta region stood at 60Mt last year, which meant the market could easily digest new capacity.
The joint venture, which is in Pingnan, operates one production line, which can produce up to 1.9Mt of cement annually. Sources said that after the second production line was completed next year, China Resources’ production capacity would rise to an annual 9.5Mt This figure includes the output of its cement factory in Guigang, Guangxi.
Daiwa Institute of Research analyst Geoffrey Cheng Bik-hoi estimated the mainland’s fixed asset investment in cement would grow at least 15 per cent this year despite its macroeconomic policies. Citing China Cement Association figures, Mr Cheng believed growth in industry earnings would slow further this year. Signs of slower growth were reflected in the 44.2 per cent increase in industry earnings to 12.5 billion yuan in the second half of last year from the same period in 2003 following a 298 per cent increase to 7.75 billion yuan in the first half of last year. "Moreover, we expect coal prices to remain high in the first half of this year," Mr Cheng said. "We do not see much room for cement companies to see any improvement in gross margins during the same period as we expect cement prices to remain weak due to the glut."