China's plan to reduce excess capacity

This week ICR will be taking a look at China's approach to cutting carbon emissions from the cement sector and reducing overcapacity.

According to the China Cement Association, the number of cement plants in the country reached 3408 (2198 grinding units plus 1210 clinker lines) in 2020, with cement capacity at around 3800Mta. Cement production climbed 2.5 per cent YoY to 2377Mt in 2020, compared with 2330Mt in 2019 (+4.9 per cent YoY), despite challenges from the COVID-19 pandemic, severe floods and the less-than-healthy global trade environment.

However, the country is rapidly moving forwards with its plans to cut excess cement capacity as part of its 14th Five-Year Plan (14FYP), which includes ambitious targets to reduce CO₂ intensity by 18 per cent between 2021-25 and take China to peak carbon by 2030. 

Following on from the introduction of regulations in 2018 that limited the addition of new cement capacity, the country’s Ministry of Industry and Information Technology (MIIT) proposed further tightening of restrictions in December 2020. The updated restrictions would see producers have to retire 1.5t of outdated capacity for every tonne of new capacity in non-environmentally sensitive areas, compared to 1.25t in the previous rules. The regulations are designed to continually reduce cement capacity in the country.

Alongside the escalating restrictions on new capacity, Shandong province, one of the most significant provinces for cement production, has now been targeted for plant closures – another method deployed to further scale back Chinese cement capacity. Except for special cement plants and chemical-related cement plants, all facilities with a clinker capacity of less than 2500tpd in the province will be phased out completely by 2022. For those <2500tpd lines, 50 per cent will be forced to stop production and the other half will be merged by 2024. ICR has seen reports which suggest these plans will result in the shutdown of around 35 clinker production lines and 182 grinding units in Shandong.

There is little doubt that such actions are necessary if the country is to meet its goals for carbon reduction from the cement sector. In the first quarter of 2021, Carbon Brief highlighted that China’s CO₂ emissions grew at the fastest pace for a decade, increasing 15 per cent YoY. "The CO₂ surge reflects a rebound from lockdowns in early 2020, but also a post-COVID economic recovery that has so far been dominated by growth in construction, steel and cement," noted Laura Myllyvirta in the report. They also stated that, if emissions for the whole of 2021 match the growth seen over the previous year, there is not much room for further growth under the targets laid out in the 14FYP.

Cement demand is forecast to remain fairly stable in 2021, perhaps posting a minor contraction in the full-year. Production levels will also need to remain consistent with the overall growth levels seen in 2019-20 for the ramped-up regulations to have their desired effect, lessen overcapacity and improve profitability.

Profitability in the sector declined 2.1 per cent YoY in 2020, despite surging 20.8 per cent YoY to CNY186.7bn in 2019. However, in the long-term, the plant closures and tighter regulations for new capacity should help overall cement sector profitability return as overcapacity is reduced, and utilisation rates and prices improve further.