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Macquarie Research China Materials
10 January 2019 2
Cement – High margins to stay; Demand upside
Cement is our most preferred sector in 2019, as it has the most exposure to potential infrastructure
stimulus upside and liquidity loosening. We are less bearish on property demand compared to the
street, as we believe construction progress should speed up in 1H19 as property developers’ land
banking activity slows. We also see limited risks from new capacity (including capacity swap) – seeing
only 0.3% net capacity additions vs. 1% demand growth. Voluntary production cut/ price coordination of
key players should remain strong in key regions like East/ South China. We see limited risks for
regulator intervention on cement prices as it has <1% impact to downstream construction costs for each
Rmb100/t increase. We expect the price to edge up by 2% YoY on average in 2019E.
Conch is a top pick, given its 48% exposure to the YRD, lowest cost among peers, rich limestone
resources, and accelerating M&A/overseas expansion. We also like CRC on strong demand
GD/GX (+8/4% in 18/19E) with a boost from the Greater Bay Area vs. a manageable +4% new
supply. BBMG to benefit from BTH-integration/ Xiongan, which could boost infra demand and a
recovering property segment. Conch Venture (CV): strong core EPS growth (60% pa) and is a
cheap proxy cement play. CNBM has synergies with Sinoma and high leverage to price upside
(5% ASP sensitivity), yet we worry about demand in the North East and North West (20%
exposure), and there are potential one-off impairment costs yet to be realised from its recent
restructuring. High gearing and needs for funding remain an overhang.
Fig 1 Ex-land real estate FAI moves in inverse relationship
to land purchase – with land banking slowing, developers will
likely accelerate construction activities
Fig 2 China property inventory (11M18) remains very
healthy – tier 3-4 cities inventory dropped to 10 months vs.
20 months in 2014
Source: CEIC, NBS, Macquarie Research, July 2018 Source: CRIC, Macquarie Research, January 2019
Property Demand stronger than expected
Property demand accounts for 35% of China cement demand and also 37% of China’s steel
demand, 60% of China float glass demand and also indirectly affects demand for white goods and
consumption (and thus paper and coal demand). While we believe the headline GFA sales/ starts
figure will slightly slow down in 2019 to 0% from this year’s 15-16%, this is because GFA starts
have started to outperform sales in 2018 and the govt will not allow that to happen for a long time –
otherwise inventory will build up. But the market has been far too negative – seeing construction
demand down 15% (esp. in 1H19) - which we think is too bearish. We think property construction
demand will likely pick up into 1H19 and might only slow by low-single digits in 2H19.
The major reason for this is that developers had been delaying construction in 2018, in our view -
many developers said they prefer to use their funding in landbanking rather than actual GFA
construction/ completion (land purchased GFA +15% YoY) - in anticipation of weaker sales ahead,
developers are keen to put projects on presales as early as possible, then take time to finish these
projects. Such behaviour has led to the gap between the strong new starts (+17% in 11M18) and
weak completion (-12% in 11M18), which we also saw in 2010-11. However, construction starts
may slow down if there is prolonged sluggish sales – so far the developers are still looking for
sales growth and thus construction to increase into 2019 (esp. the major ones). As such, from
2017 to now, the GFA starts might not be a good indicator of commodity demand anymore – rather
we should look at non-land real estate FAI.
-20
-101030
40
50
60
70
80
Fe
b-1Jun
-10
Oc
t-1Fe
b-1Jun
-11
Oc
t-1Fe
b-1Jun
-12
Oc
t-1Fe
b-1Jun
-13
Oc
t-1Fe
b-1Jun
-14
Oc
t-1Fe
b-1Jun
-15
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t-1Fe
b-1Jun
-16
Oc
t-1Fe
b-1Jun
-17
Oc
t-1Fe
b-1Jun
-18
Oc
t-1yoy (%)China Real Estate FAI Growth (3mma)
Total property FAILand PurchaseEx-land property FAI
Macquarie Research China Materials
10 January 2019 3
If we break out the real estate FAI to land purchase and non-land purchase (ie construction) – we
see the ex-land FAI is actually already negative 3%. The 10% YTD growth of Real estate FAI is
mainly driven by the spike up in land purchase to +65-70%. We believe there is an inverse
relationship between the land purchase and the non-land FAI. So when the land purchase slows
down in 2019 – non-land FAI (construction) would likely rebound – we expect so will construction
dependant commodity demand (ie cement/ steel).
Many local govts have been “delegated” several relaxation tools by the central govt (e.g. mortgage
relaxation, purchase restriction relaxation) – so the local govt can prop up the property market if
needed – this would be especially useful in tier 1-2 cities. However, this would be partly offset by a
genuine slowdown in lower tier cities – esp. after the cutback of monetized settlement on shanty
town redevelopment (i.e. when the government gives money to residents who need to be relocated
so they can buy property in the property market – which accounts for ~60% of total redevelopment
demand). Shanty town redevelopment accounts for ~30% of total GFA sales in low tier cities or
20% of total China GFA sold – so if shanty town redevelopment slows down, it could drag down
GFA starts by 5-10%.
There are also signs of overall property policy loosening from the central govt level - in less than
two months, we have seen policy stabilisation in the middle of October; removal of double
contracts and price restriction relaxation in Guangzhou was an example. We also heard of
mortgage relaxation in late October, which received no pushback from the Central government.
This should help the recovery of buyer sentiment, and we have seen sales stabilisation for leading
developers. Looking ahead, the housing market should continue to slow down, in a gradual and
healthy manner, on a high comparable basis; a sharp contraction is unlikely. See more from our
property analyst’s report here.
Fig 3 China Cement Supply/ Demand Model
Source: Digital Cement, SCI99, Wind, Macquarie Research, January 2019
Cement Supply-Demand (mnt)2009201020112012201320142015201620172018E2019E2020E
SUPPLY2009201020112012201320142015201620172018E2019E2020E
Clinker Capacity - Net (mnt)1,3571,5261,6851,8291,8571,8421,8111,8301,8511,8541,8591,851
yoy %13.2%12.5%10.5%8.5%1.5%-0.8%-1.7%1.1%1.1%0.1%0.3%-0.4%
Net addition (mnt)15916916014328-15-31202135-8
% of last year's capacity13.2%12.5%10.5%8.5%1.5%-0.8%-1.7%1.1%1.1%0.1%0.3%-0.4%
Gross Addition (mnt)2543162752491038050262920196
% of last year's capacity21.2%23.3%18.0%14.8%5.6%4.3%2.7%1.4%1.6%1.1%1.0%0.3%
Capacity Closure (mnt)-95-147-115-106-75-95-81-6-9-18-14-13
% of last year's capacity-8.0%-10.8%-7.6%-6.3%-4.1%-5.1%-4.4%-0.3%-0.5%-1.0%-0.8%-0.7%
Cement Capacity - Net (mnt)2,0962,4662,7503,1113,2803,2193,1853,1963,1843,0212,9932,962
yoy %15.2%17.7%11.5%13.1%5.4%-1.8%-1.1%0.4%-0.4%-5.1%-0.9%-1.0%
DEMAND2009201020112012201320142015201620172018E2019E2020E
Clinker production (mnt)1,0171,1231,2921,3041,3771,4171,3351,3761,4001,4491,4821,503
yoy %15.9%10.4%15.0%1.0%5.6%2.9%-5.8%3.1%1.2%3.5%2.3%1.4%
Cement production (mnt)1,5721,8152,1082,2192,4322,4762,3482,4032,3162,3622,3862,405
yoy %17.9%15.5%16.1%5.3%9.6%1.8%-5.0%2.5%-0.2%2.0%1.0%0.8%
Additional tonnage (mnt)23924429211221344-12855-87462419
Demand breakdown (yoy%)
Infrastructure14.1%11.2%4.0%5.2%12.0%5.3%1.5%7.3%-1.9%2.0%2.5%1.6%
Property19.8%24.9%18.2%4.1%9.4%0.0%-11.9%3.0%0.5%0.5%-1.3%-1.1%
Rural & others20.7%5.8%31.2%7.7%7.0%0.5%-2.2%-5.8%-13.6%5.0%3.0%3.0%
Demand breakdown (% of total)
Infrastructure35.8%34.5%30.9%30.9%31.5%32.6%34.9%36.6%37.3%37.3%37.8%38.1%
Property40.6%43.9%44.7%44.2%44.1%43.3%40.3%40.5%42.2%41.6%40.7%39.9%
Rural & others23.6%21.6%24.4%25.0%24.4%24.1%24.8%22.8%20.5%21.1%21.5%22.0%
Capacity utilisation - Clinker (%)75.0%73.6%76.6%71.3%74.2%76.9%73.7%75.2%75.6%78.2%79.7%81.2%
Capacity utilisation - Cement (%)75.0%73.6%76.6%71.3%74.2%76.9%73.7%75.2%72.8%78.2%79.7%81.2%
PRICE2009201020112012201320142015201620172018E2019E2020E
National ave. cement ASP (Rmb/t)344359406345336339272279357445453459
yoy %-0.9%4.3%13.0%-14.9%-2.6%0.9%-19.7%2.3%28.2%24.6%1.8%1.5%
Conch GP/t (Rmb/t)5980122677981546487150148150
yoy %2.3%35.5%53.6%-44.8%17.8%1.9%-33.2%19.1%35.5%72.1%-1.7%1.2%
Macquarie Research China Materials
10 January 2019 4
New Supply limited; capacity swaps remain small
To phase out obsolete, polluted and inefficient capacity, the Chinese government announced a
capacity swap implementation plan in January 2018. According to the announcement, there are
still over 800 production lines with capacity of less than 2500t/d and over 500mnt of obsolete
capacity in the cement industry. The local government should direct companies to phase out and
close excess and obsolete capacity and conduct capacity swaps if needed. The ultimate goal is to
completely eliminate the obsolete capacity and reduce the total capacity as for each 1 tonne of
new capacity to be added, at least 1.25 tonnes of capacity needs to be phased out. In Aug 18, the
MIIT further reiterated that this policy must be strictly adhered to in order to ensure that the total
capacity remained capped at the current level.
While capacities in different provinces can be swapped, according to the latest data, there are just
28 production lines that will conduct capacity swaps, with a total capacity of 125 kt/d or 39mnt/y.
Capacity swaps account for only ~2% of the current total effective capacity of 5.6mnt/d in China.
We do not believe capacity swaps will be a major worry for the cement industry. The MIIT has also
recently significantly tightened these kind of projects, requiring approvals from the corresponding
local cement associations and MIIT as well as going through a hearing procedure before these
projects can proceed – so we think cross provincial capacity swaps will become more controllable
in the near term.
In terms of geographical distribution, capacity swaps are mainly being conducted in the Southwest,
East and Central China, with a very minimal amount in North China. We believe the minimal
capacity swaps in North China are reasonable considering the weaker supply-demand dynamics in
Northeast China. Roughly 37% of capacity swaps are being conducted in Southwest China (Tibet
and Yunan), followed by 24% in East China (Fujian, Zhejiang and Jiangxi) and 22% in Central
China (Hunan and Hubei).
Fig 4 Southwest China has the highest amount of capacity
swaps – most in Yunan, Tibet and Hubei
Fig 5 Southwest China accounts for 38% of the total
capacity swap
Source: SCI99, Wind, Macquarie Research, January 2019Source: SCI99, Wind, Macquarie Research, January 2019
Fig 6 Capacity swap policies becoming increasingly stringent
Source: Digital Cement, CEIC, NBS, Macquarie Research, January 2019
44,600
29,000 26,200
9,500
5,000 5,0005,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Southwest
China
East ChinaCentral
China
NorthwestNortheastSoutheast
China
Unit: ton/dayCapacity swap by regions
Designed capacity (T/D)
Southwest
China
38%
East China
24%
Central China
22%
Northwest
8%
Northeast
4%Southeast China
4%
Capacity swap geographical distribution
DocumentRegions sensitive to TibetOther regionsClosure for capacity swapCross-province capacity swap
[2013] No.38 document1:11:11:1NANA
[2015] No.127 document1.25:11:11:1Outdated capacity after (and incl.) 2013Policy support cross-province swap
MIIT Document on Jan 8,20181.5:11:11.25:1Closure after (and incl.) Jan 1st,2018Need confirmation from two provincial governments
Swap ratio- closure: addition。