China’s cement sector has been on a roll recently, with several firms offering positive earnings surprises. Industry leader Anhui Conch Cement (00914.HK), for instance, has announced that it expects its 2013 profit to be up as much as 50 percent from the previous year.
That said, the prospects for this year are not too bright and the industry may, in fact, have had its last party, according to Guo Cheng, a columnist for the Hong Kong Economic Journal.
Auhui Conch Cement, China Resources Cement (01313.HK), TCC International Holdings (01136.HK) and BBMG Corp. (02009.HK) have all made upbeat projections on their 2013 earnings. Observers believe TCC International will be the best performer in the sector, with its profit seen up 170 percent.
Guo cited three reasons for the sector’s boom last year. Firstly, property developers were confident about the housing market, prompting them to boost investments and fueling the demand for cement.
Secondly, China Railway Corporation and local governments have accelerated their spending in order to stimulate the economy, which also helped the cement industry.
And a third factor behind the improved fortunes of cement makers was a decline in manufacturing costs due to a drop in coal prices. Coal accounts for around 30 percent of the total cost of cement firms on average. The Bohai-Rim Steam-Coal Price Index, which tracks power-station coal prices at six Chinese ports, had fallen from 800 yuan per ton at the beginning of 2012 to as low as 530 yuan last October. The drop in this major cost item significantly boosted earnings of the cement sector.
But Guo said these positive factors may not be in play in 2014.
Fixed-asset investments by local governments will definitely fall this year as central authorities have told regional administrations to deleverage. Gansu government has lowered its fixed-asset investment growth target to 25 percent for this year from the 2013 level of 30 percent. Ningxia and Hebei are planning similar moves.
Meanwhile, China Railway Corp has set its fixed-asset investment target this year at 630 billion yuan, which marks a 5 percent reduction from 2013.
Given this situation, cement demand growth is likely to slow this year. That said, continued government push to trim excess capacity may help the sector avoid an oversupply situation and keep cement prices steady.
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