Don't be overly excited about cement plays

November 13, 2019 08:00
Slowing economic growth suggests a dim outlook for housing starts. Photo: Reuters

Hong Kong has dipped into recession but the housing market remains firm; this is probably one of the biggest anomalies in the market. Similarly in China, though economic growth is slowing, the real estate climate index compiled by the National Bureau of Statistics shows an uptrend since the beginning of this year. This is perhaps why cement stocks are doing very well in general.

While sentiment is one thing, real activity is another. The China cement production has flattened out at around 200 million tons per month since 2014. This is in sharp contrast to the previous two-decade rise which doubled the amount every decade.

Building activity and cement demand are supposed to be two sides of a coin. One may wonder if the recent resumption of an uptrend in building starts implies a recovery in cement production will follow suit. This may not be the case.

Monthly cement exports peaked in 2014 and have fallen to around one-third of its peak level in recent months, reflecting weak global demand. A fall in exports is offsetting any uptick in domestic demand.

Like in any other raw resources, the demand for cement is ultimately macro-driven.

Historical data tells us that the growth in building starts has been generally correlated to real GDP growth over the past decade, where a 6 percent GDP growth corresponds to zero growth in building starts. A continued uptrend is therefore unlikely.

As such, cement production is likely to stay at the current 200 million tons per month, which is neither a bullish nor a bearish outlook.

Cement stocks are doing very well lately. But the underlying fundamentals of the sector are not as bullish as the stocks suggest.

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Chart:  National Bureau of Statistics of China

The author is Adjunct Professor in the Department of Economics and Finance, City University of Hong Kong and previously the chief economist of a bank. (, [email protected])