China Cement Weekly: Prices Continue to Decrease in May;Uncertainty Looms for 2Q14
Cement prices dipped a further 0.05% w/w, led by a 0.8% decreasein Eastern China. Other regions remained stable. The 4WMA was down 0.2% w/w. Nationwide inventory levelsedged down 0.2ppt w/w to 67.9%. Although this is the peak period of 2Q14, cement prices have stagnated in May due to continued tight liquidity and rainy weather resulting in high inventory levelsfurther suppressing prices.
Pricesin Eastern China continued to fall, down 0.8% w/wand dropping 2% in the traditional May peak season, compared with increasesin prior years. The main culprit was recent rainy weather resulting in high inventory levels. Cement clinker prices in Jiangsu and Anhui provinces fell further last week, indicating that cement prices would remain soft for the next couple of weeks. Weaker-than-expected cement prices in Maycould exert pressure on cement prices in June. This could have a negativeimpact on Conch given its significant exposure to Eastern China. Major cement producers in southern Jiangsu plan to halt production for 10 days per month in June and July to stabilize prices. We will keep an eye on execution of the production haltsince we suspect thatsmaller producers may opt for further price cuts toreduce inventory levels.
Prices mixed in South Central China.In Southern China, major cement producers in Guangxi lifted cement prices by RMB10/ton w/w through supply discipline. Since major construction projects have resumed gradually and inventory pressureis easing, we expect cement prices to remain stable in Southern China. In Central China, large cement producers in Hunan intendto lift pricesthough other producers have yetto follow suit. Pricetrends could therefore be less predictablein the near term.
Northern China remained stable.Cement prices in Hebei have been stable since the previous increase in mid-April. In Baoding, Hebei, prices increased a further RMB10/ton last week due to low inventory levels. Prices in Baoding have increased by RMB25/ton since April, which we believe was driven by previous capacity shutdowns that reduced excesssupply before the current peak season in 2Q14. Pricesare also holding up in Beijing, Tianjin, and Tangshan after recent spells of rainy weather. We expect supply/demand dynamics to improve due to strict execution of emission controls in Hebei. This should support cement prices until there are more details about the integration of the Beijing-Tianjin-Hebei region, which would further spur demand.
Our cement stock index rose 3.0% last week vs. the HSI’s 3.8%increase. Overall cement prices continued to tumble in mid-May, and it seems as though the usual 2Q14 price increase couldcome later or have less impact than in prior years. As a result we are less optimistic about nationwide cement price trendsin 2Q14. China gradually entersthe farmingseason in Juneand less construction work wouldmake it harder for cement producers to lift prices after May. Therefore, we expect more regions to exercise supply discipline to stabilise cement prices in late May and June. Cement prices are still 4.3% higher than last year, thus we expect y/y profitability improvementsfor cement producers in 1H14 amid lower coal costs. More infrastructure projects or the government easing liquidity to stabilise economic growth could be catalysts in 2H14. Meanwhile, the MIIT has released its latest draft of Entry Conditionsfor the Cement Industry, which summarises previously announced policies for the industry. Tougher entry requirements and stricter policy execution should accelerate industry consolidationand benefit largerand more efficientproducers. We continue toprefer Anhui Conch (914.HK, Buy, TP: HK$38.75)as a proxy for the favourable supply/demand situation in Eastern and Southern China and further market consolidation.We also like BBMG (2009.HK, Buy, TP HK$7.20)as a regional player due to its significant presence inthe Beijing-Tianjin-Hebei (BTH) region.
