China Cement Weekly: Prices Rebound, Mainly on Supply Discipline
Cement pricesrose 0.4% w/wlast week; the 4WMA continuedto decrease, but narrowed its loss to -0.1% w/w.Price increaseswere mainly in Eastern and Southern Chinaand came earlier than the expected early September. The nationwide inventory leveldropped by 0.3ppt w/w to 70.3%.
- Eastern Chinaincreased0.7% w/w amid supply discipline. Cement clinker prices held up after cement producers lifted prices the previous week. Overall demand remained stable with a recovery in rural areas though demand from major property and infrastructure construction remainedmuted. Cement inventory levels remained high at 70%-80%, while clinker inventory levels were less challengingat 50%-60%. Some regions in Jiangxi and Anhui lifted clinker and cement prices by RMB10-RMB20/ton on improving demand in late August and as supply disciplinekicked in. Cement producers in Zhejiang also plan to raise cement pricesfurther in early September.
- South Central Chinarose 1.1% w/w.In Southern China, prices for lower-grade cement in Southern Guangxi rose by RMB10/ton on improvingdemand and decreasing inventory in Guangxi and the Pearl River Delta in Guangdong. Prices for higher-grade cement are expected to rise amid the traditional price uptrend in earlySeptember. In Central China, cement producers in Hunan raised prices by an aggressive RMB30/ton. Whether demand can help hold up prices remains uncertain, given that inventory levels have been stagnant since August.
Prices flat in Northern China. Demand recovered slightlyin Hebeiand inventory levelseased due to previous production halts. However, some real estate projects in Tianjin and Tangshan have not resumed construction, delaying the regional demand recovery. Inventory levelsare currentlylow at 60%,so pricescould decrease further in Hebei before reboundingin 4Q14. Prices inNorth Western and South Western China also remained stable last week.
Our cement stock index down3.5% last week vs. the HSI’s 1.5% decrease. The1H14 resultswere a mixed bag and reflected the geographic exposuresof individual cement companies. Those with significant exposure to Eastern and Southern China (Anhui Conch, CR Cementand TCC) saw improvements in profitability and were able to deleverage thanks to higher ASPsresulting from a better supply/demand situation. Companies with more exposure to Northern, Western and South WesternChina as well as Shandong province, where supply/demand was less favourable,posted lacklustre results (BBMG, WCC and Shanshui Cement). For theupcoming peak season, we expect these trends to persist, given the glut of new capacitythat is expected to start operation in South Western China (Sichuan and Guizhou) and overcapacity in North Western China (Shaanxi). This shouldlimit price hikes in 4Q14.
We continue to like Conch (914.HK, Buy, HK$36.50) given its favourable marketexposure, cost leadership, and strengthening financial position as the market consolidator. We remain buyers given its undemanding valuation, near its previous trough of 5X forward EV/EBITDA, and solid earnings prospects amid improving industry fundamentals.Although the demand recovery remainstepid in Hebei, we see multiple upcoming positives for BBMG’s (2009.HK, Buy, HK$6.60) cement business, including: 1) limited new capacity, which should limit downside for regional cement prices; 2) stricter and unified emission controls in the Beijing-Tianjin-Hebei region, which shouldaccelerate the exit of smaller players and strengthen BBMG’s market position; 3) construction needed to further integrate the Beijing-Tianjin-Hebei region, including the New Beijing International Airport, which should drive a sustainable regional demand recovery.
