Affected by the decline in demand, the cement industry experienced a very difficult year in 2022. In 2023, despite various favorable policies, the demand for cement is still struggling to regain its courage. How should the cement industry respond to stabilize the market situation?
       Zheng Jianhui, chief analyst of China Cement Network Cement Big data Research Institute, believes that based on the current market situation, cement enterprises should "regain consensus", so that the industry can make steady progress, and enterprises can compete with each other, seeking common ground while reserving differences.
       1 、 Five Consensus Points for the Current Cement Industry
       1. The situation of overcapacity has become more severe
       In 2022, the utilization rate of cement production capacity reached a historic low. According to data statistics, the utilization rate of cement production capacity in 2022 was 61%, while the actual clinker production capacity was enlarged, resulting in even more severe overcapacity.
       The cement industry has been promoting capacity reduction for many years, why is capacity still increasing?
       Zheng Jianhui believes that firstly, due to technological upgrading, the maximum output of a single line has increased; Secondly, due to the replacement of production capacity, inefficient production capacity is revitalized; Thirdly, it is due to equal relocations from another locations; Fourth, the new production line lacks subversive Sexual revolution.
       2. The pressure of rising costs has increased unprecedentedly
       Especially in terms of coal costs, since 2020, coal price fluctuations have intensified. The coal price/cement price once exceeded 3; Meanwhile, after 2016, a large number of coal mines were shut down, making it difficult for future coal prices to return to the "cheap era".
       In addition, the control requirements for unit energy consumption and carbon emissions are constantly improving. With the promotion of the "double carbon goals", cement enterprises not only need to invest a lot of transformation funds, but also face the possible cost increase brought by Carbon emission trading.
       3. The Marginal utility of supply side reform is decreasing
       Taking staggered production as an example, starting from the north, it has roughly gone through several stages: Northeast staggered production in November 2014- Pan North China staggered production in January 2015-15 provinces and cities staggered production in the north in 2016- southern provinces gradually joined from 2017 to 2021. At the same time, the industry further extended staggered production time from the beginning of summer staggered production in the north - starting from 2022, with 21 provinces experiencing staggered production time exceeding 100 days.
In recent years, the time of peak production has continued to increase and the scope has continued to expand, especially in 2022. The growth rate of peak production time in various regions is significant, and the execution force is also stronger than before. However, ultimately, due to the significant impact of demand decline, the stabilizing effect of peak production on the market situation is weakening. In the future, against the backdrop of weak demand, the role of supply side reform may further diminish.
       4. The demand platform period is facing the challenge of breaking market scale contraction
       Since the founding of the People's Republic of China, the development of the domestic cement market can be roughly divided into five periods, and the current industry is about to enter a downward period.
       Cement planned economy period (1949-1977)
       Features: ① Low total amount: a total of 500 million tons of cement are consumed (an average of 17 million tons per year); ② Low per capita: below 60 kilograms per person per year;③ The number of enterprises ranges from small to large, with around 3400 cement enterprises.
       The Development Period of Small Cement (1978-1995)
       Urbanization rate: 18%~30%
       Features: ① Rapid increase in total consumption: a total of 3.58 billion tons (average annual output of 200 million tons); ② Per capita reaching the global average level: per capita consumption of 400 kilograms; ③ The number of enterprises has rapidly increased: by the end of 1995, there were 8435 cement enterprises.
High speed development period (1996-2014)
Urbanization rate: 30%~55%
       Characteristics: ① The total amount has significantly increased: a total of 23.8 billion tons of cement have been consumed (with an average annual output of 1.2 billion tons); ② More than 1.8 tons per capita; ③ The scale of enterprises has increased from large to small, and the number of enterprises has decreased from large to small: by the end of 2014, there were 3539 cement enterprises.
Demand Platform Period (2014-2025)
       Characteristics: ① High range fluctuation of the total amount: up and down 10% of 2.2 billion tons; ② Maintain stable production capacity; ③ Maintain stable competitive landscape; ④ The number of enterprises is relatively stable.
Downward period: 2025 to trough (before 2060)
       Features: ① The platform period is broken, and the cement demand is in a long downward period. It is expected that the trough of cement demand will occur before 2060; ② The per capita demand has fallen; ③ The number of enterprises has decreased.
       5. Reasonable profits are a prerequisite for transformation and upgrading
       Data shows that in the second half of 2022, the sales profit margin of the cement industry was 5.4%, 0.3 percentage points lower than the industrial average level, marking the first time since 2016 that it was lower than the industrial average level.
       Zheng Jianhui believes that the reasonable profit margin of the cement industry should exceed the industrial average level, with good fluctuations around 10%. The reasonable profit margin of the industry should be between 80 to 120 billion yuan. At present, the cement industry is in a stage of declining demand, and more attention should be paid to the quality of life. Reasonable profits are the prerequisite for transformation and upgrading.
       2 、 Prospects for the Cement Market in 2023
       1. China's economic recovery and investment remain the main driving force
       Zheng Jianhui believes that in 2023, with the release of the epidemic, the Chinese economy will experience a recovery. From the perspective of each province, no province has achieved its GDP target in 2022. In 2023, all 31 provinces have raised their GDP targets by 1 (Shaanxi) to 9.3 (Hainan) percentage points compared to the 2022 GDP growth rate.
       Based on the realization of economic growth rates in all provinces, it is predicted that: (1) China's economic growth rate will be 5.6% in 2023. (Government target of 5%) (2) Guangdong and Shanghai will increase their contribution to the economy, with Guangdong (7% → 9%) and Shanghai (2% → 4%).
       In the process of achieving economic growth, investment remains the main driving force.
       In recent years, at the policy level, government investment and policy incentives have been continuously used to effectively drive the investment of the whole society, accelerate the implementation of the "14th Five Year Plan" Megaproject, and strengthen inter regional infrastructure connectivity. Meanwhile, the early issuance of special bonds has increased: In November 2022, the Ministry of Finance issued a new special bond quota of 2.19 trillion yuan for 2023, an increase of 50% compared to the early issuance of 1.46 trillion yuan at the end of 2021. The Government Work Report also pointed out that the plan to add 3.8 trillion yuan of local special bonds in 2023 is slightly higher than the 3.65 trillion yuan planned in 2022.
       2. The fluctuation of cement demand throughout the year has narrowed: weak real estate recovery, leading to strong infrastructure development
       In terms of real estate, under the influence of the policies of ensuring completion and ensuring delivery of buildings, the real estate industry has gradually completed its foundation. However, due to the drag of land acquisition and new construction, the probability of real estate investment continues to grow negatively, with a trend of low before high.
       In terms of infrastructure, the China Cement Network Construction Project Library shows that in 2022, the bid winning amount for construction projects nationwide increased by 27% year-on-year. In 2023, infrastructure will significantly form a physical quantity, with a trend of high before and low after.
Based on the trends in real estate and infrastructure investment, Zheng Jianhui proposed two assumptions: neutral and optimistic, targeting the cement demand in 2023. Neutral assumption: the decrease in cement demand is narrowed to within 3%; Optimistic assumption: policy intervention exceeds expectations, and demand remains stable or slightly returns to normal;
       3. Delayed ignition projects or concentrated production exceeding 38 million tons in the southern region
       Affected by market trends in 2022, some production lines in China have chosen to postpone production. With the large-scale production of new lines in 2023, the pressure on domestic cement overcapacity may further increase.
Zheng Jianhui estimates that by 2023, the national production capacity of new ignition clinker is expected to reach 47 million tons, with over 80% located in the southern region; Southwest region (35%); East China (25%); Central South region (24%); Yunnan, Anhui, Guizhou, and Hunan are expected to have more than three ignition production lines.
       4. It is expected that cement prices in the fourth quarter will turn positive year-on-year
       Zheng Jianhui believes that due to the time required for investment implementation, slow project initiation, and the impact of the real estate industry, the demand for cement in the first year was sluggish, and the year-on-year decline in cement prices in the first quarter was significant; Starting from the second quarter, with the increase of project construction volume, the demand for cement will rebound, and the year-on-year decrease in cement prices is expected to gradually narrow; In addition, it is expected that the domestic cement price in the fourth quarter is expected to turn positive year-on-year. Throughout the year, the average price may be lower than the 2022 level.
       5. The cost of cement per ton is expected to fall back and the industry's profits are expected to improve
       The increase in costs is an important reason for the significant decline in profits in the cement industry in 2022, and cost issues are expected to be improved in 2023.
       Zheng Jianhui stated that from 2021 to 2022, the cost of cement per ton increased by 60 yuan/ton, with an average increase of over 30%. The cost increase far exceeded the price increase, leading to a decline in gross profit.
       Costs are expected to move downwards in 2023: (1) The impact of fuel price fluctuations on cost fluctuations is weakened, and fuel prices are also expected to stabilize and slightly decline; (2) The use of alternative raw materials/Alternative fuel has further increased, and the proportion of cement kiln collaborative disposal line has increased to more than 25%. (3) Profits decrease. Enterprises reduce expenses and reduce costs.
       Looking at the first and second half of the year: In the first half of the year, cement costs continued to rise year-on-year (coal prices remained high at the beginning of the year), prices fell year-on-year, and profits shrank year-on-year; In the second quarter, prices rebounded and the profit decline gradually narrowed. In the second half of the year, with the further improvement of cement demand, prices are driving up, and industry profits are expected to improve significantly year-on-year.
       Finally, Zheng Jianhui believes that collaborative self-discipline is a prerequisite for maintaining industry efficiency, and whether industry profits can return to a reasonable range depends on industry consensus.