By V. Phani Kumar
Chinese cement makers will benefit from the government's plans
to close down plants with obsolete technology only if the decision
is successfully implemented and new facilities don't replace the
capacity expected to be phased out, analysts say.
In an order issued over the weekend, China's Ministry of
Industry and Information Technology, or MIIT, said it planned to
eliminate production capacity at 2,087 companies in 18 industries
by September. The decision covers 762 cement companies, or more
than a third of the affected companies.
The move is aimed at clamping down on energy-intensive and
polluting industries marked by excess capacity, and it could
potentially limit supply and improve pricing power for companies
with modern and efficient plants.
However, the effectiveness of the measures would depend on the
demand-supply equation, according to Credit Suisse.
"We believe that old capacity closure is only part of the
[supply-demand] equation. We see that [a] higher closure target
tends to be associated with more aggressive new capacity addition,
thus not necessarily leading to improve the [supply-demand] picture
in the coming quarters," Credit Suisse analysts Trina Chen and
Kevin You wrote in a report.
The analysts said that the decision to lower capacity will not,
by itself, improve business conditions for the cement makers.
"However, combined with limited new supply and continued government
efforts in future closures, we expect the [supply-demand picture]
and margin to improve" in most regions next year, despite slowing
growth in demand, they said.
Shares of Chinese cement makers fell broadly Tuesday,
surrendering gains from the previous session. China Resources
Cement Holdings Ltd. (CARCY) declined 1.8%, China National Building
Material Co. (3323.HK) dropped 1.9%, and Anhui Conch Cement Co.
(600585.SH) shed 2.5% in Hong Kong.
In Shanghai, Anhui Conch's A-shares fell 2.2%, and Sinoma
International Engineering Co. lost 2.1%.
BBMG Corp. gained 1.6% to defy the broad trend among cement
shares in Hong Kong.
Meanwhile, shares of Taiwan Cement Corp. rose 1.2% in Taipei
trade amid expectations the cement maker, which has manufacturing
facilities in mainland China, would gain from the planned closure
of some competing Chinese cement plants.
In wider markets, Hong Kong's Hang Seng Index dropped 1%,
China's Shanghai Composite gave up 1.8%, Taiwan's Taiex slid 0.7%,
Japan's Nikkei Stock Average fell 0.3%, and South Korea's Kospi
declined 0.4%.
But will they do it?
Some analysts were skeptical about the implementation of the
measures, however.
"Despite the positive headline, we expect MIIT's policy to have
a neutral impact on share prices due to high execution risk," BofA
Merrill Lynch analysts led by Yongtao Shi wrote in a note to
clients.
"We believe it will be challenging to complete the task with
only two months remaining, given the government's not-so-successful
track record in execution and local governments' conflicts of
interest with the central government in order to meet their [second
half of 2010] gross domestic product growth targets," they
said.
Merrill Lynch said Sinoma was expected to be the "biggest
beneficiary" of tight cement supply in Northwestern China, where
45% of its cement capacity is located.