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China's way forward paved in
cement
By Li Yong Yan
BEIJING
- China's cement industry best resembles the country's
economy as a whole: low-tech, high-growth and
environmentally-hostile, it is building itself into
overcapacity and eventual decline, hurtling down the
same route the Western cement sector has traveled.
The cement industry took off in the 1980s when
the country's economic development embarked on a fast
track. Within a few short years, China climbed to the
world's No 1 spot in the production of this dusty
material and has kept the crown since. For the past 18
years, China consistently has produced more cement than
any other country in the world. In 2002, China's cement
production was 722 million tons and was set to reach a
new high of 780 million tons in 2003. That accounts for
40 percent of the world's total. The past nine years
have recorded an annual average growth rate of 6
percent, with the last two years spiking to 10.8 and 9.8
percent respectively.
The heady growth came
about because the government, with the zeal of a new
convert to marketism, believes that a fast-growing
economy is the panacea to cement its grip on power.
Beijing has gone to unusual lengths to spur a lethargic
economy. Education has turned into a growth industry,
driving costs further beyond the means of an
average-income household. World Trade Organization
membership is suddenly not as detrimental to the
national economy as Beijing used to make it out to be.
Even the ravaging floods are a blessing in disguise, as
damages will give rise to domestic demands in
reconstruction efforts.
When all these measures
stalled, the government reached deeper into its coffers
in an all-out effort to keep the momentum going. In
2002, government-funded capital investment in
infrastructure projects such as power, roads and ports
increased 18 percent. In the first three quarters of
2003, capital investment jumped another 30.5 percent,
the highest since 1994, creating a corresponding
increase in demand that in turn stimulated industries
such as power, raw materials and transportation.
Responding to this government-led investment
spree, cement, like many other segments, began to build
up capacity in a mad rush to meet the perceived demand.
In 2002, 51 dry kilns became operational with a total
investment of an equivalent of US$1.11 billion. As of
August 2003, another 242 kilns were under construction
at an estimated cost of $6.8 billion. And this figure
does not include the countless new projects and
expansions on a smaller scale that do not get included
in the statistics.
The furious rise in both
revenue and profits has blinded many to several factors
that severely affect the sustainable growth of the
cement industry.
First, will the demand continue
to go up at the rate we see today? The answer is a
sobering no. Government projects by definition are
time-consuming and prone to cost overruns. The
experience in the West shows that except as emergency
relief measures, government does well to keep from
becoming involved in the economy as an investor.
Inefficiency and conflict of interest are incurable ills
under the best circumstances of supervision and
independent auditing. Moreover, China is now running a
budgetary deficit equivalent to $41 billion. For the
past five years since the 1997 Asian financial crisis,
Beijing has issued $80 billion in long-term domestic
debts in an effort to boost the sagging economy,
primarily by investing in infrastructure. It is
inconceivable to continue this deficit-financed
investment boom without overheating the economy and
causing runaway inflation. In fact, warning signs such
as the recent price hikes in energy and food are already
showing up.
Second, cement relies on natural
resources but is a big polluter in return. The industry
releases a staggering 10 million tons of dust into the
air every year, or 42 percent of the country's total
dust emission. With ever-tighter environmental controls,
it is expected that a lot of the smaller producers will
be shut. Of the 700-plus million tons produced, more
than 83 percent came from small producers that average
less than 150,000 tons annually, compared with the world
average of 600,000 tons a year per producer. As a
result, further consolidation will be anticipated. The
number of cement producers has been halved in the past
10 years from more than 9,000 in 1993 to 4,700 in 2003.
The trend will continue. Gone will be those small
players who are the least efficient, waste power and
pollute the most.
Competition will bring more
pressure to bear on the Chinese cement industry. As the
government finds itself no longer able to finance
megaprojects, the economy will slow, forcing the cement
manufacturers to look outward for survival. But what
will they see? Southeast Asian countries are already
gobbling up China's traditional export market shares.
China's cement export peaked in 1994 with 11 million
tons shipped out and has been in steady decline ever
since. Only 5.18 million tons were exported out of China
in 2002. Offered at $34 a ton, Chinese cement is pricing
itself out of the market as Thailand is asking as little
as $20 for the same quality.
Looking ahead, the
dusty industry still has four to six years to pave a
high-growth road for itself, especially as the dry kilns
will gradually expand its current share of 16 percent to
take up the vacuum left by the phasing out of obsolete
technology. Fully 100 percent of South Korea's cement is
produced by the state-of-the-art dry process. Even
Thailand turns out 97 percent of its cement using dry
kilns.
Given the problems faced by the cement
industry in China, it is not the high-value investment
proposition it once appeared to be. However, it will be
a momentum industry to watch for the next three to five
years.
(Copyright 2004 Asia Times Online Co,
Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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