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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.

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Jan 7, 2004

China's economy in 2004: Dimming or brilliant? (Jan 6, '04)


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