The Chinese cement market
In his book, “Making the Modern World: Materials and Dematerialization”, Vaclav Smil argues the most important man-made material is concrete, both in terms of the amount the world produces each year and the total mass produced.
Concrete is a composite material made of water, aggregate and cement. Cement is a very fine powder, made of limestone, calcium, silicon, iron and aluminum, which absorbs water and acts as a binder to hold the concrete together.
China has produced more cement in the last three years (6.6 gigatons) than the US produced in the entire 20th century and a view of the Shanghai landscape over the past 26 years should give readers a grasp of the extraordinary changes.
http://www.theatlantic.com/infocus/2013/08/26-years-of-growth-shanghai-then-and-now/100569/
This all sounds very exciting, but as investors we need to dig a little deeper, particularly when there is as a dependence on commodity prices. A brief analysis of the Chinese Cement Market, in terms of supply, demand, capacity utilization and price, below, should assist in explaining why the major companies in that sector have performed so poorly since the cement price peaked in 2011. Remember, a large proportion of the cement ultimately goes to the property and infrastructure sectors and capacity utilization has averaged 81 percent.
The Chinese cement market: supply, demand, capacity utilisation and price
| Year | Supply (mt) | Demand (mt) | Capacity Utilisation (%) | Price (Rmb/t, grade 42.5, 17% VAT) |
| 2006 | 1529 | 1204 | 78.7 | 287 |
| 2007 | 1554 | 1354 | 87.1 | 304 |
| 2008 | 1758 | 1388 | 79.0 | 353 |
| 2009 | 2018 | 1628 | 80.7 | 343 |
| 2010 | 2309 | 1867 | 80.9 | 357 |
| 2011 | 2551 | 2063 | 80.9 | 404 |
| 2012 | 2809 | 2210 | 78.7 | 346 |
| 2013 | 3001 | 2406 | 80.2 | 336 |
| 2014 (E) | 3081 | 2530 | 82.1 | 353 |
| 2015 (E) | 3087 | 2670 | 86.5 | 362 |
| Total | 23697 | 19320 | 81.5 | |
| CAGR | 7.3 | 8.3 |
Source: Macquarie Research
And with the large inventory of property, particularly apartments, waiting to be sold, it is unsurprising the six Chinese or Hong Kong listed cement companies, Anhui Conch, CR Cement, BBMG, CNBC, Shanshui Cement and TCCI, which have a combined market capitalization of US$31.5 billion, are selling at a prospective PE of 6X and a price to prospective book value of 0.9X. This is down from 14X and 2.7X, respectively, in 2011.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
