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The oligopolistic or future of the cement industry
The cement industry has been going through a wave of mergers and reorganizations since 2008, driven by overcapacity and environmental concerns. Recently, the release of the "Guidance on Accelerating the Merger and Restructuring of Enterprises in Key Industries" (referred to as the "Opinions") has added a layer of mystery to the ongoing consolidation efforts. As one of the nine key industries outlined in the document, will the cement sector experience a new wave of restructuring? Is this a sign that an oligarchic era is approaching?
Uneven Development of Industry Concentration
According to available data, the top 10 cement companies in China had an industry concentration of only 26% in 2011. The Opinions set a target for this figure to reach 35% by 2015. However, analysts from Changjiang Securities believe this target may not be entirely realistic. Over the past decade, the cement industry experienced rapid growth, with regional structures becoming more defined due to competition and restructuring. Some regions have achieved high levels of concentration.
Currently, the domestic cement market shows significant regional disparities. In East China, Conch Cement and China National Building Materials dominate, while in North China, Jidong and Jinyu Cement lead. In the Northeast, Yatai and Northern Cement are the main players, and in the West, Tianshan and Qilianshan hold strong positions. In Southwest China, the market is largely controlled by China National Building Materials, Conch, and Taiwan Cement. Overall, the industry concentration across the country ranges between 30% and 40%, with East China having the highest concentration. In some areas like Zhejiang, the concentration of a single company can reach up to 50%.
Analysts suggest that the national target aims to encourage large enterprises to expand beyond their current regions. However, there are still challenges, especially in the western region, where the concentration is lower and local small and medium-sized private companies dominate. Efforts are underway, with major players like China National Building Materials, Conch, and Taiwan Cement engaging in M&A activities in the area.
East Reorganization Boom
Overcapacity and environmental pressures remain major obstacles to the healthy development of the cement industry. Kong Xiangzhong, Executive Vice Chairman of the China Cement Association, noted that the industry has hit a development bottleneck, with overcapacity being the primary issue. China's cement production accounts for 60% of the global total, and per capita consumption is among the highest in the world.
"To truly address overcapacity, mergers and reorganizations are essential," Kong said. "This requires dominant enterprise groups to take control, eliminate outdated production, and maintain a balance between supply and demand." However, the pace of reorganization varies by region. Wang Zhenhu believes that the eastern region is seeing more active consolidation.
In economically developed cities like Beijing, Shanghai, and Shenzhen, urbanization rates are high, leading to lower cement demand. Meanwhile, the cement industry chain is well-developed, but growth has stalled. Companies need to look for expansion opportunities outside their traditional markets.
In contrast, the western region has seen rapid growth, partly due to post-disaster reconstruction efforts. However, urbanization rates there are still low, and government policies are encouraging development. Over the next decade, much of the demand for cement and other construction materials will come from central and western regions. The competitive landscape in these areas is less intense, giving smaller companies room to survive.
Is the Oligarchy Era Coming?
Recent developments indicate that the cement industry is accelerating its merger and reorganization. Huaxin Cement recently acquired a 70% stake in Hubei Huaxiang Cement for 519 million yuan. Since 2012, there have been over 23 major acquisition cases in the industry within just a year.
While 2009 was dubbed the "year of mergers" for the cement sector, the latest "Opinions" have once again raised expectations for further consolidation. Many in and out of the industry wonder if this marks the beginning of an oligarchic era in the cement industry.
However, analysts disagree. According to Wang Zhenhu, the cement industry differs from others because of its low entry barriers and limited sales radius—typically around 200 kilometers. Beyond that, transportation costs make it unviable. Therefore, the industry is likely to remain fragmented, with regional leaders dominating different areas.
Regional oligarchs already exist, such as Conch in Anhui, Jidong in Hebei, and Tianshan in Xinjiang. Due to China’s economic structure, a full-fledged oligarchic era may take time to arrive.
As for who will lead the next wave of mergers, Wang believes it will be "big fish eating small fish." Large cement groups, especially listed companies, with their capital, management expertise, and scale, are expected to drive the consolidation.
Looking ahead, the cement industry appears to be on the path to recovery. After hitting a low in November last year, the sector has shown signs of improvement, driven by urbanization. While many listed cement companies saw declining performance in recent years, the coming months may bring better results. With increased fixed investment, the industry is expected to grow steadily in 2013.