Cement - China :South market to benefit more from old capacity closure

MIIT announces 2013 old capacity closure target

    MIIT has announced the first batch of old capacity covering 19 industries. Per itsguidance, all names mentioned in the list are required to halt production by Septand the equipment needs to be completely dismantled by the end of this year. Forhe cement industry specifically, 75mn ton of vertical and small-scaled rotary kilnsare requested to be put down, while the target for all cement-related capacityamounts to 95mn ton (outdated clinker kilns and grinding machines).

    Lower target than previous years; but within expectation

    We saw a lower closure target and more provinces slowing down the process ofold capacity closure this year than before.In 2012, the old capacity closure targetnvolved 87mn ton of clinker kilns and 220mn ton for all cement-related capacity.

    Apart from Jiangsu, Fujian, Shandong,Hunan, Guangdong, Guangxi, Guizhou,Tibet and Xinjiang, all other provinces have less-aggressive plans compared tohe past two years. The lower curtailment target is in line with our expectation, asNSP production lines already came up for the majority of the total supply.

    By region: Southern China benefits more

    The actual impact of the old-capacity shutdown will be smaller than the numbergiven, as a result of the much lower utilization ratio than NSP capacity. However,he impact could be bigger in selective regions, given their different levels ofexposure to the curtailment plan. Southern provinces, including Guangdong andFujian, are faced with aggressive targets this year, with 14mn ton and 7.6mn tonof clinker kilns to be shut down (19% and 17% of total NSP capacity by YE2012),which make it 6.4mn ton and 5.5mn ton on top of the target in 2012, respectively.

    We believe it will be helpful to relieve supply pressure in these two provinces if thecurtailment plan is well implemented. Guizhou, Hunnan, Shandong and Sichuanare also on the list of most influenced markets, given that the closure targets areabout 12%/9%/8%/6% of their NSP capacity by YE2012, respectively.

    Limited closure room ahead; new standard worth attention

    Going forward, the old-capacity closure policy will have a much smaller impact tohe industry supply side given the limited closure room nationally. Actually, theclinker produced by vertical kilns in 2012 was less than 8% in China. We shouldocus more on other solutions that could further raise the bar of the industry andnarrow the industry glut from the supply side. We believe other possible solutionsnclude: 1) new cement product standards to encourage the production of high-grade cement with lower admixture percentage; 2) stricter environmentalprotection standards to phase out the smaller-scale NSP capacity on costconsideration.