China Cement:Trip takeaways-the new order in China cement

China cement trip in West, East and South China post National Holidays。

    We have returned from a cement trip, visiting the entire construction value chain.Our biggest takeaway is that companies who control upstream resources willdominate in the new landscape of supply side reform or environmental protection.Clinker resources are increasingly tight and inventories are low, as large playersare reducing external clinker sales and overseas exports. Aggregates and sandprices have also more than doubled as a result of environmental measures,providing a profitable business extension for cement players, given their naturaladvantage. Large players who have higher environmental standards are also in aposition to gain a lot of market share, with Conch September volumes up 10.5%yoy. Given higher coal prices, large-scale production halts in 4Q and already-lowinventories, 4Q17is shaping up to be one of the strongest quarters we haveseen since 2011, prompting our earnings upgrades. Heading into 2018, we seefurther hikes to cement prices on the back of stronger price coordination andthe potential for 32.5R grade cement removal. The demand outlook is also quitestrong with many large-scale infrastructure projects due to start immediately postthe CPC meeting. Our top picks are: Conch-A, Conch Venture and WCC.。

    Structurally higher and more stable cement prices; 2017just the beginning。

    We remain constructive on 2018cement ASPs as: 1) peak shifting productionhalts will step up in strength, 2) there are higher production costs fromenvironmental costs and elevated coal prices, and 3) there is greater pricing powerby leading producers through controlling clinker resources.。

    In NE China, winter production halts announced for 2018have been extendedby one month from Nov 15, 2017to Apr 30, 2018. When the market reopenspost CNY, the market will have minimum inventories, supporting the continuationof high cement prices. Large producers are also gaining more market share asthey are selling less clinker and adding their own grinding stations instead. Forexample, Conch added 20mt of cement grinding capacity in 2017, while CRCwill reduce sales of their clinker in 2017/18and save it for their own grindingstations. Should 32.5R removal be implemented in 2018, clinker demand willincrease by c.20%, leading to nationwide shortages and a sure squeeze in cementprices. Conch, the lowest-cost cement producer, also notes its strategy changeto prioritize profitability over volumes and will soon be rolling out a regional salescompany with the likes of CNBM to coordinate all sales in East China.。