China's cement sector expecting winter season

Byyyp

Updated Fri, 19 Oct 2012 00:00:00 GMT

China's cement market has been gathering strength over the past six weeks and prices have been rising all over the country. But I believe the market has already priced in a recovery in the fourth quarter of this year and, more ominously, the late-November-to-February winter low season for the cement sector is just around the corner.

If history is any guide, the prices of cement stocks could correct up to 20 percent during this time. And given that the sector rose 20-30 percent in September alone, I would not be surprised to see a frenzy of profit taking in the weeks ahead.

Cement prices began to pick up in early September. By mid-October, the national average cement price had risen 4.7 percent compared with late August. China's southern provinces, mainly Guangdong and Guangxi, saw the biggest advances, with price hikes of 50-80 yuan per ton in September driven by a sequential recovery in demand and a regional clinker supply shortage due to the closure of Anhui Conch's four clinker production lines following a mining accident in August. Cement prices in the country's eastern provinces rose 20-40 yuan per ton in September thanks to the collective efforts by the region's leading producers to control production and coordinate prices. September also saw a recovery in cement prices from the dip that occurred two months earlier in July, mainly affecting the central provinces of Hubei, Sichuan and Guizhou. Cement prices in northern, northeastern and northwestern regions remained quite stable.

The increase in the national average cement price came after price hikes in some regions in September which saw a 5 percent average price increase in the country's eastern provinces and a 10-15 percent rise in the southern provinces. Monthly sales volume of major cement companies grew 8-10 percent month-on-month (MoM) in September according to our channel checks. By mid-October, inventory levels had fallen to 40-50 percent in the southern provinces and 60-65 percent in the east.

The recovery in cement prices that took place in September did not come as a surprise as it coincided with the predictable seasonal recovery in demand driven by greater construction activity. What was a little different this year was that the pickup in prices in September was regional (as opposed the broader nationwide rise in prices of the past) and the overall pickup in demand this high season was somewhat weaker than in previous years. Based on these signs, I believe the upside for cement prices nationwide in the next two months will be limited.

Since August, infrastructure investment has been accelerating. Monthly railway construction investment surged 63 percent MoM and 111 percent year-on-year (YoY) to 64.3 billion yuan in September. I expect infrastructure investment to grow 20 percent YoY this quarter. Property investment growth this quarter is disconcerting, however. Although total property investment realized strong growth of 16.7 percent YoY, with property new starts rising 13.9 percent YoY in August, social housing construction was a substantial part of this. Indeed, social housing accounted for 47 percent of total property investment in August. Residential property investment, meanwhile, was weak. Considering 96 percent of 2012 scheduled investment in social housing investment has already been completed (960 billion yuan by September 2012), we can expect the contribution from social housing to property new starts and property investment to drop sharply this quarter. Property investment growth is likely to remain at around 15 percent YoY this quarter.

I forecast another 5-10 percent hike in cement prices in the southern provinces of Guangdong and Guangxi and in several eastern provinces in the next two months. In contrast, the northeastern and northwestern regions will enter low season in late-November. By December, I expect a 10 percent decline in cement prices in the northeast and northwest, just as had occurred in previous years.

The author is director of CCB International Securities Research. The views expressed here are entirely her own.