Cement prices rose 0.38% w/w last week, led by a 1.7% w/w gainin Eastern Chinathough other regions were stable. The 4WMA was flatw/w. The nationwide inventory levelwas steady at 70.0%, though inventory in North Western China rose by 2.0ppts w/w due to unfavourable rainy weather in Shaanxi.
- Eastern China increased 1.7% w/w,on RMB10-RMB20/ton w/w increasesin Shanghai, Hangzhou, and Nanchang. In Anhui, cement producers again delayed plansto increase pricesdue to rainy weather last week. Inventory in Eastern China decreased a further 0.6ppt w/w on gradually improving demand. Overall, cement and clinker prices have been supportive so far inSeptember. Certain regions have not followed the recent price increasebut should pick up as construction works resume after the holidays.
South Central China was flat. In Southern China, prices remained stable in the Pearl River Delta regionof Guangdong, but should rise after mid-September as rainy weather eases after the Mid-Autumn holiday.In Central China, some cement producers in Hunan and Hubei have started increasing cement prices amid a mild demand recovery. More producers are expected to follow suit in the next couple of weeks.
South Western Chinawas flat.Chongqing’s cement price decrease from the prior week, caused bynew capacity coming online, has spread to nearby regions. CR Cement’s (1313.HK, Not Rated) new clinker production linein Guizhou has started producing higher grade clinker, but prices there continue to hold updue to low inventory levels in the region and supportive demand from local infrastructure construction works.
Northern and North Western China remained stable.The demand recovery in Northern China remained lukewarm last week. Tightliquidity and slower construction works for real estate continuedto be overhangsfor cement demand. Although leading cement producers in Hebei plan to lift prices in the 4Q14 peak season, it remains unclear whether smaller producers will follow suitor cut pricesto ease inventorypressure. In Northern China, inventory level in Shaanxi rose by 2ppts w/was rainy weather had a negativeimpacton regional demand. Overall shipment growth in North Western China has been slow coming into September, which casts a shadowon the demand outlook for the 4Q14peak season.
Our cement stock index dipped 0.4% last week vs. the HSI’s 2.6% drop.Due to falling coal prices and oversupply in the coal industry, China will introduce production limitsand aimsto cut coal production by 12% y/y for the next four months. We do not expect this to cause a coal price spike in the short term. The major uncertainty would be the execution of production limits. Production cutbackswould result in immediate lossesand stagnant cash flows, so smaller coal producersmay opt instead to continue with price competition.Similar to the cement industry, coal industry consolidation is a long-term solution that should take years to achieve. Coal prices have dropped 26.1% YTDand have stabilised recently. We believe cement producers should benefit further from soft coal prices for the foreseeable future.
We continue to like Anhui Conch (914.HK, Buy, HK$36.50) given its favourable market exposurein Eastern China, where cement prices have shown seasonal recovery. We remain buyers given its undemanding valuation, near its previous trough of 5X forward EV/EBITDA, and solid earnings prospects amid improving industry fundamentals. Althoughthe demand recovery remains tepid in Hebei, we see multiple upcoming positives for BBMG’s (2009.HK, Buy, HK$6.60) cement business, including: 1) limited new capacity, which should limit downside for regional cement prices; 2) stricter and unified emissioncontrols in the Beijing-Tianjin-Hebei region, which should accelerate the exit of smaller players and strengthen BBMG’s market position; 3) construction needed to further integrate the Beijing-Tianjin-Hebei region, including the New Beijing International Airport, which should drive a sustainable regional demand recovery.
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