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Song Zhiping: About Cutting Overcapacity in the Cement Industry


The structural reform of the supply front promoted by the Party Central Committee has rich meaning. It aims to push ahead structural adjustment through reform, reduce ineffective and low-end supply, and increase effective and high-end supply. Since the beginning of this year, the steel and coal industries have made significant results in structural reform of the supply front. Cement is also a kind of basic materials. How to cut overcapacity through the structural reform of the supply front and realize sustainable and healthy development are urgent tasks faced by us. 

The Prominent Problem of the Cement Industry is Overcapacity

Chinese cement industry made huge contribution to the cement industry in the world and China's economic development. First, it established the biggest cement industry system in the world. The production and sales volume of cement in China ranked No.1 in the world, accounting for approximately 60% of the total production and sales volume of cement in the world. Second, it made the biggest scale technical structural adjustment in the world. It eliminated backward production facilities such as small vertical furnaces, installed waste heat generating system, carried out big scale coordinated disposal, and realized green development. Third, it improved technology and equipment standards of the cement industry, and reached international first-class standard, supported the development of the cement industry in the world, and will become a front runner in advanced cement technology in the world in the future. Fourth, it cultivated many excellent cement enterprises such as CNBM, Conch and BBMG.

Chinese cement industry has made many achievements. However, we should also realize that Chinese cement industry is in a transition period. Problems still exit during its development. The market demand has been declining from the peak. The imbalance between supply and demand is more prominent. First, overcapacity is serious. In this year, the production capacity of cement in China is 3.5 billion tons, whereas the average sales volume of cement in recent two years was around 2.4 billion tons. The production capacity surpassed demand by about 30%. Third, the product structure of the cement is unreasonable. 32.5 low-grade cement accounted for 60% of the market share. Third, the concept of market competition is backward. Industrial rules of the cement industry have not been fully established. The enterprises are lack of awareness of self-discipline. Low price competition has become a norm. All this resulted in a big slump in price of cement, and seriously reduced profitability of the industry.

Cutting Overcapacity is the Key in the Structural Reform of the Supply Front

Cutting overcapacity is a touchstone to measure if the supply-side structural reform achieved success, and a key in the structural reform of the supply front in the cement industry. The cement enterprise should combine "cut production volume" with "cut overcapacity", eliminate backward production capacity, vigorously develop mid-high end products, and realize "cutting overcapacity, destocking, deleveraging, reducing corporate costs and shoring up weak spots".

In the short term, we can solve the problem of insufficient demand and low price through "cut production volume". First, we should firmly carry out staggering production in a wider scope. Faced with overcapacity, cement enterprises have no other better choice. The simplest and most effective way to cut overcapacity is staggering production. Second, we should eliminate 32.5 low-grade cement. 42.5 cement or above are used in most countries in the world. China's production technology and equipment for cement is in advanced world levels. We should eliminate low-grade cement, improve quality of cement, and reduce cement production capacity. Third, we should restrict newly built production capacity. Any enterprises or any one should not make any excuses to build new cement factories. All enterprises in different districts should firmly carry out the spirit of 34 document issued by the General Office of the State Council of the PRC, and ensure that they will not build any new cement production line until 2020. Fourth, we should enhance regional coordination. We should ensure coordinated development of the cement market in China. We should achieve supply and marketing balance, and maintain the price of cement through restricted output.

In the medium and long term, we should fundamentally solve the problem of the cement industry through "cut overcapacity", and build a healthy market and enhance the discourse power in the market. First, we should enhance regional united reorganization. Cement is a kind of non-tradable raw material product. It cannot be stored and only can be sold within 200 kilometers. It is not suitable for long distance transportation. Enterprises can achieve regional united reorganization through capacity swap and mutual equity participation. Second, we should shut down redundant factories, improve enterprises' operation efficiency, and gain more profitability. After the factories are shut down, we can make transformation and upgrading, and technology innovation, to expand industrial chain, improve added value of products, and realize mid-high end development of products. Third, we should oppose unfair competition. Good competition facilitates the social development and bad competition hinders the social development. We should protect regional markets that do a good job in cutting overcapacity, oppose enterprises that disturb market order, and protect lawful interests of operators and consumers. Fourth, we should enhance industrial-capacity cooperation with other countries. We should actively participate in the construction of "the Belt and Road", develop third-party marketplaces in cooperation with domestic big enterprises or transnational companies, transfer surplus funds and equipment into other countries, and relieve the pressure of overcapacity in China.  

Give Play to the Role as Big Enterprises in Cutting Overcapacity

In the past, when the economy faced problems, we depend on the market, "an invisible hand", to make adjustment, or depend on management and interference of the government, "a visible hand", to make adjustment. Now, big enterprises have become a mature market body. They received stricter supervision and shouldered extensive social responsibilities. They are a regulator to balance the economy. In addition to using "an invisible hand" and "a visible hand", we also should pay attention to the adjustment function of big enterprises. Big enterprises are the major driving force of the structural reform of the supply front. The integration of big enterprises is the main approach to cut overcapacity. In western developed countries, the common practice of cutting overcapacity is merger and reorganization by big enterprises. After merger and reorganization, big enterprises can shut down factories in proportion, to increase concentration ratio and market pricing, and thus to stabilize market prices. Through measures such as shutting down factories and staggering production, enterprises will enter into a positive cycle of profitable operation, which will ensure the safety of bank loans, protect the interests of creditors, and prevent bankruptcy and unemployment.

Big enterprises should play a leading role in cutting overcapacity while maintaining a moral high ground. From the perspective of national policy, industrial development and enterprise strategy, big enterprises should lead the industry to embark on a vigorous and healthy development road with orderly competition and price stability. Through big scale united reorganization, China National Building Material Group has become the world's largest cement producer and cement technology comprehensive service provider, with cement production capacity of 550 million tons. It is determined to take the lead in the industry to eliminate 32.5 low-grade cement, shut down redundant production capacity, stop building new production lines, carry out staggering production, stabilize market prices and be the mainstay in maintaining healthy development of the industry.  

 Work Together to Solve the Problem of Overcapacity

Overcapacity is a characteristic in the market-oriented economy. If concentration ratio is high and capacity utilization rate is controllable, overcapacity is not terrifying. Cement is an important basic raw material industry and heavy assets industry. The industry is not suitable for excessive competition. There are many cement enterprises across the country. Disordered competition is prevalent in the market. Overcapacity is a phenomenon everywhere all the time. There is no difference between dull period and boom period. Even advanced production facilities face serious overcapacity. Overcapacity with Chinese characteristics is closely related to the model of "serving meals to different diners from different pots" of local government. Even today, there are still some local officials who have a poor understanding of overcapacity. They still "add flour if water is too much, and add water if flour is too much", and even wish to build new production lines. Therefore, enhancing awareness of serious overcapacity is an important task of the time.

Like steel, the demand for cement will decline gradually for a long period of time in the future. Solving the problem of overcapacity is a pressing task at the moment. It is also a long term task in the future. This calls for coordinated efforts of governments, associations and enterprises. For the issue of cutting overcapacity of cement, we should give play to the role of not only the market but also the government in resource allocation. The issue of No. 34 document of the General Office of the State Council of the PRC gives guidance to the structural adjustment of the cement industry about the method and principle for the structural adjustment. The industry wishes to get continuous support and help from relevant departments of the state. The cement association made a great deal of work in cutting overcapacity and pushing ahead the structural reform of the supply front of the cement industry. It should continue to enhance its management role for the industry, become a strong organization to maintain the order of the cement market, and unite all cement enterprises together to earnestly implement relevant national policies.

As any old saying goes, "There will be no complete egg if the net is overturned." The interests of the industry are higher than the interests of the enterprise. The interests of the enterprise stem from the interests of the industry. Now overcapacity is a prevalent problem. Cutting overcapacity is not a matter for some enterprises. All cement enterprises should face this problem and take initiatives to cut overcapacity. Big enterprises should play a positive role in cutting overcapacity. If righteousness is in conflict with interests, righteousness shall prevail. Leaders should consider it their duty to cut overcapacity. They should have general situation view and altruism thinking, and integrate the development of their own enterprises into the overall industrial system. Enterprises should not only pursue profits, but also consider the environment, interests of stakeholders, and the whole system. They should strike a balance between the profitability of enterprises and the overall value of the enterprise, fundamentally solve the problem of overcapacity of cement, ensure good economic returns of the industry, and make due contribution to the structural reform of the supply front of China economy.

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