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Song Zhiping: Vigorously Push Ahead Structural Reform of the Supply Front of the Cement Industry

2016-08-22

Based on the structural reform of the supply front, the whole country is putting importance on implementing the major task of "cut overcapacity and excess inventory, deleverage, reduce costs, and strengthen points of weakness". Since the beginning of this year, the steel and coal industries have made some results in structural reform of the supply front. In May, the General Office of the State Council issued Guiding Opinions on Pushing Ahead Maintaining Stable Growth, Adjusting Structure and Increasing Efficiency of the Building Materials Industry (Guo Ban Fa [2016] No.34), to guide the building materials industry to speed up adjustment. The cement industry should grasp this opportunity, push ahead the structural reform of the supply front, cut overcapacity, and realize sustainable and coordinated development. The task is urgent. Time will not wait for us.

Find the Right Way to Solve the Problem of Overcapacity

China is a leading producer of cement. Since the reform and opening-up, thanks to rapid economic growth, China's cement production capacity has ranked No.1 in the world, and its technology and equipment manufacturing also reached world first-class levels. However, long term extensive development also caused problems such as structural overcapacity. Under the new normal, Chinese cement industry is in a transition period. The market demand has been declining from the peak, and overcapacity is serious. The imbalance between supply and demand is more prominent. Now the production capacity of cement in China is 3.5 billion tons. The production capacity surpassed demand by about 30%. In 2015, the production capacity of cement in China is 2.35 billion tons, representing a year-on-year decrease of 6%. The decline has been the first time in the past 25 years. The cost effectiveness in every district dropped across the board. In the first half of this year, the capacity of cement production amounted to 1.11 billion tons. The capacity utilization rate is only 65%. In the second half of this year, after certain new production lines commence production, the capacity utilization rate will be even lower. The profits of the cement industry dropped from 70 to 80 billion yuan every year a couple of years ago to 30 billion yuan in 2015. In the first half of this year, the profits only amounted to 9.6 billion yuan, representing a year-on-year decrease of 27%, the lowest level since the beginning of the period of "12th five-year plan".

The overcapacity of Chinese cement industry is a problem with Chinese characteristics. The structural reform of the supply front is a right way to address the problem of overcapacity. Since the reform and opening-up, the state government has encouraged local governments to establish building materials enterprises, to meet the demand of construction. However this also resulted in the phenomenon of "small, dispersed and chaotic" in the industry. In recent years, through industrial integration, the concentration ratio has been improved, but the problem of newly added production capacity has become more serious. In the past, backward production facilities produced more cement than people can buy. At present, advanced production capacity also has surpassed the demand. China produced more cement than what is needed. Industrial production and marketization is the reason of overcapacity. Adequate overcapacity is a norm in the market. But serious overcapacity happens in a particular period of industrialization and marketization, and in the fields of basic raw materials and heavy and chemical industries. Western developed countries all have experienced serious overcapacity. In China, overcapacity is attributable to some particular reasons such as the division of fiscal systems, blindly approval of projects by some local governments that pursue GDP growth. Overcapacity in China is the result of market failure and lost control of the government. Cement is a kind of asset-heavy industry. If we do not promptly cut overcapacity, the exit cost will be higher in the future. The social cost will be greater if we wait too long. Therefore, the structural reform of the supply front is in line with the internal characteristics of the new normal of the economy. It is a comprehensive measure and a breakthrough in practice and theory in structural adjustment of China's economy. Specifically, we should boost domestic demand, cut overcapacity and adjust industrial structure, to promote the balanced and coordinated development of economy.

Despite serious overcapacity, there are many favorable conditions. The No. 34 document issued by the General Office of the State Council of the PRC pointed out the direction for the structural reform of the supply front of the building materials industry. The key is to firmly implement it. Recently, it is mentioned at the steel and coal special meeting by relevant ministries and commissions that downward pressure on the economy is still huge. We should make painstaking efforts in cutting overcapacity. With the progress of the work and change of the market, some enterprises that have stopped production may wish to restart the production. We should have a clear understanding and determination. It is the same with the cement industry. We should win the battle of the structural reform of the supply front.

International Successful Experiences are Worth Using for Reference

In the 1960s and 1970s, decision makers of western countries rethought Keynesianism. They started to pay attention to supply and structural problems, and eventually realized that equal emphasis should be laid on the market and government. Meanwhile, they accumulated some experiences in cutting overcapacity.

 

The general practice of solving the problem of overcapacity in the world is merger and reorganization by big enterprises. Overcapacity is the characteristic of the market-oriented economy. Cutting overcapacity is the main target of modern economics. It has been proved that the market cannot be freely adjusted by "an invisible hand". However, only depending on "a visible hand" will bring some problems as a result of excessive regulation. "A visible hand" may work in some particular period and industries, but it usually does not work, or even be harmful for asset-heavy raw materials and heavy and chemical industries. Such industries mainly depend on big enterprises to regulate the market. For such industries, the methods of merger and reorganization are usually adopted in developed countries. The United States and the EU eased restriction on the business concentration. After the bursting of the bubble economy, Japan specified that the steel and cement industries do not apply to the antitrust law. Big enterprise groups that play dominate roles in the market have rapidly taken shape.In 2014, after the reorganization of Lafage and Holcim, the top two cement producers in Europe, they eliminated some surplus production capacity. Mittal Company in India, after reorganizing steel factories in Europe, shut down certain factories and resumed balance between supply and demand. Such practices have referential significance for China.

The exit of overcapacity requires coordinated efforts of government, associations and enterprises. It is a system project. Albert, president of Ireland CRH Company, a building materials enterprise that ranks No.3 in the world, had given suggestions on structural adjustment of China's cement industry. According to their experience, overcapacity in the cement industry is hard to control. Nevertheless, if we do not work, we will pay big price. The government, association and big enterprises should work together. In the 1990s, Japan cut overcapacity in the cement industry through multiple methods, such as launching "Measures on Stabilizing Special Industries", "Reconstruction Law" and "Preferential Policy on Business Inheritance". Under the guidance and coordination of associations, the enterprise unconditionally executed the laws. 30 enterprises were swiftly integrated into 3 groups. The annual sales volume of cement dropped from 120 million tons to 40 million tons. However, the price remained at 100 US dollars per ton. The sales volume of cement in France dropped 30% in hard times. Through integration and reorganization, the problem of overcapacity was solved and enterprises started to gain profits.

To Win the Battle of Cutting Production Volume and Cutting Overcapacity

In order to push ahead the structural reform of the supply front, resolutely implement the No. 34 document issued by the General Office of the State Council of the PRC, the cement industry has to put importance on "cut production volume" and "cut overcapacity". Cutting production volume mainly solves existing problems such as insufficient demand and low price. However, cutting overcapacity can fundamentally solve the long term problems that plague the industry. Meanwhile, we should prevent the increase of new production capacity and maintain health development after cutting production volume.

 

First, we should restrict newly built production capacity. Overcapacity is a phenomenon in the cement industry everywhere all the time. We should firmly prevent any new construction for any reason. Whether it is carbide slag or garbage disposal, we should make technical reconstruction on the existing production line. According to Guo Fa No. 38 document issued in 2009, the state government prohibited any new construction. However, local government found excuses and increased new production capacity of 800 million tons. We should bear firmly in mind this lesson. This time, the No. 34 document issued by the General Office of the State Council of the PRC emphasizes that by the end of 2020, we should prohibited approval and newly building of any cement clinker project. We should ensure that every enterprise at different regions firmly prohibits any new construction.

Second, we should eliminate 32.5 low-grade cement. No. 32.5 cement is the lowest standard cement. No. 42.5 cement accounts for 50 of the world market. No. 52.5 and No. 62.5 cement account for 50 of the world market, whereas in China, No. 32.5 cement accounts for 60% to 70% of the market. During the course of production of low-grade cement, some small factories add 2 tons of additional materials into one tons of clinker, which means that the quality is very poor. Right now, the lowest standard cement used in African countries is No. 52.5 cement. China has the world' leading production technology and equipment. There is no reason that China still produces No. 32.5 cement. Right now, No. 32.5 cement is prohibited in Xinjiang across the board. Developed regions such as Beijing-Tianjin-Hebei, Jiangsu-Zhejiang-Shanghai should play a leading role. As such, 600 million to 700 million tons of backward production capacity will be eliminated across the country, and quality of cement will be ensured at the same time.

Third, we should firmly carry out staggering production. Staggering production is the simplest and most effective way to control cost. We should make it as a norm and expand the scope of staggering production. Enterprises with advanced production capacity also should carry out staggering production. That is not to protect backward production capacity. It is an important interim measure to cut overcapacity. For the coal industry, the state governments stipulated that production should not surpass 276 days. Recently, the price of coal per ton has increased by nearly 100 yuan.The increase in the price of coal resulted in a soar in the expenditure of cement enterprises. If the cement industry does not effectively carry out staggering production, and effectively transfer out the newly added cost, when the coal industry limits the production and increases the price, the condition of the coal industry will be exacerbated.

Fourth, we should enhance regional coordination. Apart from staggering production and production curtailment, we should vigorously carry out regional market coordination to resume balance between supply and demand. Whether cement enterprises can actively carry out market coordination will have a direct impact on the price. The coordination work in the cement market in China is not satisfying everywhere. In some places, local associations are in charge of the work, with big enterprises playing the leading role, whereas, in other places, coordination work is poorly carried out. Cement is a kind of "short-leg" products. It has its own sales region. We should protect sales regions where a good job is done in the coordination work, and oppose malicious price reduction that disturbs the market order, in accordance with Anti-unfair Competition Law. The second half of this year is the peak season. We should enhance regional coordination and strive to gain good profit.

Fifth, we should encourage united reorganization of big enterprises. According to international experience, big enterprises should integrate the market to address the problem of overcapacity. With the social and economic development, big enterprises become more and more mature, with stronger innovation spirit and vitality. They are no longer monopolies that hinder innovation and choke competition. We should rethink the constructive meaning of big enterprises to the market. Through united reorganization, CNBM pushed the concentration ratio of the cement industry in China from 12% in 2006 to 58%. However, this figure still lags behind the advanced world level, compared with the concentration ratio of developed countries of 70% to 80%. Right now, the cement industry in China entered into a new phase of reorganizations among big enterprises. Governments, financial departments and big enterprises should shoulder the responsibilities. The Ministry of Industry and Information Technology recently chose Jilin Province as a pilot unit for the structural reform of the supply front of the cement industry. It plans to reorganize several cement enterprises into a big cement group, whose market share will be 70%. This will play an exemplary role for the reorganization of the cement industry in other provinces. After reorganization, big enterprises will shut down some factories, in order to run the business in an effective way. After shutting down factories, enterprises can make transformation and upgrading, and technology innovation. CNBM plans to turn cement factories that have been shut down into assembly type PC buildings, turn cement into products, expand into the downstream and increase added value of products.

Sixth, we should enhance industrial-capacity cooperation with other countries. Driven by the construction of "the Belt and Road" and "Go global", the cement industry entered into a new age of all-round investment and international production capacity cooperation. CNBM not only established cement factories in other countries, but also established the intelligent industrial platform to provide operation and management services to overseas factories.Right now, many countries need cement and China has big production capacity of cement. We should encourage cement enterprises located along the coast, the river and on the border to export cement. As for enterprises that establish factories in foreign countries, while shutting down factories in China, the government should consider giving support to them, such as granting national special construction capital loans, offering guidance to enterprises in combining "cut overcapacity" and "go global", to speed up the pace of adjustment.


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