China Cement Weekly: Heavier Emissions Fee to Accelerate Industry Consolidation

Cement pricesdropped 0.3% w/wlast week, withthe 4WMA falling 0.2% w/w.The decrease was driven by a 1.6% decline in South Western Chinaas new capacity came online. Other regions were relativelystable as producers exercised supplydiscipline and demand is recovering gradually. The nationwide inventory leveldropped a further 0.2ppt w/w to 70.0%.

    Eastern Chinaedged down 0.2% w/w, on a RMB10/ton decline for higher-grade cement in Nanjing, though prices elsewhereheld up. Cement producers’plansto raise pricesdid not materialise due to unfavourablerainy weather. Inventory levels are currently low at ~50%, and prices are expected to increase as demand recovers after the Mid-Autumnholiday. Cement producers in Fujian, Zhejiang, and Jiangsu plan to increase pricesaftertheholiday in view of the resumption in construction works.

    South Central Chinawas flat.In Southern China, prices remained stable following earlier price hikes in the Pearl River Delta region. The regional clinker inventory level remained~50%. Low inventory levels and continued supply discipline should provide upside for cement prices in the upcoming 4Q14 peak season. Prices in Guangxi held up last week amid improving demandand Henan and Hunan also remained stable. Some regionslifted clinker and cement pricesin view of the approaching peak season.

    South Western Chinaslipped 1.6%. Producers in Chongqing lowered cement prices by RMB20/ton last week due to new capacitystarting operation and unfavourable rainy weather there.Prices are expected to weaken furtherin theshort term due to new capacity. Cement producers in Guizhou also reduced cement prices by RMB10/ton last week as new capacity was released.

    Northern China remained stable. Demand remained lukewarmat the beginning of September. There have been fewer constructionstarts than expected in Beijing this year, which could limit the demand recovery in theupcoming peak season. BBMG has lifted cement prices in Shijiazhuangby RMB10/ton, but other producers have yet to followsuit. We expect cement prices in Hebei to stay at the current levelin the short term.

    - Our cement stock index increased0.6% last week vs. the HSI’s 2.0% decrease. MIIT, Ministry of Finance, and Ministry of Environmental Preservation have announcedthat they will unify pollutant emission feesat no less than RMB1.2/1.4/unit-of-discharge for air/water pollutant emissionsrespectively before June 2015. Inspections will be stricter and companies failing to meet emission standards will have to pay double/triple the new emissionscharge. As mentioned in previous notes, we expect tougher environmental standards and stricter enforcement to accelerate the exit of cement companies that have less operationalscale and allow larger players to step up industry consolidation.We continue to like Anhui Conch (914.HK, Buy, HK$36.50) given its favourable market exposure, cost leadership, and strengthening financial position as the market consolidator. We remain buyers given its undemanding valuation, near its previous trough of 5X forward EV/EBITDA, and solid earnings prospects amid improving industry fundamentals.Although the demand recovery remainstepid 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 emission controls in the Beijing-Tianjin-Hebei region, which shouldaccelerate 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.