Global Cement takes a look at China with Ian Riley, CEO of the World Cement Association and a long-standing participant in the Chinese cement industry.
China has the world’s largest cement sector by a considerable margin and produces more cement than the rest of the world combined every year. From making ‘just’ 500Mt/yr in 1995 production rose to 1Bnt/yr by 2005. By 2014, production had skyrocketed to 2.45Bnt. Cement production in 2019 was approximately 2.35Bnt, more than seven times that of India, the second-largest cement producer.
Efforts to improve the industry’s production efficiency and sustainability have been made in earnest in recent years. In 2013, China’s State Council issued its ‘Guideline to tackle serious production overcapacity,’ including in the cement sector. At the same time, the Chinese Cement Association (CCA) drafted plans to promote mergers and acquisitions in the sector. A complete ban on new capacity was announced by the Ministry of Industry and Information Technology (MIIT) in February 2018. State-mandated plant shutdowns of up to 100 days per year have been carred out since 2017 in order to reduce capacity. There has also been consolidation, most notably the merger of CNBM and Sinoma to produce the world’s largest cement producer, with more than 500Mt/yr of capacity, in 2018. The aim of these measures is to reach clinker and cement capacity utilisation rates of 80% and 70% respectively, while improving the profitability and sustainability of the sector.
In discussion: Ian Riley, WCA
GC: Can you provide a summary of the Chinese cement sector in 2020?
Ian Riley (IR): The story of cement in China in 2020, like everywhere else, was one dominated by the Covid-19 pandemic. Having originated in Wuhan, Hebei Province in late 2019, the outbreak led to the first lockdowns seen anywhere in the world in China during the first quarter. Across the country, cement production fell by 29% year-on-year to 150Mt in January and February 2020 combined, already the quietest months of the year due to Chinese New Year. Output then picked up to 149Mt in March 2020, still 17% lower than in March 2019. Across China, producers felt the full brunt of the coronavirus outbreak in their first quarter results.
However, the Chinese cement sector bounced back strongly in the second quarter, as demand was displaced from the first quarter. Subsequently, the second half of 2020 panned out much as it would have done in the absence of the Covid-19 outbreak. The information I am party to indicates that producers will be happy with their financial results for the year as a whole.
GC: What about volumes in 2020?
IR: Overall volumes. as reported by the National Statistics Bureau of China, were slightly higher in 2020 than in 2019, around 2.4Bnt compared to 2.35Bnt. The reports I have seen show very minimal changes year-on-year. Rather than reducing demand, Covid-19 displaced demand from the first quarter to other quarters, rather than knocking it on to 2021. Indeed it may have even contributed to higher demand overall.
GC: What other sub-plots were lurking in the background of the Chinese cement sector in 2020?
IR: From the outside it is tempting to say that China has completed its major building and infrastructure drive. This may be almost true of Beijing and Shanghai, but it is not the case elsewhere. Infrastructure is still a key development pillar for China. The central government has major plans for more than 60 of its major cities with more than 5 million inhabitants. There are huge outstanding metro projects, for example. There are entire rail and road networks that the government wants to build and they will demand vast quantities of cement.
GC: How will the sector develop from here?
IR: The Chinese cement industry continues to defy gravity and in the short term, the rest of 2021, we could even see production rise relative to 2020. This is because a lot of the infrastructure projects have been brought forward into 2021 and 2022 from further on in the government’s new Five Year Plan (2021 - 2026), to mitigate some of the worst economic effects of the pandemic. The plateau above 2Bnt/yr that the industry currently finds itself on will likely continue for the next 3 - 4 years, which probably wouldn’t have been the case if the pandemic hadn’t happened.
After 2025 demand will tail off. This is because major projects will have been brought forward to 2023 - 2026 from the second half of the 2020s. I think the rate of decline will be fairly noticable. By 2030 a substantial decline will be clear to see and, in the following decade, demand will likely settle at around 1Bny/yr - half of the current level. Of course, this is still astronomically high compared to anywhere else in the world.
GC: How have tighter environmental standards affected the sector’s ability to produce cement?
IR: The two main pollutants that have been tightened significantly in recent years are dust and NOx. This has led to older plants replacing electrostatic precipitators with baghouses for example. There have been dozens of new SNCR systems, with subsequent pyroprocess modifications, increases in the quantities of biomass fuels and SCR in some cases. These projects don’t affect the ability to produce cement and there haven’t been closures due to them.
The Chinese industry is now world leading in terms of NOx emissions control. This is because the limits for cement plants were borrowed from the power sector. From 800mg/Nm3 a decade ago, we are now talking of limits of 100mg/Nm3 in the most stringent jurisdictions, for example around Beijing. The best performing plants have NOx emissions of below 25mg/Nm3.
Even if these had affected capacity, there would still be plenty of extra capacity to go round, as manufacturers are constrained by government requirements to seasonally shutter capacity. This differs by Province, but each plant is required to shut down for 80 - 100 days per year on environmental grounds, thus removing a significant chunk of capacity.
GC: What is the situation with imports / exports?
IR: I don’t have good export data, but imports have risen recently. This is due to the low prices in South East Asia, mainly from Vietnam. China has allowed these in because the volumes are a drop in the ocean and it would be too costly to compete on price.
GC: What do you make of Chinese cement producers expanding to outside of China? How far can this replace lower domestic production in the future?
IR: There was a spate of announcements regarding Chinese investment in overseas cement plants in 2017 and 2018 but this has slowed. It is important to note that only a handful of serious cement producers: Huaxin, Red Lion, Conch and West China, have expanded overseas. Sinoma has too, but that is a special case due to its engineering division. The remainder of Chinese cement plants outside of China are actually private investors with limited experience of operating within the cement industry. There will likely be further projects, but not on the scale of China itself.
GC: What proportion of the Chinese cement industry is ultimately controlled by the government?
IR: I don’t have a percentage figure but I would say over half is ultimately controlled by either the central government or a regional government. Some of the larger players, CNBM, Jidong BBMG and China Resources Cement, are all government controlled. Anhui Conch is controlled by the Anhui Provincial government, which is not quite the same. There are many smaller ones that are state-controlled too.
This doesn’t stop the industry being competitive, far from it. Producers compete like crazy. Indeed, the government has to sometimes step in and call on them to maintain some kind of market order. This is the opposite of what might be seen in the west, where competing entities have in the past clubbed together in a cartel.
What the government has been able to do, however, via imposing seasonal shutdowns, is demonstrate to producers that they can make more money from less cement. This has calmed things down a bit. All the time, the central government has to balance the interests of the cement sector against those of the construction sector, its major customer. Higher profits may be great for cement companies, but they shouldn’t get too big because that will mean that the construction sector is overpaying.
In terms of environmental limits, China’s cement industry is controlled in a different way to those in the rest of the world. Not only will it set a limit for a given pollutant, but it will also prescribe the technological solution that cement producers should use. This was seen very clearly with waste heat recovery (WHR) in the 2010s. There were pilots that proved the technology, the economics were reasonable and the government said, ‘you must do this.’
I suspect that the approach to CO2 emissions will be similar to WHR. If the government decides that LC3 cements, for example, are a good cement for China, then we can expect Chinese cement plants to start making them shortly afterwards. If a certain type of CO2-derived product or a particular storage method is approved, expect Chinese equipment suppliers to rapidly meet that new need.
GC: Thank you for your insights today Ian.
IR: A pleasure as always.