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In the first half of this year, the demand for cement has plummeted significantly, with the supply-demand contradiction becoming exceptionally pronounced. To seize market share, some cement companies have intensified their cutthroat competition, leading to a continuous decline in cement prices, which is a typical example of "involutionary" competition.

Faced with the predicament of the cement industry, various provincial and municipal industry associations have recently issued a joint initiative, calling for enhanced industry self-discipline and resistance to "involutionary" competition, hoping for the industry to emerge from the difficulties as soon as possible.

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Market analysts believe that the initiative by industry associations to prevent "involutionary" competition will have some effect, but its specific impact remains to be seen, as the main contradiction the cement industry is facing now is a severe imbalance between supply and demand. It is anticipated that the demand for cement in the second half of the year will improve compared to the first half, and cement prices are expected to continue rebounding in the second half. However, considering the overall situation of the cement industry, the implementation of self-disciplined production cuts by cement companies will greatly influence the trend of cement prices.

Industry Association Initiatives for Self-Discipline

In recent years, with the downturn in the real estate industry, the slowdown in infrastructure construction projects, and the multiple overlapping factors such as technological progress and capacity expansion of enterprises, the domestic demand for cement has contracted, and the contradiction between production and sales has become increasingly prominent, plunging cement companies into a state of comprehensive disorderly competition.

The Central Political Bureau meeting held on July 30 pointed out the need to strengthen industry self-discipline and prevent "involutionary" vicious competition, which has attracted widespread attention.

Subsequently, to fully implement the spirit of the Third Plenary Session of the 20th Central Committee and the Central Political Bureau meeting on July 30, to strengthen industry self-discipline, prevent "involutionary" vicious competition, reverse the unfavorable situation of the industry's comprehensive decline and losses, and promote the healthy and sustainable development of the industry, industry associations in various provinces and cities, including Jilin, Yunnan, Shaanxi, Sichuan, Liaoning, and Shanghai, have successively issued initiatives to prevent "involutionary" vicious competition.

For instance, the Jilin Province Building Materials Industry Association issued an initiative titled "On Strengthening Cement Industry Self-Discipline and Preventing Involuntary Vicious Competition," advocating that industry companies should establish a sense of fair competition, abide by market rules, maintain good industry order, and resolutely resist improper competitive practices. At the same time, industry companies should strengthen their own construction, focus on technological innovation and brand building, and improve the quality of products and services to enhance their core competitiveness.

The Hebei Province Building Materials Industry Association issued an initiative titled "Jointly Resisting 'Involuntary Vicious Competition' to Promote the Healthy and Stable Development of the Industry," stating that under the situation of cyclical economic adjustment, the continuous decline of cement demand is irreversible. It is necessary to face it correctly, actively respond, maintain confidence in development, keep strategic focus, and actively practice the industry development concept that "industry interests are greater than corporate interests, and corporate interests are nurtured within industry interests." This approach aims to purify the industry ecology and jointly create a fair and stable market competition environment.

Recently, the China Cement Association issued a letter titled "Seeking Suggestions on Strengthening Cement Industry Self-Discipline Policies," stating that to implement the spirit of the Central Political Bureau meeting which emphasized "strengthening industry self-discipline, preventing 'involuntary' vicious competition, and strengthening the market's survival of the fittest mechanism, and smoothing the exit channels for backward and inefficient production capacity," the association is now widely soliciting industry suggestions and promoting the formation of a work plan. The feedback and suggestions include but are not limited to the phenomena and causes of "involuntary" vicious competition in this region; mechanisms for the exit of inefficient production capacity; and other opinions and suggestions for strengthening industry self-discipline and promoting high-quality development of the industry.Industry associations' initiatives to prevent 'involution-style' vicious competition should have some effect, but the specific impact still needs to be observed, according to market analysts.

Terminal demand continues to decline

According to data from the National Bureau of Statistics, the national cement production in the first half of 2024 was 850 million tons, a year-on-year decrease of 10% (comparable scale), with the lowest production since the same period in 2011, close to the level of the same period in 2010. Affected by the continued downward trend in real estate development investment and the persistent slowdown in infrastructure investment growth, the overall demand for cement is dragged down, and the cement industry shows the operational characteristics of "continuously declining demand, low price fluctuations, and continuous industry losses."

The decline in demand and falling prices directly lead to poor overall business conditions in the cement industry. According to estimates from the Digital Cement Network, the cement industry suffered losses of about 1 billion yuan in the first half of the year.

"In the first half of the year, new real estate development investment and new construction areas continued to decrease year-on-year nationwide, and the output of traffic fixed assets also declined month by month. The civilian market also saw a decrease in decoration and rural self-built housing due to the reduction in residents' willingness to spend, resulting in a comprehensive decline in terminal demand for cement," said Hou Linlin, an analyst at Zhuochuang Information.

It is understood that in 2023, the national cement prices showed a trend of being high at the beginning and low at the end, and the prices continued to decline and fluctuate at a low level in the first quarter of 2024. Starting from May this year, the cement prices in some regions increased month-on-month, and the decline narrowed year-on-year, and the prices continued to rise month-on-month in June. "The weak terminal demand led to the cement prices falling to the bottom in the first four months, but the increase in costs led to more production cuts by cement companies, which in turn promoted the rise of cement prices from May to June," said Hou Linlin.

According to Li Kunming, a researcher at China Cement Network, from January to June 2024, the national fixed asset investment growth rate was 3.9%, which was faster than the same period in 2023. The growth rate of infrastructure investment was 5.4%, with a slowdown in growth within the year. Among them, the road transportation industry, which is closely related to cement demand, decreased by 1%, and the public facility management industry decreased by 4.5%. Although the overall infrastructure growth rate is relatively stable, its supporting role for cement demand is not strong.

"According to our tracking, in the first half of this year, a total of 4 cement clinker production lines were put into operation nationwide, with a total actual clinker production capacity of 4.62 million tons, a decrease of about 60% compared with the same period last year. Although there are fewer newly put-into-production lines, due to the obvious decline in demand, the utilization rate of clinker production capacity continues to decline. It is expected that the utilization rate of clinker production capacity in the first half of 2024 will be around 48%, a new low for the stage," said Li Kunming.

What will happen in the second half of the year?

After experiencing the overall downturn in the first half of the year, can the cement industry usher in a turning point in the second half of the year? In this regard, Li Kunming believes that the lack of demand coupled with fierce market competition led to a trend of cement prices being suppressed first and then rising in the first half of this year, but the overall average price has declined significantly. Entering the second half of the year, the demand is expected to improve compared to the first half, and cement production companies also have a strong sense of self-help. Therefore, it is expected that there will still be room for rebound in cement prices.Due to the overall insufficient demand and the continued existence of overcapacity in the cement industry, the rebound in cement prices in the second half of the year may be quite limited. Especially as cement prices were generally at a lower level in the second half of 2023, it is very likely that cement prices will turn positive year-on-year in the second half of this year. However, from an annual perspective, the overall prices are still expected to move downward.

"In the face of insufficient demand and limited price rebound, profits in the cement industry may still experience a year-on-year decline," said Li Kunming.

Tianfeng Securities holds a relatively optimistic view on cement prices in the second half of the year: on one hand, under the strong profit demand, it is expected that the leading companies will also increase the intensity of price increases in the second half of the year; on the other hand, it is expected that the year-on-year decline in production in the second half of the year will gradually narrow, and the quarter-on-quarter improvement is expected to provide support for price increases.

The leading companies in the cement industry are basically state-owned enterprises, and in 2023, the top ten cement companies in terms of clinker production, state-owned enterprises' capacity reached 744 million tons, accounting for 70%. Against the background of overall fiscal pressure and state-owned enterprises increasing their assessment of listed companies, their profit demands in the second half of the year may be stronger, and their corresponding market strategies are expected to be adjusted accordingly. Currently, the cement sector's valuation is at a relatively low point in the historical cycle, and as cement prices bottom out and rebound, the return on equity (ROE) is expected to turn upward, and the valuation is expected to be gradually repaired.

"Due to the weakness on the demand side, the seasonal characteristics of cement market prices have basically disappeared. It is expected that cement prices will fluctuate and climb in the second half of this year, of course, this mainly depends on the actions of cement companies to reduce production on their own initiative," said Hou Linlin. Considering the pressure of reducing losses and ensuring the break-even point faced by cement companies, it is expected that the intensity of peak shifting and kiln suspension will be further increased, which will also affect the strength of the market price rebound. Judging by the seasonal pattern, the high point in the second half of the year is likely to appear in November.