The consolidation in the mainland's cement sector will likely accelerate over the next two years, driven by government policies and market needs, with major producers benefiting the most.

The Central Government aims to raise the total market share of the top-10 cement producers to more than 45 percent by 2015 from 28 percent currently, mainly through cross-provincial mergers and acquisitions. The expected sector consolidation is set to substantially reduce competition, enhancing major players' pricing power and profitability over the medium term.

Policies targeting the cement sector will likely restrict new capacity additions and promote consolidation in the sector. The Central Government and relevant authorities have released, over the past few months, a series of regulations and policies governing the entry and capacity addition in the cement sector. Some local cement producers have been forced to shut down their factories, as of the third quarter of 2010, leading to a reduction in excessive capacity in regional markets, especially in some eastern provinces. The association of cement producers estimates that total cement demand and capacity will increase by 9 percent and 5 percent year-on-year (YoY) in 2011, respectively, resulting in a demand/supply difference of 30 million metric tons in 2011. Improving demand and supply conditions will strengthen the market position and pricing power of leading cement players.

Supported by the relevant authorities, leading cement players are likely to speed up their nationwide expansion through mergers and acquisitions over the next two years. China National Building Materials, Anhui Conch and Sino Materials plan to expand their annual capacity to 300 million metric tons, 200 million metric tons and 100 million metric tons, respectively, by 2012. One smaller player, CR Cement, intends to increase its annual capacity to 70 million metric tons by 2012 from the current 52 million metric tons.

Leading players in eastern and southern markets are likely to post strong sales even in non-peak season. Although cement sales usually enter a weak season after the lunar new year, cement prices are expected to remain quite stable in eastern and southern markets in the first quarter of 2011 due to the combined effect of a local cement capacity shutdown and market consolidation. Leading players with strong presences in these markets may see sound sales growth and margin stability, even during weak demand seasons.

The country's cement consumption has been positively correlated with the growth in fixed-asset investment, which is estimated to grow by 22 percent YoY this year. And accordingly, cement consumption is estimated to grow by 9 percent YoY.

The author is an associate director and economist at CCB International Securities Ltd. The opinions expressed here are entirely his own.

(HK Edition 02/08/2011 page2)