Trends, Challenges, and Opportunities in China s Cement Industry

Transcription

1 Toward a Sustainable Cement Industry Trends, Challenges, and Opportunities in China s Cement Industry March 2002 by Mason H. Soule, Jeffrey S. Logan, and Todd A. Stewart with contributions from Florence Ma, Caroline Quinn, and Anataike Information Development Co. An Independent Study Commissioned by:

2 ( TRENDS, CHALLENGES, AND OPPORTUNITIES IN CHINA S CEMENT INDUSTRY ) Executive Summary Overview This document describes trends, opportunities and challenges for the cement industry in the People s Republic of China. It focuses on the following topics: Organizational structure and administration, Production, technology, and ownership, Cement markets, Environmental issues, and Future trends and opportunities. China is expected to remain the world s most populous country through Its gross domestic product (GDP) has averaged growth of more than 9 percent each year since liberalization and economic reforms began in the late 1970s. In 1985, China became the world s leading producer of cement, and today produces over one-third of total global output. While China s cement industry is relatively insulated from a global perspective, changes are underway to improve product quality, management practices and profitability, including further opening the sector to participation by international players. Political Framework and Organization of the Industry In 2000 and 2001, the Chinese government decentralized its industrial ministries, and the organizational structure of the cement industry remains in a state of flux. The Ministry of Building Materials has been changed, first to a State Administration of Building Materials Industry (SABMI), and earlier in 2001 to a small, quasi-governmental Cement Association. Changes in top officials have occurred and provincial authorities now exert more control over the industry. Ownership A shrinking number of cement companies (now about 24 percent) remain state-owned, while a growing number (about 3 percent) are foreign invested enterprises (FIEs). Collective enterprises account for over 50 percent of companies while 10 percent are privately owned. There also is a trend toward consolidation, as evidenced by the 1999 formation of China United Cement Company, a large state-owned holding company. Production China has been the world s leading cement producer since The United States Geological Survey estimated that China produced 576 million tonnes in 2000, about 36 percent of the world s total. Combined, the next three largest producers the United States, India, and Japan produce less than 20 percent of the world s cement. Cement Plants The estimated number of Chinese cement plants ranges from 8,000 to 9,300, although the actual number is uncertain due to the fragmented nature of the industry, the small size of many plants, the fact that some plants exist illegally, and data reliability issues. About 50 percent of these facilities are rural township enterprises with average annual output of less than 30,000 tonnes. Only about 570 of the 8,500 cement producers had production capacities exceeding 275,000 tonnes per year in 1995, and only ten plants produce more than one million tonnes annually. For comparison, industrialized cement producing countries average 40 to 50 major producers that manufacture up to four million tonnes annually. v

3 ( TOWARD A SUSTAINABLE CEMENT INDUSTRY ) China plans to increase the average production capacity at facilities throughout the industry through plant closures and upgrades. The country plans to raise average plant production to 200,000 tonnes per year by 2005, 300, ,000 by 2010, and 400, ,000 by Plant Closures and the Issue of Unemployment China announced in 1999 that it would close thousands of small or antiquated cement operations. As many as 6,000 plants are slated to be closed, with 4,000 closures scheduled by the end of Given current progress, this level of closure by year end 2001 seems unlikely. Initially targeted for closure are 2,000 illegal or improperly licensed cement producers as well as outdated cement operations. China plans to close (through non-recertification) plants that: Produce #325 and lower grades (by 2005) Have vertical kiln diameters smaller than 2.2 meters and/or produce <30,000 tonnes/year, and Have wet process kilns (either to be closed or converted to dry processes). Closures are significant not just for the loss in production (estimated to be about 100 million tonnes annually, more than 20% of China s total), but because of the unemployment plant closures will bring. Barriers to the successful closure of the plants include: Worker displacement and retraining costs Potential political instability, and Opposition from local leaders who have economic interests in the plants. The key issue is retaining political stability in the face of greater unemployment. The problem is exacerbated compared to similar issues in other developing countries because Chinese cement plants employ up to ten times the labor of plants in developed countries, and because China has a less robust system of protective social security. Many of the closed plants will be in rural areas and it is hoped that released workers can fall back on their agricultural jobs or be absorbed in the rapidly growing private sector. Many provincial and local governments are not enthusiastically implementing these centrally planned plant closures at this time. Product Output Grades and Technology In 2000, #325 and lower-grade cements accounted for about 30 percent of Chinese production; #425 cements made up a little over 60 percent; and about 10 percent represented high-grade #525 cement. The higher-grade cements will all increase in share in the future as #325 production is reduced. Production of special purpose cement is likely to grow rapidly. In 1995, China produced 12 million tonnes of special cement, 2.7 percent of total cement production. For comparison, developed countries produce 6 10 percent special cement. Today, 138 million tonnes or one-quarter of Chinese cement production comes from rotary kilns; the remaining 433 million tonnes from vertical kilns that will be slowly phased out. Most of the anticipated 100 million tonne reduction will be of vertical kiln production. By 1998, China had 86 dry-process cement production lines, accounting for 10 percent of cement production. The current strategy is to bring new kilns online and to upgrade old facilities, while older equipment is phased out. Geography Cement production generally tracks well against population density, but there are production concentrations in Shandong and Guangdong provinces and among the coastal provinces vi

4 ( TRENDS, CHALLENGES, AND OPPORTUNITIES IN CHINA S CEMENT INDUSTRY ) generally. There are 40 enterprises with annual capacities over 1 million tonnes, and 30 of these are located in coastal provinces. The central government is emphasizing the future development of the poorer western provinces to help alleviate regional income differentials that result in migration to the more crowded east. The western provinces account for comparatively little cement production. As urban land development rationalizes (where land uses are determined by economic and environmental considerations), local governments are reclaiming land from urban cement plants and replacing them with less noxious and more profitable activities. Companies are being displaced to the urban fringes and also moving closer to limestone deposits, employing conveyer systems to transport limestone over medium distances. Cement Markets China consumes about 35 percent of the world s cement, a figure expected to rise to about 40 percent by Domestic Demand Growth in Chinese cement production is due to the construction boom accompanying high GDP growth rates. Only rotary kiln cement can be used legally to build high-rise buildings in China, and demand for the higher grade #425 and #525 cements was estimated at about 170 million tonnes in 2000 and projected at 250 million tonnes by Forty percent of China s cement is now used for basic infrastructure construction (an area regularly neglected during the period of heavy central planning.), with about one-third of that used in rural areas. Twenty-five percent is used for maintenance activities. China s transport sector uses cement in road construction rather than asphalt. As China lacks an adequate national highway system and its rail network is so overburdened, investment can be expected in highways over the medium term. Prices Low quality cement is oversupplied and cheap, while high quality cement is rarer and more expensive. Profit margins for most cement producers hover near zero. Despite the growth in construction, cement prices have fallen 25 percent to US$36 per tonne for high-grade #525 bulk cement and US$38 per tonne for bagged cement due to a competitive market. Transportation Because cement is a bulk commodity, transportation costs are a significant component of the industry s cost structure. The main issue, however, is with the transport of coal because it is an important input into cement production and because it is the primary source of pressure on a strained transport infrastructure network. Cement industry sources indicate that the availability of coal has not constrained the cement industry to date. Unless long-term investment is made to improve the rail network this situation will worsen. Foreign investment in bulk cement storage and transportation facilities is now strongly promoted. Trade China is the second leading cement exporter in the world, accounting for about 17 percent of total world cement trade. Exports of cement dramatically exceed imports, about 5 million tonnes v. 200 thousand tonnes, respectively in Shaft kiln cements of #425 and #525 comprise percent of total exports. A share of this is from foreign owned companies or joint ventures, which themselves account for about 25 percent of exported cement. Major exporting regions include Shandong, Jiangsu, Guangdong, Liaoning, Guangxi, and Hebei provinces. The vii

5 ( TOWARD A SUSTAINABLE CEMENT INDUSTRY ) largest exporting companies include Daewoo Shandong Metal and Minerals Import/Export (with sales of about 2 million tonnes); and Taiheiyo Cement (with sales of about 1.8 million tonnes). The United States is the largest market for Chinese cement, accounting for 42 percent of trade in Environmental Issues Energy The cement industry is very energy intensive and China relies almost exclusively on coal to produce cement. Energy accounts for roughly 40 percent of the total manufacturing cost of cement in China. Unlike some industrialized countries, China has not yet moved to alternative energy sources in its cement kilns, although that may become an option. If China were to succeed in replacing output from plants that produce #325 cement with more efficient plants, it would save approximately 15 million tonnes of coal each year. Improving energy efficiency is important to a wide range of stakeholders because it cuts energy costs, improves local environmental quality, and reduces greenhouse gas emissions (see below). Emissions China has significant environmental problems. Ambient air levels of total suspended particulates (TSP) and sulfur dioxide (SO 2 ) in Chinese cities are among the highest in the world. In turn these heavy pollutant loads are closely associated with significant respiratory illness and approximately 200,000 premature deaths each year in urban areas. China s contribution to global carbon dioxide (CO 2 ) emissions is approximately 14 percent. Cement plants are responsible for over 40 percent of total industrial particulate (dust) emissions. Chinese cement plants are also responsible for about 6 to 8 percent of the country s carbon dioxide emissions. These emissions are produced in roughly equal parts from fuel combustion and the liberation of carbon dioxide from limestone at high temperature. Carbon dioxide emissions from small Chinese plants are two or more times higher than plants in industrialized nations (because of poor efficiencies requiring more fuel use, etc.). Increasing the efficiency of cement kilns is one way to reduce carbon dioxide emissions. Cement production is also associated with a number of other environmental problems including contamination of local water sources, mercury emissions, excessive noise, erosion surrounding limestone quarries, and nitrogen oxide emissions. Dry rotary kilns, including precalcinator kilns, are the most energy efficient technology currently available in China. The associated reduction in coal combustion accompanying the closure of #325 plants would reduce carbon dioxide emissions by about 30 million tonnes, sulfur dioxide by 250,000 tonnes, and solid waste and dust by over 5 million tonnes each year. Environmental Laws and Regulations China has developed a range of environmental laws to deal with air pollution, solid waste, water pollution, etc. Many of these are modeled after US or European legislation. Since 1989, emission limits for cement production have been set at 150 milligrams of particulates per cubic meter of exhaust gas. In April of 2000, China announced that emission limits would be reduced to 100 milligrams per cubic meter of exhaust. For comparison, cement plants in Europe conform to a limit of 70 milligrams, which is being lowered to 50 milligrams. Enforcement of laws is not uniform and remains an issue. Provincial level environmental protection agencies are responsible for enforcing emission limits and can direct capital toward polluters to upgrade their equipment. However, production and profit often supercede viii

6 ( TRENDS, CHALLENGES, AND OPPORTUNITIES IN CHINA S CEMENT INDUSTRY ) enforcement. Environmental regulations tend to be strictly enforced when foreign companies are involved. Finance and Investment It is difficult to obtain domestic financing for investment projects within China. Financial needs are many, and sources limited. Even though China has begun to rein in the growing number of non-performing loans from its banks, the banking industry remains strapped for funds. Chinese stock markets have been an important but insufficient source of low-cost capital for listed enterprises. The central government encourages foreign investment as an additional source of capital and because foreign technology is usually superior to that embodied in domestically produced equipment. Still, foreign investors frequently face special difficulties as a result of an evolving legal framework gradually replacing transactions based on relationships. Foreign investors often claim that the Chinese cement market lacks transparency because: Final decision-making authority is not clear, Laws and regulations change rapidly and are not uniformly enforced, and Information is not widely and uniformly available. In recent years, it has become easier for foreign companies to obtain permits for cement projects. But the paperwork, time, and dedication necessary to bring an investment to closure remain daunting, and the sentiment is shared that this situation will only change slowly. Even with sometimes-vicious competition and difficulties in operating in an opaque market, key opportunities are open for both domestic and foreign companies. Promising areas include investment in: Bulk cement transport and storage infrastructure, Environmental control equipment, Precalcinator and dry rotary cement kilns, and Specialty cements. As of 1998, there were 287 foreign-invested enterprises in joint ventures, co-ops, or wholly owned operations. FIEs account for about 3 percent of all cement producers but contribute about 15 percent to national output. China hopes to make foreign participation account for about 20 percent of total investment in the industry, but many consider this an ambitious target. Future Trends And Opportunities The State Development Planning Commission will increase total investment in all fixed assets by ten percent in Most investment will be used in infrastructure construction, environmental protection, technology upgrading, innovation, and education. Several of these priorities will positively affect the cement industry. Following near term (two to three year) adjustments to plant closings, cement output is projected to increase by about 2.8 percent per year during the Tenth Five-Year Plan ( ) and by 2.5 percent during the Eleventh Five-Year Plan ( ). From current production of around 576 million tonnes, China anticipates producing 660 million tonnes by 2005, 750 million tonnes by 2010, and 800 million tonnes by While slowly increasing production capacity, improvements in cement quality will occur more rapidly as older, less efficient facilities are closed or upgraded and newer, more modern facilities are built. Still, the ix

7 ( TOWARD A SUSTAINABLE CEMENT INDUSTRY ) 2005 production target seems high, if thousands of small plants are simultaneously being closed. Shortages of high-grade cements will remain, regardless. Vertical kilns currently contribute 75 percent of production, a number expected to decline only to 50 percent by China is predicted to be the world s largest market for cement machinery at least until Foreign investment will be focused on precalcined production lines with capacities of 4,000 tonnes or more using new dry processes for cement clinker. China plans to increase cement production from pre-heater and calciner kilns to 20 percent of total production by Bulk cement is projected to become a larger proportion of Chinese cement output, reaching 182 million tonnes or 29.5 percent of total production by China will continue the move away from enterprise-provided housing to a privatized housing market. This will stimulate housing demand from low and middle income Chinese. Other reforms aimed at improving the overall efficiency of China s quasi-market economy will include: Banning barriers to local protectionism, Commercializing the residential housing sector, Providing more discipline to bank lending and cleaning up existing bad loans, Enforcing existing legislation more thoroughly and enacting new laws, Allowing state-owned enterprises to reform without interference from local governments, and Demanding greater transparency and accountability in both government and financial sectors. To address regional income disparities, the western provinces have investment priority during the Tenth Five-Year Plan. These regions include: Xinjiang, Ningxia, Qinghai, Shaanxi (including Xian), Gansu, Sichuan, Tibet (Xizang), Chongqing City, Guizhou, and Yunnan (including Kunming). Eastern provinces should not expect new plants, but there will be many opportunities for technology upgrades in these areas. China has ambitious plans to prepare for the 2008 Olympic games. There will be much new construction in Beijing to accommodate the games. Strict environmental measures to improve air and water quality also will be in force in the capital region. China s accession to the World Trade Organization, likely by early 2002, will affect the cement sector only marginally. The sector faces little real threat from international competition due to the high transport costs of cement and abundant non-tariff barriers. WTO may have an impact on the domestic use of cement because China s construction industry will be gradually opened to foreign builders starting in Foreign firms will be permitted to enter every part of the construction sector except from general planning of cities and high-level real estate projects. Information Sources Sources used for this study include interviews with Chinese government officials and cement company managers, Internet sources, commercial database articles, and statistical compendia. No Chinese statistical yearbooks on the building materials industry (which includes cement) have appeared in several years. Therefore, there are some conflicting numbers in the text and many of the insights drawn herein are based on anecdotal evidence. x

8 ( TRENDS, CHALLENGES, AND OPPORTUNITIES IN CHINA S CEMENT INDUSTRY ) Table of Contents 1. China s Cement Sector in a Changing Economic Landscape Organizational Structure Political Framework Financing and Investment Foreign Investment and Participation Raw Materials and Reserves Cement Production Cement Products and Quality Equipment and Technologies Energy Consumption Bulk Cement Special Cements Ownership Major Producers Small Producers Labor The Market for Cement Domestic Consumption Cement Prices Imports Exports Infrastructure and Transportation Railways Water Transport Environmental Considerations Prospects and Future Developments References Appendix A Chinese Cement Producers with More Than 2000 Employees 56...A-1 Appendix B: Case Studies of Major Cement Producers 57...B-1 List of Tables Table 3-1. Average Input Levels for Cement Production by Type of Process in China... 6 Table 4-1. Cement Output from Key Chinese Provinces (Million Tonnes)... 8 Table 4-2. Rotary and Shaft Kiln Production, (million tonnes) Table 4-3. Kiln Types and Major Technical and Economic Performance in Table 4-4. Major Foreign Cement Equipment Suppliers Table 4-5. Cement Production Goals by Type of Kiln, (million tonnes) Table 4-6. Foreign-Invested Enterprises in China s Cement Industry Table 4-7. Large, Medium, and Small Cement Producers, Table 4-8. Key Chinese Cement Producers by Province and Output Table 6-1. Profitability of the Cement Industry, (Yuan million) Table 6-2. Cement Consumption, (million tonnes) Table 6-3. Cement Imports, (thousand tonnes) Table 6-4. Cement Exports, * (million tonnes) Table 6-5. Major Cement Customers, Table 8-1. Particulate and Sulfur Dioxide Emissions from China s Cement Sector xi

9 ( TOWARD A SUSTAINABLE CEMENT INDUSTRY ) List of Figures Figure 4-1. Cement Production, Selected Years, * (million tonnes)... 8 Figure 4-2. Projected Chinese Cement Production, Figure 4-3. Chinese Cement Production, by Grade, 2000 and Figure 4-4. Primary Energy Intensity of Selected Cement Producing Nations Figure 4-5. Changing Fuel and Electricity Intensity in China s Cement Industry Figure 4-6. Ownership of Chinese Cement Enterprises, Figure 4-7. Provincial Shares of Chinese Cement Production, Figure 4-8. Average Production by Cement Plant, 1995, Selected Countries xii