CHINA: Possible boost for Chinese cement firms

Labourers unload packages of cement
 from trucks at a port in Wuhu, China.

 Chinese cement makers will benefit from the government's plans to close down plants with obsolete technology only if the decision is successfully implemented and new facilities don't replace the capacity expected to be phased out, analysts say.

In an order issued over the weekend, China's Ministry of Industry and Information Technology, or MIIT, said it planned to eliminate production capacity at 2,087 companies in 18 industries by September. The decision covers 762 cement companies, or more than a third of the affected companies.

The move is aimed at clamping down on energy-intensive and polluting industries marked by excess capacity, and it could potentially limit supply and improve pricing power for companies with modern and efficient plants.

However, the effectiveness of the measures would depend on the demand-supply equation, according to Credit Suisse.

"We believe that old capacity closure is only part of the [supply-demand] equation. We see that [a] higher closure target tends to be associated with more aggressive new capacity addition, thus not necessarily leading to improve the [supply-demand] picture in the coming quarters," Credit Suisse analysts Trina Chen and Kevin You wrote in a report.

The analysts said that the decision to lower capacity will not, by itself, improve business conditions for the cement makers. "However, combined with limited new supply and continued government efforts in future closures, we expect the [supply-demand picture] and margin to improve" in most regions next year, despite slowing growth in demand, they said.