Overview of the Chinese strategy in the cement sector

1. Executive Summary

  • China has a great capacity of domestic cement production, however, it does not export much of it due to relatively high transport costs. The weight-to-product value ratio simply makes it unprofitable to ship over great distances. On the other side bulk transport of cement by ships is inexpensive even for long distances and is eventually no real barrier for Chinese cement export.
  • Nevertheless, with the economic downturn and reduced infrastructure building needs domestically, the cement capacities could be used for export as well. This could happen very quickly due to Chinese centralized industrial policy. 
  • This possibility might even rise with the recent introduction of the trade emission scheme for high-pollution sectors, including cement, in China and due to Government’s reluctance to further reduce the size of the domestic cement industry that could contribute to increased unemployment and civil unrest.
  • There is a latent fear present in the companies working in the European cement sector concerning the potential exports of cement from China to Europe, which would influence the competitiveness of European cement companies in the market.
  • One of the possibilities through which China might also overcome its overcapacity in production is to increase their production capacities abroad and lower it at home. This might result in the increased Chinese presence in the developing countries along the Belt and Road to which Chinese companies will start to heavily move their production facilities.

 

2. Who are the main actors influencing strategy decisions in respect to the topic

European actors: European cement companies and associations; European Commission 

European actors involved in the cement sectors are only private and represent one of the world’s largest players in the industry, such as LafargeHolcim (Switzerland), Heidelberg Cement (Germany), Italcementi (Italy). The companies inside the European Union are regulated through several channels, one of them being the European Union Emissions Trading System (EU ETS), or the ‘emission trading scheme’, which was launched as a major pillar of the EU energy policy, coordinated by the European Commission as a measure to tackle high-pollution sectors.

 

Chinese actors: Ministry of Industry and Information Technology, China Cement Association, state-supported top manufacturers.

Since 2008, industrial policies are under the authority of the Ministry of Industry and Information Technology (MIIT). However, China has been regulating its manufacturing policies since 1987. In the cement sector, this in practice meant that by the 1980s, the small-scale cement sector began to experience a decline due to a greater emphasis by the Government on installing large-scale modern cement plants, supported with the increased capital available from the domestic private sector. For example, China National Building Materials (CNBM) was incorporated in 1980 to help develop the cement industry and advance building materials in general. Many other similar firms were formed, which lead to the fact that the current top 5 manufacturers in the cement sector derive from the state-sponsored policies of private capital throughout this period. As described in detail in footnotes, the biggest five cement players are either directly state-owned, or their parent company is, with an exception of Taiwan Cement, which belongs to “one of the three most powerful families in Taiwan”, as reported by Wikileaks files.[1] 

 

Based on the amount of cement production capacity per year (2018):

Anhui Conch[2]

219 3 million tons

CNBM (includes Sinoma)[3]

173, 5 million tons

Taiwan Cement[4]

63,72 million tons

China Resources Cement (CRC)[5]

63,12 million tons

Jidong Development Group[6]

36, 7 million tons

 

3. What are the goals and sub-goals of the main actors in respect to the topic?

The Chinese key actors have three main goals: 

  • The national industry target for 2020 is to concentrate at least 60% of Chinese overall capacity in the cement sector into the top 10 manufacturers. 

China’s reform program is aimed at eliminating duplication, waste and high competition between the Chinese firms with nearly identical business structures. Both the MIIT and the China Cement Association,  semi-official industry federation, have made a significant effort in the last decade to further reduce the number of local enterprises, often on the grounds that they are environmentally-damaging and/or inefficient. On the other hand, the Government has pushed for the cement industry to become more concentrated and all the market and manufacturing resources are shifting towards large State-owned enterprises (SOEs). The MIIT started to encourage companies to cooperate more, in particular through joint investment enterprises, whilst state-owned enterprises grew through mergers and acquisitions. Additionally, China Cement Association has made a policy recommendation to the MIIT to establish a fund, supported by private companies as well, to speed up consolidation by compensating firms for losses incurred when leaving the industry and closing their production lines. 

China plans to expand the combined market share of its 10 biggest cement producers from nearly 42 percent in 2016 to 60 per cent by 2020 through mergers and acquisitions, according to the plan drafted by China Cement Association. 

This indicates that the top manufacturers will remain and even enhance their role as the key Chinese actors, closely connected to both the Government and the China Cement Association, as they managed to grow substantially with their help, with the authorities supposedly deciding which sectors and players survive through the next round of the economic refocus. The preference for state-owned enterprises is the latest in a long line of industry policies introduced in the late 1980s, a concept borrowed from Japan.[7]

 

China is cutting down on its cement overcapacity.

With its 11th Five Year Plan almost a decade ago, the Chinese Government called for a rapid overhaul of the cement industry and identified cement as key ‘regulated industry’ the development of which would help overall economic growth of China. All 31 provinces in China developed their own cement enterprises to decrease transportation and distribution costs, and keep profits local. In this period, China’s production of cement quadrupled and in terms of its share in global production, China accounted for about 60 percent of global cement production. Cement production exploded to fuel the country’s urbanization.

However, this quickly resulted in overcapacity. Unused capacities have been piling up since the massively overbuilt real-estate market crashed in 2014. Current overcapacity continues to increase and is negatively distorting global cement markets, though the impact does vary across regions. Currently, Reuters reports “China is currently able to produce more than 3 billion tonnes of cement, but there is only demand for about 2.2 billion tonnes in reality.”[8] China has the greatest excess capacity, representing 45% of global overcapacity, of which only a fraction is earmarked for export due to higher inland logistics costs. 

 

China is going green and introducing measures to reduce pollution in the cement sector through trade emission schemes.

Cement industry is one of the world’s top polluters, since coal fuelled energy-intensive cement plants, providing for up to 18 percent of the Chinese CO2 emissions.[9]

Political pressure on the cement and other polluting industries increased when China’s leadership declared a war on pollution starting in 2013, establishing ambitious targets and deadlines for reducing emissions. China introduced punishments for local governments that evaded the targets and in 2019, provided 18.000 inspectors monitoring their work. The National Development and Reform Commission established a program for the establishment of a national carbon emissions trading market to control greenhouse gas emissions. The program mentions that the key enterprises involved in this will be those with “annual emissions of 26,000 tons of carbon dioxide equivalent or above”.[10] This equals to the total energy consumption of circa 10,000 tons of standard coal equivalent. China started with seven pilot carbon markets in Beijing, Chongqing, Guangdong, Hubei, Shanghai, Shenzhen and Tianjin, that thrive on production of cement, electricity, heat, petroleum and oil extraction. Building on its experience of successfully piloting carbon markets in seven regions, China launched its national emission trading scheme politically in December 2017.

Although since 2012 China was learning from the European Commission, their system will not be a cap- and-trade system per se, because there will not be an administratively set mass-based cap of some ending quantity of emissions.  China has set carbon intensity-based targets, whereby emissions per unit of gross domestic product (GDP) will be reduced.[11] This impacts the design of China’s ETS, the trading system will be rate-based: a limit put on the amount of CO2 allowed per unit of output through putting CO2 caps based on production levels.[12] This would reward firms for producing less emissions per unit of output, rather than less emissions overall, which could help alleviate political worry about constraining economic growth.[13] But it would mean that even if producers under the Chinese ETS regime become more efficient, emissions could in theory still rise, if the company’s production increases overall.[14] This approach will have a smaller impact on marginal production costs and thereby likely to have a smaller impact on the price of cement. 

The current 13th Five-Year Plan mandated a 25 percent cut in the number of cement enterprises by 2020. Currently, China already phased out production capacities with low technology in selected industries, including 370 million tons in cement.

 

4. How do the main actors plan to reach their goals – what are their strategies?

There are several ways in which the Chinese government could reach the aforementioned goals. As China is striving to put “its eggs in one basket” by merging their biggest players, and closing up local factories, this might be considered as a way to overcome overcapacity problems, the reduced infrastructure needs and the possible economic downturn, as the production would get more efficient, the competition between the biggest actors hightenend and waste reduced. J Capital source mentioned that there is “simply too much capacity to sustain real price growth or stabilization in China”.[15] Similarly, the national carbon emissions trading program could help to create financial incentives to push the most inefficient cement plants to close.[16]

However, the future efficiency of the ETS is resisted by the local governments—especially in China’s Rust Belt—that fear social unrest and political risks of job losses in the cement sector and often find loopholes to continue subsidizing the industry. China needs to prevent political risks associated with the losses in the cement sector. In the long term, once this local consolidation reaches a certain level, Chinese producers are very likely to benefit from a massive increase in cash generation, giving them greater resources to embark on more aggressive overseas expansion.

China could shift its focus to international markets to compensate for the malaise at home: China could start to heavily use the export possibilities along the Belt and Road initiative to deal with the industrial overcapacity in heavy-polluting industries, cutting the supplies due to high-energy and environmental costs. On the other hand, export of cement is expensive due to high inland logistic prices. Land transportation costs are significant and cement cannot be economically shipped beyond a distance of 300km. This means that both multinational and smaller-scale companies operate local/regional production sites. Since cement transportation is neither practical nor cheap, cement tends to be produced where it will be consumed. 

Hence it is necessary that they build cement factories abroad. Chinese majors such as Gezhouba, Anhui Conch Cement and Shangfeng Cement in 2018 announced investments in at least 18 plants across Africa, Asia and South America with total annual capacity of more than 20 million tonnes – larger than the output of most European countries – according to industry publication Global Cement.[17]

Reuters provides the graphics of the China’s cement plants along the Belt and Road in 2018 only[18]:

5. What are the opportunities and threats of the Chinese strategies? What are the implications of these strategies on the main actors?

There are several implications deriving from the Chinese strategy in the cement sector, affecting European players:

  • Since the Chinese top cement players are in some way state-supported actors (with at least its parent company) and the industry policy is state-pushed in China, the shifts in policy, for example in terms of increased exports of cement, could come very quickly. 
  • China could find solutions to lower their export costs with focus on transport costs, and since the decision would be state supported, there would be little time to adapt by the European actors.
  • The export of excess capacity at low prices could create friction in terms of anti-dumping investigations in Europe.[19]
  • Moreover, state aid is in contradiction to the rules of the single market which hold that such aid distorts competition – as of Article 107 TFEU – Treaty on the Functioning of the European Union. As the EU defines state aid broadly to include any type of state assistance, most bilateral agreements which feature Chinese entities in the EU might potentially be in violation of EU competition rules and might be subjected to investigation.
  • Chinese increased presence could mean direct competition for EU companies, especially if the Chinese cement production plants are built across Europe or near European borders.
  • European actors have to follow emission trading schemes, while China produces cement without the Europe-like CO2 certificates – but it introduced its own scheme, that still enables high economic growth.
  • Possibility of the ‘colonialism’ way in the developing world, due to increased Chinese presence in the developing countries through Belt and Road, especially where the Chinese are also staked in construction projects and tenders. This might further increase instability in the world’s regions, especially those near Europe, such as North Africa and the Middle East.

 

6. Forecast of possible future developments and outcomes

Falling economic growth will have an effect on Chinese industrial production, including cement. The cement sector will likely to be constrained by further lowering demand and a backlog of cement-intensive construction projects that were previously completed on speculative demand, resulting in empty cities around China. Similar trends were reported as other countries have grown in terms of GDP/capita. Therefore, China will increasingly lower its capacity to produce.

Moreover, Chinese Government will have to deal with the consequences of higher regulatory costs arising from the new emission trading legislations mentioned above. We are likely to see a smaller number of more efficient cement players supported by the government, as this is already happening lately, as opposed to locally-owned small and medium sized companies. The new conglomerates are more modern, they even have an advantage in this regard, as China started to introduce its cement policies in the late 80ies, and their infrastructure is way more modern than in the rest of the world. Chinese companies might therefore start to heavily prioritize investment into research and new partnerships.

It is clear that the Government is working on reducing all: overcapacity, high energy waste and high pollution. However, it might be reluctant to further reduce the actual size of the industry due to social factors, such as increased unemployment and unrest. This might lead to increased efforts to export the building materials such as cement, provided that the Chinese overcome the high logistics costs of the cement transportation.

Another way of overcoming overcapacity is to use the state-supported companies to increase their production abroad and lower it at home. This might result in the increased Chinese presence in the developing countries, especially where the Chinese are also staked in construction projects and tenders. As China does not follow their own domestic environmental standards on emissions output along the Belt and Road, their new trading emission scheme would not apply to those countries abroad. Since these are state-supported companies, the consequence of this would fall on the EU players, which do not have similar support. This might introduce frictions into the relations between China and EU players in the sphere of anti-dumping efforts.

 

7. Possible strategy options for local/EU companies and decision-makers.

  • Demand for cement production depends on activities in the construction and civil engineering sectors. It is therefore important that EU policy measures and initiatives continue to support construction and civil engineering projects in which it should take into account the conditions on the global markets of building materials, encouraging or discouraging the use of specific building products/product types, to level a playing field between the European and Chinese companies in Europe.
  • To enable the competitiveness of European cement production companies, European policy-makers should monitor regulatory decisions in China itself. This is especially necessary for several areas affecting cost developments for the cement sector: energy price, emission trading scheme effectiveness and leakage, possibility of lowering transport costs in the cement sector.
  • EU should also observe its own regulatory framework that can be abused and affect the cement production industry in Europe as a consequence in the field of the public procurement works. Construction and buildings on which the cement demand relies, are one of the sectors most vulnerable to shortcomings in the public procurement legal framework. The EU should adapt its current legislative framework to address the fear of EU companies losing the competitiveness versus Chinese companies in European public tenders for construction projects around Europe. As the Chinese cement production companies (listed in the Chapter 2b) seem to be state-supported, the public procurement legislation should be adapted to:
    • specify abnormally low price tenders. Although in the legislation[20] (Directive 2014/24/EU, Article 69, Abnormally Low Tenders), state subsidies to increase price competitiveness through lower total costs on specific tenders seems to be a de facto obstacle, since it does not give guidelines on what an abnormally low tender is. To account for this, state aid could also be included under Article 57 as an Exclusion Ground. The inclusion of this should include procedures on collection and analysis of financing data on tender awards to reduce the risk of state subsidies being used as a tool to win tenders. The soft language, for example  in Article 67 (Award of the Contract) opens up for allowing tenderers to focus on price solely rather than on other advantageous factors, such as quality, environment, labour conditions and social aspects when awarding a tender.
    • A clearer directive on challenging public procurement awards should be considered to safeguard the bidding rights of EU companies (for example, procedures and authorities for raising disputes on tender awards, the need for full bidding transparency between disputants etc.).
    • The establishment of evaluation and monitoring of public procurement awards on key EU infrastructure projects by the EU Commission. The definition of key EU infrastructure project could, for example, be based on the percentage of EU funds for the project. 
  • To further reduce the CO2 emissions in the sector, new cost-effective solutions are needed in the field of CO2 abatement and reduction R&D. Policy makers and industry should consider enhancing cooperation and financing in this field.

[1] “Of the three most powerful families in Taiwan, the Koo family has the longest history, the most  power, and has proven most adept at prospering under different governments.” Read more on Wikileaks. (2006). Jeffrey Koo Speaks on Taiwan’s Future (from Taiwan American Institute to Central Intelligence Agency). Available at: https://wikileaks.org/plusd/cables/06TAIPEI1155_a.html

[2] The largest shareholder is Anhui Conch Holdings, which is owned by Anhui Provincial People’s Government via wholly owned subsidiary Anhui Provincial Investment Group Holdings Co., Ltd. and subsidiary China Conch Venture Holdings.

[3] The parent company of CNBM is China National Building Material Group, a is a state-owned enterprise administered by the State-owned Assets Supervision and Administration Commission of the State Council of China.

[4] Founded in 1946 by the Taiwanese government, but in 1954, ownership transferred to the powerful Koo family. Koo Cheng Yun family is the biggest shareholder in the company.

[5] Parented by China Resources, a state-owned enterprise supervised by the State-owned Assets Supervision and Administration Commission of the State Council

[6] The company’s parent organisation is BBMG Corporation Ltd., which is a wholly state-owned enterprise administered by the State-owned Assets Supervision and Administration Commission of the Beijing Municipal Government.

[7] Although it seems unlikely from today’s perspective – as today Japan is known to support privatisation of its state-owned enterprises – this policy was not always the case. Chinese model of development from 1980s onwards is following closely the Japanese high-growth phase (1956–1972), when Japanese industrial policy was oriented toward strengthening competitiveness of large private firms in targeted sectors, first on domestic, then on global markets through government-sponsored incentive programs. The perception that government guidance had contributed to Japan’s rapid economic rise, made Japanese experiences attractive to policymakers in China. China sent several official delegations to Japan, researched extensively and processed and  transmitted information about Japanese industrial modernization. While costly policy failures were rarely addressed, state-supported industrial policy was broadly identified in Chinese policy circles as the driving mechanism of Japan’s post-war economic success. Read more in: Heilmann S. and L. Shih. 2013. The Rise of Industrial Policy in China 1978-2012. Harvard-Yenching Institute Working Paper Series. Available at: https://www.harvard-yenching.org/sites/harvard-yenching.org/files/featurefiles/Sebastian%20Heilmann%20and%20Lea%20Shih_The%20Rise%20of%20Industrial%20Policy%20in%20China%201978-2012.pdf

[8] Reuters. (2019). Shuttered at home, cement plants bloom along China’s new Silk Road. Available at: https://www.reuters.com/article/us-china-silkroad-cement-insight/shuttered-at-home-cement-plants-bloom-along-chinas-new-silk-road-idUSKCN1PO35T

[9] “It takes 200 kg of coal to make 1 metric ton of cement—and in 2010, China produced nearly 1,868 million metric tons of cement, representing a whopping 10 percent of the nation’s total coal consumption.” Excavating sand, which is critical in the cement production, adds to the environmental costs Read more: https://www.newsecuritybeat.org/2018/09/crushing-environmental-impact-chinas-cement-industry/

[10] Swartz, Jef. (2016), China’s National Emission Trading System: Implications for Carbon Markets and Trade. ICTSD Series on Climate Change Architecture. Available at: https://www.ieta.org/resources/China/Chinas_National_ETS_Implications_for_Carbon_Markets_and_Trade_ICTSD_March2016_Jeff_Swartz.pdf

[11] The ETS affects firms from eight sectors and 18 sub-sectors, which consume over 10,000 tonnes of coal equivalent per year and are included in China’s national ETS, including cement (represented by clinker) (Swartz, 2016).

[12] Wang, Qian, Gao, Cuiyun and Shuanping Dai. (2019). Effect of the Emissions Trading Scheme on CO2 Abatement in China. Sustainability, 11(1055), 1-13.

[13] Swartz, Jef. (2016), China’s National Emission Trading System: Implications for Carbon Markets and Trade. ICTSD Series on Climate Change Architecture. Available at: https://www.ieta.org/resources/China/Chinas_National_ETS_Implications_for_Carbon_Markets_and_Trade_ICTSD_March2016_Jeff_Swartz.pdf

[14] Read more about the design: Shaozhou Qi & Si Cheng (2018) China’s national emissions trading scheme: integrating cap, coverage and allocation, Climate Policy, 18(1), 45-59 .

[15] Sainsbury, Michael. (2016).  Cement industry woes trigger giant China merger. Available at: https://asia.nikkei.com/Economy/Cement-industry-woes-trigger-giant-China-merger

[16] Yang, Kimberly. (2018).  The Crushing Environmental Impact of China’s Cement Industry. Available at: https://www.newsecuritybeat.org/2018/09/crushing-environmental-impact-chinas-cement-industry/

[17] Reuters. (2019). Shuttered at home, cement plants bloom along China’s new Silk Road. Available at: https://www.reuters.com/article/us-china-silkroad-cement-insight/shuttered-at-home-cement-plants-bloom-along-chinas-new-silk-road-idUSKCN1PO35T

[18] Source: Reuters (2019). Available at: https://graphics.reuters.com/CHINA-CEMENT/010081YM3G8/CHINA-CEMENT.jpg

[19] See Wuttke, Jörg. (2017). The Dark Side of China’s Economic Rise. Global Policy 8(S4). Available at: https://onlinelibrary.wiley.com/doi/full/10.1111/1758-5899.12439

[20] See more at: https://ec.europa.eu/growth/single-market/public-procurement/rules-implementation_en


Scroll to Top