Wednesday, September 10, 2008

Rebuilding lifts industry

Post-quake reconstruction in Sichuan province, expected to top 1 trillion yuan in the next few years, is set to give a much-needed lift to the building materials industry, threatened by rising costs and dwindling investment.

Latest official estimates indicate that demand for cement and steel will amount to 370 million tons and 37 million tons, respectively, to rebuild infrastructure, housing and other public facilities. Huge demand is expected for other building materials such as piping, tiles and bricks. Literally trillions of standard bricks will be needed.

"A huge increase in demand for all kinds of building materials will benefit not only the producers in that region but also many others around the nation," Luo Guo, a building materials analyst at Orient Securities in Shanghai, said.

Before the earthquake, Sichuan was largely self-sufficient in cement. Provincial cement sales amounted to 62.14 million tons in 2007, or 4.5 percent of the nation's total.

Transport costs make it unprofitable for outside cement producers to sell in Sichuan. It costs an extra 50 yuan to transport the cement 100 km.

But all this is about to change. Cement production in Sichuan will not be able to meet projected demand when reconstruction work shifts into high gear in the coming months. For this reason, there will be no alternative but to buy cement from manufacturers in other provinces at prices that will cover transport costs.

"The tightening supply and demand relationship is likely to drive up cement and other building material prices not only in Sichuan province but also throughout the nation, helping to boost the industry's profit margins as a whole," Hong Liang, a building materials analyst at China Galaxy Research in Beijing, said.

In the first half of this year, the average profit margin of listed cement makers located in or near Sichuan rose by 5 percentage points from the previous year, Hong said. Much of that increase was attributed to the price jump after the May 12 earthquake.

In the first five months, total domestic cement output rose by 9 percent to 514 million tons. From January to May, cement sales climbed by 23.6 percent to 160.7 billion yuan, while cement prices rose 10.1 percent year-on-year. In the same period, the cement industry posted profit of 8.4 billion yuan, up 65.4 percent from a year earlier on higher sales and prices.

Those results are due to strong demand from the building boom, which had fizzled out by the middle of the year. The credit tightening policy introduced to combat escalating inflation sent the building industry into a tailspin and demand for cement and other building materials plummeted. At that time, the industry faced an overcapacity threat that could have severely damaged producer earnings, analysts said.

But expected demand from Sichuan is brightening the industry outlook. "Increased demand for cement and other building materials in Sichuan is expected to last for at least three years until the reconstruction work is finished," Hong at China Galaxy said.

Source: China Daily

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