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Cement firms may hold on to gains

By Zheng Lifei (China Daily)
Updated: 2009-05-15 08:04

Workers operate a cement pump at a construction site in Huaibei, Anhui province. [CFP]

Listed cement firms are likely to report better earnings numbers in the forthcoming quarters, as demand for building materials improves and prices firm up on quicker-than-expected fixed asset investment growth.

The country's cement industry, the world's biggest in terms of output, has taken a blow since the middle of last year as the rapidly slowing economy and the slackness in real estate investment slashed demand and depressed prices.

Related readings:  China National Building says Q1 cement sales up 72%  China's cement exports down 12.91% in 2008  Cement firms pin hopes on reconstruction  China's cement output jumps 17%

The combined profits of the country's 19 listed cement makers dropped 9.3 percent from a year earlier to 507 million yuan in the first quarter, while the revenue increased 15.6 percent year-on-year.

However, there are signs now that the robust fixed asset investment is steadily improving prices.

China's urban fixed asset investment surged 30.5 percent in the first four months from a year earlier, picking up from the 28.6 percent increase in the first three months, according to figures from the National Bureau of Statistics.

Stimulus package

The urban fixed asset investment, analysts said, is likely to grow more than 25 percent this year, fuelled by the country's 4-trillion-yuan economic stimulus package and the moderately loose monetary policy, which has seen banks issue loans that have already exceeded the annual target of 5 trillion yuan in the first four months of the year.

"Based on historical data, cement demand this year is likely to exceed 10 percent, much higher than our original forecast of 6.7 percent growth," United Securities said in a research note.

During the past 11 years, whenever the urban fixed asset investment growth exceeded 20 percent, the demand for cement that year grew beyond 10 percent, United Securities said.

The government's decision on April 29 to cut the capital requirement ratio for investment in urban railways, airports, ports, residential property, postal services, information technology and some other sectors will further spur the fixed asset investment growth, which will in turn help drive up demand for cement, analysts said.

"The expected robust cement demand will push up prices and improve profitability," United Securities said in the note, giving an "outperform" rating to the cement industry.

China's cement output touched 280 million tons in the first three months of the year, up 12.9 percent from a year earlier, reversing the downward spiral since the middle of 2008.

"The robust output growth, which is slightly higher than our expectation, indicates that demand is relatively strong," Essence Securities said in a report.

The tentative sign of a gradually warming property market, which consumes a large proportion of the cement, may further stimulate the cement industry, analysts said.

Property investments rose 4.9 percent from a year earlier to 729 billion yuan in the first four moths of the year.

"The property investment is likely to witness gradual pickup, which in turn will spur cement demand, especially in the southern part of the country," said Tang Xiao, analyst, Bohai Securities, giving a "buy" rating for the whole industry.

Cement prices witnessed a steady upward growth since mid April, according to Digital Cement, an industry website.

Cement exports have also shown signs of slowly recovering in recent months, figures showed.

Cement exports jumped 36 percent in March from a month earlier to 1.48 million tons, according to China Customs.

"The global financial crisis continues to weigh on the industry, but its impact has diminished slightly," China Cement Association said.