ASIA MARKETS: Possible Boost For Chinese Cement Firms

By V. Phani Kumar

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.

Shares of Chinese cement makers fell broadly Tuesday, surrendering gains from the previous session. China Resources Cement Holdings Ltd. (CARCY) declined 1.8%, China National Building Material Co. (3323.HK) dropped 1.9%, and Anhui Conch Cement Co. (600585.SH) shed 2.5% in Hong Kong.

In Shanghai, Anhui Conch's A-shares fell 2.2%, and Sinoma International Engineering Co. lost 2.1%.

BBMG Corp. gained 1.6% to defy the broad trend among cement shares in Hong Kong.

Meanwhile, shares of Taiwan Cement Corp. rose 1.2% in Taipei trade amid expectations the cement maker, which has manufacturing facilities in mainland China, would gain from the planned closure of some competing Chinese cement plants.

In wider markets, Hong Kong's Hang Seng Index dropped 1%, China's Shanghai Composite gave up 1.8%, Taiwan's Taiex slid 0.7%, Japan's Nikkei Stock Average fell 0.3%, and South Korea's Kospi declined 0.4%.

But will they do it?

Some analysts were skeptical about the implementation of the measures, however.

"Despite the positive headline, we expect MIIT's policy to have a neutral impact on share prices due to high execution risk," BofA Merrill Lynch analysts led by Yongtao Shi wrote in a note to clients.

"We believe it will be challenging to complete the task with only two months remaining, given the government's not-so-successful track record in execution and local governments' conflicts of interest with the central government in order to meet their [second half of 2010] gross domestic product growth targets," they said.

Merrill Lynch said Sinoma was expected to be the "biggest beneficiary" of tight cement supply in Northwestern China, where 45% of its cement capacity is located.