China's cement industry suffers from overcapacity

China's cement industry is one of the largest in the world. It started to recover in 2006, after suffering tough market conditions in 2005. Now, the challenges seem to repeat themselves.

The country produced more than 2.2 billion tons of cement last year, a 7 percent annual increase. But although the industry was already running at full capacity, it still added over 100 new production lines. Analysts say new policies are urgently needed to encourage mergers and reform the sector.

The China Cement Association says that with the new production lines, China's cement production went up by 160 million tons last year. But in fact the increased capacity just made the industry's over-production worse, and cut overall profits by 50 percent.

James Hao, Managing Partner of SH Huaran Investment Consulting Group, said, "In fact, China can produce almost 3 billion tons of cement a year. That means we are only using about 70 percent of our capacity, and are seldom at full production. By 2015, we will have another half-billion tons of capacity a year, and will have completely lost the balance between supply and demand in the industry."

The cement industry's boom began a decade ago, with the fast growth of investment in capital assets such as housing and transport. Investment hit 170 billion yuan in 2007. But the economic crisis that hit in 2008 ended the rapid growth of many economies including China's.

That is why the government is considering how to deal with excess capacity in many industries like cement. China's authorities say they plan to have around three giant cement companies nationwide by 2015.

James Hao said, "China is a big country in terms of cement production, but in terms of competitiveness, pricing and technology, we still lag behind. The giant companies will change that situation."

Hao says environmental pressure may be another reason for the government to reform the cement industry.

He said, "The cement is a low-efficiency and high-polluting industry. In current circumstances, it is not easy to ask small companies to reduce their pollution. Only the big companies have enough money to invest in research and develop upgraded products."

China's authorities say the country plans to shut down low-efficiency production capacity of 250 million tons by the end of 2015, increasing the market share of more efficient producers.