Concrete steps for tackling overcapacity

Jidong Development Group plans to join with other overcapacity businesses in China to tap African markets. Provided to China Daily

Cement company shifts emphasis overseas as it seeks to escape cost pressures in a tough domestic market

Making the best of a tough situation is a virtue that one Chinese company is embracing as it grapples with a crowded domestic market.

"Even as some industries face overcapacity in China, capacity is urgently needed elsewhere," said Tao Feng, chief financial officer of the South African subsidiary of cement producer Jidong Development Group Co Ltd.

"Financial support is crucial in successfully shifting businesses that are operating on thin profit margins," said Tao, who was interviewed in Limpopo, the northernmost province of South Africa.

The subsidiary, Mamba Cement Co (Pty) Ltd, was jointly established by Women Investment Portfolio Holdings Ltd and limestone miner Continental Cement (Pty) Ltd - both based in South Africa - and the China-Africa Development Fund and the Jidong group.

It was incorporated in 2010 with total investment of 1.75 billion rand ($163 million).

Jidong, a developer of cement plants and the largest cement producer in northern China, and the CAD Fund have a combined 51 percent stake in the project.

WIP holds 23.9 percent, and Continental Cement has the remaining 25.1 percent.

The deal represents a significant foreign direct investment in the local cement industry.

After four years of negotiations on financing models, construction of a cement plant in Limpopo started in February and is expected to be completed in the first half of 2016. The plant will turn out about 1 million metric tons of cement a year, Tao said.

"The project is Jidong's first business overseas. The group has huge cement production capacity at home, but cement prices have been low in recent years. Rising environmental concerns have restrained development of the industry, which uses a lot of energy. That is where the idea of going abroad came from."

One of the group's listed member companies is Tangshan Jidong Cement Co Ltd, which accounts for 60 percent of the GDP of the city of Tangshan, Hebei. The city accounts for the lion's share of the GDP of Hebei province.

Hebei - saddled by overcapacity and often blanketed, as are surrounding regions, by heavy smog - is tackling overcapacity in industries such as cement, iron and steel by closing or moving facilities.

The provincial government has said it aims to relocate 60 million tons of cement production this year.

Justin Yifu Lin, former World Bank vice-president and an economics professor at Peking University, said that Africa holds "incomparable" advantages for the transfer of China's labor-intensive businesses. The continent is also the "last stop" in the relocation of global manufacturing.

Africa, which is rich in natural resources, is crying out for project construction and has 1 billion consumers, he said.

"This year, we will extend our overseas business into Zambia with a cement plant producing 2 million tons a year, and to Lesotho and Mozambique," Tao said. The group has also signed deals to build cement plants in Malaysia, Myanmar and Vietnam with combined annual output of 9 million tons, Tao said.

"Jidong is in a position to help Hebei province relocate 10 million tons of cement production this year. South Africa has huge demand for cement of about 15 million tons a year. That's growing at 3 to 5 percent a year, driven by the national development plan, which includes building roads, power stations and bridges, along with the booming real estate industry."

South Africa has been producing 12 million tons of concrete a year and the gap has been met with imports, he said. "The market will not be saturated until 2020 or later."

All of Africa needs Chinese cement, Tao said. Limestone is a key ingredient of cement, and Mamba Cement has deposits of about 100 million tons.

South Africa's leading cement supplier, Pretoria Portland Cement Co Ltd, has not upgraded its production lines for 30 years, he said.

"That's driven up its costs and taken the price of its cement to about 1,400 rand a ton. Once our plant is up and running, our wholesale price will be just 900 rand a ton," he added.

PPC is burdened by heavy debt, and it is possible Jidong will eventually take it over, which would increase the latter's limestone deposits, he said.

Cement produced at the Mamba plant will be sold mainly in and around Johannesburg, an economic hub for the continent.

The Limpopo plant is about 80 km closer to the market than other local suppliers, so that means Mamba Cement can save 80 to 160 rand a ton, which is a huge advantage, Tao said.

"In addition to joining with local partners, the key to success is making the best use of capital. Jidong's real investment accounts for just 30.6 percent of the joint venture but gives it a small majority. That means the group can control the joint venture even as it reduces investment risks."

The Mamba Cement project is believed to be the first successful instance of a Chinese business introducing project financing and long-term financing of infrastructure and industrial projects based on the project's forecast cash flows rather than on the balance sheets of its sponsors in Africa.

Nedbank Capital, a division of Nedbank Ltd, and the Bank of China Ltd's Johannesburg branch are providing $107 million in finance for Mamba, the South African news outlet Business Day has reported. The financial model reduces the parent company's financial pressure for sustainable development.

The direct investment, denominated in yuan, was structured that way to avoid foreign exchange losses, and this is important because more than 95 percent of the equipment used in the Mamba Cement project, worth 1.27 billion rand, is imported from China, Tao said.

South Africa also agreed to waive tariffs of 20 percent on the imported equipment.

In addition to increasing the export of equipment, the cement project will also help in the export of labor. Tao said that 1,000 Chinese workers, 600 for construction work and 400 for installing equipment, will be needed. The plant will also create jobs for 300 local residents and 1,000 workers indirectly.

The downside in South Africa is that labor issues, including strikes, are "a big headache", and the power supply can be unreliable, he said.

The founder and executive director of WIP, Gloria Serobe, said the investment will significantly increase South Africa's cement production capacity, contribute to economic activity and create jobs in Limpopo.

The project also has "significant black economic empowerment spinoffs", she said.

Moving China's industrial overcapacity to other countries does not simply mean relocating low-end manufacturing businesses, which "will never be successful", Tao said.

"The technology threshold in South Africa is very high, and we are using the most advanced technology in the Mamba project."

Introducing environmental protection technology has helped local small and medium-sized businesses, he said, and attracted a subsidy worth 170 million rand through cash and tax rebates from the Industrial Development Corp of South Africa.

"South Africa is an open market and a good platform for Chinese enterprises. If they can win the battle here, they can beat the international competition in European or the US."

Jidong Development Group also plans to join with other businesses in China that have excess capacity to tap African markets, including building a construction materials park in Zambia to produce cement, plate glass, architectural ceramics and construction steel.

"Transferring Chinese industrial capacity will boost equipment and labor exports," Tao said. "What is happening is that industrial capital is being transferred, but businesses with surplus capacity are confronted with slim profits, so they are short of capital. The central government should set up a specialized fund, specifically an equity fund, to support companies going abroad."