Abstract: What is a reasonable cement price? We believe that current prices are already close to being fair, and the market will gradually find its bottom over the next two weeks. Following this, staggered kiln shutdowns will take place. After the Lantern Festival restart, low inventory levels and tight supply conditions will once again drive prices higher. Looking at the full year, the supply side will remain tightly constrained, while the gradual easing of real estate policies will help bolster demand resilience. As a result, cement market conditions are expected to remain volatile yet trending upward, with the potential to reach new all-time highs.

East China cement prices have dropped significantly, yet this does not alter the industry’s overall upward trend; we continue to remain bullish on cement stocks. Last week, cement prices in Jiangsu, Zhejiang, Shanghai, and Anhui were lowered by 50-60 yuan per ton, while clinker prices fell by around 150 yuan per ton. This recent decline is due to tactical measures targeting imported clinker and the onset of the off-season. The relatively large magnitude of the drop reflects a return to more normal levels after the rapid price surge seen in December.

What is a reasonable cement price? We believe that current prices are already close to being reasonable, and the market will gradually find its bottom over the next two weeks. Following this, staggered kiln shutdowns will take place. After the Lantern Festival resumes operations, low inventory levels and tight supply will once again drive prices higher. Looking at the full year, although the supply side remains tightly controlled, the gradual easing of real estate policies will help bolster demand resilience. As a result, the cement industry will continue to experience volatile yet upward trends and could even reach new all-time highs.

Under the new normal of the economy, there is no significant risk of a sharp decline in demand. The recent relaxation of real estate policies will further boost expectations on the demand side. At the Central Economic Work Conference, it was pointed out that China should promote high-quality development, continue to pursue proactive fiscal policies and prudent monetary policies, and ensure strong support for key sectors and projects. We also need to advance initiatives such as building a manufacturing powerhouse, promoting regional coordination, revitalizing rural areas, and pursuing comprehensive opening-up. We believe that in 2018, the overall economic trend will remain one of structural adjustment amid stability. Fixed-asset investment—currently a pillar of the economy—will not be neglected, though its growth rate may slow down. Nevertheless, overall demand will stay at a relatively high level, and there is no clear basis for a substantial decline in demand for traditional cyclical construction materials such as cement and glass. Moreover, the recent relaxation of real estate policies in some second- and third-tier cities will further bolster market expectations regarding demand.

Environmental protection pressures remain unabated, and the supply side will continue to be the key driver of industry profitability. Under conditions of low inventory levels and a tightly balanced production capacity, the duration of industry prosperity is set to lengthen significantly. We believe that in 2018, China will continue to adhere to the “Lucid Waters and Lush Mountains” philosophy, rigorously focusing on improving the quality of economic development and placing great importance on environmental protection. Recently, inspection teams have provided feedback to the provinces they’ve been monitoring; judging from the environmental issues identified in each province, environmental inspections remain strictly enforced. Local governments have also responded actively, committing to implementing the feedback received and proposing specific remediation plans. Going forward, regular environmental inspections—and follow-up “look-back” reviews of problem rectifications in 2018—are expected to become standard practice, ensuring that environmental protection pressures remain persistent. The overarching direction of supply-side reform initiated since 2016 will continue to be upheld. For instance, in the cement industry, control over the entire value chain—from raw materials to clinker and then to cement—has been further strengthened. Meanwhile, medium-term supply-side reform plans have already been unveiled. In the glass industry, emission permit standards have been raised, and efforts to address small, scattered, and unregulated enterprises are underway. We believe that a state of tight capacity control and low inventory levels will become common features of the cyclical construction materials sector in 2018. Moreover, the strict prohibition of new capacity additions and the phasing out of outdated, inefficient facilities will likely dominate the industry’s agenda throughout 2018. Given the strong safety margins currently present on the supply side of traditional cyclical construction materials, industry profitability is poised for further improvement.

The off-season is anything but dull—under low inventory levels, the cement industry continues to show robust growth: The current valuation of the cement sector does not yet reflect expectations that the substantial rise in cement prices during the fourth quarter will lift next year’s profit center. Meanwhile, nationwide cement inventories continue to decline, reaching their lowest level in recent years. With continued strict implementation of staggered production schedules during the spring, supply conditions will become even tighter in the first half of this year. As the peak season approaches, cement prices are poised to hit new highs. We believe that, driven by an improving supply-demand balance and the current stringent supply-side controls, the off-season is anything but dull, and the industry’s overall profit center for the year is likely to rise further, accelerating the cement market’s upward trajectory.

[Industry Perspective]

Cement prices fell slightly month-on-month but remain at high levels, laying the groundwork for a post-holiday price increase. We continue to be optimistic about cement prices crossing into the new year. As we approach year-end, demand is gradually shifting toward the off-season in line with seasonal patterns. At the same time, factors such as the easing of production restrictions and the gradual recovery of funds by downstream mixing plants at year-end, which have led to a decline in operating rates, mean that the period of most acute cement supply-demand imbalance has passed. Cement prices will now stabilize gradually at a relatively high level. Moreover, the industry-wide low inventory situation will provide a solid foundation for cement prices in the first quarter of next year, following the start of spring. Last week, the national average cement price was 412 yuan per ton, down 0.7% month-on-month. Price increases were concentrated mainly in Chengdu in Southwest China, while price declines were primarily observed in the East China region.

Looking ahead to the medium term, demand in the cement industry is expected to remain broadly stable through 2020. On the supply side, ongoing efforts to optimize the industry’s supply-demand dynamics will continue to drive improvements, and the value proposition of leading companies is poised to strengthen further. Throughout the year, overall capacity constraints in the cement industry will not be relaxed. With steady demand, low inventory levels, and a tight balance between supply and demand, prices are likely to rise during peak seasons but struggle to fall during off-season periods, thereby significantly extending the industry’s favorable cycle. From a regional perspective, the East China and South China regions boast strong economic vitality and substantial total demand. Moreover, these regions feature a relatively healthy competitive landscape, making it highly probable that cement prices will stay elevated in the future—and there could even be a trend toward further price increases beyond current levels. Meanwhile, in the currently weaker Northern and Southwest regions, as demand gradually picks up and the industry structure continues to improve, the overall supply-demand relationship will also keep trending positively, providing regional enterprises with upward earnings potential. At the same time, the implementation of medium-term supply-side reforms aimed at reducing effective production capacity will accelerate further improvements in the cement industry’s supply-demand dynamics and industrial structure.

We believe that, given the currently relatively tight supply-demand balance in the construction materials sector as a whole, the unexpectedly strong short-term production restrictions are likely to continue boosting market expectations for the earnings resilience of industry leaders. In the medium term, as supply and demand stabilize and improve, and the industry structure becomes even more concentrated, the earnings resilience of leading cement companies will become even more apparent. Compared horizontally with consumer and growth stocks, the valuation of cyclical leaders remains relatively low. As the cyclical nature of cement industry profits weakens and their sustainability strengthens, the value attributes of these leaders are expected to stand out, ushering in a dual upgrade in both valuation and performance.