Plans of production cut by cement producers in four Chinese provinces in the second half of July may reduce demand of thermal coal, sources said.
Cement producers in Shanxi, Henan, Hebei and Shandong would halt kiln production voluntarily from July 17 to July 31, sources reported, citing an industry meeting attended by these companies.
The move is possibly a response to weak demand that accelerated inventory accumulation at cement plants, in addition to continuous fall of cement prices.
On July 3, the ratios of cement clinker inventory to storage capacity at cement plants in Shanxi, Henan, Hebei and Shandong were generally above 50%, showed data from industry portal cementren.com.
Twenty nine surveyed enterprises in Hebei had a clinker storage ratio of about 58% in average, while the ratio stood at 74% on average at 46 firms in Henan and 75% at 24 firms in Shanxi. The 72 cement production lines in Shandong had the highest average ratio of 85%.
Shandong was the top one cement-producing province in China in May, with output of 17.1 million tonnes, accounting for 6.9% of the country's total.
Industry insiders believe cement prices face downside risks when the rate of inventory to storage capacity reaches 80%, while producers may gain more pricing power when it falls to 40% or less.
Cement prices drifted lower in East China and the Yangtze River Delta region, which also triggered same decline in surrounding areas. Prices of cement supplies from other areas also fell.
Cement prices in Shanxi, Hebei, Shandong, Henan and neighboring production areas fell by around 100 yuan/t compared with the same time a year ago, according to cementren.com.
The price of conch cement, a mainstream brand in the Jiangsu-Zhejiang-Shanghai area, also encountered continuous falls. Major producers in the region had reduced cement prices by at least 75 yuan/t in three consecutive cuts in the passing month.
Cement production is closely related to thermal coal demand in China, as the country's building materials industry was second only to the power sector in thermal coal consumption in May, accounting for 12.22% of China's total thermal coal consumption.
In May, coal consumption in building material industry also increased by 14.18% year on year and 11.45% month on month to 33.77 million tonnes, , according to calculations by analysts with sxcoal.com.
China produced about 248.69 million tonnes of cement in May, up 11.3% from a month ago and 8.6% on the year, data showed from the National Bureau of Statistics.
Restriction in cement production is expected to impact thermal coal demand. If production cut is strictly implemented in July, thermal coal consumption in the sector would see a marked decrease.
Since cement is not applicable to long distance transportation due to low value, usually at 200-300 yuan/t, its sales radius was comparatively limited, which also increase the correlation between cement production and thermal coal demand on a regional basis.
(Writing by Emma Yang Editing by Harry Huo)
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