Chinese refractories industry buckles under overcapacity pressure

By Albert Li
Published: Monday, 27 April 2015

Production falls for first time in a decade; industry must face up to steel cuts, association warns while demand from cement and glass is also on the slide.

Refractories output in China slipped for the first time in a decade last year as the country’s economic growth slowed to a rate of 7.3% in the final quarter – the lowest increase in GDP since 1990.

This conclusion is based on analysis by the China Refractory Association, which held its annual meeting in Yixing, Jiangsu province, at the end of March.

Speaking at the meeting, Baikuan Liu, director of the association, said that in 2014, Chinese refractory product output (excluding raw materials such as magnesia, bauxite and graphite) reached just under 28m tonnes, down 4.5% year-on-year (y-o-y) and the smallest volume since 2004.

By product category, compact shaped refractories output stood at 16.56m tonnes, down 4.31% y-o-y; heat preservation and insulation refractory products output was 526,300 tonnes, down 5.56% y-o-y; and production of unshaped refractory products was 10.9m tonnes, down 4.68% y-o-y.

Baikuan cautioned that these figures may underestimate the scale of the decline, since the numbers were compiled based on companies’ own reports to the China Refractory Association, which may have overstated volumes.

Production capacity in the country remains unchanged, meanwhile, meaning that many of China’s manufacturing lines stood idle last year. The main refractories-producing regions of Henan, Liaoning, Shandong, Beijing and Hebei all registered a drop in production in 2014, with only Shanxi, Zhejiang and Jiangsu recording increases
y-o-y.

Baikuan blamed the fall in production on slowing growth in refractories-consuming industries, including steel, cement and glass manufacturing.

rhl 

On the bucket list: cutting cement, steel and glass capacity are a
must for China’s oversupplied economy, but this will have a knock-on
effect on refractories demand (Source: MacP2007).

Exports increase

This drop in domestic demand was countered by an increase in exports, as China sought to find international markets for its surplus refractory products.

The country shipped a total of 5.66m tonnes refractory products and raw materials last year, up 12.6% on 2013, while the aggregate value of these exports reached $3.3bn in 2014, up 11.3% y-o-y.

This figure includes 3.8m tonnes refractory minerals, up 16% y-o-y, the value of which stood at $1.8bn, up 12.67% on the previous year. Refractory products exports totalled 1.86m tonnes, up 5.27% y-o-y, and were worth $1.53bn, up 9.73%.

Domestic output continued to contract, however, despite the rise in exports.

Research by the association at the end of 2014 found that 30% of refractories producers in Liaoning province had halted production completely, while a further 30% had halved output.

Similarly, in Henan province, around a third of manufacturers had shut off production while a further third of producers had cut output volumes by 50%.

Data compiled from 58 key Chinese refractories companies shows that total refractories production, including some raw materials, stood at 11.1m tonnes in 2014, up 0.7% y-o-y, Dianli Xu, vice director of the China Refractory Association, said.

Sales turnover was Chinese renminbi (Rmb) 35.4bn ($5.71bn*), up 3.44% on 2013 levels, with an average profit margin of 4.27% – 1.64% below China’s industrial average profit rate. However, this figure is skewed by the fact that the proportion of unprofitable refractories producers in China is smaller among the top 58 players than it is across the whole industry.

This is part of the reason why the Chinese government wants to consolidate the industry into a handful of strong companies. Of the top 58 refractories companies, 51 are profitable, with 17 businesses recording 30% increases in y-o-y profit in 2014.

Slowing steel sector

According to the China Refractory Association, although the average turnover of Chinese refractories companies increased by 3.4% last year, many producers are highly leveraged by bank loans, making them vulnerable to downturns in end user demand.

Struggling steel companies have been slow to make payments to refractories suppliers, Baikuan said and noted that the Chinese government’s plan to eliminate 80m tonnes of steel production – 60m of which will be in Hebei province – needs to be addressed seriously by the refractories industry.

Dianli said that in 2014, China’s crude steel production reached 823m tonnes, up 0.9% y-o-y, but representing a 6.6 percentage point slowdown in the pace of growth since 2013. Overall steel production in China last year stood at 1.1bn tonnes, meanwhile, a 4.5% increase y-o-y but indicating a 6.9 percentage point drop in growth speed.

World crude steel production in 2014 was 1.637bn tonnes, up 1.1% on the previous year.

Crude steel demand in China was 670m tonnes in 2012; 770m tonnes in 2013; and 740m tonnes in 2014, Dianli said.

He explained how a fall in the price of iron ore and coal had helped protect the profits of steel producers in recent years, but that this had prevented capacity from dropping out of the market and maintained average profit levels at just 0.9%.

Crunch in construction

As well as decelerating growth in the steel industry, faltering demand in markets such construction materials is also eating into demand for refractory products in China – a trend that shows no sign of reversing.

In the cement manufacturing sector, which is the second largest consumer of refractories after steel, output reached nearly 2.5bn tonnes in 2014, up 1.8% y-o-y – a 7.8 percentage point deceleration in growth.

Flat glass production stood at 793m weight cases, up 1.1%, with a 10.1 percentage point decline in the pace of y-o-y growth, Dianli said.

In the nonferrous metals industry, production rose 7.2% to 44.17m tonnes, a growth speed drop of 2.7 percentage points.

According to Dianli, out of the main refractories-consuming industries in China, only cement recorded an increase in profit, with income across the sector rising by 1.4% y-o-y.

Steel industry profit dropped by 15.3%, while the nonferrous metals sector’s profit dipped by 1.5% and the flat glass industry recorded a 65% dive in earnings y-o-y.

The difficulties experienced in these sectors have been attributed to overcapacity, which creates a situation of low prices and slim or non-existent profits that is difficult to resolve.

By the end of 2014, Chinese crude steel capacity had reached 1.16bn tonnes, but the rate of capacity usage last year was just under 71%. In the electrolytic aluminium industry, efforts were made last year to reduce China’s 35m tonne capacity, but new production is due to come online despite capacity usage hovering at just 75%.

Dianli said that demand for refractories has entered the "peak arc zone", meaning that consumption is likely to decline from now on. 

*Conversions made April 2015