In 2015, the Chinese building materials industry found itself in a very unfortunate year. The industry suffered comprehensive losses, severe overcapacity, and the heavy pressure brought by environmental governance, like three great mountains pressing down on the entire industry, making it hard to breathe. Industry insiders believe that the issue is no longer how the building materials industry can "stop the bleeding," but how to carry out comprehensive reforms with the courage of "cutting off one's own arm" or even starting over.

At the end of the year and the beginning of the new one, the Ministry of Industry and Information Technology convened a symposium with the heads of China National Building Material Group, China National Materials Group, Beijing Jinyu Co., Ltd., Anhui Conch Cement, Jilin Yatai Group, and the China Building Materials Federation. The meeting focused on the main difficulties facing the building materials industry, analyzed existing problems and causes, and proposed measures and suggestions for change. It is understood that most representatives at the symposium believed that building materials enterprises can no longer examine and solve problems with the old perspective. In terms of transformation and innovation, time is pressing, and no delay or excuse is allowed.

The building materials industry, which was still growing significantly in the first three quarters of 2014, took a sharp turn for the worse starting from the fourth quarter. WIND data shows that among the 48 listed companies in the building materials category in the tertiary industry, operating revenues in the first three quarters of 2014 were 51.9 billion yuan, 128.4 billion yuan, and 203.7 billion yuan, respectively, up 18.95%, 9.93%, and 6.92% year-on-year; net profits were 3.011 billion yuan, 11.615 billion yuan, and 17.8 billion yuan, respectively, up 398.86%, 53.51%, and 30.28% year-on-year. However, the 2014 annual reports showed that the growth rates of operating revenue and net profit were only 1.93% and -3.88%. In the first quarter of 2015, the growth rates of operating revenue and net profit plummeted to -11.71% and -72.25%. Since then, they have continued to plunge.

Certainly Not a Blessing or Beauty for the Industry

Let us look at a microcosm at the end of the year: Hengyang City in Hunan Province, a prefecture-level city with a registered population of only 1.7 million, has 87 cement and cement products enterprises with an annual capacity of 16 million tons. However, even at full capacity, the local annual demand for building materials in Hengyang is only 8 million tons, leaving half of the output as a huge inventory.

The overcapacity ratio in China's ceramics industry is even higher, reaching 40%. Since 2015, 12 ceramic enterprises in the Pearl River Delta region have gone bankrupt. In addition, the flat glass industry has also experienced widespread losses. "Although the massive losses in the building materials industry have their own reasons, they are mainly affected by the real estate market," said a responsible person from the China Building Materials Circulation Association.

It is understood that the reason why China's building materials industry has a large loss area and weak risk resistance is related to the low concentration of the entire industry, dispersed industries, poor product integration, and weak brand influence. At present, the total number of building materials enterprises in China is as high as 400,000, of which more than 70% are small and medium-sized enterprises. Take Guangdong, a major province of building materials, as an example: private small and medium-sized enterprises account for more than 95%, and 21% of enterprises have survived for less than 7 years. With such a survival state of low concentration and poor brand influence, producing more than 50% of China's ceramics, glass, coatings, stone, and hardware is certainly not a blessing or beauty for the industry.

The vicious competition brought about by low industrial concentration is like a nightmare in a vicious cycle. The lower the concentration, the more it can only increase quantity while reducing quality, losing the best opportunity for reform. "Thus, a cycle of price reduction—overcapacity—further price reduction—increased investment—expanded reproduction is formed. Overcapacity has come about through such repeated cycles," said the aforementioned responsible person from the China Building Materials Circulation Association.

The first major problem caused by overcapacity is the sharp decline in profits, leading to comprehensive losses. Take cement as an example. A few years ago, when the steel industry was suffering comprehensive losses, the cement industry was still profitable. But entering 2015, the cement industry began to repeat the mistakes of steel, with profits plummeting, and even in some regions, there were price wars where companies slashed prices to see "who could afford the losses."

Hidden Losses Hard to Conceal

It is understood that in the first three quarters of this year, nearly half of cement and flat glass enterprises suffered losses. The loss amount of loss-making cement enterprises reached 17 billion yuan, and that of loss-making flat glass enterprises reached 3 billion yuan. Although half of the enterprises reported meager profits on their financial statements, most were actually in a state of hidden losses.

Kong Xiangzhong, executive vice president and secretary-general of the China Cement Association, analyzed that cement prices have continued to decline since the beginning of this year. In the first three quarters, the average ex-factory price of general-purpose cement nationwide fell by 10% per ton compared with the same period last year. In September, the monthly average ex-factory price of general-purpose cement nationwide hit the lowest level since the 2008 financial crisis.

At a recent symposium of some industry association heads held by the State Council, the head of the China Building Materials Federation pointed out in a report that since March 2012, the national producer price index for industrial products has declined year-on-year for 40 consecutive months. Currently, the ex-factory prices of national industrial products are only equivalent to the 2007 level. What is even more lamentable is that after the second quarter of this year, the prices of cement and flat glass fell below the average cost line of the industry, and prices have lost their role in regulating supply and demand balance.

"Although overcapacity has existed for many years, the situation this year appears particularly severe," said Qiao Longde, president of the China Building Materials Federation. But even so, some industries with overcapacity are still adding new capacity, leading to a situation where, under non-standard market competition, not only is the overall economic operation of the building materials industry under downward pressure, but the degree of severe decline in economic benefits far exceeds the downward pressure on economic operation, bringing a huge impact on industry development. Many enterprises are still wandering in confusion or at a loss, blindly waiting to rely on external drivers to change the status quo.

"This helpless act of drinking poison to quench thirst not only causes a significant decline in enterprise sales revenue and profits but also cannot fundamentally solve the problem of enterprise cash flow. Instead, it will push enterprises into an awkward situation of reduced cash income from operating activities and banks' reluctance to lend," Qiao Longde said with a touch of sadness.

It is reported that since the beginning of this year, although the building materials industry has held more than 20 analysis meetings and symposia in various forms to curb new capacity, and has also issued a joint initiative by several large enterprises promising not to add new capacity, the effect has been minimal. Qiao Longde suggested that merely staying at the level of empty talk is certainly not acceptable. It is necessary to break through the existing merger and reorganization models, change one-on-one negotiations, formulate guiding catalogues, and change overall acquisitions to mutual shareholding. Using mixed ownership, try to establish a new company with unified operations based on capital for enterprises in the same region, and at the same time organize staggered production, exploring joint profit-sharing for enterprises that have stopped or limited production and those still producing in the same region.

Industry insiders believe that in the face of this severe situation, major reforms and innovations in systems and mechanisms are necessary. Through resource integration, merger and reorganization, and integration with the Internet, the industry concentration should be comprehensively improved.

The Raw Materials Industry Department of the Ministry of Industry and Information Technology responded that it will consider solving the severe difficulties existing in the building materials industry in terms of financing, taxation, environmental protection, fair market environment, and going global. Next, the Raw Materials Industry Department will conduct on-site research at key enterprises, sort out common problems and practices in the current development of the industry, and study and propose practical and effective policy measures.