CITIC SEC: Real estate industry stabilizing benefits the recovery of building material demand Cement and glass are expected to accelerate capacity elimination by 2025

CITIC SEC released a research report stating that since October 2024, the price of cement has gradually increased, and the profitability of enterprises is expected to recover. The inclusion of cement in the national carbon trading market has accelerated, and the introduction of the new version of capacity replacement policy is expected to expedite the clearance of 300 million tons of outdated cement clinker production capacity. Moreover, the phenomenon of overproduction will be effectively controlled, and actual capacity will decrease from 21 billion tons to within the designed capacity of 18 billion tons. With increased cold repair capacity in the float glass industry under pressure of losses, enterprise inventories are rapidly decreasing and glass prices are being restored. The main points of CITIC SEC are as follows: - The gradual increase in cement prices is expected to restore the profitability of enterprises. According to the National Bureau of Statistics, from January to September 2024, China's cement production was 1.327 billion tons, a decrease of 10.70% year-on-year; the average operating rate of clinker production lines was 47%, a decrease of 11 percentage points year-on-year, leading to severe industry losses. Since October 2024, the East China region has led in raising prices, followed by regions such as Central China and Southwest. According to Digital Cement Network, from September 27th to October 25th, cement prices in East/ Central South/ Southwest regions increased by 73/22/39 yuan per ton respectively. With the leading enterprises driving the price hike in cement, the prices are expected to be maintained following this round of rise, leading to a significant recovery in enterprise profitability. - The cement industry is expected to accelerate capacity clearance through carbon trading, over capacity replacement policies, and other regulations. From a medium to long-term perspective, it is inevitable that cement demand will show a downward trend in the future, with more focus on the supply side. 1) The process of cement entering the carbon trading market has accelerated, with carbon emission costs gradually increasing. On September 9, 2024, the Ministry of Ecology and Environment issued a draft of the "National Carbon Emission Trading Market Coverage Plan for the Cement, Steel, and Electrolytic Aluminum Industries". The sector estimates that future carbon costs could range from 1-15 yuan per ton of clinker, accounting for 0.26%-3.84% of the national average cement price in the third quarter of 2024. 2) The revision of the capacity replacement implementation method aims to expedite capacity clearance. In October 2024, the Ministry of Industry and Information Technology revised and issued the "Implementation Measures for Capacity Replacement in the Cement and Glass Industries (2024 Edition)". The new method has stricter requirements for cement replacement, aiming to accelerate the clearance of 3 billion tons of outdated cement clinker production capacity; improvement in capacity verification methods will require the overproduced capacity to be made up, with China's actual cement clinker production capacity expected to decrease from 21 billion tons to within 18 billion tons. - Glass demand decreased in the first three quarters of 2024, keeping prices at a low level. From January to September 2024, national float glass sales volume was 780 million weight boxes, a decrease of 3.81% year-on-year; the sales-to-production ratio was 93.69%, down 9.50 percentage points year-on-year, mainly influenced by the real estate industry. In the third quarter of 2024, float glass prices fell by 30% year-on-year to 1418 yuan per ton, with an average loss of -32 yuan, leading the entire industry into a state of losses. - The increase in cold repair capacity for glass production alleviates supply-side pressures. As of the end of October 2024, the in-production capacity of float glass was 159,800 tons per day, a decrease of 9% compared to the end of 2023, and the share of total production capacity decreased to 79%. This is mainly due to an increase in cold repair production lines for float glass following increased losses faced by glass companies nationwide after August. As of October 2024, the proportion of production capacity with a kiln age of 10 years or more reached 13%, indicating a potentially significant reduction in production capacity. The sector predicts that by 2025, float glass production capacity will decrease to 157,000 tons per day. Considering that most float glass companies are currently in a state of losses, there may be more production lines undergoing cold repairs ahead of schedule, further optimizing the supply side. - Policy stimuli drive glass inventory down and prices gradually recover. Under the push from the Ministry of Housing and Urban-Rural Development to cancel purchase restrictions, cancel sale restrictions, reduce the down payment ratio for housing loans, and decrease interest rates on existing loans, the real estate industry's recovery speed is expected to accelerate, greatly boosting the demand for glass in the real estate sector. In October, national float glass inventory began to rapidly decline, with inventory levels decreasing by 30% by the end of October; glass prices began to rise, increasing by 13% month-on-month by the end of October; the extent of glass losses also narrowed. Investment Strategy: With various departments recently introducing policies to promote the stabilization of the real estate market, the stability of the real estate industry also benefits the recovery of demand in the cement and glass industries. On the supply side of cement, the inclusion of cement in the national carbon trading market has accelerated, and the introduction of the new version of capacity replacement policy is expected to expedite the clearance of 300 million tons of outdated cement clinker production capacity, with overproduction being effectively controlled. Actual capacity will decrease from 21 billion tons to within the designed capacity of 18 billion tons. On the supply side of glass, with increased cold repair capacity due to industry losses, enterprise inventories are rapidly decreasing, and glass prices are being restored. Risk Factors: Real estate and infrastructure demand lower than expected; significant increase in raw material costs; intensified industry competition; diversification of leading companies falls short of expectations; stricter environmental policies; deterioration of overseas operating environments.