Concrete steps for tackling overcapacity

Cement maker moves operations to Africa, and will help others do the same

Making the most of what you have, however and wherever, is a virtue one Chinese company is embracing as it grapples with overcapacity.

Not only has the cement maker Jidong Development Group moved its excess capacity in China to Africa, but it also plans to join other Chinese businesses that want to solve the problem of overcapacity the same way.

"Even as some industries face overcapacity in China, that capacity is urgently needed elsewhere," says Tao Feng, chief financial officer of the South African subsidiary of Jidong Development Group.

"Financial support is crucial in successfully shifting businesses that are operating on thin profits margins," says Tao, speaking in Limpopo, the northernmost province of South Africa.

The subsidiary, Mamba Cement Company (Pty) Ltd, was jointly set up by Women Investment Portfolio Holdings, the limestone miner Continental Cement, both of South Africa, and the China-Africa Development Fund and Jidong Development Group. It was incorporated in 2010 with total investment of 1.75 billion rand ($163 million).

Jidong, a developer of cement plants and the largest cement producer in North China, and the CAD Fund have a combined 51 percent stake in the greenfield project. Women Investment Portfolio Holdings holds 23.9 percent, and Continental Cement has the remaining 25.1 percent. The deal represents a significant foreign direct investment in the local cement industry.

After four years of negotiations on financing models, construction of the cement manufacturing plant in Limpopo started in February and is expected to be completed in the first half of 2016. It is expected to produce 1 million tons of cement a year, Tao says.

"The project is Jidong's first business overseas. The group has huge cement production capacity at home, but the price has been low in recent years. Rising environmental concerns have restrained development of the industry, which uses a lot of energy. That is where the idea of going abroad came from."

One of the group's listed member companies is Tangshan Jidong Cement Co Ltd, which accounts for 60 percent of the GDP of the city of Tangshan. In turn, Tangshan accounts for the lion's share of the GDP of Hebei province.

Hebei, saddled by overcapacity and often blanketed, like surrounding regions, by heavy smog, is tackling overcapacity in industries such as cement, iron and steel by shutting down operations or moving them.

The provincial government has said it aims to relocate 60 million tons of cement production this year.

Justin Yifu Lin, former World Bank vice-president and an economics professor at Peking University, says that Africa holds "incomparable" advantages for the transfer of China's labor-intensive businesses and is also serving as the "last stop" in the relocation of global manufacturing.

Africa is rich in natural resources, is crying out for project construction and has 1 billion consumers, he says.

"This year we will extend our overseas business into Zambia with a cement plant producing 2 million tons a year, and to Lesotho and Mozambique," Tao says.

The group has also signed deals to build cement plants in Malaysia, Myanmar and Vietnam with combined annual output of 9 million tons, Tao says.

"Jidong is in a position to help Hebei province relocate 10 million tons of cement production this year. South Africa has huge demand for cement about 15 million tons a year and growing at 3 to 5 percent a year driven by the national development plan, which includes building roads, power stations, bridges and the booming real estate industry."

South Africa has been producing 12 million tons of concrete a year and the gap has been met with imports, he says.

"The market will not be saturated until 2020 or later."

In fact, the whole of Africa needs Chinese cement, Tao Feng says Limestone is a key ingredient of cement, and Mamba Cement holds deposits of about 100 million tons.

"South Africa's leading cement supplier, PPC, has not upgraded its production lines for 30 years, which has increased its cost and taken the price of its cement to about 1,400 rand a ton."

"Once our plant is up and running, our wholesale price will be just 900 rand a ton."

PPC is burdened by heavy debt, and it is possible Jidong will eventually take it over, thus increasing its limestone deposits, he says.

Cement produced at the Mamba plant will be sold mainly in and around Johannesburg, an economic hub for the continent.

The Limpopo plant is about 80 kilometers closer to the market than other local suppliers, so that means Mamba Cement can save 80 rand to 160 rand a ton, which is a huge advantage, Tao says.

"In addition to joining with local partners, the key to success is making the best use of capital. Jidong's real investment accounts for just 30.6 percent of the joint venture but gives it a small majority. That means the group can control the joint venture even as it reduces investment risks."

The Mamba Cement project is believed to be the first successful instance of Chinese businesses introducing project financing and long-term financing of infrastructure and industrial projects based on the project's forecast cash flows rather than on the balance sheets of its sponsors in Africa. Nedbank Capital and the Bank of China's Johannesburg branch is providing $107 million of debt capital to fund Mamba, the South African news outlet Business Day says. The financial model reduces the parent company's financial pressure for sustainable development.

The direct investment with renminbi was done to avoid foreign exchange losses, and this is important because more than 95 percent of the equipment used in the Mamba Cement project, worth 1.27 billion rand, is imported from China, Tao says.

South Africa also agreed to waive tariffs of 20 percent on the imported equipment.

In addition to increasing the export of equipment, the cement project will also help in the export of labor. One thousand Chinese workers, 600 for construction and 400 for installing equipment, will be needed, Tao says. The plant will also create jobs for 300 locals and 1,000 workers indirectly.

The downside in South Africa is that labor issues, including strikes, are "a big headache", and the power supply can be unreliable, he says.

The founder and executive director of Women Investment Portfolio Holdings, Gloria Serobe, says the investment will significantly increase South Africa's cement production capacity, contribute to economic activity and create jobs in Limpopo.

The project also has "significant black economic empowerment spinoffs", she says.

Moving China's industrial overcapacity to other countries does not simply mean relocating low-end manufacturing businesses, which "will never be successful", Tao says.

"The technology threshold in South Africa is very high, and we are using the most advanced technology in the Mamba project."

Introducing environmental protection technology has helped local small and medium-sized businesses, he says, and attracted a 170-million rand subsidy through cash and tax rebates from the Industrial Development Corporation of South Africa.

"South Africa is an open market and a good platform for Chinese enterprises. If they can win the battle here, they can beat the international competition in European or the US."

Jidong Development Group plans to join with other overcapacity businesses in China to tap African markets, including building a construction material park in Zambia to produce cement, plate glass, architectural ceramics and construction steel.

"Transferring Chinese industrial capacity will boost equipment and labor exports," Tao says. "What is happening is that industrial capital is being transferred, but businesses with surplus capacity are confronted with slim profits, so they are short of capital. The central government should set up a specialized fund, specifically an equity fund, to support companies going abroad."

Contact the writers through lijiabao@chinadaily.com.cn

(China Daily Africa Weekly 06/06/2014 page20)