Is the demand for cement expected to rebound from the bottom when the transformation of villages in the city starts in an all-round way?

Urban renewal has always been an important part of the high-quality development of large and medium-sized cities. On October 12, the Ministry of Housing and Urban-Rural Development announced that mega-cities are actively and steadily promoting the transformation of villages in cities. Since

this year, the transformation of villages in cities has been mentioned many times in important meetings of the central government and various departments. In July 2023, the executive meeting of the State Council deliberated and adopted the Guiding Opinions on Actively and Steadily Promoting the Transformation of Urban Villages in Megacities. From the perspective of the scope of policy influence, this round of urban village reconstruction mainly involves 21 mega-cities. Among them, there are 7 megacities, namely Shanghai, Beijing, Shenzhen, Chongqing, Guangzhou, Chengdu and Tianjin; and 14 megacities, namely Wuhan, Dongguan, Xi'an, Hangzhou, Foshan, Nanjing, Shenyang, Qingdao, Jinan, Changsha, Harbin, Zhengzhou, Kunming and Dalian.

Some brokerages believe that the transformation of villages in the city is expected to bring a significant increase in the physical volume of real estate, and the current capital-side policy continues to advance. Considering the large number of reserve projects in first-tier cities, it is expected that the short-term pulling effect may exceed expectations, and the demand for cement is expected to bottom out in 2024.

Under the background of shrinking overall demand for cement, how much demand can be brought by the transformation of urban villages has become the focus of the industry.

China Cement Network Cement Big Data Research Institute divides the demand for urban village reconstruction into pessimistic, neutral and optimistic situations according to the different implementation of the policy, with the proportion of old demolition being 20%, 40% and 60% respectively, and assumes that the ratio of demolition to construction is 2. According to the estimates of major securities firms, the total construction area of urban villages in the 21 mega-cities mentioned above is about 9-1.2 billion square meters. Based on this data, under optimistic, neutral and pessimistic circumstances, the total demand for cement brought about by the transformation of urban villages is about 300 million tons, 200 million tons and 100 million tons, respectively.

From the perspective of the rhythm of demand release, the overall pace of transformation is expected to be relatively slow due to the complex nature of the land involved in this round of urban village transformation, the high proportion of floating population, the difficulty of land requisition and resettlement, and the weakening of government financial support compared with the period of shanty reform. Combined with the planning and actual project experience of urban village reconstruction published by various places, this round of urban village reconstruction may take more than ten years.

Therefore, the average annual cement consumption for urban village reconstruction is estimated to be about 10-30 million tons, which is equivalent to 0.5% -1.5% of the national cement output in 2022. Among the 21 mega-cities, Shanghai alone had a cement demand of about 23 million tons last year.

It can be seen that the transformation of urban villages can indeed stimulate part of the demand for cement, but due to the limited scope of the policy and the proportion of demolition and renovation, its role in boosting the demand for cement is still weak. To change the downward trend of the national cement market, the key may still lie in substantial capacity.