Beijing time, the Federal Reserve announced that it would cut the target range of the federal benchmark interest rate by 50 basis points, with interest rates ranging from 4.75% to 5%, the first rate cut since March 2020. In the past four years, the Federal Reserve has raised interest rates 11 times. The benchmark interest rate continued to increase from 0%-0.25% to 5.25%-5.5%. The market expects that there is still the possibility of interest rate cuts in the fourth quarter of this year and 2025, and this interest rate cut marks the beginning of a new round of interest rate cuts. Or affected by this, a shares and major commodities closed in red on that day, so what is the impact of the Fed's interest rate cut on the cement market? In the
short term, the most intuitive manifestation of the Fed's interest rate cut is to reduce the cost of borrowing and the rise of dollar-denominated asset prices. Since 2001, the Federal Reserve has started four cycles of interest rate reduction. In the first three cycles of interest rate reduction, the first and second cycles of cement market demand and price have risen synchronously, and the range is relatively large; in the third cycle, the cement demand and price have risen moderately. The author believes that the current round of interest rate cuts by the Federal Reserve has the following main impacts on the cement market.
Table 1: Previous interest rate cuts by the Federal Reserve and the performance
of the cement market since 2001 Source: Cement Big Data Research Institute
The positive impact
of the cement market (I) Easing expectations have boosted market confidence
this year. Despite the sustained recovery of China's economy, the problems of insufficient effective demand and overcapacity in some industries are prominent, and the foundation of economic recovery is not solid. In June 2024, the confidence index of economists recorded 93.7%, which was below 100% for five consecutive months, reflecting that the prospects for economic growth were not optimistic. After the Federal Reserve cut interest rates, the domestic monetary policy easing space will be opened, which will help boost economic confidence, including the cement industry, and enhance development beliefs.
Figure 1: Economists' Confidence Index Has Been Below 100%
for 5 Consecutive Months Data Source: Cement Big Data (https://data.ccement.com/)
(2) Moderate Recovery of Short-term Demand Since the beginning of this year, the long-term downward trend
has been difficult to change, and the downturn in cement demand has basically run through the first three quarters due to the continuous bottoming of real estate and insufficient capital construction. According to the big data of China Cement Network, up to now, the cement shipment rate is about 36%, and the demand recovery is less than 40%, which is far inferior to the same period. On the one hand, the interest rate cut by the Federal Reserve and the appreciation of the RMB exchange rate are conducive to alleviating the debt pressure of some real estate enterprises that issue more US dollar bonds and repairing their balance sheets; on the other hand, after the opening of monetary policy space, the market interest rate has dropped, liquidity has increased, the financial pressure of some infrastructure projects has been alleviated, and the short-term demand is expected to warm up. The difference is that in the first three rounds of interest rate reduction cycle, China's cement demand is in the rising period and high platform period, and is currently in the downward channel, and the demand decline is irreversible in the long run.
Figure 2: Cement shipment rate lower than same period (%)
Data source: Cement big data (https://data.ccement.com/)
(III) Price rebounded slightly
Coal accounts for the main part of cement production cost, and the trend of coal price has a greater impact on cement price. In the past two months, cement prices have continued to fall, and there has been no obvious upward trend so far. In addition to the weak demand in the off-season, the low coal price has led to weak cost support or another important factor. Despite the large coal output in China, imported coal, as a supplementary part, still occupies a certain weight. After the Federal Reserve cut interest rates, the international coal price denominated in US dollars has risen, which will increase the production cost of cement enterprises importing coal, and the cement price will be supported to a certain extent. In the short term, the cement price may rebound slightly.
Figure 3: The utilization rate of clinker production capacity is less than 50%
Data source: Cement Big Data (https://data.ccement.com/)
The author believes that in the long run, the core factor restricting the rise of cement prices is the serious overcapacity. At present, the real utilization rate of clinker production capacity has reached a new low level in recent years, and the problem of excess contradiction is extremely acute. Only by taking effective measures to resolutely reduce production capacity and solve the persistent illness, can cement price be guided to return to normal level.
