A spikey situation

The prices of building materials such as cement and glass have been soaring in recent months, ramping up pressure on downstream producers. Some attribute the price hikes to a nationwide government-led crackdown on pollution, which has prompted upstream enterprises to suspend output or adopt the method of peak shifting production, leading to reduced market supply. But other industry insiders have slammed those upstream producers for "artificially manipulating" prices for their own gains, while also raising concerns about potential monopoly.

China's cement prices, along with prices of other building materials, have been jumping in recent months. While upstream suppliers have justified the price gains by taking note of reduced stockpile following a national environmental protection campaign, downstream producers have accused their suppliers of artificially manipulating prices for their own gain.

As such, the upstream and downstream cement producers in Wuhan, capital of Central China's Hubei Province, have been bargaining with each other for months.

Since September, cement prices in Wuhan have soared by 30 percent, or 150 yuan ($22.88), to 220 yuan a ton, according to a report by financial news publication Caixin Weekly.

In response, dozens of concrete component factories publicly declared earlier in December that they had "voluntarily halted production in an orderly manner and ceased the purchasing of cement," the report noted.

All of the producers involved in the cement industry claim that their decisions are motivated by the government's agenda to clean polluted skies and protect the environment. But industry insiders have pointed out that each side has their own motivations and that those moves are just an aim to make the other side compromise.

Some Chinese cement producers may have taken advantage of regulators' environmental crackdown by "artificially pushing up prices," the report noted.

Follow-up measures taken by downstream cement producers, however, are expected to curb such ongoing price spikes.

"If no one purchases [cement], its price would fall in the near future," an executive from a concrete component factory based in Wuhan was quoted as saying in the report.

These frictions between the upstream and downstream sectors provide just a glimpse of the fierce price war raging in the building material industry amid a government campaign to reduce air pollution in 28 cities across northern and eastern China.

In 2017, China's largest-ever environmental protection initiative stormed in, prompting factories in the cement, steel, paper and glass sectors to suspend or cut output or peak shifting during the winter season. The initiative has led to a shortage in supply in recent months, pushing up prices as a result.

This year, the largest-ever peak shifting of production also further shrank supplies. The Caixin report said that the peak shifting scheme has been carried out in over 20 provinces across the country and is not limited to the winter heating season.

Price spikes

On October 6, the Wuhan Concrete Association, an industry body, published an urgent report saying that "some important construction projects in the province have been halted due to cement price spikes."

The chairman of the association, who asked to remain anonymous, told Caixin that as an industry rule, project builders generally estimate material cost based on the market price at the beginning of a month.

But since September, cement price increases have been "so frequent that concrete component producers have not even had enough time to negotiate with project developers about adjusting costs," he said.

On Tuesday, China's Cement Price Index rose to 149.39, the highest level so far this year and up more than 46.85 points from the same day last year, according to the China Cement Research Institute.

In other construction material sectors, price gains have also been common. For example, flat glass was trading at 1,636 yuan per ton in early December, a 10 percent increase from the same period last year.

Environmental protection

Some industry players attribute the price surges to the nationwide environmental protection campaign.

Kong Xiangzhong, vice president of the China Cement Association (CCA), said in an article on CCA's website published in early December that the environmental inspection led by central authorities has ramped up pressure on local governments.

"During the inspection, almost all related industries [that contribute to pollution] were ordered by local regulators to cease production so that the pollution index could be met… As stocks plummeted, prices naturally skyrocketed," Kong noted.

Since 2015, China has deployed four environmental inspection teams to investigate factories across the country. The investigation results were later concluded to act as important indicators for local governments' performance assessments.

In the first round of inspection, over 2,000 local officials were held accountable, according to the Ministry of Environmental Protection (MEP). In the second and third rounds, over 3,000 and 4,600 officials were held accountable, respectively. And in the ongoing fourth round, 5,700 local regulators have been held responsible so far.

Local authorities have been feeling the bite. Some have even adopted a "one-size-fits-all" measure when shutting down factories and resumed production after inspection results were released, according to a low-ranking local official in East China's Anhui Province.

"Such measure is in fact not limiting production for environmental purposes," he stressed, "Only shutting down enterprises that fail to meet certain criteria related to pollution emissions can be seen as environmental protection efforts. And resuming production requires technological upgrading."

Rate manipulation

However, Cui Shuhong, director of MEP's environmental impact assessment department, claimed that the nation's crackdown on winter air pollution is not the main cause behind the recent price increases.

"The campaign has not exerted a negative impact on the quality of major industrial products. In some cases, companies merely mark up prices in the name of environmental protection, causing market disorder," Cui said at a press conference on September 27.

Cui's opinion is echoed by the chairman of the Wuhan Concrete Association. "[The ongoing cement price spikes] are abnormal," he stressed, suggesting they have been upped manipulatively.

So far, many upstream companies in the involved sectors, which used to suffer from overcapacity, have reaped the benefits of ballooning profits thanks to this year's price increases. In Southwest China's Chongqing, the profits in the cement industry have risen 96.2 percent year-on-year in the first half of 2017, the Caixin report said.

China's cement sector is dominated by 10 suppliers, with those leading players all having purchased shares in each other, making them a community with shared interests and creating room for collective price mark-ups.

Simultaneous price increases in the Pearl River Delta have provided further evidence of disingenuous hikes. On December 14, a number of cement producers issued notices to inform clients that cement prices would be increased by 20 yuan per ton from December 15. The written expressions on the notices were all the same.

Such price surges in recent months have sparked widespread monopoly concerns among downstream producers, with some urging governments to launch anti-monopoly probes against upstream suppliers.

Under China's current anti-monopoly law, "limiting production or sales of commodities for public interests such as energy saving, environmental protection and disaster rescue" are not prohibited.

However, even if the law exempts the upstream companies from punishment, the suspected joint price mark-ups are still illegal, said Liu Xu, a research fellow at the Intellectual Property and Competition Law Research Center at Tongji University in Shanghai.

"Yet the investigation into those cases faces obstacles," Liu said, pointing to a shortage of staff and a lack of efficient penalties for State-owned enterprises.