Building Materials Breakdown: Comprehensive Analysis of Investment Logic for Three Core Sub-Sectors

Ask AI · How can cement carbon trading policies optimize industry competition?

How should the story of building materials be developed? Here, I’ll focus on three key sub-sectors within building materials: cement, consumer building materials, and glass.

These three sectors, when viewed from the overall construction materials industry, account for approximately 45%, 34-35%, and just over 10%, respectively. Together, they essentially represent the operational status of the entire building materials industry. All three segments will benefit from policies driven by real estate, urban renewal, and the positive expectations created by the “anti-involution” movement. Additionally, because the market structures and production regions differ across cement, consumer building materials, and glass, even under the same policy benefits—such as real estate policies, urban renewal, and anti-involution—they each have their own unique catalytic and future development logic, with distinct stories to tell.

(1) Cement: Key Varieties in the “Anti-Involution” Movement, Focus on Policy Implementation

First, let’s discuss the cement sector. Cement accounts for a very high proportion within our entire building materials segment—about 40-45%. It’s also a product everyone is very familiar with. You’ve probably seen cement at construction sites—two piles of raw material, mixed with water, then used to plaster walls, for finishing, or to pave roads. So, most people are quite familiar with this product. But I also want to share some characteristics of cement from an operational and enterprise perspective.

Cement roughly has four prominent features. First, it is highly homogeneous. Regardless of which company produces it, where it’s produced, or even which country, cement is generally the same. Using cement from different suppliers doesn’t make much difference—there’s little to no premium or differentiation.

Second, it has a short shelf life and is difficult to store. Once applied, cement dries relatively quickly. This short shelf life means there’s almost no inventory held by producers.

Third, the transportation radius for cement is small because it must be used shortly after production—typically within about twenty days—making long-distance transportation impractical. On the other hand, transportation costs are high, which makes cement a regional product. Usually, cement is purchased locally—within the same province—rather than across provinces or long distances. From this perspective, analyzing cement demand and supply at the national level can mask regional imbalances, so regional differentiation must also be considered.

Fourth, the startup and shutdown costs are relatively low. If producing one ton of cement results in a loss, companies can choose to halt production. While there are costs involved—since clinker, a key raw material, requires high-temperature calcination, and restarting production incurs costs—the overall costs are relatively low compared to steel or glass, where shutdowns can cost tens of millions or even hundreds of millions. This low cost of adjusting production allows for operational collaboration among companies. For example, if demand is weak, companies with excess capacity can coordinate—such as in North China or South China—to produce fewer days per month, stagger production, and control overall output. This way, cement supply and demand can be balanced over the year, generally avoiding industry-wide losses.

Given this, the overall supply and demand situation for cement remains manageable. Its small transportation radius and regional nature mean it can be shut down when prices are low. But remember, the first feature of cement is its high homogeneity—products are interchangeable. This makes cement highly prone to internal competition, or “involution,” mainly driven by price competition. Because the product is homogeneous, buyers will choose the cheapest option, intensifying price wars. Also, since cement’s transportation radius is short, it’s a domestic demand-driven bulk commodity, with little to no export. Excess capacity becomes a significant pressure.

Demand for cement mainly comes from three areas: real estate, infrastructure, and rural use. Real estate accounts for about 30%, infrastructure about 50%, and rural use roughly 20%. Capacity utilization rates are quite low—Foshan Securities estimates that in 2024-2025, clinker capacity utilization will be around 50%. This indicates a serious oversupply.

Therefore, cement is a key focus in our “anti-involution” strategy. On one hand, its production can be easily staggered and coordinated through policy measures. On the other hand, many private enterprises want to profit, and since halting and restarting production is relatively easy, there’s a risk of a “wait-and-see” attitude, leading to price volatility. Past years have seen prices fluctuate, with price hikes often not fully effective.

Recently, some cement companies have begun actively expanding overseas. Exporting is different from simply selling domestically; it involves building factories abroad and selling directly in foreign markets. Some companies have been successful, with profits becoming quite substantial since mid-last year. This overseas expansion is a bright spot in cement demand.

Another demand-side opportunity is Africa, where infrastructure development is accelerating, creating strong demand for cement. Local production levels and technology are far behind China’s, so Chinese cement companies building factories abroad can sell at favorable prices, with some achieving notable returns.

In the short term, domestic demand for cement isn’t showing much growth. The real opportunity lies in supply-side reforms—specifically, capacity reduction driven by policies like excess capacity management and carbon trading. Let’s discuss these separately.

First, excess capacity management. Historically, cement capacity has been built in small, incremental projects—“small approvals, large construction”—leading to actual capacity exceeding approved capacity by over 20%. To address this, inspections focus on actual versus approved capacity. The industry is now moving toward unifying actual and approved capacities. Last year, a policy was issued requiring cement companies to develop capacity replacement plans before 2025 for any capacity exceeding approved levels. Companies can either decommission excess capacity or buy capacity quotas from others at a ratio of about 1.5 to 2:1, effectively reducing overall capacity. It’s estimated that by 2025, about 160 million tons of capacity will be phased out, with total capacity reductions reaching around 200 million tons. This will improve utilization rates from roughly 50% to about 60-65%.

While 65% utilization is still below the ideal 80%, regional differences matter—areas like the Yangtze River Delta already have higher utilization, and further improvements could support prices during peak seasons. Monitoring policy developments on capacity verification and enforcement is crucial, as recent policy surprises in steel suggest.

Second, carbon trading. Cement production emits significant CO₂—possibly accounting for 80% of the building materials sector’s emissions. The industry’s carbon allowances are linked to 2025 targets. Companies with low carbon intensity (emissions per unit of cement) will be rewarded, while those with high intensity will face penalties. Companies exceeding a baseline emission intensity by 20% are considered “poor performers” and will receive fewer allowances; those below this threshold will get more. Companies can buy allowances from better performers, creating a market-based incentive to reduce emissions. This policy aims to push companies to improve efficiency, raise costs for high-emission firms, and accelerate industry consolidation. Leading companies with cost advantages will benefit, while weaker firms face higher costs, speeding up market-driven capacity reduction.

In summary, cement features—product homogeneity, short shelf life, small transport radius, low startup/shutdown costs—drive industry oversupply and intense price competition, which policies aim to address through capacity management and carbon trading. Demand remains modest domestically, but overseas opportunities and supply-side reforms are promising. These policies are expected to accelerate by 2026.

(2) Consumer Building Materials: Supply-side Clearing and Price Rise Logic

Next, let’s discuss consumer building materials. This segment is characterized by strong growth potential. Although it may sound unfamiliar, it mainly includes renovation-related materials like waterproofing, coatings, tiles, and piping. Waterproofing, in particular, accounts for over 10% of the building materials sector.

In recent years, the supply of consumer building materials has undergone significant clearing, and industry leaders have gained market share. Notably, waterproofing stocks have seen substantial gains this year. Why? Since late 2021, supply has shrunk by about 38%, a large reduction, and leading companies have begun raising prices.

The chemical sector’s strong performance last year and into this year supports this trend. Many upstream raw materials for consumer building materials are chemical products, so price increases in chemicals have driven higher prices for products like waterproofing and gypsum boards. Leading companies have issued multiple price increase notices since 2025, reinforcing the investment logic.

Furthermore, the growth of consumer building materials is driven by increased awareness of product functionality—people now pay more attention to pollution levels, waterproofing quality, and aesthetic features like paint color and texture. The younger generation, in particular, is more conscious of these factors. Additionally, the development of new markets such as rural and “beautiful countryside” projects is expanding demand.

All these factors—product upgrades, market penetration, and consumer awareness—are helping consumer building materials carve out their own independent growth trajectory. While still linked to real estate and infrastructure demand, this segment has shown strong recent performance and clear future potential. Investors should keep an eye on ongoing price hikes and industry consolidation.

(3) Glass: High Fixed Costs Accelerate Capacity Reduction

Finally, let’s look at glass. Unlike cement, glass is quite different. While it’s also related to real estate, it’s not as regionally constrained, and its characteristics are quite distinct.

Glass can hold inventory, and its transportation radius can be quite long. However, the costs of starting and stopping glass production are very high—because manufacturing involves melting raw materials into liquid and shaping them. Shutting down a glass furnace causes the liquid to cool and solidify, clogging pipelines. Restarting is costly—ranging from tens of millions to over a hundred million yuan. As a result, companies are reluctant to shut down unless absolutely necessary, and even then, reactivation is difficult.

This leads to industry-wide losses, especially when demand drops sharply, such as during winter when energy costs are high. Last winter, glass industry losses accelerated, and many plants entered cold shutdowns. The long-term oversupply and high shutdown costs mean that by 2026, at least in the first half, capacity reduction will accelerate.

For float glass—used mainly in construction and real estate—about 80% is tied to real estate development. Photovoltaic glass, which is more aligned with the “anti-involution” logic, can see new capacity added, unlike float glass. During 2020-2023, rapid growth in solar capacity led to oversupply and low utilization rates. Future trends depend on the development of the photovoltaic industry.

Currently, the sector’s valuation remains relatively low, with potential for a rebound similar to the 2025 chemical sector rally. The building materials ETF (159745), covering cement, consumer building materials, and glass, is well-positioned to benefit from supply reductions, real estate policies, urban renewal, and price increases. It’s an efficient way for ordinary investors to gain exposure to the sector.

Risk Warnings:

Investors should understand the differences between regular fixed-amount investment plans and lump-sum savings methods. Regular investment encourages long-term, averaged costs but does not eliminate inherent market risks or guarantee returns. It’s not a substitute for savings.

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The short-term performance of sectors or funds shown in this article is for reference only and does not guarantee future performance.

Any mention of individual stocks is for informational purposes only and does not constitute a stock recommendation or a performance forecast.

These views are for reference only and do not constitute investment advice or promises. Before purchasing related funds, investors should review suitability regulations, conduct risk assessments, and choose products aligned with their risk tolerance. All investments carry risks; please invest cautiously.

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