Doubts over ability of cartel to halt slump
Analysts have questioned whether a cartel of Chinese float glass manufacturers will succeed in halting a slide in prices that is crimping profits in the sector.
H-share Luoyang Glass Co is leading the alliance with 21 other glass-makers that together account for about 80 per cent of China's float glass.
The move follows a 30 per cent fall in prices in the first six months of the year.
An analyst at a European brokerage in Shanghai said the cartel, to come into effect next month, would halt the fall in prices and help settle them in the short term, but she said he doubted it would hold together in the long term or solve the underlying problems in the industry.
'Four years ago, China's major glass manufacturers fixed a price ceiling due to an oversupply in the market,' she said.
'But a year later, the prices collapsed,' she added.
The analyst said that co-operation might not be successful as the sector's fundamental problem of oversupply would not be tackled.
The sector, bruised by over-expansion, keen competition, weak demand and shrinking margins, is unlikely to pick up in the near future, she said.
'In the next few years, the sector will continue to be difficult.
'Capacity has been growing too much while demand hasn't yet picked up. More margin will be squeezed,' she said.
ING Barings Securities' senior analyst in Shanghai, Alex Conroy, said a number of sectors in China, particularly those in the light industries, were suffering from oversupply due to uncontrolled growth.
'There are just too many people wanting to get into these sectors,' Ms Conroy said.
The cartel, however, might not have a direct impact on B-share counters such as processed glass-maker China Southern Glass and Shanghai Yaohua Pilkington Glass, which made high-quality float-glass for the upper end of the market, analysts said.
The analyst with the European brokerage said: 'The state-owned enterprises are the second-grade float-glass manufacturers, which have a separate market from Pilkington.' Shenzhen-listed China Southern Glass operations manager Wang Zhiliang said the effects of the cartel on the company would be minimal, if any at all.
He said this was because China Southern Glass sourced float glass for processing from its subsidiary Guangdong Float Glass, which is not among the 22 glass-makers, at prices higher than the price ceiling set by the cartel.
He said the company might even benefit from the cartel if the price of processed glass rose because of the increase in raw material costs.
PPG of the United States has a stake in Guangdong Float Glass.