After years of government coaxing, the reluctance to shake up the mainland's fragmented and inefficient cement industry may finally be coming to an end, thanks to the nation's accelerated environmental protection drive to rid the country of polluting factories. The national push for a clean and green environment has compelled the government to pinpoint the culprits - 5,000 small cement firms with polluting production facilities - and force them to shut or be gobbled up by bigger players. China Cement Association vice-secretary general Zhuang Chunlai estimates that only 30 of the 5,000 'unqualified' companies are eligible to remain by upgrading their technology and management skills. This means a mere 0.6 per cent of the small and medium-sized cement companies would eventually survive the market under Beijing's stricter directives, according to the association's figures. 'Overcapacity means too many cement producers are scattered throughout one region. The industry is not centralised, with a few big companies,' said Guo Jingbin, executive director of Anhui Conch Cement. Excess capacity has also hurt prices and made it difficult for producers to raise rates. Cement prices last year rose 7 per cent to about 600 yuan (HK$3,897) per tonne, at least 50 per cent below international levels. The growth rate was far below other raw materials, such as steel, which rose 20 to 25 per cent year on year. Mr Zhuang further stressed that financial ability and technology are the keys to sustain business in this highly competitive industry. According to the cement association, about 70 small to medium-sized cement companies have turned around their businesses between 2002 and the end of last year. During the same period, 3,000 of the original 8,000 were forced to close for damaging the environment. 'Consolidation is an ongoing process,' said Tom Clough, an executive of Switzerland's Holcim, who oversees its East Asian business. 'And that process is at high speed in China.' Not all large cement producers agree. Anhui Conch, the mainland's largest local cement maker, said the timing was not right for making acquisitions. 'Consolidation doesn't necessarily mean acquisition,' said Mr Guo. He said local governments should drive consolidation by ordering polluting producers to close shop. 'Companies will not buy out backward production lines,' he added. Citic Securities analyst Pan Jianping said mainland cement companies had now reached the third round of consolidation after Beijing curbed overcapacity by tightening credits in 2004. 'State-owned companies, such as China National Building Materials and Sinoma, have recently taken the chance to finish listing [in the H share market], as a way to carry out internal restructuring and mergers,' he said. The first round in the early 1990s was marked by the restructuring and A-share listing of Huaxin Cement, one of the mainland's largest producers, which raised funds to strengthen its cash flow and bring in better technology. In February this year, Holcim brought into Huaxin by taking a 40 per cent stake. After Huaxin's listing, others like Anhui Conch also listed in the H- and A-share markets in 1997 and 2002, seen as the second round. In addition to tapping the capital markets, consolidation came through technology upgrades which government officials encouraged through mergers and acquisitions. In the past decade, many of the cement companies employed an older and cheaper technology: heating limestone and coal in a simple big burner to produce cement, a process that releases sulphur and carbon dioxide into the air. The central government, however, has encouraged a cleaner way - the modern dry process that only releases carbon dioxide. In this process, limestone and other materials, such as sand, iron ore and clay, are heated in a rotary kiln at temperatures as high as 1,450 degrees Celsius to produce black and nodular clinker, the precursor of cement. To push industry consolidation forward, Mr Guo, a 20-year industry veteran, advocated that non-environmentally friendly cement makers be turned into clinker powder producers. 'Before the cement is produced, we have to grind the precursor, clinker, into powder, and those small companies can do that,' Mr Guo explained. 'Cement producers will then buy the powder from the small companies. 'The process will not cause environmental problems... it will not lead to a radical and complete shutdown of the small cement producers.' Mr Guo said big cement companies would like to outsource the manufacture of clinker powder to save on operational costs. Currently, 45 per cent of cement manufactured on the mainland is still produced through the polluting or the so-called 'backward' process, according to official figures. The remaining 55 per cent is produced using the modern dry process. Jia Yinsong, an official of the National Development and Reform Commission, said China shut backward production facilities with a total capacity of 87 million tonnes of cement last year. Another NDRC official Lu Guixin pledged that the government would accelerate its crackdown on polluting producers in the coming years. 'The 11th Five-Year Plan [2006-2010] aims to eliminate 250 million tonnes of backward production,' he said. 'The industry should be thoroughly tidied up with more subsidies from the government.' That meant the government should financially encourage big companies to merge with the smaller ones, he said. The mainland last year produced 1.36 billion tonnes of cement, up 13.48 per cent from 2006. The NDRC has forecast an average of 9.9 per cent year-on-year growth in cement production under the 11th five-year development plan. With strong demand for cement sustained by infrastructure development, the State-owned Assets Supervision and Administration Commission last year issued a directive for important industries, including cement making, to be led by 12 pillar companies. In tandem, the NDRC set a target for the industry: 30 per cent of the country's cement should be produced by the top 12 companies by 2010, a 23 per cent increase from last year. By capacity, the top 12 pillar companies suggested by the government already exist, Huaxin's chief executive Li Yeqing said. But he believed these top players still have room to improve their performance and profitability. '[Improving] technology is too narrow a concept,' he said. 'The big companies now need production management, quality control, corporate social responsibility, financing and marketing [skills].' For younger managers like Mr Li, who supports co-operation with global players, 'national brand' means 'modern ideas' and 'transformation of technology to performance and quality of products'. To better facilitate industry consolidation, industry players have also urged the central government to ban local officials from approving small-scale polluting cement producers. Mr Guo of Anhui Conch said every province received a central government directive annually on the number of polluting cement producers that should be eliminated. Provinces are expected to meet the target while separately carrying out consolidation. But any effort would be futile as there are no regulations at the central or local government level governing approval of new cement plants. Companies can easily obtain approvals from local officials to set up shop. 'Small-scale companies can easily get the nod at the local level to start up business, which contradicts Beijing's current policy initiative,' said a staff of Paris-based Lafarge, the world's largest cement producer, in an industry conference. 'It's the source of overcapacity.'