Broken wrists for survival Fuyao glass 9 float glass production lines 4 production discontinuation
The real estate and auto industries have been experiencing a prolonged downturn, which has had a ripple effect on upstream raw material suppliers. Building float glass and automotive glass producers are also struggling to survive. According to public data, 40 out of 186 float glass production lines in China are currently idle, signaling a deepening crisis in the sector.
Among listed companies, Fuyao Glass (600660.SH), a leading player in the domestic glass industry, has felt the brunt of this slowdown. In November 2008, the company halted two production lines, and by December, it had shut down two more in Hainan. To date, a total of nine production lines have been suspended, marking a significant operational shift for the company.
Analysts believe that the economic downturn will persist for some time, and the recovery in real estate demand often lags behind the broader economic cycle. As a result, Fuyao Glass may face challenges for the next two to three years. Analyst Yao Hongguang from Associated Securities told *The Financial Weekly* that the company's decision to halt operations was aimed at "protecting life" during these tough times.
Despite the shutdowns, Fuyao Glass continues to grapple with financial losses. On December 31 last year, the company announced the closure of two newly launched production lines in Hainan, which had only been in operation for over a year. This move is expected to cost the company between RMB 100 million and RMB 120 million. The official statement cited the need to adjust production based on current market conditions and future projections.
In November, just a few months prior, Fuyao Glass had invested in new production lines in Fuqing, Fujian, and Shuangliao, Jilin, both with melting capacities of 600 tons and 460 tons respectively. However, these facilities were soon placed on hold, contributing to a cumulative book loss of approximately RMB 350 million to RMB 4.2 billion. For reference, the company’s net profit in 2007 was only RMB 910 million.
Analyst Xu Minfeng from Changjiang Securities warned that the losses from these closures could significantly impact Fuyao Glass’s 2008 earnings, potentially resulting in a negative net profit for the fourth quarter and an annual decline of over 30%.
While the shutdowns have hurt short-term profits, they may be necessary to avoid further losses in the long run. Analyst Yao Hongguang emphasized that “one ton of building glass produced today results in a loss of one ton.†He stressed the importance of controlling capital expenditures amid uncertain market conditions.
Fuyao Glass Chairman Cao Dewang described the closures as a “life-saving†measure. Data shows that the price of float glass in Hainan has dropped to around RMB 1,800 per ton, while prices in South and East China have fallen to RMB 850 per ton. This means Hainan’s float glass is now priced 300–400 yuan lower than standard building glass. Before the shutdown, the two Hainan lines were losing over RMB 10 million per month.
Some analysts, like Luo Wei from China National Gold Corporation, view the closures positively. He argued that the recent production cuts and impairment provisions, although affecting 2008 results, will reduce operational pressure in the following year.
The drop in demand for building glass has been driven by a weak real estate market and a sluggish economy. From January to September 2008, major companies produced 256.1 million weight boxes of flat glass, up 5.71% year-on-year, but sales rates fell to 93.44%. Analyst Xu Minfeng attributed this to the cooling macroeconomic environment and reduced real estate activity.
Fuyao Glass acknowledged that the U.S. subprime mortgage crisis has impacted global markets, leading to a continued decline in demand for architectural float glass and worsening supply-demand imbalances.
Meanwhile, the automotive glass segment, which accounts for 70% of Fuyao Glass’s revenue, is also under pressure. Domestic auto sales growth slowed sharply in late 2008, with November seeing a 14.6% drop. Annual growth is expected to fall below 10%, the lowest in seven years. Export markets, once a key driver, are also struggling due to global economic conditions.
However, there is still hope for the automotive glass segment. Although overseas auto markets have declined, Fuyao Glass’s OEM export business saw strong growth in the second half of 2008. While domestic auto sales are down, the company can still maintain around 10% growth, aided by falling raw material costs such as heavy oil and soda ash.
Despite these positives, Fuyao Glass has decided not to resume production immediately. Cao Dewang stated that the company has made strategic adjustments to ensure long-term health. With the full impact of the financial crisis expected in 2009, the company is prioritizing stability over expansion.
Other industry players, like CSG (000012.SZ), have also taken similar steps, making provisions for impairment on their float glass lines. Investors remain concerned about when Fuyao Glass might resume operations, but the company has yet to provide a clear timeline.
When contacted, Chen Yaodan, director of Fuyao Glass, said that all decisions would be based on official announcements. Future earnings forecasts and potential resumption dates will be disclosed in the annual report.
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