With the UK economy no longer the concern it has been in recent years, the focus of interest in the UK cement industry in 2014 and 2015 has been on the repercussions of the LafargeHolcim tie-up on the structure of industry, as well as the steadily increasing level of long-deferred investment. Here Edwin Trout of the Cement Industry Suppliers' Forum (CISF) looks at these and other aspects, including company performance, investment and fuels.
The time period covered in this article started with the announcement of a proposed 'merger of equals' between Holcim of Switzerland and Lafarge of France, with a view to the new company (re-)gaining the top spot in the global cement rankings. While the full details of the deal lie, on the face of it, outside the scope of this review, both companies have substantial interests in the UK and their combination and the asset disposals required as a result will have a significant impact on the UK cement industry.
Shareholders and potential investors largely welcomed the prospect of a deal. Blackstone, Cinven, Apollo, Carlyle, TPG Capital and others were among those reported to be considering making an offer. It was also clear that disposal of some assets would be a necessary condition of the approval of the merger. The UK was quickly identified as one such territory.
Ironically, therefore, less than two years after the merger of Tarmac and Lafarge UK and only months after 'new' Lafarge Tarmac's acquisition of Tarmac Building Products, the combined business was put up for sale in July 2014, with the possible exception of a single cement plant.
Lafarge's asking price was Euro2.2bn. Anglo American, the other joint venture partner, had been looking to get out of building materials for several years and indicated its willingness to ease the sale on the condition that it could realise at least Euro1.25bn from its half of the business. In pursuance of this Anglo American signed a binding agreement in August 2014 for the sale of its 50% stake to Lafarge SA, for a minimum value of Euro1.25bn in cash.
In September 2014 Ireland's CRH announced the sale of its clay brick division for Euro830m amid reports that it was considering making an offer for some of the assets Holcim and Lafarge would have to shed in order to gain regulatory approval. Likewise Votorantim of Brazil was understood to be planning a trade purchase. HeidelbergCement and Cemex ruled themselves out.
In October 2014 the single cement works likely to be excluded from the future sale of Lafarge Tarmac was identified as Cauldon. This works would then become part of the future LafargeHolcim business in the UK, currently trading as Aggregate Industries, though no change was anticipated before completion of the merger in 2015. This announcement came as the two parties formally notified the European Commission (EC) of the proposed merger, and with it revised the list of intended disposals. Holcim and
Cemex's asset swap in Germany, Spain and the Czech Republic was also approved. EC approval for the LafargeHolcim merger followed swiftly on 15 December 2014 and with it came the final list of disposals. It largely reiterated the earlier list, including for the UK. 'Lafarge Tarmac assets with the exception of its Cauldon plant and certain associated assets,' to which the Cookstown plant in Northern Ireland was added in later statements.
Having sold its stake in the Turkish producer Denizli Çimento for Euro320m at the year-end, and entered into discussion with the American private equity firm, KKR, to buy Lafarge Tarmac, CRH then revealed a more ambitious bid for Euro6.7bn-worth of the assets being auctioned off by Holcim and Lafarge. As well as the UK's Lafarge Tarmac, CRH would expand its portfolio with production lines in Brazil, Canada, the Philippines and several European countries. Lafarge Tarmac confirmed the deal on 2 February 2015.
However, financial results for 2014 revealed rather different fortunes at each of the merging parties. In March 2015 Holcim and Lafarge were in negotiations to vary the terms of their agreement. Holcim shareholders asked for a change in the share structure of the deal, away from a 1:1 ratio. Indeed, the Holcim board then formally rejected the terms and proposed to negotiate the exchange rate in line with recent valuations and to review aspects of governance. Lafarge acquiesced, restating its commitment to the merger in principle. On 20 March 2015 a new exchange ratio of nine Holcim shares for 10 Lafarge shares was agreed. On the same day a meeting of shareholders backed the CRH bid for the divested assets.
Hanson disposals
HeidelbergCement has also disposed of assets in the UK in the past year. In June 2014 the company announced it planned to sell its Hanson Building Products division in order to concentrate on the core business of cement, aggregates and ready-mixed concrete. A value of Euro1.24-1.67bn was placed on the assets that might be included and the sale was scheduled to start in September 2014. In December 2014 an agreement was reached with an American affiliate of Lone Star funds, a private equity firm, to sell the business for Euro1.24bn. The sale was completed in March 2015 and the income used to pay down debt. A further sale is expected, part of Hanson's Regen ground granulated blast furnace slag (GGBS) processing capacity, in line with a UK Competition Commission ruling announced in 2014.
Investment
While a late 2014 survey by the UK manufacturers' trade body EEF reported that more than 90% of businesses had invested in plant and machinery over the past two years, half of the respondents to the survey claimed to have no plans to scale up current levels of spending during the next two years. However, while investment by the cement industry has been very limited since the completion of the Cemex grinding mill at Tilbury in 2009, there have been positive signs of improvement during the past year, outlined below.
Aberthaw, Wales: Lafarge Tarmac undertook a Euro2.8m programme of upgrades at Aberthaw during the year to April 2014. Euro1m was spent on a new packaging plant to facilitate an increase in productivity. Other projects have increased the amount of tyres and municipal waste used as fuels.
Dunbar, Scotland: Recent investment by Lafarge Tarmac amounted to Euro1.5m in refurbishing the kiln and overhauling the dust abatement system.
Ketton, Rutland: In the early months of 2014 a solar power farm was installed in a disused quarry at Hanson Cement's Ketton works by Lark Energy, working in partnership with Armstrong Energy. The 38,544 units are expected to generate enough electricity to cover around 10% of the cement plant's annual consumption. It was the first of what the company hoped will be many such projects, and has also prompted interest from other cement producers.
Padeswood, Wales: In July 2014 Hanson submitted plans to expand its packaging facilities at Padeswood, just two years after the plant faced the threat of closure. Work is now underway on a new cement line with additional equipment to increase output. The company is applying for planning permission to build a solid recovered fuel (SRF) facility and is considering re-opening a rail link. Its skeleton staff of 50 is expected to double to pre-recession levels of around 100.
Purfleet, Essex: The fans in mill three at Hanson's Regen grinding plant in Purfleet were upgraded over the winter with integrated drive systems from Siemens, with energy savings of 36%. The financial savings are likely to be in excess of Euro217,00/yr, more than originally anticipated. A return on investment is expected within two years.
Rugby, Warwickshire: The go-ahead for a solid fuel recycling plant at Malpass Farm to supply
Cemex's Rugby plant was granted by the Environment Agency in June 2014. The Climafuel plant was built during the second half of the year for operation by waste resources firm SITA UK. It was completed in February 2015, when the commissioning process for producing Climafuel commenced. (Turn to page 16 for an interview with SITA UK staff about the site).
South Ferriby, Lincolnshire: Six months after the devastating floods at South Ferriby, Cemex UK reported 'good progress' in its programme of repairs. Partial production had started in April 2014, though full production was not expected until later in the year. Efforts in June 2014 were directed to the kiln system and the two raw and coal mills. The repair bill was rumoured to have already reached Euro14m.
Then in December 2014 Cemex was able to report that one of the two kilns had been commissioned mid-month and the site was at last producing clinker. A year-long effort by 150 employees at the plant and over 400 contractors had enabled the company to not only repair the damage, but to upgrade production facilities and prepare the plant for future challenges.
Hope, Derbyshire: Hope Construction Materials has invested in a considerable programme of work at the Hope Works, the most recent tranche amounting to Euro19m. Saxlund International Ltd was commissioned to construct an alternative fuel handling system for the storage, transportation, weighing and injection of solid waste-derived fuel. The contract's scope extended to the design, manufacture and delivery of a push-floor storage system, reclaim conveyor, process tower with drum magnet, star screen and feed into the weighing and pneumatic injection system to the main burner on both kilns.
Under a separate contract, FLSmidth installed its new 'ProcessExpert' control system for process optimisation. At the start of 2015 work commenced to overhaul the main stack, with a temporary chimney now under construction, along with a new clinker storage facility, designed for a capacity of 20,000t.
Other areas of expenditure
Fuels: After so many new sources of alternative fuel were introduced in the 2000s there has been a comparative lull in the pace of innovation in recent years, though investment in handling equipment and processes to optimise substitution rates continues apace.
The most obvious development of the past few months has been the construction of SITA UK's new plant at Malpass Farm, Rugby, which, with its existing sister plant at Landor Street, Birmingham, will generate up to 250,000t/yr of Climafuel SRF for Cemex.
Meanwhile, Hanson is applying for planning permission to build a SRF facility at Padeswood. In south Wales, Lafarge Tarmac's operation at Aberthaw is now successfully substituting more than 30% of its fuel requirements with tyres and municipal waste, a challenge soon to be attempted at Cookstown Works in Northern Ireland, where coal currently still accounts for 95% of thermal requirement. Lafarge Tarmac has recently been allowed to use waste-derived fuels at the plant. The new agreement will see 35% of fuel replaced with waste from renewable sources.
Mobile plant: At the beginning of 2015 Lafarge Tarmac awarded Babcock International Group a five-year contract worth Euro57m, with the option of a five-year extension, to provide a fleet management service for heavy mobile plant. The agreement covers more than 400 assets located throughout 189 sites and is in addition to the existing fleet management contract with Babcock that has been in operation since 2011.
In a similar development Cemex has signed a Euro15m contract with Finning Managed Solutions for the management of quarry equipment at Dove Holes, near Buxton. The eight-year deal commits Finning to work with Cemex to enhance fleet efficiency, with Euro2m of fuel cost savings expected, a 15% increase in production and 10% reduction in machine operating hours.
Company performance
According to HeidelbergCement, 2014 opened with reports of double-digit growth, buoyant sales volumes and continuous improvement in margins. The workforce was expanding in line with rising demand, particularly in the UK and Germany. Recovery in these two mature markets was again singled out for volume growth in all business lines during the second quarter. Growth continued in the third quarter and at the end of nine months, earnings before interest, tax, depreciation and amortisation (EBITDA) were up by 5.7%. Cement and clinker volumes were up by 4.3% to 16.3Mt in north and west Europe, attributed to high demand in the UK and the Baltic states. Cement volumes at the year-end were said to have been boosted by growth in the UK and North America.
Reports from Cemex were less geographically specific, noting that while global turnover was up by 3.2% and EBITDA was up by 3.7%, it was lower in northern Europe, rising by 1% to Euro3.6bn. However 2014 did open with a statement that in the UK cement deliveries were growing by 2% and prices were growing by 1%.
The overseas parents of cement importers Premier and Aggregate Industries experienced varying fortunes. Although Holcim suffered a 4.4% reduction in operating profit globally, EBITDA increased in part due to a strong UK performance, among others. For CRH the improving trend of late 2013 continued into 2014, with sales up as much as 10% in European markets. CRH reported a 4% increase in global revenue in the middle of the year but a 7% increase in Europe.
Economic indicators
Production: The above financial results reflect increases in the turnover of materials and material prices. In the second quarter of 2014 manufacturers enjoyed their strongest sales performance since 2008.
There was one shortfall, however, and Cemex was a leading voice in raising concerns during the summer of 2014 about the shortages of supplementary cementitious materials that were being experienced by concrete producers. The output of fly ash had dwindled in response to conditions in the power generation sector and the consequent increase in demand for ground granulated blast furnace slag created a squeeze in supply. The Mineral Products Association (MPA) reported that all of the Association's members were 'reporting a significant shortage of fly ash.' The UK Quality Ash Association has since announced the launch of an extensive research programme into the recovery and use of stockpiled fly ash, conducted in partnership with the Concrete Technology Unit at the University of Dundee in Scotland.
Prices: While official UK cement price infomation is now restricted, market analyses have been unanimous in noting a general increase in materials prices. For example, in August 2014, 95% of building contractors reported an increase in material costs over the past year, according to the CPA Construction Trade Survey. The EC Harris Contractor Input Cost Index traced a 4.5% year-on-year increase in October 2014 compared to October 2013 and the official Output Price Index for New Construction reported a 6% price increase for all construction in the second quarter of 2014.
Construction market: All UK regions recorded growth in 2014, which opened with a fourth consecutive quarter of growth for the first time in six years. This set a pace for the rest of the year that the industry was not, in the event, able to support. Activity eased off in the autumn and winter, though after seven consecutive quarters it is still growing and remains at historically very satisfactory levels.
In May 2014 the CPA/BarbourABI Construction Index indicated a 5% rise in activity year-on-year, while the Office of National Statistics (ONS) announced that construction output in June 2014 was up by 5.3%. The ONS also suggested that house building was at its highest level since 2010. However, ONS figures for output in December 2014 suggested the market had reached a plateau at the end of the year.
The CPA forecasts 10% growth in construction over the two years to August 2016 and revised this upwards in its autumn forecast to 23% by the end of 2018. This figure encompassed a broad range of market segments: housing, private commercial, roads and energy infrastructure. It was amended again in February 2015, to 18% over the next three years and exceeding its pre-recession peak within 18 months. Similarly, Leading Edge expects total construction output in UK to grow by 4.2% in 2015, though slowing to 3.7% in 2016.
Transport and logistics
Driver Certificate of Competence: The cement industry was one of many affected by the Large Goods Vehicle Driver Certificate of Competence requirement that came into force on 10 September 2014. Truck drivers without the certificate faced losing their jobs, even if they held a full Large Goods Vehicle licence. The Freight Transport Association reports that 20,000 drivers had quit in the two months to 10 November 2014, adding to a pre-existing 60,000 shortage, with another 45,000 expected to retire before the end of 2016.
Telematics: Continuous care in optimising fleet management is of greater importance than ever before. Hope Construction Materials, for instance, is in the process of introducing TomTom Telematics technology to its 400-strong fleet. Installation of the integrated Webfleet system in cement tankers commenced at the end of 2014 and was extended to related vehicles in 2015. The entire fleet was to be connected in early 2015. Hope Construction Materials was among those companies expanding its fleet, with the addition of 36 new Mercedes-Benz tractor units for cement mixers.
Health and safety
Awards: Lafarge Tarmac, Hanson, Cemex and Hope Construction Materials all secured category wins at the MPA's Health and Safety Awards in November, Lafarge Tarmac winning in four categories. Further success came to Cemex UK when the Royal Society for the Prevention of Accidents (RoSPA) recognised the company's achievements with 13 successes at the Occupational Health and Safety Awards in June 2014. It also won the 'Safety in Operation' category at the Motor Transport Awards in July 2014, in recognition of its 10-year programme to enhance cyclist safety.
Safer Lorries Scheme: Concern for the safety of road users, and cyclists in particular, was brought sharply to public notice in early 2014 by a series of highly publicised deaths in London. Construction vehicles were singled out for opprobrium by the press. The London authorities responded and began consultation on a proposed Safer Lorries Scheme on 1 August 2014. The scheme will ban heavy goods vehicles that are not fitted with specified safety equipment to protect cyclists and pedestrians from entering London after 31 August 2015.
Accidents: Sadly, despite considerable effort by the industry to prevent them, accidents have happened. In early May 2014 a German contractor died in an incident at the Cemex plant in South Ferriby when carrying out repairs due to the earlier flood damage. In January 2015 the Cypriot-registered Cemfjord was en route from Aalborg, Denmark to Runcorn with a cargo of cement when it foundered in the Pentland Firth off the north coast of Scotland. The crew was reported missing, presumed dead.
Sustainability
Reporting: Hanson UK's latest Performance and Sustainability Report, published in September 2014, reflected on five themes: people, systems, carbon, water and biodiversity, waste and raw materials, setting out the company's 2020 targets for each.
A similar review on behalf of the entire industry was published by MPA Cement in December 2014. It pointed to the challenges faced by the industry in remaining both competitive and sustainable. The report identified UK-specific carbon costs being applied to the sector as a major burden and a potential threat to the future of the industry.
Lafarge Tarmac signed up to the Infrastructure Carbon Review at a conference held by the Green Construction Board on 27 October 2014, and supported the launch of a new infrastructures sustainability resource by the Supply Chain Sustainability School, a collaborative initative aiming to develop greater competence across construction supply chains.
In October 2014 Hanson's parent company, HeidelbergCement, was named 'best improver' among 350 businesses in the energy and materials sector by the Carbon Disclosure Project and now ranks in the top five of its type.
Policy: A group of experts looked at how to ensure a steady and secure supply of minerals to support the UK economy for the next 35 years and published a report in October 204 entitled Future Minerals Scenarios for the UK. The group's findings and recommendations for developing a shared vision for the sector was reported at the CBI's Living with Minerals conference on 17 November 2014. The MPA welcomed government proposals for a domestic extractives plan and an Extractives Minister at the Department for Business, Innovation and Skills.
Conclusion
Looking ahead, the UK cement industry faces further structural change as the consequences of the LafargeHolcim merger play out and GGBS assets are sold off under a 2014 Competition Commission ruling.
Despite this uncertainty, there appears to be increasing stability and growth in the UK economy. This has already been built on by UK cement producers, which will continue to enjoy growth in the construction, cement, concrete and allied sectors in the coming years. The re-emergence of a willingness to invest suggests an easing of the austerity in the cement sector, greater availability of capital and increased confidence in the future.