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Cement and taxes
Written by David Perilli, Global Cement
28 February 2018
The old saying goes that nothing is certain except for death and taxes. But maybe that should be cement and taxes. Paying your taxes is something most people and companies just get on with, perhaps with some grumbling or perhaps not, but certainly with little press. So two news stories popping up in the same week about cement plants with tax issues is out of the ordinary.
The first concerned Lucky Cement’s battle in Pakistan to keep one of its plants open following accusations of underpaying its taxes. The local tax office tried to shut the Pezu plant down for not paying its property tax. The cement producer hit back with a restraining order from the provincial high court. The second detailed efforts by the Ethiopian authorities efforts to claw back US$10m from a local cement producer accused of deliberately understating its profits. In both cases it’s hard to tell if there is an obvious right or wrong party. Yet if these kinds of stories are hitting the local press headlines then either something has gone wrong or both parties are digging in for a fight.
Looking over a longer time frame two major stories about tax have been doing the rounds over the last year in the industry news. India’s Goods and Services Tax (GST) is a classic example of how cement producers sometimes have to deal with changes to existing regulations. It received another outing this week in the form of the credit agency ICRA’s latest forecast. It explained how the introduction of the new tax, a consolidation of other existing indirect taxes, had slowed production in the second quarter of the Indian financial year in 2017 - 2018.
The other example from a large cement producing country was US President Donald Trump’s cut to federal corporate tax in December 2017. The tax cut was expected to particularly benefit companies that produce materials, like building materials manufacturers. It prompted HeidelbergCement to say in early January 2018 that it expected to see a boost to its profits in 2019. Warren Buffet, the chairman of Berkshire Hathaway and owner of insulation producer Johns Manville amongst other companies, put it bluntly when he said in his 2017 annual report that nearly half the gain of his company’s net worth came from the changes to the US tax system.
Multinational companies, including some cement producers, face issues when dealing with different rules and regulations between the various countries that they operate in. However, sometimes unfairly, sometimes not, large companies also hold a reputation for trying to avoid paying tax.
In this context it’s interesting to look at how LafargeHolcim says it approaches the issue. The company published its tax principles in 2016 where it talks about being responsible and that it, “…accepts tax as a necessary and required contribution to society.” It then talks about the necessity of transparency and good relationships with tax authorities. The same year it declared a total tax bill of Euro726m versus total sales revenue of Euro23bn. By contrast Cemex UK in its tax strategy talks about how it follows the US Sarbanes Oxley Act 2002, which applies a more stringent international accounting and auditing standard. It feels far more honest when it says that it aims to minimise the tax burden upon its shareholders by using methods outlined by the UK government. Taxes may be a certainty but nobody wants to pay a penny more in taxes than they have to.
Nothing says I love you like a white cement plant
Written by David Perilli, Global Cement
21 February 2018
HeidelbergCement made Italy’s Cementir Holding its Valentine last week in the form of a deal for the Italian company to buy up the remaining shares in Lehigh White Cement in the US. Cementir takes control of the former joint venture by upping its share to 63.25% for US$107m and one of the other partners, Cemex, increases its share to 36.75% for US$34m. Despite making the announcement on Valentine’s Day HeidelbergCement then described the sale in fairly unromantic language, “As a niche product with small volumes, the standalone production of white cement does not fit to the strategic focus on efficiency of HeidelbergCement.” Maybe they could just send flowers to each other next year instead!
More seriously, this latest deal by Cementir is yet another intriguing evolution of the Italian multinational building materials producer. The company says it is the largest white cement producer in the world through subsidiaries like Aalborg Portland in Demark, Sinai White Cement in Egypt and Lehigh White Cement in the US. Its plant at El-Arish in Egypt is the largest white cement unit in the world. In 2016 it reported a white cement production capacity of 3.3Mt/yr from six plants in Denmark, Egypt, China, Malaysia and the US. Its volume sales of white cement were 2.2Mt at this time or a capacity utilisation rate of 67%. In the US it operates two white cement plants located in Waco, Texas and York, Pennsylvania with a total capacity of 0.26Mt/yr, as well as a distribution network throughout the country, which is also used to distribute white cement imported from its partners across North America. In 2017 Cementir produced 10.3Mt of Ordinary Portland (grey) Cement and white cement, a rise of 24.6% year-on-year from 8.25Mt in 2016. The boost was delivered by the acquisition of Compagnie des Ciments Belges. Like-for-like sales volumes increased by around 1.7% year-on-year.
Cementir left the Italian market in 2017 when it sold Cementir Italia to HeidelbergCement for Euro315m. As this column commented as the time (GCW320) the deal seemed cheap given that HeidelbergCement paid Euro315m for five integrated cement plants plus extras. However, Cementir appeared to actually make a profit on Sacci which it picked up cheaply in 2016.
Now HeidelbergCement has returned the favour by selling Cementir the controlling stake in Lehigh White Cement. The German cement producer may have grumpily rubbished the sale in its press release but the language makes one wonder whether this was a quiet part of the Cementir Italia deal in 2017. The white cement industry is miniscule compared to the OPC one but HeidelbergCement has just handed even more control of it to Cementir. From Cementir’s perspective this probably seems very efficient.
Innovations in industrial carbon capture
Written by David Perilli, Global Cement
14 February 2018
Lhoist’s Jean Marbehant pretty much summed up the bind the cement and lime industries face from the tightening COP21 climate agreement when he said, “We produce CO2… and our by-product is lime.” He made the comment at a ground breaking event that HeidelbergCement hosted this week for a new carbon capture pilot project at the CBR Lixhe cement plant in Belgium. The project with the Low Emissions Intensity Lime And Cement (LEILAC) Consortium will test Australian company Calix’s direct CO2 separation process at an operational cement plant for two years at a pilot level scale.
Previously the technology has been used by Calix in the magnesite calcining sector in Australia. Now it will be trialled at 10t/hr of raw material for cement production and 8t/hr of ground limestone in a 60m tall direct separation reactor that is about to be built next to the cement plant’s pre-heater tower. The process has a target to capture up to 95% of process CO2 emissions. Construction is scheduled to be completed in 2018 and then followed by two years of operation and testing until the end of 2020. At this point the Euro12m funding ends but the next steps, if agreed, would be to test the process at a commercial scale for lime production and a large scale demonstration at a cement plant by 2025. Full scale commercial application at a cement plant would then happen by 2030.
The Innovation in Industrial Carbon Capture Conference was built around the various carbon capture initiatives that HeidelbergCement is involved with. The other big pilot is the oxyfuel project it is running with LafargeHolcim and the European Cement Research Academy (ECRA). As ECRA’s Volker Hoenig explained, this project is now set to move to the pilot scale at two cement plants in 2020 at a cost of Euro90m. The plants, in Italy and Austria, have been chosen so that the testing can start at a ‘simple’ plant and then move to a more complicated one. The former site, Colleferro, has a spare unused kiln that doesn’t use alternative fuels, making the testing less complicated. The latter, Retznei, does co-process alternative fuels and it also has a kiln bypass system. It’s also worth noting that Calix’s direct separation process is intended to be compatible with an oxyfuel kiln. Other technologies were also previewed at the conference such as the Cleanker calcium looping project, the CO2MIN mineral carbonation project, the Carbon8 process to make aggregates from flue gas and HeidelbergCement’s experiences with growing microalgae.
The event to mark the start of the pilot was an optimistic one but the cement and lime producers like Jean Marbehant have no illusions about the cliff face-steep challenge that meeting the CO2 emissions reduction targets the Paris agreement potentially demands. One slide Marbehant discussed in his presentation placed the CO2 marginal abatement cost for carbon capture at Euro90/t. However, since the European Union (EU) Emissions Trading Scheme (ETS) currently places the cost of CO2 at Euro9/t the real question about the future of carbon capture is about who is going to pay the bill. Albert Scheuer, a board member of HeidelbergCement, made it clear how his company thinks the cost should be divided when he said that its end product was concrete and he explained just how much cement and concrete everyone uses in their lifespan. He may not have said that we all need to pay but he certainly made it feel that way. The future of carbon capture it seems may be a bit like a group of friends awkwardly deciding how to split the bill after a meal.
One speaker at the LEILAC event used the phrase ‘no silver bullet’ to describe how industrial CO2 emissions could be cut and how Carbon Capture and Storage (CCS) might be used. Perhaps more tellingly though has been the emergence of a new acronym that seems to be doing the rounds at the European Parliament, of ‘Carbon Capture and Something.’ That ‘something’ here is of critical importance as it can either put up or decrease the price that CCS will add to cement production. So, whilst moving to Carbon Capture and Something might suggest that legislators are starting to get realistic about what carbon capture might actually be able to do, it might also indicate a naïve lack of understanding of how hard cutting CO2 emissions is from essential industries that produce CO2 from their core process.
The challenge for cement producers in this kind of environment is deciding how far they should go towards exploring CO2 reduction strategies whilst governments are not being precise about how they intend to meet their targets. Going first might bring an innovator advantages if the legislation toughens up, but the early cost is high. HeidelbergCement and others are definitely doing ‘something’ but commercial applications are at least a decade away at current funding levels. And that timescale doesn’t include rolling out the new technologies across the entire industry. Despite this it was reassuring to hear the director of the European Commission’s Directorate-General for Climate Action say that his outfit didn’t want to reduce cement production, only CO2 emissions. This was ‘something’ cement producers want to hear.
West African Roundup
Written by Global Cement staff
07 February 2018
A couple of news stories have emerged from West Africa this week reminding Global Cement of the growth potential the region holds. First Ghacem announced that it had opened a new truck terminal at Sefwi Dwenase in Ghana. Then LafargeHolcim Ivory Coast inaugurated a new mill at its grinding plant in Abidjan. Then Cimburkina, a subsidiary of Germany’s HeidelbergCement, said that it was starting work on enlarging its grinding plant at Kossodo in Burkina Faso.
The other theme that received some coverage this week was another attempt by an African government to regulate its hastily growing cement sectors. Jean-Claude Brou, the Minister of Industry and Mines in Ivory Coast also found time to announce the creation of a commission to monitor the quality control of cement when he inaugurated the new mill in Abidjan. As building collapses due to substandard cement in Nigeria have shown, this kind of government monitoring is essential to protect the public in booming markets. Unfortunately, rightly or wrongly, these kind of bodies often seem to end up embroiled in rows about imports of cement competing with local producers.
Away from the cut and thrust of the market, the new mill at Abidjan is particularly interesting because it was imported and reinstalled piece-by-piece from its original home at a former Holcim plant in Spain. The move cost Euro23m and LafargeHolcim say that it is now the largest horizontal ball mill in French-speaking west Africa. The 1Mt/yr year mill was originally manufactured by Polysius (ThyssenKrupp) in 2006 and uses a 4500kW motor.
Data from the National Institute for Statistics in Ivory Coast reported a 39% rise year-on-year in cement production to 1.64Mt in the first half of 2017. This follows reports of cement shortages in early 2017. The government then took the action of importing 0.15Mt of cement to meet the shortfall until local production capacity caught up.
This is starting to happen now with the LafargeHolcim opening. Other projects that were in the pipeline include Cim Ivoire’s 2.6Mt/yr grinding plant, also in Abidjan, that was due to be completed by the end of 2017. This project is interesting because Cim Ivoire is a subsidiary of Burkina Faso’s Cim Metal Group. It also operates a grinding plant, Cimfaso, near the capital Ouagadougou. Similar to LafargeHolcim it is preparing its supply lines to the African interior. Finally, Nigeria’s Dangote Cement was also building a 3Mt/yr grinding plant near Abidjan. This unit was due to be finished by the end of 2017 but there has been little news about it in recent months.
Ghana’s cement industry has been consolidating itself and is facing an oversupply situation. The government placed production capacity at 8.5Mt/yr in 2016 versus demand of 6Mt. It has since made the headlines with spats between local producers and foreign companies like Dangote Cement. Unlike Ivory Coast, Ghana has two integrated plants that, no doubt, want to preserve their markets from imports. Despite this, Ciments de l'Afrique (CIMAF) and Diamond Cement both opened plants in late 2016. More recently two grinding plant projects have been announced near Tema.
Although the timing is fortuitous , we admit that these stories are fairly loosely connected at best. However, they do illustrate an inward development trend in the region. Bigger and more efficient grinding plants to process locally made or imported clinker, more terminal infrastructure to distribute the cement and then more grinding plants further inside the region geographically as the logistics situation permits. The Cimburkina plant, for example, is situated in landlocked Burkina Faso. Clinker for its mills will initially be supplied by HeidelbergCement’s integrated Scantogo plant at Tabligbo. The drive to develop these countries moves ever forwards and they demand cement.
Paying the gas bill
Written by David Perilli, Global Cement
31 January 2018
As readers in colder climes will understand: nobody likes a gas bill. Save some pity for LafargeHolcim Bangladesh then this week, as it faces attempts to hike the price it’s paying.
As reported by local press the government-run Jalalabad Gas Transmission and Distribution Systems (JGTDS) is trying to raise the rate for natural gas to the cement producer. Allegedly, LafargeHolcim Bangladesh is paying a lower unit cost for gas supplied to a power plant at its Chhatak cement plant than the fixed amount set by the country’s energy regulator. LafargeHolcim Bangladesh says the rate was set in a gas sales agreement (GSA) signed between JGTDS and its predecessor, Lafarge Surma Cement, in January 2003. The state body meanwhile has referred the issue up the chain of command to the Energy and Mineral Resources Division under the Ministry of Power, Energy and Mineral Resources.
JGTDS says that the plant is consuming around 450,000m3/day of gas. Of this, about a quarter is used to run the power plant and the remainder is used to power the cement plant’s kiln. The plot thickens though as LafargeHolcim Bangladesh is actually paying above the industry tariff for gas of US$0.09/m3. Commentators reckon the price of gas is set to rise in the future. Naturally the cement producer wants to stick to the pre-agreed price for the economic viability of the country’s main integrated cement plant. The Spanish embassy, representing Cementos Molins one of the owners of the company along with LafargeHolcim, has even gone as far as intervening in the argument.
The pressure is on LafargeHolcim Bangladesh because its sales revenue fell slightly year-on-year in 2016 but its fuel costs rose by 12%. As the country’s sole clinker producer it suffered from falling international clinker prices in a nation full of grinding plants. So far in the first nine months of 2017 its sales revenues have risen a little yet its profit has more than halved. Any change to its fuel costs would seem likely to damage the company at a delicate moment.
Energy costs for cement plants are nothing trivial as the graph above shows. It uses data from the German cement industry but the key takeaways are that the calorific ratios of the different types of energy cement production uses don’t directly correlate to the cost. Hence, in Bangladesh and other countries where the electricity grid might be unreliable or expensives, running one’s own captive power plant makes sense both for cost and supply reasons. As an aside that may not be applicable to Bangladesh right now, the stark disparity between the energy produced by alternative fuels and their cost proportion is a great reason to use them if the necessary supply chains can be organised. LafargeHolcim launched local operations for its waste management wing Geocycle in December 2017 so this point has not been lost the company.
The situation in Bangladesh is reminiscent of the bind Dangote Cement found itself in towards the end of 2016 in Tanzania. A dispute over gas prices for its Mtwara plant led to company boss Aliko Dangote negotiating personally with President John Magufuli to protect his investment. Governments want inward spending in the form of new industrial plants and multinationals want assurances on some of their costs, like fuel supplies, before they reach for the chequebook. However, if one side is seen to be getting too good a deal then the relationship can break down. LafargeHolcim Bangladesh may have bagged itself a scandalously low gas deal and the Bangladesh government may also be breaking an agreement. Bear in mind though, that with sales of nearly US$28bn in 2016, LafargeHolcim took in revenue nearly one tenth of Bangladesh’s gross domestic product. If the two parties don’t reach an accord, the consequences for both parties could be negative.