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UltraTech Cement seals the deal
Written by David Perilli, Global Cement
05 July 2017
Congratulations are due to India’s UltraTech Cement this week for finally completing its US$2.5bn asset purchase from Jaiprakash Associates. The deal has been around in some form or another since at least 2014 when UltraTech arranged to buy two cement plants in Madhya Pradesh for around US$750m. That deal, publicly at least, became a victim of the 2015 amendment to India’s Mines and Minerals (Development and Regulation) (MMDR) Act. The Bombay High Court eventually rejected it in early 2016 after a period of delays. However, the deal bounced back in a much larger form around the same time and since then everything has gone relatively smoothly.
As chairman Kumar Mangalam Birla put it in his letter to shareholders in the company’s 2016 – 2017 annual report the, “move is essentially for geographic market expansion.” He then went on to mention all the usual keywords like ‘synergy’ and ‘economies of scale’ that you expect from an acquisition. Quite rightly he finished with, “It is with great pride that I record, that UltraTech is the largest cement player in India and the fifth largest on the world stage.” On that last point he meant outside of China but UltraTech does have a small number of assets outside of India, notably in the UAE, Bahrain, Oman and Bangladesh, hinting at an international future for the cement producer.
Map 1: UltraTech Cement’s plants in India. Source: UltraTech Cement Corporate Dossier, January 2017.
To give a scale of the deal, UltraTech has increased its number of integrated cement plants in India to 18 from 12 and its cement grinding plants to 21 from 16. Its overall cement production capacity will increase by nearly 40% to 91.4Mt/yr from 66.3Mt/yr. The new assets are in Himachal Pradesh, Uttar Pradesh, Uttarakhand, Madhya Pradesh and Andhra Pradesh. The main regions that will benefit are the North, Central and South zones. In particular the Central Zone will see its capacity jump to 21.1Mt/yr from 6.2Mt/yr. This area also includes a new 3.5Mt/yr plant at Dhar in Madhya Pradesh that is scheduled for commercial production in late 2019.
The completion of the Jaiprakash Associates deal was followed by the introduction at the start of July 2017 of the Goods and Services Tax (GST), a rationalisation of some of the country’s central and state taxes. UltraTech promptly said it had reduced its product prices by 2 – 3% in light of tax reductions under the new regime. Some producers were warning of a rise in cement prices in the run-up to the introduction of the GST and the Cement Manufactures’ Association said that the new tax rate was insufficient. However, UltraTech said that the new tax rate of 28% was better than 30 – 31% previously. Other Indian producers also reduced their prices this week following the introduction of the GST.
UltraTech’s expansion and the start of the new tax scheme auger well for the Indian cement industry in 2017. Demonetisation knocked cement production at the start of the year and it may have lowered UltraTech’s capacity utilisation rate as well as reducing domestic sales by cutting housing demand. However, sector rationalisation and a simpler tax approach should help to remedy this. Not all government interaction has been helpful to the cement industry in recent years as the MMDR amendment and demonetisation show but the signs are promising.
Roll on the next set of financial reports.
Update on South Korea
Written by David Perilli, Global Cement
28 June 2017
Further shifts in the South Korean cement industry this week as Ssangyong Cement purchased Daehan Cement. Private equity firm Hahn & Company owns both producers so this looked like a realignment exercise. Yet it follows a corporate version of pass-the-parcel within the local cement industry. Hyundai Cement was acquired by Hanil Cement in the first half of 2017, Halla Cement was bought by investment firms from LafargeHolcim in mid-2016 and Tongyang Cement was bought by Sampyo Group in 2015.
Ssangyong Cement’s purchase is seen in the local media as an attempt to reaffirm its market dominance. Before the Hyundai Cement auction, Ssangyong Cement was the market leader with a cement production capacity of 15Mt/yr and a market share of around 20%. Hanil Cement’s on-going purchase of Hyundai Cement will see it increase its production capacity from 7Mt/yr to over 15Mt/yr. Ssangyong Cement’s transaction for Daehan Cement puts it back in the lead again.
The local industry is notable for the high ratio of cement grinding plants to integrated plants. The Korean Cement Association (KCA) reported that the country had 12 integrated plants to 23 grinding plants in 2015. This compares to other developed countries in relatively remote places such as Australia and Chile that also have high numbers of grinding plants. South Korea doesn’t import that much clinker though. One difference is its prominent steel industry that has hovered around 70Mt/yr since 2014 and which puts it in the top ten of world producers. Subsequently, as POSCO’s Sunghee Han explained at the Global Slag Conference 2016, 13.9Mt of granulated blast furnace slag (GBFS) was produced in 2015 and the majority of this ended up being used as supplementary cementitious materials (SCM) either to grind cement or to make concrete. The size of this slag market underlines the value of the Daehan Cement sale, as it is a major slag cement producer.
Other notable point about the local cement industry includes the presence of a few extremely large multi-kiln plants with production capacities in excess of 7Mt/yr. The country also has a relative scarcity of limestone. South Korea is the fifth biggest importer of limestone in the world at US$34m. It brings limestone in principally from the UAE, Japan, India, Malaysia, and Vietnam. Notably it also has one of the world’s longest single conveyors, with a length of 12.8km, connecting a quarry to Ssangyong Cement’s Donghae plant.
Graph 1: Cement production and consumption in South Korea, 2010 – 2015. Source: Korean Cement Association.
Unlike the European cement-producing nations that this column has covered in recent weeks, fundamental market structural changes do not appear to be driving the merger and acquisition activity in South Korea. As Graph 1 shows, production and consumption fell from 2010 onwards but has started to pick up since 2013. Instead, a general slowing of the economy from 2010 and a relaxation of the rules triggered merger and acquisition activity. Unsurprisingly then, perhaps, given the potential opportunities for market manipulation, that the Fair Trade Commission fined six of the seven major producers a total of US$168m in early 2016 for alleged price fixing. With the private equity firms widely expected to exit the market after a relative short time, the cement industry looks set to remain volatile for the next few years. Doubtless the market regulators will be watching very carefully indeed to see how it all plays out.
Italy’s cement sector continues to consolidate
Written by David Perilli, Global Cement
21 June 2017
Buzzi Unicem strengthened its position in Italy this week with a deal to buy Cementizillo. The agreement included Zillo Group’s two integrated cement plants at Fanna and Este in the northeast with a combined production capacity of 1.4Mt/yr. The sale price appeared to be low at a maximum of Euro104m plus 450,000 shares in Buzzi. However, the interesting part of this transaction is a variable portion of zero to Euro21m based on the average price of cement achieved by Buzzi in Italy between 2017 and 2020.
Buzzi hammered home the point in its acquisition statement that the local cement sector suffers from, “…significant surplus of production capacity coupled with permanently reduced sales volumes.” No doubt this was a prominent part of the deal negotiations given that, with a rough calculation of Euro10m for the shares, Buzzi has picked up the new cement production capacity at about Euro80/t or US$91/t. In July 2016 this column commented that Cementir’s purchase of Compagnie des Ciments Belges’ assets for Euro125/t seemed fairly low globally. Yet even this seemed high when Cementir picked up Sacci’s cement business, including five cement plants, for Euro125m or Euro38/t. Although it should be noted that Sacci was bankrupt at the time and being run by its liquidators.
As ever all these transactions were complicated by assets other than clinker production lines but the problems facing the Italian cement industry are clear. Following on from last week’s column about changing patterns of cement consumption in southern Europe, the cement intensity of the construction sectors in Italy and Spain has dropped significantly since 2000 suggesting that the mode of construction has moved from new projects to patching up old ones. Throw in the financial crash in 2007 and, strikingly, cement production in Italy fell from 49Mt in 2006 to 21Mt in 2015. Anecdotally, looking through the Global Cement Directory 2017, 13 of the country’s 56 integrated cement plants were listed as idled, mothballed or closed at the start of the year. Cembureau, the European Cement Association, reckons that consumption fell year-on-year by 4.7% in 2016 with a further drop of 3% forecast for 2017. Surprisingly though estimates from the Associazione Italiana Tecnico Economica Cemento (AITEC) suggest that cement exports have not increased dramatically since 2007. Since hitting a low of 1.6Mt in 2011 they rose to 2.5Mt, a similar figure to that of before the crash.
This kind of environment suggests consolidation and that’s exactly what has happened with Buzzi buying Cementizillo this week, Germany’s HeidelbergCement’s purchase of Italcementi in 2016 and Cementir’s purchase of Sacci in the same year. Earlier in 2014 Austria's Wietersdorfer & Peggauer picked up a plant in Cadola from Buzzi.
Financially, the story is in line with what the declining production and consumption figures suggest. Buzzi reported that its net sales in Italy fell by 16% to Euro375m in 2016 and Cementir said that its sales would have fallen by 14% had it not benefitted from the new revenue from Sacci.
HeidelbergCement presented Italy as a territory ripe for ‘substantial’ recovery potential at a shareholders event in the autumn of 2016. It highlighted opportunities in further rationalisation of the industry, recovery in cement consumption from a low base and optimisation of the country’s distribution and depot network. It probably will not be publicly released but if Buzzi Unicem pays out the full amount of its variable payment to Cementizillo then the industry may be picking up again. Until then expect more acquisitions.
Changing patterns of cement consumption in southern Europe
Written by David Perilli, Global Cement
14 June 2017
Plenty to mull over this week in Cembureau’s newly published Activity Report for 2016. The association pulls together data from a variety of places including its own sources, Eurostat and Euroconstruct. For competition reasons much of it stops in 2015 but it paints a compelling picture of a continental cement industry starting to find its feet again.
Graph 1: Cement intensity of the construction sector in Europe, 2000 – 2015. Source: Cembureau calculation based on Eurostat and Euroconstruct in Activity Report for 2016.
The really interesting data concerns so-called cement intensity. This is the quantity of cement consumed per billion Euro invested in construction. Figures calculated by Cembureau from data from Eurostat and Eurocontruct show that cement intensity has remained stable in Germany, France and the UK but that it fell sharply in Spain and Italy from 2000 to 2015. In other words the pattern of construction changed in these countries. One suggestion for this that Cembureau offers is that construction moved from new projects to renovation and maintenance. These types of construction projects require less cement than new builds. Seen in this context the huge production over capacities seen in Italy and Spain in recent years makes sense as the local cement industries have coped with both the economic crash and a step change in their national construction markets.
Further data in the report falls in line with the impression given by the multinational cement producers in their quarterly and annual financial reports. Cement production picked up in the Cembureau member states from 2012 and in the European Union members (EU28) from 2013. Meanwhile, import and export figures disentangled from a close relationship at the time of the financial crash in 2008 with imports of cement declining and exports increasing markedly. Much of it will have originated from Italy and Spain as their industries coped with the changes. Cembureau then forecasts that cement consumption will rise in 2017 by 2.4% and 3.5% in 2018 in the 19 countries than form the Euroconstruct network. A key point to note here is that most of the larger European economies will see consumption consistently grow in 2017 and 2018 with the exception of France where it growth will remain positive but it will slow somewhat in 2018. This fits with last week’s column about France with the early reports from LafargeHolcim, HeidelbergCement and Vicat reporting slight declines in sales volumes so far in 2017.
Cembureau’s country-by-country analysis also provides a good overview of its member industries. Looking at the larger economies, residential construction was the main driver for cement consumption in France and Germany in 2016. In Germany further growth is hoped for from an increased infrastructure budget set by the Federal Government. Italian cement consumption fell in 2016 and further decreases are anticipated for 2017, particularly from the public sector. By contrast though the story in Spain is still one of declining cement consumption but one heavily mitigated by exports. Spain is the described by Cembureau as the leading EU export country. Finally, there’s little recent on the UK other than uncertainty concerns about the Brexit process and an anticipated rise in infrastructure spending by 2019. The sparse detail here is probably for the best given the current political deadlock in the UK following the continued fallout from the general election in early June 2017.
In summary, Cembureau’s data shows that modest growth is happening in the cement industries of its member countries. It’s not uniform and some nations such as Spain and Italy are coping with changes in the composition of their industries. Cembureau also highlights the unpredictable consequences of the UK’s departure from the EU as one of the biggest risks in 2017. Check out the report for more information.
Update on France
Written by Global Cement staff
07 June 2017
2017 is an anniversary year for the French cement industry as it marks the bicentenary of Louis Vicat’s pioneering work into the creation of ‘artificial’ cement. The company that bears his name, Vicat, is a major force in the global cement industry to this day. However, the French industry has suffered since the global financial crash in 2007, with steadily declining production volumes, despite a bounce in 2011. Lafarge was only able to maintain its international status through a merger with Switzerland’s Holcim in 2015 and the arguments surrounding that ‘merger of equals’ are still playing out now with the resignation of the group’s chief executive officer in April 2017.
Graph 1: Cement consumption in France, 2012 – 2016. Source: Syndicat Français de l’Industrie Cimentière & Vicat.
Thankfully, the industry started to recover in 2016 and the signs are positive that this will continue into 2017 with the presidential elections concluded. Graph 1 shows the situation since 2012.
Sensing the rebound in 2016 the head of the French building federation (FFB) placed growth in construction materials volumes at 1.9% in December 2016 with a forecast of 3.4% in 2017 based on new residential housing. Naturally he used his position to lobby the politicians in the run-up to the election and the FFB have carried on in this vein haranguing the new administration with 112 (!) proposals to ‘rebuild’ France.
The major cement producers broadly agreed with the outlook in 2016 with LafargeHolcim describing the local construction sector as growing ‘slightly’ despite subdued public spending on infrastructure and HeidelbergCement concurring. Vicat was more effusive pointing to its 6% rise in sales volumes to 2.9Mt in the domestic and export markets. It pinned the recovery down to the last quarter of 2015. However, it noted that the rise in volumes had compensated for a fall in prices due in part to the increased exports. On this point, although it’s outside the scope of this column, it would be fascinating to know how much the European Union Emissions Trading Scheme is stoking the French cement indsutry’s recovery through exports (see GCW290).
Investment has been returning to the market though with Ecocem France’s order of a Loesche mill for a slag cement mill it is building Dunkirk, the inauguration of a new tyre recycling unit at Lafarge France’s Martres plant and the start of a gasifier project at Vicat’s Crechy plant in 2016. More recently Lafarge France reported to the French press in May 2017 that it was starting to consider contractors for a new production line at the Martres plant, leading to fears that it might choose a Chinese provider.
So far in 2017 the situation is on a knife-edge with LafargeHolcim, HeidelbergCement and Vicat all reporting slight declines in sale volumes or earnings that they have blamed on the weather. However, LafargeHolcim did mention growing momentum towards the end of the period offering some hope. As seen above the fundamentals for the French cement industry are all ready and present for growth. Now with the pro-business Euro-centric new president installed in office the industry should be about to flower in time for Louis Vicat’s anniversary.