Analysis
Search Cement News
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.
Reading the runes at the IEEE/PCA Calgary 2017
Written by David Perilli, Global Cement
31 May 2017
Ed Sullivan, the Portland Cement Association’s (PCA) chief economist was in tub-thumbing mood last week at the IEEE-IAS/PCA Cement Conference in Calgary, Canada. The headline figures that the PCA put out in a press release was a forecast of a 3.5% rise in cement consumption in 2018 and 2019. Yet behind this in a stirring speech given to a cement industry crowd craving growth was a tale of riches ahead. The audience lapped it up. There was only one problem: nothing has really happened yet to make any if this happen. It always seems to be riches ahead. As Sullivan freely put it, “Trump policies will impact cement… But we don’t know what they are!”
Sullivan broke down his forecast into three sections that hinged around President Trump’s desired policy changes kicking in from about the third quarter of 2019. At this point, owing to lack of information about what the Trump administration actually wants to do, Sullivan freely broke open the assumptions. These covered issues such as a tax reform, infrastructure budgeting, immigration reforms and more. As he explained it all of these issues interact, so that reducing taxes potentially pushes national debt up making infrastructure spending harder. Owing to the lack of specifics from the current administration though Sullivan was forced to resort to the more solid plans of Democratic presidential contenders Hillary Clinton and even Bernie Saunders for nuggets of information of how ‘a government’ might act. For example, he used a breakdown of Saunders’s intended infrastructure spend to try and predict how Trump’s policies could play out. Increases in highway building from the overall infrastructure spend in this context being good news for the cement industry. And as for Sullivan’s view on the impact of the Trump border wall: ‘overrated’.
The new forecasts for 2018 and 2019 appear to be retrenchment given that the PCA was predicting growth of 4% for 2016 in the middle of that year. It subsequently reduced its estimate to 2.7% for 2016 by December 2016 after the presidential election. However its figures for 2017 and 2018 have increased since the December forecast. Sullivan predicted that growth will start to surpass 5% in 2020 once Trump’s policies have time to make waves. The crescendo of his presentation at the IEEE-IAS/PCA was a prognostication of an extra requirement of 14Mt of cement in 2021 and 2022. Sullivan topped this off by saying that, “We have the supply infrastructure in place right now.” However, some delegates informally questioned afterwards where that cement might actually come from with mass international clinker capacity waiting in the wings from places like Vietnam and new cement plants such as the McInnis Cement plant in Quebec expressively targeted at the US import market about to come on line.
Sullivan has a tricky job trying to predict what will happen next in the US cement industry and sometimes his forecasts seems to change as much as the weather that cement company financial reports often blame their poor returns on. This column knows a little bit how he feels. As Sullivan’s biography points out he’s been cited by the Chicago Federal Reserve as the most accurate forecaster regarding economic growth among 30 top economists. In short he’s the best we’ve got. But Donald Trump’s approach to government so far has made his job exponentially harder. As we’ve said more than a few times when describing the US cement market, the basis are there for growth but something is holding back faster growth. Will Trump be the catalyst to break the 5% growth barrier? Looks like we’ll have to wait until late 2019 to find out.
Elsewhere, the conference brought together a large cross-section of the North American industry. Surprisingly perhaps given the change in leadership at the US Environmental Protection Agency (EPA) several parts of the speaker and discussion programme focused on coping with National Emission Standards for Hazardous Air Pollutants (NESHAP), carbon tax schemes in Canada and California and practical carbon capture methods at the plant level. The key here seemed to be a piecemeal approach that may not necessarily be at odds with less government environmental legislation. Next year’s outing in Nashville, Tennessee looks set to be an even more important event, especially if more on Trump's infrastructure plans become known.
‘Continuity and change’ at the top for LafargeHolcim
Written by Global Cement staff
24 May 2017
The changeover at the top of LafargeHolcim, with Eric Olsen standing down and with the appointment of Jan Jenisch (CEO of Sika AG), is worthy of note for a number of reasons. American/French Eric Olsen has been in charge of the merged company since its inception and has made a good job of bringing together two very different companies, while at the same time battling uneven economic growth worldwide which has seen some patchy results over the last two years. Given more time, he would undoubtedly have presided over more robust results as yet more synergies are discovered in the newly-lean company.
In fact, lean-ness is one of the four ‘strategic pillars’ that are now governing LafargeHolcim, according to the recent fascinating 2016 annual report. Alongside ‘commercial transformation,’ ‘cost leadership’ and ‘sustainability,’ the report stipulates that the company will be ‘asset light.’ The report goes on to explain that LafargeHolcim ‘will optimise our current asset base, better leveraging our industrial footprint, reducing our capital expenditure and exploring new growth opportunities with lower capital expenditure.’ It says that ‘Future growth will be focussed on low-capital intensive business models that enable us to access more of the value chain.’ Putting numbers to the words, LafargeHolcim’s capex in 2016-2017 was CHF3.5bn (Euro3.21bn), but it will plummet to CHF2bn (Euro1.83bn) from then on. As CEO, Eric Olsen’s prints are all over this plan.
The company plans to use its ‘know-how in preventative maintenance and capacity optimisation’ to reduce its ongoing capex in the cement industry, and says that ‘we outsource our fleet management whenever possible and develop alternative logistics offers to reduce capital expenditure.’ So, out with its own fleets of vehicles, and in with contractors, freeing-up capital (but possibly leading to lower retained profits). The company also says that ‘the leveraging of our global trading platform enables us to serve some markets without the need to invest in local clinker capacity.’ Alongside various statements in the annual report that suggest that the company has quite enough clinker production capacity already, we can see that it intends to stop building any new greenfield plants, and to potentially invest in clinker grinding facilities in markets where it does not have a presence, supplied by its currently under-utilised clinker-producing plants. It plans to expand into low-capital concrete markets, stating that ‘we are implementing franchise models in the ready-mix and retail segments, enabling us to reach customers in a differentiated way while keeping capital expenditure low.’
Eric Olsen’s plan is/was a sensible one: stop sending money out the door, make the current assets work a lot harder, and get into businesses with a good margin but which don’t cost a lot in which to become established. This is a plan that will take time to come to fruition, but unfortunately, Eric Olsen will not be at the helm of the company to see the benefits. He resigned at the end of April after an internal investigation at the company showed that managers at the company’s cement plant in Syria had paid-off local militias in order to stay open. As Eric Olsen stated at the time, “While I was absolutely not involved in, nor even aware of, any wrongdoing I believe my departure will contribute to bringing back serenity to a company that has been exposed for months on this case.” It seems that the chairman and the board of directors owe Mr Olsen a few beers - at least - for taking the heat off the company.
German national Jan Jenisch steps into Eric Olsen’s shoes at an interesting time then. He is coming from a company, Sika AG, that has also seen some tumultuous events in the last few years. The company’s controlling family wish to sell its 16% stake (including 53% voting rights) to multi-national building materials group Saint-Gobain, which is eager to buy, against the wishes of the company’s board, senior managers and other shareholders. So far the sale has been foiled by Mr Jenisch, but a crucial court case decision is due later in the year. Who knows, in the meantime maybe another building materials company might step-in to try to take over Sika’s attractive business? Mr Jenisch managed to increase Sika’s profit by 22% in the last full year of operation of the company, and the board of LafargeHolcim will be hoping that he can repeat the magic with his new company. If he manages it though, just remember that he has inherited Eric Olsen’s ‘cunning plan that might just work.’