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Update on India, August 2023
Written by David Perilli, Global Cement
09 August 2023
Adani Group announced this week that it was set to acquire a majority stake in Sanghi Cement. Its subsidiary Ambuja Cements said it was going to spend an enterprise value of just over US$600m on buying a 57% share in Sanghi Industries. The acquisition will be fully funded through internal accruals. The transaction works out at about US$99/t of clinker production capacity, a similar amount to what Adani Group paid Holcim to buy Ambuja Cements and ACC in 2022.
The acquisition has generally been perceived as consolidation in a crowded market. Profits have been under pressure in recent years due to the coronavirus pandemic lockdowns, logistics issues and then energy and other input price rises. However, commentators from ICICI Securities, cited in the local press, took the alternative view that Adani Group might be trying to start a price war in the west of India. They noted that demand for cement was 70Mt/yr in the region versus a production capacity of 82Mt/yr. Yet Sanghi Cement has reportedly been operating at less than a third of its capacity. Adani Group also revealed its intention to increase the cement production capacity at Sanghi Cement’s Sanghipuram plant to 15Mtyr by mid-2025 from 6.1Mt/yr at present. If the plant were upgraded it would potentially increase Adani Group’s market share from 19% to 37%.
Another aspect to consider with any large corporate action by Adani Group is the political angle. Adani Group’s chair Gautam Adani is often linked in the local press to the country’s ruling Bharatiya Janata Party (BJP) and Prime Minister Narendra Modi. So, every time Adani Group does something newsworthy, opponents of the BJP play up the perceived connections. This time the Indian National Congress (INC) simply noted publicly that a rival bidder for Sanghi Cement had encountered a tax investigation before it withdrew from the auction. There is no evidence suggesting that anything underhand happened here. Yet the point to consider going forward is that anything that Adani Group does is likely to be subject to more scrutiny than its peers. This may have unexpected consequences.
The financial results for the India-based cement producers covering the first quarter of the 2023 - 2024 year have been released in recent weeks. Generally, revenue and sales are up strongly but profits less so. Due to this, there has been a lot of attention placed on the costs these companies are incurring. Inflation on energy costs reportedly peaked in late 2022, but as Graph 1 below shows, it has been a mixed situation for the larger cement companies.
Graph 1: Comparison of Power & Fuel costs for selected Indian cement producers in first quarter of 2021, 2022 and 2023 financial years. Source: Company financial reports.
UltraTech cement said that its energy cost grew by 3% year-on-year in the first quarter of the 2024 fiscal year and it blamed this mainly on negative currency exchange effects. It also reported higher raw material costs due to the growing price of fly ash and slag. Ambuja Cements (and subsidiary ACC) managed to cut both its fuel costs and increase its earnings, which, while impressive, is not entirely unexpected following the takeover by Adani Group in mid-2022. Similarly to UltraTech Cement, neither Shree Cement nor Dalmia Cement were able to grow earnings faster than revenue, so earnings per tonne of cement fell. Birla Corp, however, did manage to pull off this trick due to a “substantial decline in fuel and power costs.”
One consequence of a competitive cement market with lower profits than previously, is a renewed emphasis on marketing. Adani Group’s subsidiaries Ambuja Cements and ACC both highlighted the companies’ branding and marketing activities in the first quarter. Ambuja Cements has resurrected its television advert with wrestler The Great Khali, ACC is highlighting its part in the building industry since the 1930s with its own campaign and both companies are targeting sporting events such as the India versus Australia World Test Championship. Adani Group is building up brand awareness following the acquisition and potentially leading up to a name change in the future.
The other companies are also doing this but one campaign that sticks out has been Shree Cement’s use of classic video games such as the ‘Shree Cement Bros” video on its website. Computer game character Mario has done a lot of things in his time but he also worked in a cement plant back in the 1980s Game & Watch title ‘Mario’s Cement Factory.’ We are still waiting for the 4k remake with online multiplayer for some reason! Until then, it is worth reflecting that brand awareness is important in the world’s second largest cement market and it may become more so as Adani Group continues to establish itself.
First half 2023 update on cement producers in Europe and North America
Written by David Perilli, Global Cement
02 August 2023
The release of the half-year financial results from many of the larger multinational cement producers in Europe and North America gives us the usual opportunity to examine how well the year has gone so far. In summary, each of the companies highlighted here increased its sales and earnings on a like-for-like basis. However, in many cases, but not all, sales volumes of cement fell. Notably, both Holcim and Heidelberg Materials did not appear to release these figures. Heidelberg Materials did say though that its sales volumes declined in all business lines as “a result of the global economic down-turn.” In Holcim’s case, on top of whatever else has been going on over the last six months, the group has continued to divest cement assets as it realigns its portfolio. One more interesting point to note is that, instead, Holcim and Heidelberg Materials highlighted their reductions in CO2 emissions at the start of their half-year reports.
Graph 1: Sales revenue for selected multinational cement producers in the first half of 2023. Source: Company financial reports.
Holcim continued to expand its light building materials business segment in North America as well as picking up some aggregate and ready-mix concrete assets in North America and Europe. Its sales grew fastest in North America, although Europe generated more sales overall. Elsewhere the other geographic business areas all held up. The group’s Solutions & Products division, the one responsible for the light building materials, lost sales and earnings year-on-year. This was blamed on the “normalisation of buying patterns” in the roofing market in North America in late 2022 and carrying into 2023, leading to destocking in various distribution channels. How this might effect the group’s ongoing diversification strategy remains to be seen.
Heidelberg Materials was more upfront about the specifics of its cement business in the first half of 2023. Sales volumes fell in all business lines. For cement, the largest falls were reported in the Western and Southern Europe Group area due to a ‘significant’ decline in residential construction followed by the Africa-Eastern Mediterranean Basin area although a slight increase was recorded in deliveries in Asia-Pacific. That last region benefited from the local subsidiary increasing its cement and clinker deliveries in Indonesia. This was reportedly due to the company leasing the Maros cement plant in September 2022. The plant serves markets in the east of the country. Overall, despite the falls in revenue in many regions, the group pushed up its prices sufficiently to keep net sales revenue and earnings growing well.
Cemex, meanwhile, was keen to shout about its improved earnings in all of its regions. It attributed this to its price strategy, lowering input cost inflation and the growing effects of its investments portfolio and its Urbanisation Solutions business. Each of the group’s main regions – Mexico, the US and Europe – performed well, with Mexico growing sales the fastest, the US driving up earnings the most and Europe, Middle East, Africa and Asia holding growth steady despite demand issues. Pricing was cited as a main issue for the success of each region.
Vicat’s sales and earnings rose due to increased sales volumes of cement and higher prices. At home in France, the company successfully fought off falling cement sales volumes with price rises, particularly due to energy price inflation. North America, the group’s other big market, grew strongly, boosted by the ramp-up of production and sales from the new kiln at the Ragland plant in Alabama. Finally, Titan experienced a similar situation to the other companies featured here, with increasing demand driving sales and further helped by prices. Earnings then grew in turn. Unlike the other companies, the US contributed a much larger share of sales for Titan than Europe or elsewhere. Back home in Greece the company’s sales and earnings benefited from increased sales volumes across all business lines. Both Vicat and Titan had mixed experiences in Egypt and Türkiye, with negative currency exchange effects causing problems in both countries, despite demand mounting in the latter.
On the basis of these financial results, it has been a positive first half for the larger cement companies based in Europe and North America. Cement sales volume growth has been mixed, where known, but price rises have compensated for this, leading to higher earnings. Whether these companies can continue to pull off this trick as or if global inflation starts to slow down is very much an ongoing question. As mentioned at the start, some of the companies also led their half-year reports with emission figures and many of them prominently highlighted forthcoming sustainability projects. These companies may be making most of their money in Europe and North America but there is clearly an awareness that these regions are also leading globally in implementing CO2 emission legislation.
Seeking a stake in Sanghi Cement
Written by David Perilli, Global Cement
26 July 2023
Adani Group and JK Lakshmi Cement were reported to be leading the race to acquire Sanghi Cement this week. The Economic Times newspaper reported sources who said that both companies are about to start due diligence processes ahead of making formal offers in the next few months. The enterprise value of Gujarat-based Sanghi Cement is around US$730m. Shree Cement, Nirma Group and Dalmia Bharat were said to have been interested previously, but no longer at this stage. However, none of the companies involved have commented directly on any bidding process so far.
Coverage in the India-based press earlier in July 2023 suggested that Shree Cement had dropped out of the bidding process for a 40 - 70% stake in Sanghi Cement. Although the exact reasons for Shree Cement withdrawal were not expressed, it was noted that the enterprise value for Sanghi Cement included debts of around US$220m. In late 2022 the Kotak Mahindra Bank made an investment of around US$67m in Sanghi Cement to ‘help the company's liquidity profile and enhance its operations.’ The head of the bank’s Special Situations Fund added that the cement producer’s performance had been under pressure due to high energy costs and that this had been further exacerbated by impending debt repayments stemming from expansion capital expenditure.
Sanghi Cement had the misfortune of commissioning a new line at its integrated plant during the Covid-19 pandemic. The subsidiary of Sanghi Industries operates a 6.6Mt/yr unit at Kutch in Gujarat, with a 130MW captive power plant and a 13MW waste heat recovery (WHR) unit, making it one of the largest plants in the country. It also owns three cement terminals in Gujarat, Maharashtra and Goa. Its annual power and fuel costs rose by 79% year-on-year to US$49.9m in the year to March 2022. Then its finance costs tripled to US$29m in the year to March 2023. Some of the increased fuel costs may have been down to the new production line but its total income in the year to March 2023 was lower than in the year to March 2019.
Adani Group and JK Lakshmi Cement both operate plants in Gujarat. Adani Group runs one integrated and one grinding plant in the state via its Ambuja Cement subsidiary. JK Lakshmi Cement owns a grinding plant. A number of other companies additionally manufacture cement in the state. The biggest of these is the country’s largest cement producer, UltraTech Cement, with three integrated plants and two grinding ones in Gujarat. It would be a surprise if this company tried to buy a share of Sanghi Cement. One prominent India-based cement company that does not have a manufacturing presence in the state is Shree Cement. This made it a compelling candidate for the acquisition before it ruled itself out.
On the national stage, ratings agency ICRA’s June 2023 cement sector report forecast a ‘stable’ outlook for the sector, with cement volumes expected to grow by 7 - 8% in the 2024 financial year. This should be supported by the residential market and infrastructure projects. Crucially, it also noted that power and fuel costs, which peaked in the July - December 2022, eased in early 2023 and are anticipated to further soften in the 2024 financial year. The agency’s view was that this would help company earnings margins, but not to the levels seen in the five years prior to the Russian invasion of Ukraine. This may be cold comfort for Sanghi Cement, but it may have implications for any bidding process.
Lastly, ICRA also warned of the weakening effects that El Niño could have on the monsoon season and, in turn, rural house building during this period. The weather has been a ‘hot’ topic globally this year, as various records have been broken. Yet on a day-to-day basis the weather can also affect the business of making and selling cement. ICRA’s concern was for the latter. An example of the former occurred in June 2023 when Cyclone Biporjoy caused disruption at Sanghi Cement’s Sanghipuram plant. The unit was shut down in mid-June 2023 to protect the staff. Some damage was reported and the plant reopened at the end of the month. Again, as with fuel prices, the weather may also play a part in the calculations of any company considering buying a stake in Sanghi Cement.
Update on Indonesia, July 2023
Written by David Perilli, Global Cement
19 July 2023
The government in Indonesia made building new cement capacity harder this week. The new rules are intended to strengthen the local sector in the face of a utilisation rate of only 53%. A moratorium policy and/or new investment arrangements have been placed on new cement plant projects. Instead, companies have been asked to focus on the regions of Papua, West Papua, Maluku and North Maluku instead, where demand for cement is higher than what the local production base can produce. Ignatius Warsito, the Director General of the Chemical, Pharmaceutical and Textile Industry at the Ministry of Industry, said that the new rules would be reconsidered once the capacity utilisation rate reaches 85%.
Other measures the government is also looking at include increasing exports of cement, changing regulations related to the coal Public Service Agency (BLU) and improving overland transport. On that last point the authorities and the cement producers are looking at how logistics costs can avoid rising in the face of the impending Zero Over Dimension Over Load (ODOL) policy. Proposals the sector has submitted include implementing a multi-axle policy for trucks and improving the quality of certain roads to allow for higher capacity vehicles.
As one of the government’s focus areas - coal - suggests, fuel prices have been a headache for the cement sector in recent years. Warsito noted that international coal prices started to rise in late 2020. This was likely due to the logistical mess that the coronavirus pandemic caused to the global economy. Higher coal prices caused a “significant” effect on the cement industry through both higher production costs and restrictions on supplies. One irony to note here is that Indonesia is one of the world’s leading coal producers. Donny Arsal, the head of Semen Indonesia, told the government in 2022 that the war in Ukraine had enticed local coal companies to export more coal due to the rising international price. At this time he lobbied the administration to use its local domestic market obligation (DMO) subsidy to better serve the cement sector by giving it more coal at a fixed price.
Graph 1: Cement demand and capacity in Indonesia. Source: Semen Indonesia and Indonesia Cement Association.
Overcapacity has been a recurring feature of the Indonesian cement market since at least the 1990s as the demand and capacity have grown sometimes out of step. The capacity utilisation rate reached 90% in the early 1990s only to fall to 50% by the end of that decade due to the Asian financial crisis. More recently Holcim left the market in 2019 when it sold its business to the Semen Indonesia. The state-owned company consolidated more than half of the country’s cement production capacity at the time. According to its data for the first quarter of 2023 it has a 51% market share and a 46% production capacity share. It also said that 92% of local demand was catered for from four of the country’s 14 producers, namely: Semen Indonesia; Indocement; Conch; and Merah Putih.
A recent study by the Jakarta Post newspaper suggested that after a poor first half in 2023, cement demand was expected to rebound and create modest overall annual growth by the end of the year. The key reasons for this outlook are increased government infrastructure spending, ongoing work on the new capital city Nusantara and anticipated price stability. The new city project, for example, is expected to require 1.6Mt of cement in the 2022 - 2024 period. Risk factors, of course, abound such as a global economic slowdown, financial problems at some of the government-owned construction companies like Waskita Karya and new capacity. A new 8Mt/yr (!) plant owned by local company Kobexindo and China-based Honshi Cement, for instance, is scheduled to start operation in the second half of 2023 in East Kalimantan. Even though the government says that the new unit will export 90% of its production, it will place pressure on other existing sites hoping to increase exports.
The country’s largest cement producer being majority owned by the government is a pertinent feature here given that the same government has also effectively banned new capacity. Semen Indonesia’s earnings before interest, taxation, depreciation and amortisation (EBITDA) have fallen each year consecutively since 2020. As mentioned above overcapacity has long been present in the local sector and recent events have made it worse. Yet, the companies that are likely to benefit the most from a block on newer, competitive cement plants are likely to be the established players. That said, though, with the utilisation just above 50% and new projects like the Kobexindo-Honshi plant on the way, the government likely feels it has to take some form of action. Other tools at its disposal include a national carbon exchange set to launch in September 2023. Power companies will participate from the start with cement producers anticipated to follow at a later stage. Despite the uncertain short-to-medium term outlook the cement sector in Indonesia remains one of the largest in the world with plenty of business to be done. Denmark-based FLSmidth was clearly mindful of this when it opened a new office in Jakarta in April 2023.
Has Vietnam's export-driven cement industry reached a precipice?
Written by Jacob Winskell, Global Cement
12 July 2023
The close of the first half of 2023 brought the latest crop of seasonal cement data from the Vietnam National Cement Association (VNCA). Vietnam sold 61.4Mt of cement and clinker during the first half of 2023, up by 2.7% year-on-year.1 Graph 1 (below) tracks the progress of full-year Vietnamese cement and clinker sales over the six years up to 2022, as well as the most recent half-year.
Graph 1 - Vietnamese annual cement production, January 2017 – June 2023
The first half of 2023 marks the first half-year in which lockdown restrictions have been absent in both Vietnam and its main export market, China, since the start of the Covid-19 outbreak.2 Vietnam was especially hard-hit: it implemented the first lockdown outside of China in March 2020, and has recorded the 13th most Covid-19 cases of any country up to July 2023. Then, the Russian invasion of Ukraine in 2022 caused uncertainties for cement producers and importers all around the world. Yet the price of imported coal across Southeast Asia had returned to pre-war levels by the end of June 2023.3 This indicates that the first half of 2023 may represent a ‘typical’ first half for the Vietnamese cement industry, for the first time this decade. During the 2010s, this meant growth margins of over 10% year-on-year.
During the first half of 2023, Vietnam’s sales volumes grew by 30% from pre-Covid-19 levels of 47.1Mt in the first half of 2019, confirming the industry trend of rapid capacity expansion. Just in the course of the half year, Vietnam’s integrated cement capacity rose by 7.9% to 123Mt/yr.4 It previously rose by 6.9% year-on-year to 114Mt/yr in 2022. That year, first-half cement sales also grew by 6.9% year-on-year, to 59.8Mt from 55.9Mt. In the first half of 2023, capacity growth has outstripped the country’s sales growth, of 2.7% year-on-year.
Meanwhile, Vietnam exported 15.7Mt of cement and clinker in the first half of 2023, 26% of its total despatches.5 This corresponds to a decline of 31% year-on-year from 22.7Mt (38% of despatches) in the first half of 2022 and a rise of 0.5% from pre-Covid-19 levels of 15.6Mt (33%) in the first half of 2019.
Chinese construction is the lynchpin in the Vietnamese cement industry’s current growth model. Over successive Five-Year Plans, it has consumed increasing volumes of clinker from Vietnam, as well as cement, at diminishing prices. This strategy overreached itself in the first quarter of 2023, more than a year into an on-going Chinese property market slump, when the value of Vietnam’s cement and clinker exports to the country fell by 95% year-on-year, to US$11.4m.6
By lowering prices, Vietnam’s cement sector charts a careful course within the contested waters of global trade rules, but it has run aground before. Most recently, from the start of 2023, the Philippines attached tariffs of up to 28% (and up to 55% for blended cement) to Vietnamese cement from 11 different producers.7 The Philippines Tariff Commission had found that ‘dumped’ cement from Vietnam – constituting over 50% of cement imports over the 18 months up to the end of 2020 – threatened the domestic industry. The failure to diversify its markets is a further sign that Vietnam’s current positioning in the cement and clinker trade is, at best, medium-term.
From October 2023, cement entering the European Union (EU) will become subject to extra taxes under the carbon border adjustment mechanism (CBAM).8 The EU is a relatively small trade partner for Vietnam, but the longer-term effect of this policy will be to replicate itself in the statute books of other nations and trade blocs, beginning in the Global North. With forecast lignite imports of 70 – 75Mt to Vietnam in 2023 – 2026, opportunities for cement exports from Vietnam, and countries like it, are diminishing.
The best situation for Vietnam would be accelerated growth in its domestic consumption base. The government is attempting to trigger a construction boom with its 2023 budget, which includes US$5bn in residential construction funding. Meanwhile, full-year infrastructure spending will rise by 25% year-on-year.9 To this end, it also needs to keep the cement price low. From 1 January 2023, Vietnamese exporters paid a tax of 10% of value on shipments of cement and clinker, instead of the previous 5% rate. If successful, this will nourish booming consumption with booming, and cheap, supply. Vietnam is grafting its Chinese model back onto the domestic market.
Producers will keep exporting. In May 2023, Nghi Son Cement Corporation despatched a first shipment of 31,500t of cement to the US. Nghi Son Cement Corporation’s cement, produced with fly ash, is clearly considered by the company and its owners to have some long-term marketability in the US. Said owners include Japan-based Taiheiyo Cement, which produces cement in the US via its CalPortland subsidiary.
In Vietnam, the cement industry has undergone a period of unparalleled growth, fuelled by exports. It can now reinvest the proceeds in establishing a self-sufficient construction sector around an ever more sustainable cement industry, ready to become the first choice across new markets as they arise in Southeast Asia and beyond.
1. Global Cement, 'Vietnam's first-half cement production declines in 2023,' 29 June 2023, https://www.globalcement.com/news/item/15941-vietnam-s-first-half-cement-production-declines-in-2023
2. The Observer, ‘‘It was all for nothing’: Chinese count cost of Xi’s snap decision to let Covid rip,’ 29 January 2023, https://www.theguardian.com/world/2023/jan/29/chinese-cost-covid-xi-lockdowns-china
3. Reuters, ‘Column: Asia thermal coal prices get the blues from Europe and LNG,’ 20 June 2023, https://www.reuters.com/markets/commodities/asia-thermal-coal-prices-get-blues-europe-lng-russell-2023-06-20/
4. Việt Nam News, ‘Record input costs thwart cement groups,’ 12 July 2023, https://global.factiva.com/ha/default.aspx?mod=SavedSearch_SelectSearch&page_driver=SavedSearch_SelectSearch#./!?&_suid=168119771197707004455190223307
5. Việt Nam News, ‘Industry: Vietnam’s Cement, Clinker Exports +82.2% y/y to $116M in Jun: GSO,’ 4 July 2023, https://global.factiva.com/ha/default.aspx?page_driver=searchBuilder_Search#./!?&_suid=168908188871006418595282713178
6. Vietnam Investment Review, ‘A strenuous year ahead in cement,’ 9 May 2023, https://vir.com.vn/a-strenuous-year-ahead-in-cement-101707.html
7. Global Cement, 'Philippines Department of Trade and Industry to impose anti-dumping duties on cement from Vietnam,' 22 December 2022, https://www.globalcement.com/news/item/15084-philippines-department-of-trade-and-industry-to-impose-anti-dumping-duties-on-cement-from-vietnam
8. Global Cement, 'Too taxing? How the CBAM affects cement exporters to the EU,’ 29 June 2022, https://www.globalcement.com/news/item/14316-too-taxing-how-the-cbam-affects-cement-exporters-to-the-eu
9. Customs News, ‘Cement enterprises expect a "brighter" second half of 2023
https://english.haiquanonline.com.vn/cement-enterprises-expect-a-brighter-second-half-of-2023-25368.html