During recent discussions with construction, cement and building materials executives, one said that the next 12 months will be about the need to ‘survive until 2025.’ Proudfoot’s Angus Maclean looks at five ways global cement producers can do just that...
During 2023, Proudfoot held numerous discussions with construction, cement and building materials sector executives on the challenges for 2024. This, combined with its ongoing consulting engagements and 78-year history of implementing operational excellence around the world, have allowed it to develop a five-point plan for the building materials sector in 2024:
1: Recession Proofing
Most global players still saw good financial results throughout 2023, but cement producers still need to have recession plans to combat future economic slowdowns. It’s not the same everywhere. For example, demand in the US remains high, especially in the southeast and central regions. Even with high interest rates, commercial construction demands high volumes of cement. Some markets were sold out in the fourth quarter of 2023.
However, all firms should develop recession plans. These can include pre-planned templates for downscaling or divesting operations, to 90%, 70% or even 50% of normal size. More agile companies that can take take big decisions quickly do this better.
Proudfoot sees that volumes are dropping in certain parts of the world, so firms will also need to convert as many fixed costs as possible into variable ones. This will improve cost flexibility and responsiveness to changes in production levels. Ways to ‘variablise’ costs include: Outsourcing non-core functions or, to put it another way, centralise core-functions. For example, this could include the use of a single remote operating centre to operate several plants in the same region. Flexible labour contracts (particularly for semi-retired and young workers) are another approach, as are energy-efficiency improvements, proactive maintenance expenditure planning, improving inventory and raw material management, transportation and logistics, exploring leasing, variable cost allocation and fixed cost controls. Alongside this, producers should continue to adopt more sustainable practices, such as using alternative fuels, improving energy efficiency and developing carbon capture technologies.
2: Sustainability as a Hook
Last but not least, with the cost-of-living crisis in many parts of the world, building new properties is likely to slow considerably due to inflation in building materials prices. Productivity improvements and/or cost cutting will therefore be crucial.
Uptake of low-CO2 products and services has been ‘okay’ to date. 2024 needs to be the year that cement producers get clients ‘hooked’ on these within the circular economy. This will maximise their market share, even at the expense of prices and margins. Firms that can entice construction firms to use significant volumes of such products - in preference over lower-cost traditional products - will experience a short-term income hit, but will see a pay off in 2025 and beyond.
However, there are now enough low-CO2 products out there. There is no need to add more, so rationalise! Stop your older stock keeping units (SKUs) using environmental constraints and suspend all ‘new’ new products until 2025.
3: The End-to-End Value Chain
Global cement players have been repositioning themselves as building materials suppliers for some time. But why not go even further, into products like: steel, wood, bricks, masonry, roofing, insulation, electrical components, plumbing systems, heating, ventilation and air-conditioning (HVAC) systems and landscaping products? Other options include expansion into: architectural and engineering services, construction management, contracting/coordination of construction activities, site preparation and excavation, surveying and geotechnical services, environmental and regulatory compliance services, waste management and disposal, circular economy advice and safety and training services. Other tangential moves could include transportation and logistics to move construction materials, equipment and personnel. Proudfoot sees these behaviours in other sectors all the time. Why not cement?
4: Be Clear on Capex
Cement producers should have a very clear strategy regarding how they will split capital expenditure (capex) over the next 3 - 7 years. What should the method be? Fixed or historical allocation, return on investment, needs, strategic priorities, payback time, net present value (NPV), internal rate of return (IRR)..? The list of options is long, and the answers usually balance several of these. How much should be allocated to capex that simply maintains the status quo (i.e., maintenance): 10%, more? How much should go to ‘normal’ developments like process improvement, efficiency enhancement and digitisation? 20%, more, less? How much capex should be directed towards environmental, sustainability and governance (ESG) and decarbonisation? 70%?
Many cement firms are thinking out of the box to address best practice to ensure maintenance turnaround and shutdowns come in under budget. Labour training and recruiting for maintenance continues to be a challenge in all markets. Many cement firms are partnering with technical educational programs to stay out front on recruitment.
For those engaged in more than one business stream - an increasingly common situation - what should be the ideal capex split for cement, concrete, aggregates, asphalt and other building materials sites? What are the ‘ideal’ percentages for these over the period from 2024 to 2027 and on to 2030? These are all questions that Proudfoot has been asked several times over the past year. It’s not an easy answer, as it needs to align with the financial goals of your business, accounting practices, and the specific assets and projects in question. It would take a lot of time to explain our full insights. The author welcomes further discussion with interested parties.
5: Workforce Capability & Attractiveness
Proudfoot’s number five tip for 2024 is that companies develop the ability to deliver real results through their frontline workers - and help them to have a great day, every day! Why? Because, given the workforce demographics and the relatively low attractiveness of the sector, if this is not done there will be many gaps in the organisations by 2030. Most companies Proudfoot has spoken with experienced challenges in 2023 when trying to recruit transportation drivers and maintenance technicians. By looking at the ages on your demographic pyramid, it may be possible to anticipate how shrinking populations and migration will affect staffing levels. Wages are forecasted to increase at a minimum of 5%/yr, which creates product pricing risk and some market slowdown. The situation varies from country to country of course, but Proudfoot is receiving more and more requests on how companies can attract and retain employees at all levels.
A recent assignment focused on creating best practice ‘job fairs,’ where these events become a monthly standard versus quarterly in the hiring season. For example, clients in some regions need work done 24/7 but the culture is drifting towards a four-day work week due to recruitment, inflation, and salary challenges. Entire work patterns need to be updated. There are also reputational challenges facing the cement industry. We can see a tsunami coming towards the cement industry in terms of reputational damage. Young apprentices will be stigmatised for working at a cement plant. In Germany it will only be a matter of time before cement plants are facing stunts from activist groups. Making jobs at cement plants more attractive, particularly for the younger generation, and improving productivity - with which Proudfoot can help - are both matters of survival in our view.... for many plants.
