Another week and it’s another commodity story related to the effects of coronavirus. This time the Indian press and financial analysts have started to notice a shift in the fuel mix of some of the major producers from petcoke to coal. UltraTech Cement moved to 30% petcoke and 60% imported coal in the fourth quarter of its 2021 financial year that ended on 31 March 2021. This compares to a reported mix of 77% and 10% in the previous year according to Mint. Dalmia Bharat reduced its share of petcoke to 52% in the fourth quarter from 70% in the third quarter, while its coal mix was 35 - 40% in the fourth quarter.

Price is the driver here. UltraTech Cement’s chief financial officer Atul Daga summed the situation up in an earnings call in late January 2021. Essentially, he said that fuel represented about 13% of total costs for cement producers in India and that both the cost of coal and petcoke nearly doubled from June 2020 to January 2021. However, coal is seen as the cheaper option, hence the move towards it in the fuels mix ratio. The petcoke market meanwhile has suffered due to reduced oil refinery output due to, you guessed it, the effect of coronavirus on global markets in 2020. Scarcity in the US market has particularly affected the decisions on buyers for Indian cement companies since this is the key source of their imports. Demand for petcoke from Latin America and the Mediterranean hasn’t helped either. Both petcoke and coal markets are expected to stabilise in the second half of 2021. Diesel prices have also risen recently causing UltraTech Cement’s power and fuel costs to increase by 28% year-on-year to US$356m and logistics costs, including freight expenses, to rise by 25% to US$449m in the fourth quarter of its 2021 financial year.

With this in mind it’s interesting then, that for some analysts at least, fuel prices have been seen as more worrying for cement producer profits than the latest round of coronavirus-related lockdowns from India’s second wave of infection. Fitch Ratings for example, warned that the impact of mounting fuel costs would continue to be seen in the quarter to June 2021 but that it would subside due to the switch in fuel mix and price rises passed to end consumers. On the lockdowns, it forecast that localised restrictions, with cement plants being allowed to continue operating in most states, would cause a far less pronounced drop in cement demand than during the first national lockdown.

Graph 1: Monthly cement production in India, January 2019 – April 2021. Source: Office of the Economic Adviser.

Graph 1 above shows that the crisis the Indian cement sector faced during the first lockdown, when production crumbled by 85% year-on-year to 4.3Mt in April 2020. The following recovery saw production reach its second highest ever figure at 32.9Mt in March 2021. It’s too soon to tell what’s happening from the national figure but that dip in April 2021 is not looking good so far.

One benefit from unstable fuel prices is that it builds the economic case for cement producers to raise their alternative fuels substitution rates. UltraTech Cement, for example, reported that its ‘green’ energy rate grew to 13% in its 2021 financial year from 11% in 2020. With a target of 34% by its 2024 financial year, this is an ideal opportunity for a change for both UltraTech Cement and other producers.

The UK construction market is in a funny situation right now. As the economy has started to grow in 2021, shortages of building materials have been reported following the relaxation of coronavirus-related restrictions. In April 2021, for example, the Construction Leadership Council (CLC) added cement, aggregates and certain plastics to its existing lists of products in short supply. These commodities joined a slew of other materials, including timber, steel, roof tiles, bricks and imported products such as screws, fixings, plumbing items, sanitaryware, shower enclosures, electrical products and appliances. The CLC advised all users to, “plan for increased demand and longer delays, keep open lines of communication with their suppliers and order early for future projects.”

Skip forward a month to May 2021 and these shortages are on more people’s minds with the announcement by the Office for National Statistics that UK monthly construction output grew by 5.8% month-on-month to around Euro16.5bn in March 2021 due to both new work and to repair and maintenance projects. Quarter-on-quarter output also rose by 2.6%, adding to the impression of a building sector emerging from the fog of lockdown. In the face of this good news Nigel Jackson, the chief executive of the UK mineral Products Association (MPA), was asked about reported shortages of cement. He told local press this week that “it would not be surprising if there were short-term issues of supply as the economy gathers momentum.” He added that the biggest issues had been observed in levels of bagged cement typically used in domestic projects.

The MPA followed this up with the results of a survey of building materials manufacturers that reported a slow but steady start to 2021 with mounting construction demand month-on-month. Sales volumes of aggregates and concrete were both up quarter-on-quarter but volumes of asphalt and mortar fell. Unfortunately that survey didn’t cover cement volumes but it did have more to say about concrete. In its view ready-mixed concrete sales had been subdued since 2017 due to the UK’s departure from the European Union (Brexit) and a general slowdown in residential building. The market recovery seen so far in 2021 was likely to be merely a return to growth from a subdued level of activity that pre-dates Covid-19.

At the time of writing the UK government faces a decision about whether to continue opening up the economy or exercise caution in the face of the as-yet unknown consequences of the Indian variant of coronavirus. This may delay talk of building materials shortages but it can’t avoid it forever. In the UK, cement shortages appear to be due to the self-build segment and will hopefully soon be resolved.

A shortage of cement in the UK may not mean much to people outside the country, with the exception of exporters. Yet the wider picture here is that the coronavirus pandemic has affected the production of building materials, changed end-user behaviour and distorted markets around the world. Other examples include the row over the price of cement in Nigeria, the boom in cement sales in Brazil in the second half of 2020 or reported shortages in Jamaica this week. A significant number of people, when forced to spend more time at home, appeared to save money and then decided to either move to a different house or make their current one better. Yet at the same time differing government restrictions and market fluctuations have seen building material output levels vary widely. Other reasons are at play both local and international. Brexit in the UK is one example of the former, as importers and exporters have been forced to grapple with new rules and costs. The temporary blockage of the Suez Canal in March 2021 is one example of the latter. No wonder supply chains are struggling. That last point goes wider than building materials though, for example, as anyone trying to buy semiconductors has discovered. One fear behind all of this though is whether these are temporary shortages or whether inflation is on the way for the global economy generally. In this is the case, then it signals the end of the low consumer inflation rate era since the financial crash in 2008 and may herald changes in behaviour from both producers and consumers.

HeidelbergCement confirmed the rumours this week with the announcement that it was selling assets in the western US to Martin Marietta for US$2.3bn. The deal covers subsidiary Lehigh Hanson’s US West region cement, aggregates, ready-mixed concrete and asphalt businesses in California, Arizona, Oregon and Nevada. This includes two of its cement plants, with the exception of the 1.5Mt/yr Permanente cement plant in California, related distribution terminals, 17 active aggregates sites and several downstream operations. The companies expect to conclude the deal by 2022 but naturally it is subject to approval by competition bodies.

Well, this is a big one considering that one of the catalysts for the group’s divestment plan was the reduction of the value of its total assets by Euro3.4bn in July 2020 following a review. Depending on the exchange rate, the value of the divestment to Martin Marietta covers half to two thirds of that amount. Group chairman Dominik von Achten later told the media in February 2021 that the company was planning to sell the first of the five assets in early-to-mid 2021. However, cement isn’t the full story here since Lehigh Hanson operates three integrated plants in California and seven terminals. So, by elimination, the Tehachapi and Redding plants are the ones that are being sold along with some combinations of the terminals. Both of those plant have production capacities of around 0.8Mt/yr. Unless the terminals being sold have been valued highly, then the majority of the deal appears to encompass some or all of the 25-odd aggregate sites, 15 asphalt sites and 30 ready-mix concrete sites the company operates in the four states.

On the cement side it doesn’t seem unreasonable at face value for the authorities to allow Martin Marietta to take over most of Lehigh Hanson’s business in the region since it should broaden competition from a production angle. Instead of five companies in California with integrated plants, there will be six. For Martin Marietta, the deal also carries the feel of unfinished business in the region since it briefly held a cement business there for around a year in the mid-2010s. It acquired Texas Industries (TXI) in July 2014 and then sold the cement business in California to CalPortland in September 2015.

Both companies are pursuing different strategies. HeidelbergCement says it is hunkering down on its other four North American regions – the US Midwest, Northeast and South, plus Canada - through selected ‘bolt-on’ acquisitions and plant upgrades. Martin Marietta says it wants to take advantage of long term demand trends such as increased state infrastructure investment in California and Arizona and private-sector growth. It also reassured shareholders with its version of the acquisition/divestment story by saying it was going to generate value the same way it did previously with TXI. It’s a small thing but the acquisition also sees the US’ largest domestic cement producer increase its production base. The top five North American cement producers will remain controlled by companies headquartered in Europe but it is a step towards regionalism.

As for who’s right, in the short term, the west coast region looks good. The area included some of the best performing states in 2020 in terms of growth in cement consumption year-on-year in 2020 with the exception of Oregon. In its winter forecast the Portland Cement Association (PCA) attributed growth in the Mountain region of the US (including Nevada) to underlying economic fundamentals and favourable demographic trends, although it expected this to slow down in 2021. In the Pacific region it forecast consumption to grow modestly in 2021 due to residential construction. As if to underline the current situation, Cemex decided to recommission a kiln in Mexico in February 2021 to cope with cement shortages and project delays in California, Arizona and Nevada.

In the face of these figures HeidelbergCement’s decision to sell suggests either it dangled a juicy proposition with good short term prospects in front of the buyers or its long term projections are pointing elsewhere. Selling up, yet holding onto its largest cement plant in the region, also smacks of hedging its bets. No doubt it will be holding on to a few terminals too. On the other hand, it would be very interesting indeed to know what part, if any, HeidelbergCement’s internal carbon price played in its decision to divest in the western US. California has the country’s biggest carbon emissions trading scheme (ETS). If say, legislators suddenly decided to follow the price trend of the European Union’s ETS then things might look different.

Reporting from Egypt this week suggests that the government may be finally taking action to aid the country’s beleaguered cement sector. Sources quoted by Reuters indicate that a production cut of at least 14% has been proposed. One of the cement industry sources broke it down into a 10.5% baseline reduction with a further 3.7% reduction per production line at a cement plant with an additional cut of 0.7% per year of operation. The Ministry of Trade and Industry has declined to comment on the story.

Graph 1: Cement production and capacity utilisation in Egypt. Source: Cement Division of the Building Materials Chamber of the Federation of Egyptian Industries.

Graph 1 above shows the key problem facing the sector: cement production has fallen each year since 2016. Added to this, local capacity utilisation took a knock when the 13Mt/yr government/army-run El-Arish Cement plant at Beni Suef opened in 2018. Before it opened the natural utilisation rate was around 80%. By 2020 it had sunk to 60%.

The coronavirus pandemic was another problem that the building materials market didn’t need and the last time this column covered Egypt (GCW 475), HeidelbergCement was restructuring its local subsidiaries in the country. Most producers were holding on for better days in the future but hoping for some form of government intervention such as production limits or an export subsidy programme. Meanwhile, analysts have been waiting for divestments. However, the prospect of the situation becoming worse was also present, in the guise of the Egyptian Cement Group’s new integrated 2Mt/yr plant, scheduled to open at Sohag later in 2021. Since then there’s not been much of a change until now.

Some very rough calculations by Global Cement suggest that the alleged government measures could have created an artificial utilisation rate of 78% in 2020 before the age of the plants was taken into account. For example, the El-Arish Cement plant with its six production lines would potentially see its production cut by around 33% and capped at 8.7Mt/yr. In theory a measure like this could better share out the market between the smaller producers or those with less market share. However, how this would play out with actual plant running costs or existing market share is unknown, although, as mentioned above, some of the multinational producers have been publicly calling out for these kinds of controls.

Playing around with the proposed caps could potentially create some absurd situations. For example, if a single line plant had been running for over 120 years (!) then it wouldn’t be allowed to produce any cement at all. It is lucky then that the earliest plant in the country opened in 1911 and it’s likely long gone. It’s a silly example, but the point is, if production limits do come in, there are likely to be winners and losers. The question for the local producers then is whether a system like this would be better than the current situation.