One of the surprises from the recent round of half-year results has been HeidelbergCement’s struggle to grow its sales so far in 2017. Part of this has been down to a variable market in Indonesia where the German cement producer runs the second largest player, Indocement.

Cement consumption for the country as a whole dropped by 1.3% year-on-year to 29Mt in the first half of the year, according to Indonesian Cement Association figures. This appears to be due to a particularly poor month in June 2017 where local consumption fell by 27% to 3.7Mt. Prior to that, consumption was actually showing 4% growth up until the end of May.

Fairly reasonably HeidelbergCement blamed the decline in part on this year’s timing of Ramadan. Unfortunately this could not explain everything, as its total sales volumes including exports fell by 2.4%. Remove the exports and its sales volumes fell by 4.4%, more than the national average. It said this was due to its concentration in weaker markets in Jakarta, Banten, and West Java where competition pressures had forced prices down ‘significantly.’

They weren’t alone in feeling the pain in June 2017 with both Semen Indonesia and LafargeHolcim reporting reduced sales. However, LafargeHolcim also raised the issue of production overcapacity creating increased sales volumes and pushing down prices. This was reflected in lower earnings for its Asia Pacific division. HeidelbergCement too saw its earnings crumble.

Graph 1: Cement production capacity and consumption. Source: Semen Indonesia investor presentation, March 2017.

Graph 1 shows quite nicely the fix the Indonesian cement market is in at present. Consumption surpassed production capacity in the early 2010 before incoming capacity jumped ahead again around 2013. You can also view Global Cement’s version of this graph here. Even at an optimistic annual growth rate of 8%, consumption won’t get close to capacity until 2020. Yet before the market collapsed in June, consumption was growing at 4%, which is the weakest of Semen Indonesia’s growth scenarios.

Admittedly the graph is in an investor document so we can forgive ebullience but they are going to need a magic bullet to dodge this one. Lucky then that the graph also has infrastructure highlighted. The cement producer says that the Indonesian government earmarked US$26bn for infrastructure spending in 2017 and that this spending campaign can be seen in the changing ratio of bulk to bagged cement it has been selling. Independent of Semen Indonesia, the Fitch credit rating agency was also predicting rising consumption off the back of infrastructure plans in a report it put out in June.

However, as more cement plants are being built, cement plant utilisation rates seem destined to stay subdued for the foreseeable future unless the government seriously ups its infrastructure investment or unless the economy goes into overdrive. Unsurprisingly exports have shot up so far in 2016, by 74% to 1.14Mt. Cement producers in neighbouring countries beware!

Last week we looked at the prospect of two new Angolan cement plants, a situation that will reportedly lead the country to being ‘self sufficient in cement.’ When we hear this phrase, very often from relatively small markets in Africa or Asia, the obvious next step invariably follows: The country in question will become a regional powerhouse for cement exports.

But try telling that to the desperate Vietnamese cement producers, swamped by chronic overcapacity and very low prices, both at home and abroad. In an effort to shift more of Vietnam’s cement mountain, this week the Ministry of Planning and Investment (MPI) proposed big changes to its handling of cement exports. At the moment cement is subject to a 5% export tax and does not receive VAT refunds. This means that Vietnamese cement has become less competitive than Chinese, Thai, Indonesian and Japanese cement on the regional market, compounding the oversupply situation at home.

The MPI now proposes to scrap the tax and allow for VAT refunds to avoid a colossal 36-47Mt oversupply of cement by 2020. It is quite staggering that this response hasn’t been considered before. This is especially the case, given that the VICEM’s General Director Tran Viet Thang asked for the government to look at the rules back in February 2017. Indeed the Vietnam Cement Association predicted an oversupply of nearly 50Mt/yr by 2020 in January 2017.

Vietnam exported 14.7Mt of cement and clinker in 2016 according to its domestic statistics service. The country was the seventh largest exporter of cement and clinker in 2016 in value terms, with a total value of US$431.7m. China, as one might suspect, topped the list, but only at US$683.6m, around 58% more than Vietnam. Given that China’s cement capacity is around 20 times that of Vietnam, this highlights the extent to which Vietnam is trying to rely on imports.

A market-led response to this would be to close some of the cement plants down and stop commissioning any new ones. China has made some inroads into this approach and Vietnam is following suit… to some extent. That said, however, Trinh Dinh Dung, the Deputy Prime Minster, inaugurated the second production line at the Thanh Thang Cement plant on 4 July 2017 and Long Son Cement will open its second production line at Long Son in late August 2017. That new line will add nearly another 3Mt/yr of capacity to the national total just by itself. On top of this, Thai-owned Siam City Cement Vietnam opened a new ‘terminal’ in Vietnam in late June. Thailand ranked above Vietnam in the cement and clinker export list for 2016 at US$612.2m, suggesting that, contrary to the obvious implication, the port could even be used to ship out Thai exports into Vietnam!

This is not the first time we have heard about Vietnam’s massive cement surplus but it is the first time that the government appears to have registered it as needing attention. A market-led economy would simply shut the plants down but Vietnam plays by different rules. Will changing the rules on tax help it sell out its surplus? Call us in 2020…

Cement sales volumes are down at the larger multinational cement producers so far in 2017. As the first half-year results emerge, a picture seems to be appearing of sluggish growth at best for the major internationals. Reduced working days and poor weather have been blamed for the underwhelming performance.

Graph 1: Cement sales volumes for selected multinational cement producers during the first half of 2017. Source: Company financial reports.

True, LafargeHolcim’s sales rose by 0.4% year-on-year on a like-for-like basis, probably due to the assets the group has been sloughing off since the merger, but this is hardly the dynamic growth shareholders may have hoped for. Meanwhile, HeidelbergCement, following its acquisition of Italcementi in late 2016, has only been able to increase its cement and clinker sales by 1% for the first half of 2017 once consolidation effects were excluded. Here the problem appears to be reduced sales in both the US and Indonesia at the same time. This then leaves Cemex with a 2% drop in sales volumes to 33.9Mt with a big drop in the US despite a promising construction market otherwise. It blamed the decline on a high comparison base in 2016 and the weather.

The larger regional players examined here appear to have fared better. Both UltraTech Cement in India and Dangote in sub-Saharan Africa reported flat or falling sales volumes. However, delve a little deeper and there’s more going on. UltraTech didn’t offer any reason for the decline although it was likely focused on its acquisition of assets from Jaiprakash Associates and the knock-on from the demonetisation process last year. That purchase increased its cement production capacity by nearly 40% to 91.4Mt/yr from 66.3Mt/yr and it seems keen, to investors at least, that it will be able to rocket up the capacity utilisation rate at the new plants.

Dangote meanwhile has taken a blow from the poor economic situation in Nigeria, where it still produces most of its cement. Here, sales fell by 21.8% to 6.86Mt from 8.77Mt, causing its overall sales to fall by 11.3% to 11.5Mt. Almost incredibly though, as Graph 2 shows, Dangote upped its sales revenue by a whopping 41.2% to US$1.13bn off the back of improved efficiencies and a much better fuel mix in Nigeria. The turnaround is impressive considering the pressure the company faced in 2016. Today’s news that the firm has sold a 2.3% stake to foreign investors adds to the impression of a company on the move.

Graph 2: Sales revenue for selected multinational cement producers during the first half of 2017. Source: Company financial reports.

Looking at overall sales revenue shows a happier picture for most of the producers detailed here, with the exception of HeidelbergCement. Although Graph 2 shows declines for LafargeHolcim and Cemex on a like-for-like basis, at least growth is occurring. HeidelbergCement though has reported static revenue on an adjusted basis for the period. This suggests that the producer has hit problems just as it is starting to integrate the Italcementi assets into its portfolio. In theory the geographic spread of its new production units should shield it from lowered growth elsewhere but if this doesn’t happen it may be in for a rougher ride than LafargeHolcim following its merger.

In summary, being a large-scale multinational cement producer doesn’t quite seem to be offering the balanced growth one might expect so far in 2017. Cement sales volumes are slipping and revenue is also down on a direct comparison basis. It’s barely a case for comparison but smaller regionally based producers like UltraTech Cement and Dangote, in the right locations, seem to be capitalising on their positions. We’ll see how the big Brazilian producers Votorantim and InterCement, Buzzi Unicem and CRH fit this trend when they release their financial results over the next few weeks.

The old joke about buses only coming along in pairs might just apply to Angolan cement plants this week with the inauguration of Nova Cimangola’s new 2.4Mt/yr cement plant in Luanda. It follows the announcement of the start of an upgrade project to build a clinker kiln at Cimenfort’s grinding plant in Benguela. In cement industry terms for a country with a production capacity below 10Mt/yr these projects are right on top of each other!

Nova Cimangola’s new plant has been a well-publicised project internationally. Sinoma International Engineering coordinated the line for US$400m in 21 months using components from well-known suppliers. Loesche provided a number of raw material, cement and coal mills for the project, including the country’s first vertical roller mill, as well as other components and parts. Loesche’s Austrian subsidiary A Tec also got involved as an EPCM (Engineering, Procurement & Construction Management) partner.

Cimenfort’s clinker kiln project is the third phase of a process to turn its grinding plant at Catumbela in Benguela into a fully integrated unit since it opened in 2012. Earlier phases saw the grinding plant’s capacity increase to 1.4Mt/yr from 0.7Mt/yr by using a new roller press. Work on the kiln is now scheduled to start in January 2018 with completion scheduled for 2020.

If Cimenfort makes it to clinker production they will join the country’s three main producers: Nova Cimangola, Fabrica de Cimento do Kwanza Sul (FCKS) and the China International Fund. Getting that far is by no means certain as the Palanca Cement plant project demonstrates. That scheme was backed by Brazil’s Camargo Corrêa, the owners of InterCement, and local business group Gema. However, the regulators bailed out Portugal’s Banco Espírito Santo, the financial backer of the project, in 2014 effectively killing it. Another project that has gone on the back burner is Portugal’s Secil’s plan to build a second plant next to its grinding plant in Lobito. Originally approved by the Angolan government in 2007 the project has been kicked around since then through various revisions to the local investment body. It was last reported as being under consideration by the president’s office of Angola in 2016.

Ministry of Industry figures place cement production capacity at 8.3Mt/yr compared to a consumption of 6Mt/yr. In contrast to this Secil’s parent company Semapa reported that the Angolan cement market contracted in 2016 by 25% to 3.9Mt in line with the poor state of the general economy, pushed down by poor oil prices. It blamed the decrease in cement consumption on a halt in public infrastructure spending and the negative effect that local currency devaluations had on clinker imports and other incoming raw materials. With the International Monetary Fund (IMF) forecasting economic growth to pick up for Angola in 2017, improvements in the construction and cement sector are expected by Semapa but they hadn’t been seen so far during the first quarter of the year.

The government’s keenness to describe its cement industry as ‘self-sufficient in cement’ mimics calls from other African countries like Nigeria. The Angolan government banned cement imports in 2015, with the exception of certain border provinces, and this has continued into 2017. However, the ban hasn’t stopped the country exporting cement to its neighbours. Earlier this year the head of Cimenterie de Lukala in the Democratic Republic of Congo blamed the closure of his company’s integrated plant on imports from Angola.

All of this leaves an enlarged local cement industry waiting for the good times to come again. In the meantime, exporting cement and clinker no doubt seems like a promising proposition. In the middle of this are projects like those from Cimenfort and Secil that are looking decidedly dicey in the current economic environment. These companies may have just missed the bus to make their upgrades happen. Still, if they wait around long enough, their chance may come again when the market revives.