Analysis

Holcim agreed to sell its Indian assets to Adani Group this week for US$6.37bn. These include Holcim’s stakes in its local subsidiaries Ambuja Cement and ACC. The deal, if approved by the local competition body, should complete in the second half of 2022. This is one of the larger sales of cement company assets over the last decade. Adani Group, an Indian-based conglomerate with businesses across energy, transport and more, is now poised to become the second largest cement producer in India.

Global Cement Weekly previously covered a potential sale of Ambuja Cement and ACC in April 2022 when the story that Holcim was looking for a buyer first emerged in the Indian press. At the time local press speculated that the sale could generate as much as US$15bn for Holcim. So it is interesting to see that a figure of US$6.37bn has been agreed upon instead, less than half of the speculative figure. Roughly, as ever, this places a value of a little below US$100/t of cement production capacity. This seems like a relatively low pricing for these plants by international standards over the last decade. However, this doesn’t take into account many factors such as, for example, the condition of the plants, Holcim’s desire to change its business, the ease of selling up in India all in one go, other non-cement assets and so on. For Adani Group though, buying into heavy building materials production in a large market like India clearly seemed attractive. It is also worth noting that, similar to other cement sector acquisitions recently, here again is a buyer with a background in another carbon-heavy industry buying into another heavy emitter.

Table 1: Selected large scale acquisitions of controlling shares in non-Chinese cement production assets since 2012. Source: Global Cement news and company releases. Italcementi acquisition value reported by Reuters.

Table 1 above provides some historical context to Adani Group’s agreed acquisition by comparing it to other large completed deals in the cement sector over the last decade. Don’t forget that it is only looking at this from the cement sector. This list excludes changes in ownership in the Chinese cement companies in this period because, generally, there has been a government-driven consolidation in the industry through mergers rather than large-scale acquisitions. So, for example, the world’s current biggest cement producer CNBM had a reported production capacity of 350Mt/yr in 2012 and this rose to 514Mt/yr in 2020 as it absorbed other state-owned companies. The big merger it underwent during this time was with China National Materials (Sinoma) in 2018, primarily an engineering company that also produced cement.

The most obvious trend in Table 1 is the journey of Lafarge and Holcim from their merger in 2015 and the gradual realignment of the business subsequently. During this time the company has sold up in large markets outside of its core regions in Europe and North America. Latterly, it has also started to diversify away from heavy into lightweight building materials. One notable ‘nearly happened’ was LafargeHolcim’s attempt to sell its business in the Philippines to San Miguel Corporation for US$2.15bn in 2019. That deal collapsed when the Philippines Competition Authority failed to approve it within a year of its proposal. CRH enlarged itself from assets sold during the creation of LafargeHolcim and then picked up Ash Grove in the US in 2018. CRH’s head Albert Manifold memorably said in 2018 that his company was focusing on markets in developed countries and CRH’s large-scale acquisitions have largely followed this.

As for the others, HeidelbergCement’s purchase of Italcementi in 2016 almost appeared as a riposte to the formation of LafargeHolcim, albeit on a slightly smaller scale. It confirmed HeidelbergCement’s place as the world’s second largest non-Chinese cement producer. It is also one of the minority of truly multinational acquisitions on this list. Unlike LafargeHolcim and now Holcim though, HeidelbergCement hasn’t exhibited a desire to downsize or diversify at quite the same speed. UltraTech Cement’s acquisition of Jaiprakash Associates in 2017 confirmed its place as the largest Indian producer. That deal was publicly one of the longer lasting one as it originally started out in at least 2014 on a smaller scale and was later slowed down by the Mines and Minerals (Development and Regulation) (MMDR) Amendment Act. Smikon’s purchase of Eurocement in 2021 almost looks like part of the isolation of the Russian economy, especially with the benefit of hindsight given by the invasion of the Ukraine in early 2022.

Mega-deals have lots of moving parts but two of the most tangible to broader audiences are the price and the timing. Cemex infamously got both of these wrong with its acquisition of Rinker in 2007 as it paid high just as the US subprime mortgage crisis started a wider global financial one. This was despite Cemex’s emergence over the previous 15 years as a multinational force to be reckoned with due in part to the so-called ‘Cemex Way’ approach to management, acquisitions and integration. Clear winners from the big acquisitions over the last decade are harder to spot but CRH and UltraTech Cement look strong so far. Adani Group has certainly picked a lively time to make a purchase on this scale following a global pandemic with ongoing global supply chain issues and disruptions to energy and food markets.

China Daily ran a story this week entitled “Steel and cement don't reflect China's growth story any more.” The piece reassured English-language readers that the country’s economy is moving on and that recent falling production of cement simply reflected the “profound changes China's economic structure is undergoing.” Profound is the right word here given that China is home to the world’s largest cement sector.

Graph 1: Cement output by quarter in China, 2019 - 2022. Source: National Bureau of Statistics of China.

Data from the Ministry of Industry and Information Technology shows that cement output fell by 12% year-on-year to 387Mt in the first quarter of 2022. This compares to 7% and 15% falls in the third and fourth quarters of 2021 respectively. On an annual cumulative rolling basis, output previously hit a low of 2.22Bnt in March 2020 as the initial coronavirus outbreak was brought under control. Output then surged to a high of 2.53Bnt/yr in April 2021 before it started to fall in the autumn of 2021. On a monthly basis, output volumes fell by 5.6% year-on-year to 187Mt in March 2022.

As covered in last week’s column (GCW 555), the financial results from the larger Chinese cement producers have also suffered in the first quarter of 2022. CNBM’s total operating revenue fell by 1% year-on-year to US$7.29bn in the first quarter of 2022. Anhui Conch’s revenue fell by 26% to US$3.85bn and China Resources Cement’s (CRC) turnover fell by 18% to US$889m. Of these three only CRC has released cement sales volumes. Its sales volumes of cement and clinker decreased by 34% and 12% respectively.

In its own analysis, the China Cement Association (CCA) has summarised the current situation as one of rising costs, falling demand and declining benefits. The latest large-scale coronavirus lockdowns and a poor real estate market have hit demand. Rising energy and freight prices have increased the cost of cement. Together, higher costs and falling demand have hit the profits of the cement producers. CNBM’s net profit, for example, fell by 9% to US$420m. Regionally, the CCA observed that the losses of the northern-based producers had increased and that the profits of the southern producers had started to fall sharply also. Another interesting point it made was that the year-on-year decline in March 2022 was slower than compared to the first quarter as a whole and that high levels of inventory may have made March 2022 look worse than it actually was. The association is now pinning its hopes upon demand and prices picking up again later in the second quarter after the current quarantine controls are eased and the government curbs high coal prices.

The CCA’s take doesn’t seem unreasonable, although the first quarter of 2022 was previously deemed to be a continuation of the trouble the Chinese cement sector experienced in the autumn of 2021. Possibly the first quarter has turned out worse than expected but the monthly output in March 2022 has started to look like it might be a tail-off from the worst. The period to watch remains the second quarter of 2022. Looking more widely, energy shocks from the war in Ukraine couldn’t be easily predicted but coal prices were already becoming a concern in the autumn of 2021. China’s renewed zero-Covid policy meanwhile is starting to look unpalatable both economically and socially. Throw in a continued slowdown of the real estate sector and China Daily’s profound pronouncement about the future of cement may prove accurate.

Many first quarter financial results for cement producers are out already and what can be seen so far deserves discussion. The first observation is that the sales revenues of Chinese companies have suffered compared to their international peers. As can be seen in Graph 1 (below) CNBM increased its sales slightly in the first quarter of 2022 but Anhui Conch and China Resources Cement (CRC) had significant falls. Stronger results from CNBM’s non-cement production subsidiaries released so far suggest that the parent company’s slow performance is likely due to the cement market. The China Cement Association has reported that national cement output dropped by 12% year-on-year to 387Mt in the first quarter of 2022. It blamed this on the latest local coronavirus wave, limited construction project funds and poor weather.

Graph 1: Sales revenues in the first quarter of 2022 from selected cement producers. Source: Company financial reports. Note: SCG data is for its building materials division only.

Outside of China sales revenue growth has been better with Holcim and Dangote Cement leading the companies presented here. Holcim attributed its success to “strong demand, acquisitions and pricing”. Demand and pricing have been familiar refrains in many of the results reports this quarter. The undertone though has been the destabilising effects upon energy prices by the ongoing war in Ukraine. Holcim’s head Jan Jenisch summed it up as navigating “challenging times, from the pandemic to geopolitical uncertainty.” The producers with operations in the Americas and Europe seem to have coped with this so far mostly due to resurgent markets. Quarterly sales revenue growth for Holcim, CRH (not shown in the graphs) and Cemex each exceeded 10% year-on-year in both of these regions.

The regionally focused companies presented here have suffered more. India-based UltraTech Cement said that its energy costs grew by 48%, with prices of petcoke and coal doubling during the period. Nigeria-based Dangote Cement reported that its group sales volumes were down 3.6% mainly due to energy supply challenges in Nigeria. Internationally, its operations relying on cement and clinker imports – in Ghana, Sierra-Leone and Cameroon – were also hit by high freight rates caused by global supply chain issues. Thailand-based SCG said that national demand for cement demand fell by 3% due to negative geopolitical effects causing inflation, a delay to the recovery of tourism and a generally subdued market.

Graph 2: Cement sales volumes in the first quarter of 2022 from selected cement producers. Source: Company financial reports.

It’s too early to read much into it but one final point is worth considering from cement sales volumes in the first quarter of 2022. They have appeared to fall for the companies that have actually released the data. The reasons for CRC in China and Dangote Cement in Sub-Saharan Africa have been covered above. Holcim’s volume decline was 2% on a like-for-like basis and the others were all very small changes.

To summarise, it’s been a good quarter for those cement producers covered here with operations in North American and Europe. Energy instability caused by the war in Ukraine so far seems to have been passed on to consumers through higher prices with no apparent ill effect. The regional producers have suffered more, with the Chinese ones having to cope with falling demand and the others finding it harder to absorb mounting energy costs and supply chain issues. Plenty more first quarter results are due from other cement companies in the next few days and weeks and it will be interesting to see whether these trends hold or if others are taking place.

Cement shortages were being reported in the US media last week in Alabama and South Carolina. The owner of a ready-mixed concrete supplier in South Carolina was blaming it on labour and supply shortages. Dan Crosby, the president of Metrocon, told Fox News that his business could only take on 60% of the work it could normally cope with due to the issue despite demand for construction growing in the state. Meanwhile, the Alabama Concrete Industries Association said that its home state saw a 14% increase in the demand for concrete in 2021 but that a cement shortage might cause delays to projects. The association also pointed the blame at labour and supply issues. It pointed out that high demand for concrete during the winter prevented inventory being built up and then the annual cement plant maintenance breaks in the spring added to the problems. Once contractors actually secured supplies of cement they then faced further delays due to a nationwide truck driver shortage!

Graph 1: Annual rolling cement shipments in the South of the US. Source: USGS.

Data from the United States Geological Survey (USGS) doesn’t especially shed light on the situation in Alabama and South Carolina. Alabama was the fifth largest cement producing state in the country in January 2022 but this is unsurprising as it’s the state with the fifth largest cement production capacity. Rolling annual data on Portland and blended cement shipments by origin show the effects of the coronavirus outbreak in the south from the start of 2020 to January 2022. Shipments took a dive in 2020 and then mostly recovered in 2021. However, Alabama, Kentucky and Tennessee saw shipments rise from 7.1Mt pre-pandemic to 7.6Mt in January 2022. South Carolina’s shipments grew from 3Mt to 3.2Mt. Regionally, the North East had a similar pattern although, unlike the South, shipments have surpassed those at the start of 2020. The Midwest and West were different with a general upwards trend over the two years, although the West softened slightly from mid-2021 onwards. Overall the US as a whole has seen its shipments grow throughout this period.

Ed Sullivan from the Portland Cement Association (PCA) told the May 2022 issue of Global Cement Magazine that the US cement sector did well in 2021 with a 4.1% year-on-year rise in sales to 104Mt. However, he flagged up supply chain problems that actually slowed growth, led by a lack of staff.

The other point along these lines that Sullivan made was that imports of cement might not necessarily be able to compensate for domestic supply issues due to global demand for shipping post-coronavirus. USGS data placed imports to the US at 13.7Mt in 2019 compared to 16.3Mt in 2021. Notably, Cemex restarted one production line in 2021 at its CPN cement plant in Sonora State in Mexico to export cement to the west of the US. In March 2022 it added that it was going to restart another line at the plant also. It’s not alone though as GCC reported in January 2022 that a line at one of its plants in Chihuahua, Mexico, was exporting cement to Texas. Sullivan reckoned that January 2022 was ‘weak’ but that it was followed by an ‘extremely strong’ February 2022. The first quarter results from Holcim and CRH seem to back this up with the former describing the period as ‘outstanding’ and the region leading its sales and earnings growth rate globally. CRH reported strong demand in central and southern regions.

As the US economy restarted following the peak of the early coronavirus waves in 2020, various supply chain issues have manifested. Staff shortages are one issue and this can also worsen other logistic problems. The south seems particularly vulnerable to all of this as it is both the country’s largest cement market and because demand has held up. In January 2022 research by the International Monetary Fund (IMF) identified several reasons for staff shortages in the US and the UK. These included increased inactivity among older workers, the so called ‘She-cession’ (where female employment has overly reduced due to coronavirus trends) and shifting worker preferences amid strong labour demand.

Staff shortages are expected to sort themselves out throughout 2022 but favourable forecast demand for cement in the US is balanced by inflationary pressure. Persistent low staffing levels could further add to inflation growth. The US cement sector may be doing well at the moment but even success carries risks.

Global Cement’s Robert McCaffrey will be giving a keynote presentation at the IEEE-PCA Cement Conference in Las Vegas on Tuesday 3 May 2022. The May 2022 issue of Global Cement Magazine, including interviews with PCA chief executive officer Mike Ireland and chief economist Ed Sullivan, is available to download now.

This week’s big story has been that Holcim may be considering selling its business in India. Both the Economic Times newspaper and Bloomberg separately reported that the owner of Ambuja Cement and ACC has been holding early talks with local producers. The discussions have been described as exploratory and an eventual divestment is far from certain. The combined market value of both companies was placed at US$15bn, at the time that the story broke, making it one of the largest potential acquisitions in India. Holcim has refused to comment on the matter.

If it actually happened then the scale of this potential sale would be breathtaking. Holcim has been gradually slimming down since the merger between Lafarge and Holcim in 2015. The big divestments mostly came after the appointment of former Sika boss Jan Jenisch in 2017. Four integrated plants and other assets were sold in Indonesia for US$1.75bn in 2019, a 51% stake in three integrated plants and two grinding plants were sold in Malaysia for US$396m (also in 2019) and five integrated plants were approved for sale in Brazil for US$1.03bn in April 2022.

A complete divestment of Ambuja Cement and ACC in India would see 17 integrated plants and 14 grinding plants being sold with a production capacity of around 66Mt/yr. If any company did buy the lot in one go, at a stroke it would become the second-largest cement producer in the world’s second-largest second market. The nearest acquisition in the last decade that comes close to this was when CRH purchased 24 cement plants with a production capacity of 36Mt/yr from Lafarge and Holcim in 2015 for US$6.5bn.

2022 would certainly be a good time to sell up with both Ambuja Cement and ACC having reported strong sales and earnings figures in 2021 following the coronavirus-related lockdowns in 2020. Performance is even better compared to 2019. Ambuja Cement’s net sales and earnings before taxation, interest, depreciation and amortisation (EBTIDA) grew by 23% year-on-year to US$1.81bn and by 21% to US$420m respectively in 2021. ACC’s sales and operating EBITDA grew by 17% to US$2.07bn and 28% to US$393m respectively in 2021. However, ACC’s net sales growth was much lower compared to that in 2019. Ambuja Cement produced 25.9Mt of cement in 2021 with a production capacity of 31.5Mt giving it a utilisation rate of 82%. ACC produced 26.9Mt of cement in 2021 with a production of 34.5Mt/yr giving it a utilisation rate of 78%. Both of these rates are higher than the national cement sector rates forecast by analysts of up to 64% in the 2022 financial year. The corporate specifics of any sale are that Holcim owns a majority stake in Ambuja Cement, which in turn owns a majority stake in ACC. In other words: buy one, get the other.

One wider question here is whether there are still any companies and investors out there prepared to put money on this scale into a carbon-intensive industry with net-zero deadlines on the way. Ahead of the 2021 United Nations Climate Change Conference (COP26) in November 2021, India’s prime minister Narendra Modi pledged that his country would cut its emissions to net-zero by 2070. There’s plenty of time left to turn a profit, as cement kilns last about 50 years, but the risk of investing in a stranded asset is growing if the targets are honoured or even brought forward. As a recent Intergovernmental Panel on Climate Change (IPCC) report put it, “Cement and concrete are currently overused because they are inexpensive, durable, and ubiquitous, and consumption decisions typically do not give weight to their production emissions.” All of this suggests that buyers might well be more interested in purchasing parts of Holcim’s Indian operations rather than the whole bundle or breaking operations up further down the line. And that’s even before any competition concerns related to any local buyers are considered. Holcim, for its part, has shown with recent divestments, such as its business in Northern Ireland, that it isn’t necessarily against smaller piecemeal divestments. Negotiations, if they are indeed happening, will be closely guarded.