Analysis

There has been a significant investment in the South Korean cement industry this week with the news that Hanil Hyundai Cement has ordered a steam-based waste heat recovery (WHR) system from Japan-based Kawasaki Heavy Industries. The 22.6MW system will be used on two of the production lines at the Yeongwol plant in Gangwon Province. The supplier says that installation is expected to generate about 30% of the energy the plant needs and save around 10,000t/yr of CO₂ in the process. Delivery is scheduled for late 2022.

This order may be the first investment following the announcement in late June 2021 that the state-owned Korea Development Bank had pledged around US$870m towards supporting the cement sector in making carbon reduction upgrades by 2025. These are intended to include moving away from burning fossil fuels in cement production and increasing the use of recycling materials. At the time of the agreement between the bank and the Korea Cement Association (KCA), Hanil Hyundai Cement noted that the local alternative fuels substitution rate was 24% compared to 46% in the European Union and 68% in Germany.

Graph 1: Cement production in South Korea, 2010 – 2020. Source: Korea Cement Association

By European or American standards South Korea kept its coronavirus cases under control in 2020. A robust testing and contract tracing regime (K-Quarantine) managed to prevent the country enforcing stricter measures until late in 2020. A fourth wave of infections, currently underway in July 2021, due to the more contagious Delta variant, has started to change this. Despite being able to keep its economy open though, the construction sector still took a hit although not as bad as initially feared.

Cement production fell by 6% year-on-year to 47.5Mt in 2020 from 50.6Mt in 2019 following a downward trend since 2017. The KCA expected worse after a poor third quarter in 2020 when it was preparing for shipments to fall below the level last seen in the midst of the International Monetary Fund (IMF) crisis in the late 1990s. On top of this the industry was also potentially facing a new tax on production towards the end of 2020. One large local producer, Ssangyong C&E, reported a 5% year-on-year drop in sales to US$864m in 2020 from US$910m in 2019. However, it managed to increase its operating profit over the same period. So far in 2021 the sector faced supply shortages in the spring. The KSA blamed the winter plant maintenance schedule and a lack of railway wagons and trucks.

The timing of the Korea Development Bank investment in the cement sector is interesting given the movement on the European Union carbon border adjustment mechanism. Cement exports seem unlikely to be affected but business lobbyists like the Federation of Korean Industries are well aware of the effects schemes like this might have upon commodities like steel and aluminium in the first phase and then the implications for car production later on. Target markets for cement exports such as the US, Peru, Chile and the Philippines might all become vulnerable should carbon-based trade restrictions become more prevalent. Of course export markets remain vulnerable to more usual hindrances. For example, in March 2021 the Philippines extended its safeguard measures on cement imports to various countries including South Korea.

Following a round of market consolidation in the late 2010s, the South Korean cement sector now appears to be entering a phase of sustainable realignment. In late May 2021 Prime Minister Moon Jae-in announced plans to hasten the country’s carbon reduction targets ahead of the United Nations Climate Change Conference scheduled for November 2021, including a carbon tax. With cement production on a downward trend since 2017 and the coronavirus crisis far from gone it will be instructive to see how far the intervention of the Korea Development Bank will go.

LafargeHolcim became Holcim this week with the launch of its new group identity. It also released a manifesto. Corporate names and logos come and go in the swirl of capital but straight up declarations of intent are rarer. Companies in the normally conservative building materials sector don’t tend to do this. This is more the terrain of political movements. So what’s going on?

Figure 1: From a merger of equals to building progress for people and the planet, the LafargeHolcim and Holcim logos.

Looking at the new logo gives us a few clues. The light grey-brown Tetris-style ‘L’ and ‘H’ letters symbolising the ‘merger of equals’ have gone. In its place come two circular symbols that look like they might connect. Together they give the impression of a slanted figure of eight or a lemniscate (infinity symbol). All of this is set to a few shades of blue and green. Could these two symbols be suggesting recycling or the circular economy? Who knows, but hopefully the advertising agency that came up with it was well remunerated. Luckily for us Holcim’s chief executive officer, Jan Jenisch, explained it, “Today marks a milestone for our company in our transformation to become the global leader in innovative and sustainable solutions.”

The manifesto is clearer. Entitled ‘Building progress for people and the planet’ it lays out some of the problems facing the world, such as population growth, urbanisation and climate change mitigation. It then addresses how Holcim is already tackling these issues and how it wants to go further in becoming part of the answer. This is the big vision so it doesn’t trouble itself with the detail on how, for example, the company is going to eliminate process emissions from clinker production on its journey to net zero. This is after all the big pitch to hearts and minds. It also doesn’t stain its fingers with anything suggesting who is going to pay for this grand noble ambition. We’ll have to wait for the next investor’s event to discover how much of this dream washes over into the private equity and pension fund crowd.

In Holcim’s defence, as one of the world’s largest building materials producers, it needs to carve itself a grand vision to occupy within a future preoccupied with climate change. Pretty much everyone in the developed world uses products manufactured by Holcim and its competitors even if they don’t realise it. Yet they are increasingly becoming more aware of the negative issues raised by environmental campaigners. Over in the developing world, adequate housing and infrastructure provision are live political issues for many as economies grow. Threading the needle to tie these trends together is quite the challenge for Holcim and the others. As a public company it serves its shareholders, but, as a multinational wedged in the middle of the climate change debate cascading into global politics, it ultimately answers to everyone. Hence a mission statement or a manifesto makes sense.

Meanwhile, for a glimpse on the Chinese approach to these kinds of problems, China National Building Materials (CNBM) subsidiary China Building Materials Academy (CBMA) signed a knowledge sharing agreement this week with the Canada-based International CCS Knowledge Centre to collaborate on carbon capture technology. The project plans to start with a 155kg CO2/day pilot on an active cement plant kiln. If successful, the study could lead to CNBM rolling it out across its entire cement operations. This would be hugely significant globally and given the scale of the Chinese industrial sector there’s also a reasonable chance it could happen at speed. If this occurred CNBM could leave the politics to its owner, the Chinese government.

There was good news from the corporate finance sector for cement producers this week in the form of an approving statement by Fitch Ratings. It declared that it expected the sector to be able to pass on the costs of decarbonisation to customers due to a lack of alternatives. It recognised the challenges posed by regulators, investors and societal pressure but, even so, it suggested that cement was still an industry worth backing. Or at least for now. Added to this, it forecast that demand for building materials would grow to support the transition to a low carbon economy and to combat the damage caused by climate change. It did admit that the capital or operating costs required to decarbonise are seen as being potentially large, especially with uncertainty over how much governments will pay or incentivise. Yet the timescales involved are beyond the ratings agency’s ‘horizon’ hence no really disruptive shifts in producer economics are expected anytime soon.

This was obviously a win for the cement industry and its cheerleading associations led by the Global Cement and Concrete Association (GCCA), the World Cement Association and the regional associations. After all, the increasingly convergent message to the wider world has been along the lines of ‘concrete is part of the solution and you need our products because there’s nothing else.’ Good timing then for the GCCA to launch its collaboration with the World Economic Forum, the ‘Concrete Action for Climate’ (CAC) initiative. The collaborative platform is planned to help drive the industry’s journey to carbon neutral concrete by 2050 as part of the wider Mission Possible Partnership, a wider coalition of public and private organisations working on setting the heavy industry and transport sectors towards net-zero. Expect lots more of these kinds of announcements on the road to the 26th UN Climate Change Conference of the Parties (COP26) taking place in Scotland in late October 2021.

Fitch Ratings did point out that societal awareness was likely to accelerate decarbonisation. The sharp end of this trend was experienced by the building materials industry this week when environmental activist group Extinction Rebellion forced operations to stop temporarily at LafargeHolcim’s Port de Javel ready-mixed concrete plant in Paris on 30 June 2021. This followed a similar incident by the same group at a LafargeHolcim subsidiary ready-mix plant in London in mid-2019. Given the share of global CO₂ emissions from the cement-concrete production chain, it is perhaps surprising that climate activists haven’t targeted clinker-producing cement plants directly in the same way that they have gone after coal-fired power stations. Clinker kilns are, after all, the source of the majority of the sector’s emissions. However, blockading a concrete plant in the city may conjure up a more potent media image than doing the same to a factory out in the country.

Instead the battles with cement plants and their quarries tend to be of a ‘not in my back yard’ (Nimby) nature. Or rather ‘not in my monastery (Nimmon?) this week, with the news that a subsidiary of YTL Cement in Malaysia is attempting to evict a group of Buddhist monks and their underground place of worship from a quarry on Mount Kanthan in Perak. In the latest twist of the long running saga, the monks have hit back with an attempt to get their portion of the site recognised as a place of worship and a heritage site. Thankfully a more positive example of how quarries can fit in with the wider community could be found this week in the guise of an archaeological dig at CRH subsidiary Tarmac’s Knobb’s Farm quarry in Cambridgeshire, UK. The discovery of a Roman Britain-era cemetery with a high proportion of decapitated bodies may have been gruesome but the relations between the operator and the archaeologists were much more harmonious. Another recent example was the discovery of what may be a new precursor species of humans, unearthed at a quarry run by Nesher-Israel Cement Enterprises site at Ramla in late June 2021.

The paradox building materials producers pose to environmental activists could be summed up by the record heat wave that hit the north-western region of North America recently. CO₂ emissions, in minor part produced by the cement and concrete industries, are the most likely reason for an increased frequency of extreme weather events such as this. Yet, infrastructure such as pavements and roads were widely reported as having buckled in the heat, principally because they weren’t built for such high temperatures. They will have to be rebuilt to withstand similar temperatures in the future. Building materials can thus be seen as both part of the problem and part of the solution. Yet with net zero targets nearly 30 years away it seems likely that continued extreme weather events and their potentially lethal consequences will speed up the public demand for decarbonisation. It is worth noting here that one of Extinction Rebellion’s demands in the UK is that the country should become net zero by 2025.

Fitch Ratings has cast its vote for now and Extinction Rebellion and its fellows are set to continue to wage their political campaigns. In the meantime it is debatable how much spiritual solace will be found by the monks of Mount Kanthan during blasting hours at the neighbouring quarry.

Fernando A González and Cemex took to the virtual airways this week with Cemex Day 2021. The investors’ update comprised the usual greatest hits package explaining how well everything is going: earnings growth and leverage levels about to hit desired targets, selective investments and divestments on the way, new production capacity round the corner and punchy sustainability goals turning up earlier than expected. Or at least that’s the way that chief executive officer González and the team told it.

To be fair to Cemex, it seems to be in a good place right now. It weathered 2020 well and now its first quarter results in 2021 compared to the same period in 2019, before coronavirus hit, are looking rosy with cement sales volumes growth of 9%. How much of that is attributable to pent up demand from 2020 remains to be seen though. Its strategy of focusing on markets in North America and Europe appears to have paid off in recent years with its competitors copying it as they have retreated from riskier climes and concentrated on core territories. Its obsession with righting the ratio between its debts and earnings is closer than ever to being realised, with a 4.07x net leverage ratio in 2020 and a target of 3x or lower planned for 2023. That last target is crucial both materially and psychologically for the company as it starts to put it back in the same financial field as its Western multinational competitors and opens up new investment opportunities.

From a production angle, the big news from the event was a 10Mt/yr cement production expansion project between now and 2023. This wasn’t quite as promising as it sounded, as just under half of this was attributed to legacy projects in Mexico, Colombia and the Philippines and some of the new projects had already been announced, but it does bookmark a move from divesting plants to upgrading and building new ones.

The new projects comprise an additional 5.7Mt/yr capacity from on-going debottlenecking, new integrated plants, new grinding plants and reopening idle or mothballed plants. During the event José Antonio González, the Executive Vice President of Strategic Planning & Business Development broke it down into 3.5Mt in Mexico, consisting of 1.5Mt additional grinding capacity at the integrated Tepeaca plant, a 0.5Mt/yr expansion at the integrated Huichapan plant and 1.5Mt/yr from bringing both idled lines back into production at the CPN Hermosilla plant in Senora to support the US market. That last one notably was partly announced in February 2021. In Europe and the US the group plans to add 1.2Mt/yr including expanding grinding capacity at two plants in Europe with details to be announced later. Finally, the company plans to add 1Mt/yr of additional capacity in South American including restarting an idled 0.5Mt/yr kiln at a plant in the Dominican Republic and building a new 0.5Mt/yr grinding mill in Guatemala.

Cemex has also stepped up its target reduction in CO₂ emissions to below 475kg CO₂/t of cementitious material, an approximately 40% reduction in CO₂ emissions compared to 1990 levels, by 2030. The previous target for 2030 of 520 kg CO₂ has been brought forward to 2025. This compares to LafargeHolcim’s similar target of 475kg CO₂/t by 2030, HeidelbergCement’s target of 500kg CO₂/t by 2030 and CRH’s target of 530kg CO₂/t by 2030. The group is planning to spend US$60m/yr on its decarbonisation projects. This compares to a spend of around US$140m/yr on its 10Mt/yr cement production capacity expansion drive over the next three years. Or to put it another way, the group is spending more on growing than sustainability.

Unfortunately, it wasn’t all good public relations for Cemex this week with the news in the Colombian press that one of its former executives is set to be investigated by the authorities over his alleged involvement in the ongoing Maceo cement plant corruption case. The background to this one is that in 2016 Cemex fired several senior staff members, and the local subsidiary’s chief executive resigned, in relation to the building of a new integrated plant at Maceo. This followed an internal audit and investigation into payments worth around US$20m made to a non-governmental third party in connection with the acquisition of the land, mining rights and benefits of the tax free zone for the project. Legal proceedings followed in Colombia and the US. Many large companies have legacy problems to deal with. Just take LafargeHolcim’s continued connection to Lafarge Syria’s conduct in the early 2010s. At the time of writing the Maceo plant is still yet to start operation and is likely to be one of the ongoing projects mentioned above.

Cemex’s second quarter results are due to arrive towards the end of July 2021 but the group is presenting an upbeat image. Sales are up, debts are down, divestments are out and expansions are in. Confidence is important for a multinational trying to convince the rating agencies to give it back its investment grade, so whether this is strictly true or not it certainly knows how to talk the talk. One question going forward at least is how strictly Cemex will want to stick to its core markets if the good times really have returned?

Two news stories merit a closer look at Argentina this week. Firstly, Loma Negra fired up the kiln on its new 2.7Mt/yr production line at the L’Amalí cement plant in Olavarría. Work on the US$350m started in 2017 but was delayed due to the coronavirus pandemic. Notably, engineers from China-based Sinoma International Engineering, who built the plant, caused a stir when they arrived in Argentina in full personal protective equipment in late 2020 to continue work on the project. Full commissioning of the second line at the plant is scheduled for July or August 2021.

Almost at the same time, the Argentine government announced it had persuaded local building materials producers to stick to reference prices for construction materials, including cement, in order to control inflation. Loma Negra, Cemento Avellaneda and Petroquímica Comodoro Rivadavia (PCR) were said to be on board with the ‘voluntary’ plan. Building materials prices generally were reported to have risen 85% year-on-year in May 2021 compared to a national inflation rate of 49%. The new arrangement is planned to last until the end of 2021 with revisions to the reference prices every two months.

Graph 1: Cement sales in Argentina including imports and exports, 2016 – 2021. Note that the 2021 figure is an estimate. Source: Asociación de Fabricantes de Cemento Portland (AFCP).

Data from the Asociación de Fabricantes de Cemento Portland (AFCP) doesn’t show any obvious signs of disruption from inflation so far in 2021. Cement sales grew by 50.5% year-on-year to 4.55Mt in the five months to May 2021 from 3.02Mt in the same period in 2020. The cement market in Argentina didn’t shut down but it hit a low of 0.41Mt in April 2020 before compensating with a strong second half of the year, most likely due to pent-up demand as the economy reopened following local coronavirus-related lockdowns. At the time of writing the AFCP has forecast that cement sales will reach 11.3Mt in 2021, a slight rise over the 11.1Mt reported in 2019, when the market was more stable. However, cumulative sales to May 2021 are slightly behind similar sales in 2019.

Loma Negra’s upgrade at its L’Amalí plant follows Holcim Argentina’s inauguration of a new 0.5Mt/yr clinker production line at its Malagueño cement plant in Cordoba in May 2021. This project also added a 0.63Mt/yr cement grinding unit at the site as well as a new 120,000 bag/day despatch unit. Altogether it had a price of US$120m. This followed the announcement in late April 2021 that the subsidiary of LafargeHolcim was planning to open 1000 new branches of its Disensa retail chain in the country by 2024.

Loma Negra reported a 13% drop in sales to US$436m in 2020 from US$500m in 2019. However, its adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) rose by 3% to US$139m from US$136m. This was partly aided by the sales of its Paraguayan operations during 2020. At face value, Cemento Avellaneda had a tougher time of its in 2020 with its sales down by 22% to Euro111m and EBITDA down by 9% to Euro37m. However, once adjusted on a like-for-like basis with constant currencies and without a hyperinflation adjustment, its sales and earnings actually rose by 22% and 45% respectively.

Holcim Argentina’s director Christian Dedeu was interviewed by national news agency Télam in May 2021 around the time of the upgrade at the Malagueño cement plant was officially completed. When asked by the company had made the investment he said that the country had potential for both the residential and infrastructure sectors. He also pointed out that the subsidiary of Switzerland-based LafargeHolcim had been forced to import clinker at times of high demand previously. The announcements for both the Loma Negra and Holcim Argentina new lines were made at the end of 2017 when the market hit a high in sales volumes. Since then the country has faced rocketing inflation, further delays to it debt repayment programme to the International Monetary Fund (IMF) and the coronavirus pandemic. Producing more commodities, such as clinker, domestically certainly seems enticing with high inflation and unfavourable foreign currency exchange rates. So, the new production lines from Loma Negra and Holcim Argentina are well timed in this sense unless they get hit by any mounting input costs, from imported raw materials for example. On the other hand the government’s measures to curb inflation such as reference prices for cement may constrain the cement producers’ flexibility. As the local construction industry slowly recovers after 2020, continued uncertainty lies ahead.