Analysis

The Coronavirus Disease 2019 (COVID-19) took on direct implications for the international cement industry this week when an Italian vendor infected with the virus visited Lafarge Africa in Ogun state, Nigeria. The cement producer said that it had ‘immediately’ started contact tracing and started isolation, quarantine and disinfection protocols. This included initiating medical protocols at its Ewekoro integrated plant, although local press reported the unit’s production lines were still open. Around 100 people were thought to have had contact with the man.

Global Cement has been covering the epidemic since early February 2020 when the virus’ effect on the construction industry in China started to become evident. First, an industry event CementTech was postponed, financial analysts started forecasting negative financial consequences for producers and plants started going into coronavirus-related maintenance or suspension cycles. Then at least one plant started to dispose of clinical waste and now China National Building Material Group (CNBM) is considering how to restart operations at scale. Also, this week Hong Kong construction companies reportedly laid off 50,00 builders due to a lack of cement due to the on-going production suspension in China.

The major cement companies have identified that their first business risk from coronavirus comes from simply not having the staff to make building materials. LafargeHolcim’s chief executive officer Jan Jenisch summed up the group’s action in its annual financial results for 2020 this week when he said, “We are taking all necessary measures to protect the health of our employees and their families.” Other major cement producers that Global Cement has contacted have placed travel restrictions for staff and reduced access to production facilities.

The next risk for cement companies comes from a drop in economic activity. The Organisation for Economic Co-operation and Development (OECD) forecasts a global 0.5% year-on-year fall in real gross domestic product (GDP) growth to 2.4%, with China and India suffering the worst declines in GDP growth at around 1%. The global figure is the worst since the -0.1% rate reported by the International Monetary Fund (IMF) in 2009. The OECD blamed the disease control measures in China, as well as the direct disruption to global supply chains, weaker final demand for imported goods and services and regional declines in international tourism and business travel. This forecast is contingent on the epidemic peaking in China in the first quarter of 2020 and new cases of the virus in other countries being sporadic and contained. So far the latter does not seem to have happened and the OECD’s ‘domino’ scenario predicts a GDP reduction of 1.5%. All of this is likely to drag on construction activity and demand for cement and concrete for some time to come.

Moving to cement markets and production, demand is likely to be slowed as countries implement various levels of isolation and quarantine leading to reduced residential demand for buildings directly and as workforces are restricted. Business and infrastructure projects may follow as economies slow and governments refocus spending respectively.

The UK government, for example, is basing its coronavirus action plan on an outbreak lasting four to six months. This could potentially happen in many countries throughout 2020. This has the potential to create a rolling effect of disruption as different nations are hit. Assuming China has passed the peak of its local epidemic then its producers are likely to report reduced income in the first quarter of 2020. The effect may even be reduced somewhat due to the existing winter peak shifting measures, whereby production is shut down to reduce pollution. Elsewhere, cement companies in the northern hemisphere may see their busy summer months affected if the virus spreads. The effect on balance sheets may be visible with indebted companies and/or those with more exposure to affected areas disproportionately affected. The wildcard here is whether coronavirus transmits as easily in warmer weather as it does in the cooler winter months. In this case there may be a difference, generally speaking, between the global north and south. Exceptions to watch could be cooler southern places such as New Zealand, Argentina and Chile. Shortages, as mentioned above in Taiwan, potentially should be short term, owing to global overcapacity of cement production, as end users find supplies from elsewhere.

The cement industry is also likely to encounter disruption to its supply chains. Major construction projects in South Asia are already reporting delays as Chinese workers have failed to return following quarantine restrictions after the Chinese New Year celebrations. As other countries suffer uncontrolled outbreaks then similar travel restrictions may follow. Global Cement has yet to see any examples of materials in the cement industry supply chain being affected. On the production side, raw mineral supply tends to be local but fuels, like coal, often travel further. Fuel markets may prove erratic as larger consumers cut back and suppliers like the Organisation of the Petroleum Exporting Countries (OPEC) react by restricting production.

On the maintenance side cement plants need a wide array of parts such as refractories, motors, lubricants, gears, wear parts for mills, ball bearings and so forth. Some of these may have more complicated supply chain routes than they used to have 30 years ago. On the supplier side any new or upgrade plant project is vulnerable if necessary parts are delayed by a production halt, logistics delayed and/or staff are prevented from visiting work sites. Chinese suppliers’ reliance on using their own workers, for example, might well be a hindrance here until (or if) international quarantine rules are normalised. Other suppliers’ weak points in their supply chains may become exposed in turn. This would benefit suppliers with sufficiently robust chains.

Chinese reductions in NO₂ emissions in relation to the coronavirus industrial shutdown have been noted in the press. A wider global effect could well be seen too. This could potentially pose problems to CO₂ emissions trading schemes around the world as CO₂ prices fall and carbon credits abound. This might also have deleterious effects on carbon capture and storage (CCS) development if it becomes redundant due to low CO₂ pricing. In the longer-term this might undesirable, as by the time the CO₂ prices pick up again we will be that much nearer to the 2050 sustainability deadlines.

COVID-19 is a new pandemic in all but name with major secondary outbreaks in South Korea, Iran and Italy growing fast and cases being reported in many other countries. The bad news though is that individual countries and international bodies have to decide how to balance the economic damage disease control will cause, versus the effects of letting the disease run unchecked. Yet as more information emerges on how to tackle coronavirus, the good news is that most people will experience flu-like symptoms and nothing more. Chinese action shows that it can be controlled through public health measures while a vaccine is being developed.

Until then, frequent handwashing is a ‘given’ and many people and organisations are running risk calculations on aspects of what they do. It may seem flippant but even basic human interaction such as the handshake needs to be reconsidered for the time being.

The Queensland state government in Australia took a blunt approach to health and safety earlier this month when a report it commissioned said that it expected 12 deaths to occur in the mines and quarries sector over the next five years unless changes were made. This is far removed from the usual news stories that industry magazines like Global Cement and others cover. Typically, these are either plants or companies reaching Lost Time Injury (LTI) milestones or sad (but thankfully rare) reports of death.

The forecast in Queensland was based on a review of fatalities in the sector that the state commissioned from Sean Brady, Department of Natural Resource, Mines and Energy, looking at the years 2000 to 2019. Year-by-year the figures were significantly lower than those occurring in the 1900 to 2000 period but didn’t appear to have any discernable pattern. However, when presented as a 12-month rolling sum of fatalities, a two to three year cycle seemed to occur. Brady then went on to look at how the fatalities happened, how the industry behaved and reacted and what could be done to improve the situation. His recommendations included looking more deeply at the causes of seemingly unrelated accidents and then changing overall organisational behaviour and insight through methods such as adopting principles of High Reliability Organisational theory, simplifying the reporting system and changing the standard safety indicators like LTI.

That last point is interesting given the prevalence of LTI indicators on corporate sustainability reports in the cement industry. The point that Brady cites here is that LTI can become a measure of how well injuries are managed, not how safely an organisation is performing. For example, the definition of what an injury is can be manipulated, leading to distortion, as can workers being brought back to work before they recover or into lighter duties. Instead he recommends that ‘serious accidents’ be used in place of LTI. These are defined as incidents that result in a fatality or incidents where an individual requires admission to hospital for treatment of an injury. The preference here is based on so-called ‘serious accidents’ being unambiguous and transparent because they are defined by a third-party medical practitioner.

Wider critiques of health and safety measurements have identified under-reporting of incidents arising from safety incentive programmes, safety culture, employee perceptions of reporting and workplace bullying. This isn’t to say that the LTI measure is not fit for purpose. It has undoubtedly led to higher safety conditions around the world, with reduced injury and mortality from working conditions, and it allows for comparisons between organisations. Yet, any health and safety metric or indicator could be liable to bias or manipulation either unconsciously or consciously. Serious accidents, for example, could be potentially undermined by an organisation having its own medical centre and would also suffer from different health care systems in different locations. Throw in different legislative frameworks around the world and comparing countries can also start to become confusing.

This tension between data and real-life safety is acknowledged by the Global Cement and Concrete Association (GCCA) in its sustainability guidance from late 2018. It distinguishes between so-called ‘lagging’ indicators, like LTI and fatalities, which show the effectiveness of a safety programme after the fact and the importance of continual safety improvement plans that aim to prevent adverse events before they happen. It is easy to become lost in a dust storm of facts and figures on health and safety but, as the Queensland authorities and the GCCA agree, measuring health and safety is a means to an end. The aim is zero harm to everyone involved.

There was fantastic news for fans of novel cements this week, when Cementos Argos announced the completion of work on a new 0.45Mt/yr calcined clay production line at its Rio Claro plant in Colombia. This artificial pozzolanic material, developed and promoted by the Swiss-led LC3 consortium in recent years, can dramatically lower cement CO₂ emissions by replacing slag and/or fly ash in cement mixes. The Rio Claro plant is the first major cement plant to install such a line following smaller trials in Switzerland, India and Cuba.

Suitable clays are more widely available than slag and fly ash, alleviating some of the difficulty and cost of obtaining supplementary cementitious materials. They also need to be calcined at just 800°C, offering massive savings in terms of fuel costs, CO₂ emissions and embodied energy compared to Ordinary Portland Cement (OPC) production. Karen Scrivener from the École Polytechnique Fédérale de Lausanne (EPFL), the leading academic party in the LC3 consortium, explained that calcined clays are at their best when in ternary (three-way) blends alongside clinker and limestone in the September 2019 issue of Global Cement Magazine. “It has long been known that calcined clays can be pozzolanic,” she explained. “When used alone, the maximum substitution level is around 30%, which gives a moderate saving in CO₂ emissions. However, if we substitute a further 15% of the clinker with limestone, we get a significant reduction in CO₂ emissions, with a product that has almost identical properties to the blend that contains just the calcined clay.”

While the exact composition of Rio Claro’s new products is unclear, it will enable Cementos Argos to produce ternary cement blends with CO₂ emissions 38% lower than OPC. Energy consumption is also cut by 30%, which provides secondary benefits in terms of reduced off-site CO₂ emissions. At the plant’s launch, Cementos Argos’ President Juan Esteban Calle clearly stated that calcined clays were the way forward, announcing, “With this project we are sowing the seeds of the Argos of the future. It starts today with a new production line at Rio Claro. In our commitment to climate change, this project makes us very proud.”

The response from Argos’ consumers will be keenly watched, especially in Europe. Just this week LafargeHolcim and Vicat, along with France’s Technical Association of the Hydraulic Binders Industry (ATILH), called on the European Commission and European Committee for Standardisation to hurry up and publish ternary cement standards across the European Union (EU). At the moment these producers are primarily concerned with CEMII / C-M and CEM VI cements. These classes of cement comprise a range of ternary blends that contain clinker and limestone, plus a third component, be it slag, fly ash, natural pozzolans or calcined clay. They claim that placing low-clinker cements on the market could reduce the amount of CO₂ emitted by 127kg/t, around 20% of the 656kg/t average in Europe at present.

Frustrated with the delays at Commission level, cement producers have now taken things into their own hands. The plan is to establish the same standard within each EU Member State at the national level, rather than waiting in vain for standards from ‘on high.’ One pressing driver for this behaviour is the rapid approach of the Phase 4 of the EU Emissions Trading Scheme (ETS) in January 2021. In Phase 4 it is likely that EU cement producers will be allocated only 80% of the free allowances they have become accustomed to. They will have to buy the remainder at market prices, currently Euro25.1/t of CO₂ (17 February 2020). This will represent a massive new expense for some producers. The opportunity to sell cement that emits only 58% of the CO₂ of OPC is clearly exceedingly attractive as a way to reduce outgoings. CO₂ emissions will be reduced, of course but, as usual, the way to make companies do things is to hit them in the wallet.

Indeed, on this point, Vicat seemed to almost goad or ‘troll’ its competitors in Europe this week by announcing that it has never sold any EU ETS allowances and is sitting atop a 5Mt CO₂ reserve worth Euro120m. This is sufficient to last it until 2030 at current prices. The key part of that last sentence is ‘current prices,’ which are subject to change. In its press release, Vicat was keen to point out that it is not resting on its laurels, highlighted by its advocacy for ternary blends and continued development of alternative fuels. This may be wise, considering that EU ETS allowances will likely cost more once Phase 4 kicks in.

With clinker factors of just 50 - 65% for CEMII / C-M, and 35 - 50% for CEM VI, Edelio Bermejo, director of research and development (R&D) at LafargeHolcim insists, "These cements are no longer at the research and development stage. They have been widely validated and we are ready to produce them, especially as their manufacture does not require modification of our facilities." The establishment of Cementos Argos’ Rio Claro calcined clay plant proves his point. We can expect to hear a lot more about these blends in the coming months. In the words of Bermejo, “The future is here!”

Nirma Group won the auction for Emami Cement this week with an US$770m offer. The deal is subject to approval by the Competition Commission of India but it signals further consolidation for the Indian cement industry. It sets Nirma Group and its subsidiary Nuvoco Vistas in a strong position in Central, North and East regions of the country, if authorities agree to it.

Sometimes the press releases connected to corporate acquisitions can be accused of hyperbole but Nuvoco’s chairman Hiren Patel may be proved closer to reality than some when he said, “This acquisition is a momentous and transformational step in Nuvoco’s journey to becoming a major building materials company in India.” This is because Emami Cement operates one integrated cement plant in Risdah, Chhattisgarh and grinding units in Bihar, West Bengal and Odisha with a total installed capacity of 8.3Mt/yr. It also holds mining leases in Chhattisgarh, Rajasthan and Andhra Pradesh. Nuvoco Vistas runs four integrated plants in Chhattisgarh and Rajasthan and three grinding plants in West Bengal, Jharkhand and Haryana with a total installed capacity of around 15.2Mt/yr.

Put all of this together and Nuvoco Vistas has a capacity of 23.5Mt/yr. This may not make it a leader nationally, where it faces the likes of UltraTech Cement’s capacity of just under 110Mt/yr. Yet it does make the producer a serious player regionally in Chhattisgarh and Rajasthan. Backing this up are five grinding plants in East India. Hence, Hiren Patel might not be exaggerating all that much.

It’s difficult to ascertain the valuation of this deal given the mixture of integrated and grinding capacity that was on sale. Altogether, for its total of US$770m, Nirma Group has agreed to pay around US$93/t. Like any deal there must have been some haggling going on given that the projected price for Emami Cement drifted downwards as the auction went on. Emami Cement’s owners reportedly valued the company at around US$1.2bn before the auction and were subsequently said to be looking for US$1bn. Later, local media said that UltraTech Cement was likely to submit an offer around US$0.94bn.

In the wider context of the Indian cement industry, the picture looks similar to when this column looked at the country as a whole in December 2019. Since then the November 2019 production figures have been released showing that cement production grew in the first 11 months of 2019, to 308Mt, but at a far slower rate than in 2018. A growth in production in November 2019 also broke a downward trend since August 2019. Adding to this growing sense of optimism, analysts ICRA were forecasting increasing profitability for cement producers in the 2020 financial year due to ‘benign’ input costs. If correct then Nirma Group will have picked a good time to expand.

There have been rumours in the press this week that LafargeHolcim is weighing up its options in South Africa. Reports in the local press allege that the building materials company has tasked Credit Suisse Group with finding a buyer for its business. This may or may not be true, only time will tell, but South Africa certainly feels like a market where LafargeHolcim should be considering its future.

As a prominent but smaller producer in the country, Lafarge South Africa is behind PPC and AfriSam in terms of clinker production capacity. InterCement’s subsidiary Natal Portland Cement and Dangote’s subsidiary Sephaku Cement have a similar production base with an integrated plant each and one or two grinding plants. Halfway through 2019 LafargeHolcim was describing market conditions as ‘difficult’ in the country with it being the sole Sub-Saharan market holding back regional growth for the group. By the third quarter the situation had reportedly improved but net sales and cement sales volumes were flat for the year to date. A clearer picture should emerge when LafargeHolcim publishes its fourth quarter results at the end of February 2020.

PPC provided its view of the market in its half-year results to 30 September 2019. Its estimate was that the South African cement industry declined by 10 - 15% for the period, creating a competitive environment. It added that the situation had been, ‘exacerbated by imports and blender activity.’ Both its revenue and earnings fell year-on-year, although a 30% rise in fuel costs didn’t help either. Sephaku Cement suffered a similar time of it, with a 19% fall in cement sales volumes during the first half, although it reported improvement in the subsequent quarter. Overall, it blamed falling infrastructure investment for pressurising the market and allowing blending activity to mount. Sephaku Cement was also wary of the local carbon tax that started in June 2019 warning of a potential US$2.8m/yr bill.

PPC noted that cement imports had risen by 5% to 0.85Mt in the year to August 2019. This followed a lobbying effort by The Concrete Institute (TCI) in mid-2019 to implore the International Trade Administration Commission (ITAC) to look into rising imports levels. At the time the TCI’s managing director Brian Perrie expressed incomprehension that a country with six different cement production companies with an over-capacity rate of 30% could be facing this problem. This latest broadside tails South Africa’s previous attempt to fend off imports when it instituted anti-dumping duties of 17 – 70% against importers from Pakistan in 2015. Imports duly fell in 2016 but rose again in 2017 and 2018, mainly from Vietnam and China.

All of this sounds familiar following LafargeHolcim’s departure from the ‘hyper-competitive’ South-East Asian countries in 2019. Those countries also suffered from competition and raging imports. Bloomberg pointed out in a report on the local industry in 2016 that PPC’s, AfriSam’s and LafargeHolcim’s kilns had an average age of 32 years, suggesting that efficiency and maintenance were going to be concerns in the future. Also of note is LargeHolcim’s decision to move its South African operations from one subsidiary, Lafarge Africa, to another, Caricement, in mid-2019.

Some level of market consolidation would certainly help local overcapacity. Plus, surely, LafargeHolcim’s mix of inland integrated capacity and a grinding plant near the coast could prove enticing to some of the Asian companies pumping out all of those imports. The thought on the minds of potential buyers everywhere must be, if LafargeHolcim chief Jan Jenisch was bold enough to sell up in South-East Asia, how can he not in South Africa?!”