Analysis

The visible lobbying work by Cembureau, the European cement association, has been building in recent months as it has started to tackle the European Green Deal. Last week’s move was its aim to align with the objectives of the new legislation. To this end it plans to review the targets from its 2050 Low Carbon Roadmap (2013/2018) to fit with what the European Commission’s (EC) policy initiatives are aiming to do. It intends to publish the new roadmap in the spring of 2020.

The immediate problem for the European cement industry is that the EC wants to pick up the pace. Before the Paris agreement in 2016 it was aiming for a 40% reduction in greenhouse gas emissions by 2030 compared to 1990 levels. The overall target, remember, was an 80% reduction in emissions by 2050. However, the wording from the EC to the European Parliament about the Green Deal in December 2019 is now targeting carbon neutrality and the 2030 target has increased to ‘at least 50%’ and toward 55% in a ‘responsible way.’

To give readers an idea of the uphill battle facing the cement industry. Cembureau said it was on target in 2015 with a 14% reduction in emissions per tonne of cement produced from direct, indirect and transport sources. For comparison, gross CO₂ emissions Cement Sustainability Initiative (CSI) data from the Global Cement & Concrete Association (GCCA) shows a 29% drop from 1990 to 2017 from Cembureau members. The EC now wants to make it even harder to meet the 2030 target.

The cement industry’s problem is that it is energy intensive and that making clinker releases CO₂ (process emissions) as limestone is calcined. Cembureau’s roadmap offered multiple paths to its end goal including resource efficiency, energy efficiency, carbon sequestration and reuse, product efficiency. However, most of these things - like lower clinker factors, production efficiency use of alternative fuels, better transport efficiency and so on - only reach a reduction of a little below 35%. We should note here that great work has been achieved in all of these with Europe leading the way for many. The other 45% was intended to come from breakthrough technologies such as carbon capture and usage (CCU) and/or storage (CCS). Again, Europe has been leading the way worldwide with its various research and pilot projects. Yet, given that there are no commercial-level carbon capture installations at any cement plants in Europe in 2020, the EC is potentially cutting off the industry’s escape route to meet the 2030 deadline.

The EC gives the impression that it knows that energy intensive industries need help meeting the targets with the publication of its masterplan for energy-intensive Industries in November 2019. CCS, CCU, biomass, alternative binders to make cement, more efficient use of cement in concrete and the use of alternative fuels were all listed as being of in use of high potential to the sector. These are similar to Cembureau’s five paths on its roadmap. Incidentally, more recently Cembureau has been promoting its so-called 5C approach: clinker, cement, concrete, construction & built environment, and (re)carbonation. This is intended to initiate a wider debate across the construction industry supply chain along similar lines to the objectives in the roadmap. It also follows the general industry pivot towards concrete.

However, just one badly-considered measure from the legislators could scupper this. The new tax on refuse-derived fuel (RDF) imports in the Netherlands is one example of this. It potentially complicates alternative fuels markets in Europe. Another, more subtle risk that Cembureau warned of in December 2019, was of the EC’s intent to propose a carbon border adjustment mechanism to reduce the risk of carbon leakage. Its argument was that a new untested scheme could create uncertainty in an industry already at risk being replaced by production capacity outside of the EU.

So now we wait to see how many more reductions Cembureau can squeeze out of its revised roadmap in the spring. It may be able to gain more from its existing measures or offset emissions more widely along the construction chain. Whether it does or does not though the bulk of emissions reduction needs to come from the continued research, testing and implementation of novel technologies like CCU/S. CCS also needs help setting up the infrastructure to move CO₂ to the storage sites. To this end the EU heavy industry expert group says that developing large-scale pilot projects on ‘clean’ technologies should be supported with EU funds and by easier access to private financing. The ongoing question is how and when can this funding be unlocked? The answer is far from clear.

Here’s a fun idea: providing building materials as a service. Instead of the owner of a building possessing all the materials in it forever, they simply rent them. It would be like a music or television streaming service. A ‘Netflix’ or ‘Spotify’ for the construction industry. ‘Rentacrete’ if you will…

The Guardian Cities series has been discussing the idea this week in a feature on whether buildings should be demolished at the end of their lifetime. The feature largely looks at the ideas of Dutch architect and commentator Thomas Rau, the author of Material Matters. He talks about his ‘materials passport’ concept whereby all the materials in a building are logged with their properties to highlight their value when the structure is demolished. This is a refinement of the Building Information Modelling (BIM) system. Rau has put his passport premise into action for a couple of projects through his firm and the Madaster Foundation promotes its use.

The next steps that he envisages are buildings where the materials that constitute it are simply rented from the manufacturer. Since the material owners would now become companies they would have an interest in efficiency where the materials can be refitted, such as lighting, and/or recycled for when the building is torn down. In Rau’s view these companies would be in a better position to recoup the value of these materials when a building is demolished. He estimates that 18% of a building’s original construction cost can be preserved in this way. Suddenly, sustainability becomes much easier by changing one’s perspective on who owns what exactly in a building.

How this idea would work in practice raises all sorts of questions. For example, most buildings in the developed world last for as least as long as humans do. Which companies could be relied on to hang around this long? Building materials as a service might work for soft materials that are replaced more often, such as lighting and other interior fittings, but could this extend to a structure’s shell? One answer to this is that people invest in pension schemes and use banks quite happily over long periods time, so why not a building’s very fabric? Another issue is of liability and whether a manufacturer would want to take on additional responsibilities for its products decades later. This, and the idea in general, have similarities to the extended product responsibility strategy. Obviously someone needs to try out building materials as a service for real to tackle these questions and many more.

Building materials as a service is compelling but one reason that the construction industry has proved resistant to the digital revolution across the entire business, so far, is because it ultimately deals with physical products that people need permanently. Consumer digital renting services for media, like Netflix and Spotify, are ‘disposable’. Hence, the mindset is different. That’s not to say that building materials as a service is impossible just that it is a harder shift in thinking. A country with a high level of residential renting, for example, might find it easier to move to this model than one with high levels of home ownership.

One more thing to consider is that the media renting companies mentioned above are dependent on other companies producing the content. Due to this they have moved towards vertical integration as the producers themselves, notably Disney in 2019 which has started to set up its own online rental platform. The point here being that in a product rental environment, whoever produces the product, holds a large amount of influence. Building materials manufacturers take note. Building materials as a service might just be a talking point on the lecture circuit along the road towards sustainability in the construction industry. Yet if it did happen at any scale then the producers of concrete, mortar, bricks, steel and all the rest would be well placed to benefit from it.

Last month Soyuzcement, the Union of Russian Cement Producers, reported that cement production was on course to grow by 8% year-on-year to 58Mt in 2019. This estimate was based on growth from January to October 2019 followed by a modest rise in November.

Graph 1: Cement production in Russia, 2010 – 2019. Source: CM Pro, Ernst & Young.

The pickup is significant because it’s the country’s first annual resumption of growth since 2014. At that time low commodity prices, a worsening economy and international sanctions broke a fairly steady growth cycle that had started in 2000. The only blip in that run was the global economic downturn around 2008. In the medium to long term Soyuzcement’s review pinpointed growth drivers as being government-backed residential housing schemes, integrated land development projects and an increase in the construction of concrete roads. This increase has been driven by consumption growth in most regions, led by a 12% rise in the Central Federal District although the Volga Federal District started to slow in the second half of 2019.

Figure 1: Russian Federal Districts by cement production in 2016. Source: Soyuzcement.ru.

Anecdotally, this change in the fortunes of the Russian cement industry can be seen in the volume of news coverage on the Global Cement website over the last few years. The mean number of news stories on the country in 2016 and 2017, increased by half in 2018 and then again in 2019. Partly this is down to our attempts to increase our coverage of the region but it also shows a general trend. In the news specifically there haven’t been many new plant projects domestically but there has been a steady stream of upgrades and maintenance related stories. For example, Eurocement subsidiary Kavkazcement reported in recent weeks that it had installed a replacement dry kiln. This has been part of a group of upgrades that Eurocement has started in 2019. On the supplier side both Germany’s Gebr. Pfeiffer and Italy’s Bedeschi opened subsidiaries in Russia in 2019.

One thing that didn’t seem to slow down the growth were mounting tariffs on Russian exports into Ukraine. Russia’s neighbour first blocked imports of cement from Russia in May 2019 due to, what it said was a Russian ban on imports. It then followed this with an antidumping rate of 115% for imported clinker and Ordinary Portland Cement (OPC) from Russia. It also penalised imports from Belarus and Moldova, although at lower rates. Russia’s cement export rates seemed untroubled by this, rising by 13.5% year-on-year to 0.8Mt in the first 10 months of 2019. Exports hit of high of just below 2Mt/yr in 2014 but have since stabilised at around 1Mt/yr. Imports reached around 5Mt/yr in the early 2010s and have been slowly declining since then, reaching 1.5Mt in 2018.

The lowered production rate that the Russian cement industry has faced over the last five years has been noteworthy given the apparent low capacity utilisation rate. The Global Cement Directory 2019 records the country as having a production capacity of 111Mt/yr. This gives Russia a capacity utilisation rate of 48% in 2018! Unlike, say, the countries in southern Europe that have had to rationalise their cement industries following the post-2008 decline, Russia may have structural aspects to the industry that have helped protect it from lower utilisation rates. These include relatively low export-import rates and the large size of the country with limited sea access to many regions. Most of its production capacity is located in the west but a sizable minority of plants are based further east across the Ural, Siberian and Far Eastern regions. Even under subdued economic conditions, plants in these places are likely to be less susceptible to foreign imports, for example.

Looking ahead, the question is whether the current growth that the cement industry is enjoying is viable once government spending slows down. Alongside this the industry could also focus on sustainability. As the government announced in early January 2020, the country expects to face both negative and positive effects from climate change. The cement industry could be at the front of this trend if it decides to clean up production and/or move into new markets as the Arctic region opens up.

It’s the end of the year so it’s time to look at trends in the sector news over the last 12 months. It’s also the end of a decade, so for a wider perspective check out the feature in the December 2019 issue of Global Cement Magazine. The map of shifting production capacity and the table of falling CO₂ emissions per tonne are awesome and inspiring in their own way. They also point towards the successes and dangers facing the industry in the next decade.

Back on 2019 here are some of the main themes of the year in the industry news. This is a selective list but if we missed anything crucial let us know.

European multinationals retreat

LafargeHolcim left the Philippines, Malaysia and Indonesia, HeidelbergCement sold up in Ukraine and reduced its stake in Morocco and CRH is reportedly making plans to leave the Philippines and India, if local media speculation can be believed. To be fair to HeidelbergCement it has also instigated some key acquisitions here and there, but there definitely has been a feel of the multinationals cutting their losses in certain places and retreating that bit closer to their heartlands.

CRH’s chief executive officer Albert Manifold summed it up an earnings meeting when he said, “…you're faced with a capital allocation decision of investing in Europe or North America where you've got stability, certainty, overlap, capability, versus going for something a bit more exotic. The returns you need to generate to justify that higher level of risk are extraordinary and we just don't see it.”

The battle for the European Green Deal

One battle that’s happening right now is the lobbying behind the scenes for so-called energy-intensive industries in Europe as part of the forthcoming European Green Deal. The cement industry is very aware that it is walking a tightrope on this one. The European Union (EU) Emissions Trading Scheme (ETS) CO₂ price started to bite in 2019, hitting a high of Euro28/t in August 2019 and plant closures have been blamed on it. The rhetoric from Ursula von der Leyen, the new president of the European Commission, has been bullish on climate legislation and the agitation of Greta Thunberg internationally and groups like Extinction Rebellion has kept the issue in the press. Cembureau, the European Cement Association, is keen to promote the industry’s sustainability credentials but it is concerned that aspects of the proposed deal will create ‘uncertainty and risks.’ Get it wrong and problems like the incoming ban on refuse-derived fuel (RDF) imports into the Netherlands may proliferate. What the Green Deal ends up as could influence the European cement industry for decades.

The managed march of China

Last’s week article on a price spike in Henan province illustrated the tension in China between markets and government intervention. It looks like this was driven by an increase in infrastructure spending with cement sales starting to rise. Cement production growth has also picked up in most provinces in the first three quarters of 2019. This follows a slow fall in cement sales over the last five years as state measures such as consolidation and peak shifting have been implemented. The government dominates the Chinese market and this extends west, as waste importers have previously found out to their cost.

Meanwhile, the Chinese industry has continued to grow internationally. Rather than buying existing assets it has tended to build its own plants, often in joint ventures with junior local partners. LafargeHolcim may have left Indonesia in 2018 but perhaps the real story was Anhui Conch's becoming the country's third biggest producer by local capacity. Coupled with the Chinese dominance in the supplier market this has meant that most new plant projects around the world are either being built by a Chinese company or supplied by one.

India consolidates but watches dust levels

Consolidation has been the continued theme in the world's second largest cement industry, with the auction for Emami Cement and UltraTech Cement’s acquisition of Century Textiles and Industries. Notably, UltraTech Cement has decided to focus its attention on only India despite the overseas assets it acquired previously. Growth in cement sales in the second half of 2019 has slowed and capacity utilisation rates remain low. Indian press reports that CRH is considering selling up. Together with the country's low per capita cement consumption this suggests a continued trend for consolidation for the time being.

Environmental regulations may also play a part in rationalising the local industry, as has already happened in China. The Indian government considered banning petcoke imports in 2018 in an attempt to decrease air pollution. Later, in mid-2019, a pilot emissions trading scheme (ETS) for particulate matter (PM) was launched in Surat, Gujarat. At the same time the state pollution boards have been getting tough with producers for breaching their limits.

Steady growth in the US

The US market has been a dependable one over the last year, generally propping up the balance sheets of the multinational producers. Cement shipments grew in the first eight months of the year with increases reported in the North-Eastern and Southern regions. Imports also mounted as the US-China trade war benefitted Turkey and Mexico at the expense of China. Alongside this a modest trade in cement plants has been going on with upgrades also underway. Ed Sullivan at the Portland Cement Association forecasts slowing growth in the early 2020s but he doesn’t think a recession is coming anytime soon.

Mixed picture in Latin America

There have been winners and losers south of the Rio Grande in 2019. Mexico was struggling with lower government infrastructure spending hitting cement sales volumes in the first half of the year although US threats to block exports haven’t come to pass so far. Far to the south Argentina’s economy has been holding the cement industry back leading to a 7% fall in cement sales in the first 11 months of the year. Both of these countries’ travails pale in comparison to Venezuela’s estimated capacity utilisation of just 12.5%. There have been bright spots in the region though with Brazil’s gradual return to growth in 2019. The November 2019 figures suggest sales growth of just under 4% for the year. Peru, meanwhile, continues to shine with continued production and sales growth.

North and south divide in Africa and the Middle East

The divide between the Middle East and North African (MENA) and Sub-Saharan regions has grown starker as more MENA countries have become cement exporters, particularly in North Africa. The economy in Turkey has held back the industry there and the sector has pivoted to exports, Egypt remains beset by overcapacity and Saudi Arabian producers have continued to renew their clinker export licences.

South of the Sahara key countries, including Nigeria, Kenya and South Africa, have suffered from poor sales due to a variety of reasons, including competition and the local economies. Other countries with smaller cement industries have continued to propose and build new plants as the race to reduce the price of cement in the interior drives change.

Changes in shipping regulations

One of the warning signs that flashed up at the CemProspects conference this year was the uncertainty surrounding the new International Maritime Organistaion (IMO) 2020 environmental regulations for shipping. A meeting of commodity traders for fuels for the cement industry would be expected to be wary of this kind of thing. Their job is to minimise the risk of fluctuating fuel prices for their employers after all. Yet, given that the global cement industry produces too much cement, this has implications for the clinker and cement traders too. This could potentially affect the price of fuels, input materials and clinker if shipping patterns change. Ultimately, IMO 2020 comes down to enforcement but already ship operators have to decide whether and when to act.

Do androids dream of working in cement plants?

There’s a been a steady drip of digitisation stories in the sector news this year, from LafargeHolcim’s Industry 4.0 plan to Cemex’s various initiatives and more. At present the question appears to be: how far can Industry 4.0 / internet of things style developments go in a heavy industrial setting like cement? Will it just manage discrete parts of the process such as logistics and mills or could it end up controlling larger parts of the process? Work by companies like Petuum show that autonomous plant operation is happening but it’s still very uncertain whether the machines will replace us all in the 2020s.

On that cheery note - enjoy the winter break if you have one.

Global Cement Weekly will return on 8 January 2020

In case you’ve missed it there’s been a boom in cement demand in China during the current quarter. Henan province saw a run on cement prices in November 2019 that the local press described as ‘crazy.’ Some companies were issuing price adjustments twice a day, according to the China Cement Association. The article on the CCA’s website also includes a video showing dozens of cement trucks queuing at a mill with the caption ‘all the plants are like this, don’t ask the price any more.’

The CCA’s blamed the situation in Henan on pollution controls on production and a rebound in cement demand. Weather-based pollution controls enacted in late October 2019 shut-down or limited production at 66 of the province’s 72 clinker production lines. Builders were then forced to source cement from neighbouring Shanxi, Hebei and Shaanxi provinces. At the same time demand for cement from real estate and infrastructure sectors picked up in the fourth quarter of 2019. Following advice from the local cement manufacturers’ association, the provincial government relaxed the rules on peak shifting that normally run from November to February in a bid to control the situation. Cement prices in Henan hit a high in mid-to-late November 2019 and have since subsided somewhat.

Nationally, Chinese cement prices hit a high in late November 2019 beating the highest level in 2018 and also setting the highest price since 2011. The key regions driving the increase have been in central and south China, including Guangxi, Guangdong and Henan. One more thing to note here is that peak shifting or seasonal shutdown of production capacity has different dates in different provinces. So, potentially, the situation could repeat itself if unexpected demand continues and provincial governments fail to monitor the situation.

Recently a couple of economic indicators in China have suggested a recovery in infrastructure spending in recent months, supporting increased cement demand. Data from Wind quoted by the Financial Times newspaper suggests that the cement price rose by 15% since September 2019 in large cities. Reinforced steel (rebar) and aggregates prices have increased similarly. At the same time the South China Post newspaper has reported a growth in the Purchasing Managers’ Index (PMI), an indicator of manufacturing activity that could also point to renewed infrastructure spending. Central government is also reported to be taking measures to support provincial infrastructure development.

If true then this may be creating some pretty direct lessons in economic interventionism. The Chinese government appears to be stimulating demand for cement via infrastructure growth while restricting production at the same time. Cement prices have reacted in a ‘crazy’ fashion. The real tension here is between two conflicting desires: protecting the economy and protecting the environment. The state planners may be grappling with this one for a while.