Analysis

Jan Jenisch and the team at LafargeHolcim only went and bloody did it! Apologies for readers not wanting yet more column inches on LafargeHolcim but when the world’s largest cement producer leaves an entire sub-continental market it deserves mention.

First Indonesia, then Malaysia and now the Philippines. LafargeHolcim will soon no longer produce clinker in Southeast Asia. That’s a region with 651 million inhabitants or around 8% of the world’s total population. All of those people need cement and other building products as their nations build houses, infrastructure and so on. And LafargeHolcim is no longer there.

The reason, of course, is local production overcapacity in many of these countries and rampageous importers pulling in cheaper product from elsewhere. The Association of Southeast Asian Nations (ASEAN) includes Thailand and Vietnam, two of the world’s largest cement exporters. The region also borders China, the place which could produce 40% of the world’s cement if it so wanted. So, understandably, LafargeHolcim pulled the plug. Note that the recent divestments in the region didn’t include its seabourne trading wing, LafargeHolcim Trading. Oh no! Clearly, if you can’t beat them, you join them instead.

So, what to say about the Philippines sale? Unlike the divestments in Indonesia, this sale has valued the production base more highly. LafargeHolcim’s integrated production capacity, including the upgrade at its Bulacan plant, is being sold for over US$175/t with the partial share factored in. And that’s not even including the grinding plant at Mabini. The sale in Indonesia was US$120/t or lower. The Duterte administration’s infrastructure drive (Build, Build, Build) and muscular government action on imports have doubtless played their part here. Yet still LafargeHolcim sold. In the words of chief executive officer (CEO) Jan Jenisch the area was ‘hyper competitive.’

Back home at the group’s headquarters in Switzerland, the potential revenue of over US$4bn from the three ASEAN divestment is poised to trickle onto the balance sheets for 2019. If it were all to go towards debt reduction then these proceeds could pile drive the group’s net financial debt to below Euro10bn. This would be good place to be if the on-going Chinese-US trade tiffs became a little hotter, say, or in the case of a fresh banking crisis. Alternatively the group could pick a new region for development and start all over again or focus on diversifying its business along the building materials chain. And let’s not forget the potential legal bill from the on-going investigation into Lafarge Syria’s conduct during the Syrian civil war.

Throughout this whole exercise, from the outside looking in at LafargeHolcim’s actions, the thought has persistently been: what do they know that everyone else doesn’t? The answer, it may turn out to be, nothing. Yet, rightly or wrongly, we’re marvelling at the bravado of it all.

RHI Magnesita has taken the step this week of raising its prices globally by 5% for its products for its industrial and steel divisions. It has applied the increase to both its basic (magnesia and dolomite based) and non-basic products, varying in a range of 3% to 20%. It has blamed this on a global scarcity of raw materials caused mostly by Chinese environmental regulations on mining and processing. It goes on to attribute the issue to increased export taxes, more restrictive allocation of explosives and the nationalisation or controlled consolidation of mining operations in China. All of this has, “...structurally altered the production, pricing and dynamics for industrial minerals.”

Graph 1: Revenue in 2018 from industrial divisions at selected refractory producers. Source: Company reports.

Other major refractory producers, including Imerys and Vesuvius, reported similar mounting raw material costs in 2018. They also implemented price changes to maintain income and/or sales growth. As can partly be seen in Graph 1 some of the major refractory producers reported mixed fortunes in 2018 for their divisions that produce products for the cement industry.

RHI Magnesita noted that 2018 was a year of steady refractory market growth and relative stability for cement and lime from a global market perspective, with some significant variances on a regional basis. Imery’s Energy Solutions & Specialties division suffered due to flat markets. However, its High Resistance Materials division (not shown in Graph 1) benefited from the ongoing integration of Kerneos into the group. The group restructured its businesses at the end of 2018 creating a High Temperature Materials & Solution segment that brings together its various refractory concerns. Vesuvius' Steel Advanced Refractories division, which include monolithic products, reported particular growth in the Americas in 2018. Although it noted some market share loss in North Asia and in certain European countries, the latter due in price increases.

Refractories aren’t the only material or commodity used by the cement industry that has been distorted by Chinese domestic policy. Regulations on imports of waste streams including plastics started in 2017 leading to European and US suppliers struggling to find alternate markets. One implications of this appears to have been waste firms focusing on separating plastic into high and low calorific fractions to fight the downward price trends of a market glut. The outcomes are different but the sheer size and variety of China’s economy is increasingly affecting the cement industry in new and different ways.

RHI Magnesita’s travails in China and the debacle of waste imports bring to mind the quote by the 19th century Austrian diplomat Klemens von Metternic, ‘When Paris sneezes, Europe catches a cold.’ Metternic was referring to Napoleonic-era France and its aftermath. The modern version may have been used to reference the US but maybe it should be instead, ‘When China sneezes, the world catches a cold.’ Gesundheit.

One of the long running trends in the cement industry is that of production overcapacity. Sure enough more than a few news stories this week covered this, as various players reacted to international trade in clinker and cement. The Bangladesh Cement Manufacturers Association wants its government to cut import duties on clinker. Algeria’s shift from an importing cement nation to an exporting one continues.

Armenia and Afghanistan are coping with influxes of cement imports from neighbouring Iran. Pakistan’s cement exporters, who have been losing ground in Afghanistan, are once again lobbying to remove anti-dumping measures in South Africa. The argument between Hard Rock Cement and Arawak Cement in Barbados may have swung Hard Rock Cement’s way as the Caribbean Court of Justice (CCJ) has ruled in favour of lower tariffs for imports. Last week it was reported that the Rwanda Bureau of Standards had blocked cement imports from Uganda on quality requirement grounds.

The summarised version is that all this excess clinker and cement can cause arguments and market distortions as it finds new markets. Typically, the media reports upon the negative side of this, when the representatives of national industries defend their patch and speak out about ‘quality concerns,’ potential job losses and blows to the local economy. However, it isn’t always like this as the Afghan story shows this week. Here, although the Chamber of Commerce and Industries wants to promote locally produced cement, imports are welcome and the relative merits of different sources are discussed. Ditto the situation in Bangladesh where a predominantly grinding-based industry naturally wants to cut its raw material costs.

We’ve covered clinker and cement exports more than a few times, most recently in September 2018 when the jaw-dropping scale of Vietnam’s exports in 2018 started to become clear. Yet as the continued flow of news stores this week makes clear it’s a topic that never grows old.

Graph 1: Top cement exporting countries in 2018. Source: International Trade Centre.

Looking globally raises a number of issues. First, a warning. The data in Graph 1 comes from the International Trade Centre (ITC), a comprehensive source of trade statistics. Most of its figures are in line with data from government bodies and trade associations but its export figure is around a tenth of the estimated export figure for Iran of around 13Mt for its 2018 - 2019 year. Last time this column looked at exports similar issues were noted with a discrepancy between Vietnam’s exports from the ITC compared to government data.

Iran aside, all the usual suspects are present and correct. A point of interest here is that the list is a mixture of countries that make the headlines for their exports, like Vietnam, and those that are quietly just getting on with business. Japan for example exported 10.7Mt in 2018. More telling are the changes in exports from 2017 to 2018. Exports fell in Japan, China and Spain. They rose in Vietnam, Thailand, Indonesia, Pakistan and South Korea.

Looking globally, China is the elephant in the room in this topic given its apparent massive production overcapacity. The industry here is structurally unable to export cement on the scale of other countries but, as its major companies expand internationally, this may change. Despite this China still managed to be the third biggest exporter of cement to the US in 2018 at 2Mt and the fifth biggest in the world. Yet, as the ITC data shows, its exports fell by 30% year-on-year to 9Mt in 2018.

Vietnam, Pakistan and Turkey continue to be some of the key exporting nations with production capacities rising in defiance of domestic realities. Pakistan, for example, is coming off a building boom from the China–Pakistan Economic Corridor infrastructure project and all those plants are now looking for new markets. Vietnam says it is benefitting from industry consolidation in China. Its exports grew by 55% year-on-year rise to 31.6Mt. It shipped 9.8Mt to China in 2018. Its main export markets in 2019 are expected to be the Philippines, Bangladesh, China, Taiwan and Peru. Turkey, meanwhile, struggled with general economic issues in 2018. Its cement exports fell by 6% to 7.5Mt in 2018 according to Turkish Cement Manufacturers Association data. Once again this is at odds with ITC data, which reports nearly twice as many exports.

This touches the tip of the iceberg of a big issue but while production over-capacity continues these kinds of trade arguments will endure. Vietnam, for example, may be enjoying supplying cement in China as that country scales down production. Yet, what will happen to all of those Vietnamese plants once Chinese consumption stabilises?! Similar bear traps lie in wait for the other major exports. Alongside this many of the multinational cement companies are pivoting to concrete production. This may be in recognition of the fact that in a clinker-abundant world profits should be sought elsewhere in the supply chain. A topic for another week.

For an overview of some of these themes and more read Dr Robert McCaffrey’s article ‘The Global Cement Industry in 2050’ in the May 2019 issue of Global Cement Magazine and his forthcoming keynote presentation at the 61st IEEE-IAS/PCA Cement Conference 2019 at St Louis in Missouri, US.

Good news for Cemex Colombia this week with an agreement reached to open its Maceo cement plant in Antioquia. Local media was reporting that the cement producer has struck a government-brokered deal with CI Calizas y Minerales to lease the land it built its plant on. Finally, the new(ish) US$350m integrated plant can start operation.

For those unfamiliar with the debacle, Cemex has been fighting the fallout publicly since 2016, following a dodgy land deal at the site. The 1Mt/yr integrated Maceo plant was originally announced in 2014 with full operation scheduled for late 2016. Then, in October 2016 Cemex fired several senior staff members in relation to the project and its subsidiary’s chief executive resigned. This followed an internal audit and investigation into payments worth around US$20m made to a non-government third party in connection with the acquisition of the land, mining rights and benefits of the tax free zone for the project. Other irregularities are also alleged to be linked to the project. As well as the Colombian authorities being involved, the US Department of Justice is also running its own investigation into the affair with wider implications for Cemex’s operations in other Latin American countries. Some of the sacked staff members and others have since been investigated on corruption charges.

Graph 1: Cement production in Colombia, 2010 – 2018. Source: DANE.

Looking at the wider Colombian market though, it does make one wonder whether the long-delayed plant is really necessary. As Graph 1 shows, cement production rose steadily year-on-year to 2015 before it hit a downturn. It reached a high of 13Mt in 2015 before declining. Production in 2018 grew slightly compared to 2017 but not at the same rate seen previously. In Antioquia specifically despatches increased by 1.3% in 2018, above the national average of 0.2%. Despatches now appear to have continued into January and February 2019.

Cemex Colombia started to benefit from an improved fourth quarter in 2018 as the general economy picked up. Despite this its overall net sales and operating earnings fell in 2018. However, it did flag its earnings margin as a concern with higher freight and energy costs in the fourth quarter of 2018, although it partially offset this with higher prices. Cementos Argos, the other big producer in Colombia, reported a similar picture to Cemex, although in a better position. Its cement volumes fell slightly for the year in 2018 but picked up fast in the fourth quarter. Annual revenue was down slightly, as were adjusted earnings. In its opinion the construction industry improved in the second half of 2018 due to an improved housing market and infrastructure projects.

Given the downturn in production since 2015 the thought does occur whether the opening of the Maceo plant being delayed accidentally helped Cemex or not. It has probably been losing money by not running the plant but if, for example, the company had some sort of insurance to protect it against unexpected delays it might still benefit. However, if evidence of serious wider misconduct in both Colombia and other Latin American countries are found by the US authorities, then things could get expensive. This would be unfortunate, particularly in Colombia, given that the market looks set to recover.

More movement in Italy this week with Buzzi Unicem’s purchase of three cement plants from HeidelbergCement. Buzzi acquired the Testi integrated cement plant at Greve and the Borgo San Dalmazzo and Arquata Scrivia grinding plants in Piedmont. No value for the transaction was disclosed but HeidelbergCement trumpeted that it was ‘well on our way’ to reach its target of Euro1.5bn of disposals by the end of 2020. This follows last week’s purchase of Cemitaly's Spoleto cement plant in Perugia by Colacem. Cemitaly, in case readers don’t know, is another of HeidelbergCement’s Italian subsidiaries.

Upon completion of these deals, Buzzi Unicem will own 10 integrated plants and five grinding plants in Italy. It continues the company’s consolidation drive in Italy from mid-2017 when it bought Cementizillo and two of its integrated plants for the knock down price of up to Euro125m.

The two other leading cement producers are now Germany’s HeidelbergCement with its local subsidiaries (led by Italcementi) and Colacem. HeidelbergCement has 10 integrated plants and 10 grinding plant. Colacem has seven integrated plants and one grinding plant. All three companies have integrated production capacities of around 9 – 14Mt/yr. Since 2012 the market has shifted from six major producers to three. Sacci, Cementir and Cemenzillo have left the field following acquisitions by their competitors. Italcementi was taken over by HeidelbergCement in 2016.

Graph 1: Cement production in Italy, 2006 – 2017. Source: Italian Cement Association (AITEC).

Data from the Italian Cement Association (AITEC) shows that the impetus for this consolidation trend was the reduction in Italian cement production to 19.3Mt in 2017 from a high of 47.9Mt in 2006. Despite this though the country still has a total production capacity of 37.7Mt/yr, according to Global Cement Directory 2019 data, giving it an utilisation rate of just over 50%. Production picked up again in the north and central regions of Italy in 2017 but this was insufficient to counter declines in the south and Italy’s islands. Exports have held steady in this time at around 2 – 3Mt/yr but this represents a doubling share of production from 5% in 2006 to 10% in 2017. Production has been steadily dwindling year-on-year since 2006 but domestic consumption rallied a little to 18.7Mt in 2017.

The Italian government instituted its ‘Industry 4.0’ policy in early 2017 to boost competitiveness. This included modest growth forecasts of 1%. International Monetary Fund (IMF) data shows that the country managed gross domestic product (GDP) growth of 0.9% in 2018. Yet, Buzzi Unicem reported like-for-like net sales contraction of 0.9% in 2018. HeidelbergCement was more circumspect in its reporting on Italy for 2018 but it did describe a ‘moderate’ increase in sales volumes of cement excluding its acquisitions.

With the IMF diagnosing the Italian economy as ‘weak’ and cutting its growth forecast to 0.1% in 2019 the prospects aren’t looking encouraging for the cement sector. AITEC data placed cement consumption at 309t/capita in 2017. This is on the low side for Western European standards suggesting that, although more consolidation could be coming, the market may also be down too. Its not great news for cement producers but the Italian market is edging ever closer to recovery.