Analysis

The UAE is having a moment. Over the last week Fujairah Natural Resources, a new entrant to cement, said it is going to build a clinker plant at Habbab in Fujairah. It’s also looking likely that Raysut Cement might buy UAE-based Fujairah Cement Company’s shares in Sohar Cement in Oman. Then, Ras Al Khaimah (RAK) Cement announced that it had purchased the Newtech cement plant. What’s happening here?

The last couple of years have been tough ones for Emirati cement producers, which have been fighting falling sales and beleaguered profits. The largest producer, Arkan Building Materials - a group majority controlled by the Abu Dhabi government, reported flat sales growth for the first nine months of 2018. It blamed this on falling sales of clinker due to imports from Iran and a tough pricing environment. Its profits were hit by rising clinker production costs due to its reliance on imported limestone from Oman whilst it resolves problems with its own local quarry. Arkan had closed its Emirates Cement plant in Al Ain following revenue and profit falls in 2016. This story thread reached its end earlier in February 2019 when Arkan sold the closed plant for around US$14m. National Cement reported a similar experience in its nine months results, with growing revenue but sales sapped by mounting costs.

Data from Riyad Capital in early-2018 suggested that the UAE only consumes about half of its own cement production. The rest is exported to the Middle East and North African region, particularly Oman and Egypt, and African countries. The country has 14 integrated cement plants with a production capacity of 31.4Mt/yr and eight grinding plants with a capacity of 10.4Mt/yr. These are owned by a mixture of local companies and multinationals.

The European producers still have a presence through LafargeHolcim’s Lafarge Emirates plant in Fujairah and a grinding plant run by Cemex. Although how long LafargeHolcim will remain seems uncertain given a report by Bloomberg earlier in February 2019 suggesting that the group is seriously looking at exiting the Middle East and Africa. Oman’s Raysut Cement holds a plant too via its Pioneer Cement subsidiary but the majority of the foreign-owned plants are Indian. Their presence has been steadily growing.

Aditya Birla/UltraTech Cement, JK Cement and Shree Cement all run plants in the UAE and JSW Cement said in mid-2018 that it was going to build a 1Mt/yr integrated plant in Fujairah. UltraTech Cement renamed its grinding plant UltraTech Nathdwara Cement in December 2018. This plant was formerly a Binani Cement plant and part of the rancorous bidding war between UltraTech Cement and Dalmia Bharat.

The background to all of this has been a country that is very willing to spend big on infrastructure projects when the need arises. Forbes reckoned, for example, that the UAE had awarded US$20.7bn on infrastructure projects in 2018 in the first nine months of 2018. Impending projects like the Expo 2020 are still generating construction activity and longer ones like Dubai Metro are in progress. However, the country is in a dynamic place geographically between the two-major economic and cement-producing powerhouses of Saudi Arabia and Iran. For the cement industry this explains the prominence of the grinding sector and the growing interest from Indian companies looking to expand overseas. For the new project and acquisition this week it’s looking more like local variation in the market at this stage. In this context though the fourth quarter results from local producers will make interesting reading to see if anything bigger is going on.

One of the more interesting news stories in recent weeks was the completion of Oyak Cement’s acquisition of Cimpor. Previously we focused on the connection to Taiwan Cement (GCW377). Around the same time that the Oyak-Cimpor deal was announced in late October 2018 the Taiwanese company bought a 40% stake in the Turkish cement producer for around US$640m. However, as the world’s sixth largest cement producer by cement production capacity, Turkey is always a country worth keeping an eye on for both the Oyak deal and the wider industry.

Graph 1: Turkish domestic cement sales, 2007 - 2017. Source: Turkish Cement Manufacturers' Association (TÇMB).

Graph 2: Turkish cement and clinker exports, 2007 - 2017. Source: Turkish Cement Manufacturers' Association (TÇMB).

Data from the Turkish Cement Manufacturers' Association (TÇMB) shows that domestic cement sales have been rising steadily to 72.2Mt in 2017 after a blip in the late 2000s. So far 2018 has not kept the trend, with a drop of 2.01% year-on-year to 50.8Mt for the first nine months of 2018 from 51.8Mt in the same period in 2017. Turkey is also a major exporter of cement so these are the other figures to watch. After hitting a high of nearly 18Mt in 2010 they dropped for five years before rising again. The ratio of clinker in the exports total has also been growing recently. LIke domestic production ,exports were down at the nine month mark in 2018, by 1.8% to 9.9Mt, but the ratio of clinker exports has continued to grow.

Given the focus on exports for the Turkish market Oyak Cement’s international purchases via Cimpor widen its options. The deal covered assets in Portugal and Cape Verde including three integrated cement plants and two mills, with a total cement production capacity of 9.1Mt/yr. It’s not clear yet how Oyak wants to run its new foreign plants but it might be tempting to focus on a grinding model abroad using imported Turkish clinker depending on running costs. Back home in Turkey Oyak Cement is the largest local producer with a 15% market share. It operates seven integrated plants with a production capacity of 16Mt/yr according to Global Cement Directory 2019 data.

As for the other major companies, Akçansa, a joint venture of Sabancı Holding and HeidelbergCement, saw its sales rise by 4% to US$277m in 2017. Its sales volumes of cement and clinker rose but its exports fell by 13% to 1.3Mt. In its third quarter report for 2018 HeidelbergCement highlighted issues with the local economy such as high inflation, a currency crisis and a resulting loss of confidence.Sabancı also holds a majority stake in the other major producer, Çimsa Çimento. At the six month mark Çimsa Çimento reported that its sales grew by 35% year-on-year to US$162m and its net profit increased by 55% to US$23.2m. Notably, Çimsa also runs a number of international terminals in Germany, Italy, Spain, the disputed Turkish Republic of Northern Cyprus and Russia, with distribution operations in Romania and the US also.

As mentioned above the general Turkish economy faced problems in 2018 when the value of the Turkish Lira dropped sharply in mid-2018 and interest rates soared. This led to a reduction in industrial output. On the cement side this is likely visible in falling local sales in 2018 and the switch to exports. Raw materials have also risen in this environment leading the president of the TÇMB to reassure the construction industry that the price of cement would not rise too sharply in 2019. Some of the eye-watering input hikes that he cited included a 76% rise in electricity costs, a 182% rise in the price of coal and a 170% rise in the price of petcoke. With this kind of backdrop the 2018 annual results for the Turkish producers may not make easy reading. Yet this also may explain why Oyak Cement moved overseas and allowed Taiwan Cement to invest in it when it did. Looking more widely it seems exports are likely to grow in the near future.

Cemex was the first of the big multinational cement producers to release its fourth quarter results this week. Revenue, sales volumes of cement and gross profit were all up in single digits. Earnings growth was less impressive, with operating earnings before interest, taxation, depreciation and amortisation (EBITDA) rising by 1% year-on-year on a like-for-like basis to US$2.56bn in 2018. This was a decrease of 1% in real terms. Cemex blamed this on rising energy costs and on lower earnings from its territories outside of Mexico and the US.

Figure 1: Breakdown of Cemex’s net sales in 2018 by region: Source: Cemex.

As Figure 1 shows, over three quarters of Cemex’s sales come from Mexico, the US and Europe. Elsewhere its presence is smaller but it does have plants in key countries like the Philippines and Egypt. The former, for example, saw its cement sales rise by 7% in 2018 bringing along the rest of the Asia, Middle East and Africa region into volume growth.

Some other non-financial results to consider lead with the good news that 2018 was the first year ever that Cemex has had without any employee fatalities. This probably doesn’t include contractors or third parties, we’ll have to wait for the next sustainability report to find out for sure, but this is undoubtedly a milestone. Another point of interest was the growth of Cemex Go, its online sales platform. In 2018 it was responsible for around 40% of the company’s sales volumes. Around 85% of its recurring clients use it and it has nearly 30,000 customers. The analytics alone from the system and the potential for further tailoring it towards both customer and company objectives sound promising. Lastly, Cemex was also keen to note its alternative fuels substitution rate of 27% in 2018.

In recent years the other metric that the analysts have been watching is Cemex’s debt. It dropped by 8% year-on-year to US$10.4bn in 2018 compared to a high of US$17.5bn in 2013. Its plan is to reach an ‘investment-grade’ balance sheet by 2020.

In this way Cemex has been ahead of the curve of the major European cement multinationals like LafargeHolcim and HeidelbergCement that have taken on ‘indigestible’ acquisitions more recently. Possibly behind all of these companies is CRH, which has steadily been growing in recent years through acquisitions. It made the headlines this week on the corporate side when Swedish so-called ‘activist investor’ Cevian bought what is thought to be around a 3% stake in the Irish company. The financial press thinks it’s after a seat on the board to try and influence CRH to focus on margins rather than its acquisition strategy. CRH’s EBITDA margin was 12% in 2017 compared to 23%, 19% and 19% for LafargeHolcim, HeidelbergCement and Cemex respectively. This is just one way of comparing these companies. CRH, for example, might be keen to promote how its other metrics like cash generation and return on capital employed perform compare favourably to its competitors.

The point though is that it has taken Cemex over a decade since its acquisition of Rinker to rebuild its finances. All being well, it stands ready to take advantage of whatever the cement market holds in the 2020s.

Two supplier news stories this week presented a snapshot of the global cement industry. The first was FLSmidth’s annual results for 2018. The second was the announcement by France’s Fives that it had signed a collaboration agreement with China’s CNBM.

Overall FLSmidth reported its highest order intake in six years with revenue growth driven by its minerals division. On the cement side though the equipment manufacturer was blunt, describing the market for new cement capacity as, “subdued with low plant utilisation globally.” In its assessment a slow increase in global consumption outside of China was not enough to absorb overall production overcapacity. It said it saw a ‘healthy’ level of small to mid-sized orders for grinding plants, upgrades, retrofits and single equipment orders. The market for replacements and upgrades was identified as a strategic focus. It also noted environmental upgrades for plants in China and India as environmental regulations tighten.

Fives’ news touched on the rivalry that western-based manufacturers have faced from Chinese competitors. Fives and CNBM have agreed to explore projects together in new plants, expansions and upgrades. Although the press release was brief, this seems to involve CNBM using Fives technology such as grinding mills, pyro-lines and burners. Like the rest of the industry Fives has had a tough time of it in recent years in the cement sector although 2018 seemed to have improved considerably at the nine-month stage in September 2018. So signing an agreement with a competitor at this stage is interesting. FLSmidth did a similar deal with CNBM in mid-2018 when it signed a framework agreement for future collaboration.

The context here is that the new plants that are being built are often part of China’s One Belt, One Road Initiative, typically in Central Asia or Africa. Mostly these plants are being financed by Chinese joint ventures and built by Chinese suppliers. This week Reuters published a map of new cement plants being built in 2018 with Chinese involvement along the silk road using Global Cement data. Rightly, FLSmidth and Fives are taking steps to be a part of this growth.

Figure 1: New Chinese cement plant projects outside of China in 2018. Source: Reuters using Global Cement data.

There is a tendency in the western press to play up Chinese imperial ambitions exemplified by US Vice President Mike Pence’s comments at the Asia-Pacific Economic Cooperation summit in Papua New Guinea in November 2018. Yet, Sinoma International Engineering, one of CNBM’s engineering subsidiaries, reported that its new order intake fell by 14% year-on-year to US$4.56bn in 2018. No reason for the decrease was given but most of this fall seemed to come from its construction division. In turn most of this came from a fall in foreign orders. The implication is that China’s attempts to move its cement industry out of the country may not be happening fast enough to preserve the size of these companies.

Returning to European equipment suppliers, FLSmidth summed up its response to this situation in its annual report. The cement market is split between premium and mid-market projects, with the latter dominated by Asian suppliers. FLSmidth says it is targeting the mid-market by becoming the preferred original equipment manufacturer (OEM) of choice. They are not alone in their ambition as the Fives deal shows.

The cement industry in the Philippines has been generating a lot of ‘steam’ in the past three months. Some of this has now come to a head in the last few weeks with the Department of Trade and Industry’s (DTI) decision to impose tariffs on imported cement and the Philippine Competition Commission’s (PCC) on-going investigation into alleged-anti-competitive behaviour. Then, there was the unnamed sourced quoted by Bloomberg this week that LafargeHolcim was seriously thinking about selling up in the country.

Resistance to imported cement has been building for a while as local producers and importers have repeatedly clashed in the media. The latest thread of this story started in September 2018 when the DTI started an investigation into imports. A review by the department found that imports grew by 70% year-on-year in 2014, 4391% in 2015, 549% in 2016 and 72% in 2017. However, the market share of imports grew from 0.02% in 2013 to 15% in 2017. This was followed by various organisations taking sides. The Philippine Constructors Association, Laban Konsyumer (a consumer group), the Philippine Cement Importers Association and others came out on the side of the importers, warning of the risk to prices and consumers if duties were implemented.

It didn’t stop the DTI though. It imposed a provisional safeguard duty of US$0.16/bag on imported cement, around 4% of the cost of a 40kg bag. The PCC then said that it was going to consider the new tariff as part of its on-going investigation. Its probe started in 2017 following allegations that the Cement Manufacturers Association of the Philippines (CEMAP), LafargeHolcim Philippines and Republic Cement and Building Materials had violated the Philippines Competition Act by engaging in anti-competitive agreements.

Amid all of this, LafargeHolcim popped up earlier this week with a news story that it was actively trying to find the ‘right’ price for its local subsidiary, Holcim Philippines. The ‘right’ price at the moment being something around US$2.5bn for four integrated plants and associated assets. That’s around US$225/t of production capacity using the total of 8.4Mt/yr in the Global Cement Directory 2019 and considering LafargeHolcim’s 75% share in the subsidiary. This is about what you’d expect, but it is certainly higher than the US$120/t LafargeHolcim has officially accepted for its divestment of its Indonesian operations.

Given the anonymous nature of the sources involved, it’s uncertain whether LafargeHolcim’s alleged intentions to sell in the Philippines is anything more than market scuttlebutt. What is more certain is that Holcim Philippines has had a tough time so far in 2018, reporting a 23% year-on-year drop in earnings before interest, taxation, depreciation and amortisation (EBITDA) to US$64.8m in the first nine months of 2018 from US$83.9m in the same period in 2017. Sales have grown but this has been hit by the fuel, power and distribution costs as well as the depreciation of the Philippine Peso against the US Dollar. It also blamed imports for its problems. However, alongside all of this the company announced in December 2018 that it was spending US$300m towards increasing its production capacity by 30% to 13Mt/yr by 2020. This includes upgrades to its plants at Bulacan and Misamis Oriental with the installation of new kilns, mills and waste heat recovery systems.

The latest victory in the war between producers and importers seems to be on the side of the producers as the government steps in with protection for the industry. The Philippines’ economy is doing well with its gross domestic product (GDP) forecast to rise by 6.5% in 2019 by the World Bank. The trick for the government will be striking the balance between shielding industry from dumping and allowing the construction industry to keep on growing. Rumours about LafargeHolcim selling up are enticing but seem less likely than LafargeHolcim’s decision to exit Indonesia. Leaving would mean abandoning South-East Asia and exiting a country with a growing industry.