Analysis

The Chinese cement sector had a tough time in 2022. This was confirmed this week as the large domestic cement producers released their financial results. Revenue was down, profits fell and cement sales volumes tumbled. The key causes included the continuation of the country’s zero-coronavirus policy, the declining real estate market and rising input costs for raw materials such as coal. Demand for cement withered and so did the fortunes of the cement companies.

Graph 1: Cement output in China, 2018 to 2022. Source: National Bureau of Statistics of China.

Data from the National Bureau of Statistics of China shows that cement output fell by 9.8% year-on-year to 2.13Bnt in 2022 from 2.36Bnt in 2021. The greater decrease was in the first half of the year rather than the second. The China Cement Association (CCA) said that this was nearly the lowest output in the last decade and the largest decline since 1969 ! The National Bureau of Statistics of China also pointed out in a release that, despite investment in fixed assets increasing by around 5% in 2022 and national infrastructure spending growing by 9%, real estate development investment dropped by 10% to US$1.46Tn.

Graph 2: Sales revenue from selected Chinese cement producers. Source: Company financial reports.

Graph 3: Sales volumes of cement and clinker from selected Chinese cement producers. Source: Company financial reports.

The cement producers warned in their forecasts that the results for 2022 were going to be rough and so it came to pass. China National Building Material (CNBM)’s revenue fell by 16% year-on-year to US$33.4bn in 2022 and Anhui Conch’s sales fell by 21% to US$19.2bn in 2022. Although, Tangshang Jidong Cement and Huaxin Cement reported declines of income or revenue in single digits. Profits halved for all of the companies covered here. Various combinations of the reasons covered above were cited for the situation.

What is more interesting are the responses some of the producers are making and what has gone well. CNBM, for example, is pinning its hopes on better staggered peak production and infrastructure projects. Anhui Conch, meanwhile, appears to have been diversifying its business by increasing both its concrete and solar power production capacity significantly in 2022. It was also announced that it plans to spend US$2.81bn on capital expenditure projects in 2023. China Resources Cement (CRC) said it had optimised its presence in South China through selected acquisition and divestments. Huaxin Cement has continued its focus on overseas markets with its share of operating revenue originating from outside China rising to 13% of the group’s total in 2022 compared to 8% in 2021. It also mentioned a number of unnamed projects around the world steadily drawing nearer to action. Sure enough, the group announced earlier in March 2023 that it was buying a majority stake in Oman Cement.

As for 2023, the CCA forecast in January 2023 that cement demand would be flat or slightly down. However, at the same time, provincial changes to the real estate market are expected to improve market conditions and infrastructure development will further drive demand for cement. The CCA identified that the cement sector’s production overcapacity could become an issue with lower demand. In 2022 the national clinker production utilisation rate was 65%, a fall of 10% from that in 2021. It also pointed out that peak-staggered production had actually helped cement producers generally to cope with smaller declines in profits compared to less well regulated industries.

Problems such as the zero-coronavirus policy, the real estate market and rising raw material costs have made the country’s production overcapacity issue worse. Changes are being made such as the national abandonment of the coronavirus lockdowns in late 2022, and, as mentioned above, the real estate market is being modified. In addition to this, various environmental changes are on the way, as the government works towards its sustainability goals. The country remains the largest cement producer in the world. Yet the message here is that we should expect more of the same for the cement sector in China in 2023.

A dispute between Cemex and Vulcan Materials over the use of a terminal in Quintana Roo state heated up this week as the two companies publicly argued over the situation. US-based Vulcan Materials went to the press to say that the Mexican police had forced entry into the facility south of Cancun, run by its subsidiary Calica, with orders to allow a Cemex ship to discharge cement. Vulcan denied that the authorities had any legal basis for the action and said that it was an illegal occupation. Cemex then responded with a press release explaining that the two companies had held a previous contractual relationship for joint-usage of the terminal until the agreement broke down in late 2022. It says it was granted an injunction by a local court to continue using the terminal while legal proceedings carry on.

The disagreement over the use of the Punta Venado terminal dates back to at least 2018 when Vulcan initiated a North American Free Trade Agreement (NAFTA) arbitration claim over alleged planning and environmental issues in relation to a nearby quarry. Dialogue continued, but Calica’s operations in the area were shut down by the government in May 2022. Subsequently, Vulcan’s total volumes of shipped aggregates fell by 6% year-on-year to 54Mt in the fourth quarter of 2022, partly due to the closure.

Unfortunately, the argument has become increasingly politicised with Mexican president Andres Manuel Lopez Obrador criticising Vulcan for its environmental record and US senators using the Vulcan case as an alleged example of Mexico treating US companies unfairly. Some media commentators have also noted that the Mexican government is promoting a number of large-scale infrastructure schemes in the region, including the Tren Maya project, a new 1500km train line around the Yucatan peninsula, which would link tourist towns such as Cancún with historical sites like Palenque.

Graph 1: Grey cement production in Mexico, 2018 - 2022. Source: National Institute of Statistics and Geography (INEGI).

Data from the National Institute of Statistics and Geography (INEGI) shows that rolling annual cement production in Mexico peaked at around 43Mt in late 2018 before falling to 39Mt in mid-2020. It later recovered to a peak of just under 46Mt in mid-2021. It has since dropped a little to mid-2022 and then started to trend upwards again. The nominal cement production capacity in Mexico is 60Mt/yr according to the Global Cement Directory 2023. Yet, the actual production capacity has been reported in local press as being 42Mt/yr, lower than the annual cement production of 43.9Mt in 2022. In February 2023 it was reported that the Mexican government was taking steps to 'implement import facilities' to support more cement being imported. This was due to shortages in certain states particular in the south-west of the country.

Cemex’s net sales in Mexico grew by 11% to US$3.84bn in 2022 and this was attributed partly to tourism-related construction in ‘the peninsulas.’ Holcim noted ‘market softness’ for cement in the country but reported growth for concrete due to infrastructure projects such as the Tren Maya. Cemento Moctezuma’s net sales rose by 2.6% to US$878m. Despite rising sales, both Cemex and Cemento Moctezuma reported falling earnings in 2022.

The dispute between Cemex and Vulcan Materials overlaps with wider trends on how and where the Mexican cement market is developing following a lull in the late 2010s. Production is growing in certain parts of the country, particularly in the Yucatan peninsula due to various infrastructure projects and tourism-related demand. However, the overall economic environment appears to have decreased earnings for some producers. However Cemex said that this was starting to correct itself in late 2022, as prices caught up with inflation. Portraying the Cemex - Vulcan situation in nationalistic terms is unhelpful, especially since Cemex made more money in the US than Mexico in 2022! However, this may be yet another example of more isolationist economic policies along the same lines as the US Inflation Reduction Act.

After the initial shocking coverage of the Russian invasion of Ukraine, which began in February 2022, came announcements of the most extensive sanctions in history by the EU, G7 nations and others against Russia. In the EU, this effectively deconsolidated companies' Russian subsidiaries, leaving decision makers with the choice whether to sell up or hold out for better times.¹ Four Russian-facing EU cement producers - Buzzi Unicem, CRH, Heidelberg Materials and Holcim - finalised their strategic responses in March 2022.

One year on, on 15 March 2023, 666 (21%) of 3110 eligible multinationals have withdrawn from Russia, according to the KSE Institute.² Ireland-based CRH led the cement sector exit. It abandoned its Finland-based subsidiary Rudus' ready-mix concrete joint venture, LujaBetomix, on 2 March 2022. Switzerland-based Holcim took longer, but affected its exit on 14 December 2022, agreeing to sell Holcim Russia to local management. One condition of the sale was a rebrand (to Cementum, in February 2023) to withdraw the Holcim name from Russia. Unlike CRH, Holcim's Russian business included multiple cement plants - though the producer stated that it contributed less than 1% of group sales during 2021.

The KSE Institute uses the equivocal label of 'waiting' for companies which have paused investments, or scaled back operations, in Russia, while retaining their subsidiaries. This applies to 500 companies globally (16% of the pre-war total). Germany-based Heidelberg Materials acted swiftly to freeze further investments in HeidelbergCement Russia on 10 March 2022. At that time, its three cement plants were in winter shutdown. In terms of capacity, the 4.7Mt/yr-capacity Heidelberg Materials Russia constitutes 2.8% of Heidelberg Materials. In 2022, Heidelberg Materials suffered a Euro102m impairment on account of its Russian business. CEO Dominik von Achten, announcing the freeze, had described the subsidiary as a 'pure local business with no imports or exports.' Its website has since come offline, but the corporate structure presumably maintains in its frozen isolation.

1220 global multinationals - 39% of all those previously operating in Russia - are still 'continuing operations.' Among these is Buzzi Unicem. Having decided that 12 months was long enough, the Ukrainian National Agency for the Prevention of Corruption (NAPC) placed Italy-based Buzzi Unicem on its list of Russian war sponsors on 8 March 2023 for the actions of its subsidiary SLK Cement. A scathing denouncement accompanied the listing, in which the NAPC set out its main charges. It accused Buzzi Unicem of:

1. Expanding its business in Russia since the invasion;

2. Supplying its products to Russian state-owned businesses, including energy suppliers Rosatom and Rosneft;

3. Voicing support for the invasion via its social media presence.

The NAPC concluded “Buzzi Unicem's continued business in Russia means direct support and sponsorship of terrorism by Russia.”

Buzzi Unicem responded in no uncertain terms that these allegations are untrue: it has no business in Russia, and the entity bearing its logo on its (SLK Cement's) website is entirely independent in its decision-making and commercial actions.

This goes to the root of what it means to be a subsidiary of a corporation. Buzzi Unicem seeks to define the relationship as beginning and ending in operational involvement. Yet Buzzi Unicem and other corporations have invested large sums in businesses like SLK Cement. According to the NAPC, Buzzi Unicem paid Euro62m in taxes alone in Russia between 2016 and 2021. Whether they have elected to 'continue operations,' 'wait' or write in favourable buy-back options into sales contracts, as has happened in other industries, companies can be expected to seek to return to their investment.

As such, it is not entirely surprising that Buzzi Unicem should have followed up its rebuttal with a defence of SLK Cement. It stated "SLK Cement is a Russian domiciled entity operating exclusively in that country and therefore subject to domestic legislation. Payment of taxes and having employees being mobilised to the army are not discretionary decisions, rather legal obligations within the Russian jurisdiction."

In the decision to sell or hold, multinationals face the usual considerations: can they afford to yield their market share to other - less conscientious - competitors? Or, in this instance, those from Türkiye, India and China, whose potential investments are unrestrained by sanctions? Even as Holcim thrashed out its exit deal in October 2022, China-based West China Cement announced plans for a new US$260m, 1.2Mt/yr cement plant in Tatarstan, Volga Federal District. Meanwhile, Cemros (formerly Eurocement) is carrying out a Euro3m mill upgrade at its Lipetsk integrated cement plant in Central Federal District, which will increase the plant's capacity by 20% upon commissioning in early 2023. Between them, Central Federal District and Volga Federal District host four former Holcim cement plants.

12 months into the Russian invasion of Ukraine, an onslaught of withdrawals has shrunk, but not collapsed, the Russian economy.³ The Russian government insists that cement demand remains high (up by 2.1% year-on-year to 58.3Mt during the first 11 months of 2022, according to the Russian cement association Soyuzcement).⁴ The country has substituted new sources of imports for those lost since the beginning of the invasion, the government claims. It is even preparing for a cement shortage from 2024 onward by 'further developing domestic production capacities.'

Far from shrinking, Russian cement production rose by approximately 2.5% year-on-year to 60.7Mt in 2022.^{4, 5} The two aforementioned districts - Central Federal District and Volga Federal District - contributed a healthy 15.3Mt (25%) and 13.4Mt (22%) respectively. If the statistics are to be believed, the EU's recalled producers are missing out on a bonanza.

At the same time, all four EU-based producers face the parallel burden of increased costs in their key markets, as sanctions keep energy prices at an all-time high, and nowhere more so than in Europe. These sanctions purport to target Russian businesses and individuals, but their bite is far less discriminating. Companies may well wonder why they are being penalised by governments whose policies failed to prevent a Russian invasion of Ukraine in the first place.

We have no idea what will happen in Ukraine and Russia in the rest of 2023, but we can be sure it will be uncertain territory for the two countries’ cement producers. Those with (former) assets in the Russian market will have to continue their delicate balancing act.

1. European Commission, 'Frequently Asked Questions,' 16 March 2022, https://trade.ec.europa.eu/doclib/docs/2022/march/tradoc_160079.pdf

2. KSE Institute, 'Stop Doing Business with Russia,' 15 March 2023, https://leave-russia.org/leaving-companies?flt%5B147%5D%5Beq%5D%5B%5D=9062

3. European Council, 'Infographic - Impact of sanctions on the Russian economy ,' 9 March 2023, https://www.consilium.europa.eu/en/infographics/impact-sanctions-russian-economy/

4. Soyuzcement, 'Cement Review,' December 2022, https://soyuzcem.ru/documents/%D0%A6%D0%B5%D0%BC%D0%B5%D0%BD%D1%82%D0%BD%D0%BE%D0%B5_%D0%BE%D0%B1%D0%BE%D0%B7%D1%80%D0%B5%D0%BD%D0%B8%D0%B5_%D0%B4%D0%B5%D0%BA%D0%B0%D0%B1%D1%80%D1%8C%202022.pdf

5. BusinessStat, 'In 2022, 60.7 million tons of cement were produced in Russia,' 21 February 2023, https://marketing.rbc.ru/articles/14025/

National Cement is preparing to open its new integrated West Pokot plant in September 2023. Readers may recall that the long-running project was taken over by Devki Group from Cemtech and Sanghi Industries after the Competition Authority of Kenya (CAK) gave it permission to do so in 2019. The original feasibility report by the Kerio Valley Development Authority dates back to 2010. The new plant will have a production capacity of 2.5Mt/yr.

However, this isn’t the only new clinker production capacity that Devki Group, which sells cement under the Simba Cement brand, is preparing to commission. Local media also reports that the company is also preparing to restart the former Athi River Mining Cement integrated plant at Bondora in Kaloleni, Kilifi County. After five months of trial runs the unit should be ready for full operation from April 2023. Devki Group also picked up this plant in 2019 following the long breakup of ARM Cement, after the latter producer entered financial administration back in mid-2018.

Devki Group started out in the steel sector but it has been steadily carving out a presence in the cement industry. The group opened its first cement grinding plant in 2013 and then built a 1.95Mt/yr integrated plant in Kajiado County, south of Nairobi, in 2018. Once the West Pokot plant is commissioned, the company will reportedly have a clinker production capacity of 7.5Mt/yr from three plants.

This kind of growth is making waves in the local cement sector. Since Global Cement Weekly covered the situation in September 2022 (GCW576), an argument has been brewing in Kenya over whether the country should import clinker or manufacture more of its own. This has moved to lobbying the government on whether the duty on imports of clinker should rise from 10% to 25%. Unsurprisingly, the country’s largest clinker producer, National Cement, even before the new plants are operational, has been a major advocate for putting up the import tariff. This carried over into 2023, when local press revealed the minutes of a meeting between the State Department of Industry and the Kenya Association of Manufacturers (KAM), with input from the cement producers. Rai Cement, Bamburi Cement, Savannah Cement, Ndovu Cement and Riftcot were all against raising the tariff, saying that it would enable the largest clinker producers, National Cement and Mombasa Cement, to dominate the market. However, unlike the last such meeting, Mombasa Cement was said to be non-committal on the proposal to increase the duty. Despite the disagreement over the tariff, all of the cement companies imported clinker in 2021.

Graph 1: Rolling annual cement production in Kenya, 2019 - October 2022. Source: Kenya National Bureau of Statistics (KNBS).

Rolling annual cement production in Kenya peaked at just over 10Mt in May and June 2022. Data from the Kenya National Bureau of Statistics (KNBS) shows that monthly production started to fall on a year-on-year basis from July 2022. This is likely to be connected to the elections that took place in August 2022, although wider economic trends such as inflation and high input material prices may not have helped either. Despite this, cement production rose by 5% year-on-year to 8.02Mt in the first 10 months of 2022 from 7.65Mt in the same period in 2021.

Other recent news of note in Kenya includes the restart of clinker production at East African Portland Cement’s (EAPC) Athi River Plant in mid-2022. The upgrade was conducted as part of a general five-year upgrade and expansion campaign by the company. The next steps were announced in January 2023 with a stated intention to consider entering markets in the Democratic Republic of Congo and Rwanda. The other story of note was in December 2022, when China-based Sinoma International Engineering announced that it had signed a deal with Savannah Cement to build a new 8000t/day clinker production line with a 2400t/day cement grinding unit, a 35MW captive power unit and a 13MW waste heat recovery unit. As is standard for Sinoma’s new contract releases, it said that the contract would become active once an “advance payment guarantee” had been received. Later in December 2022 the Kenya High Court intervened to stop two creditors from seizing assets from Savannah Cement and putting it into administration, although the court did acknowledge the company’s debts and a loan repayment default. In January 2023 Mauritius-based Barak Asset Recovery, another related creditor, was approved by the competition regulator to buy a majority stake in Savannah Cement. The current state of that new production line is unknown.

As the two stories above show, it is not just National Cement that is trying to move towards increased clinker production in Kenya. The whole situation is reminiscent of the time before Nigeria declared itself self-sufficient in cement in the early 2010s. Local producers became prominent and the market battle between producers and importers became public. Kenya’s range of different cement companies seem to be more diverse than Nigeria’s were, but a similar type of national interest argument may be rolled out by one side. The other parallel to note with Nigeria is that Dangote Cement is said to have attempted to buy National Cement previously and has also been trying to build its own plant in the country since the mid-2010s. Kenya’s demographics and location make it a prime place for this kind of producer-importer tussle. Let’s wait and see how much the situation has changed when the new plants open over the next six months.

The key trends to note from the financial results of cement producers in 2022 released so far are that sales revenues are up, sales volumes of cement are mostly down and earnings have mostly dropped too. Readers are not going to be surprised that 2022 was a tough year for business as the raw materials and services inflation coming out of the coronavirus period was heightened by energy cost spikes caused by the Russian invasion of Ukraine. Producers put their prices up in response to deliver often record high annual revenues.

Graph 1: Sales revenue from selected cement producers in 2021 and 2022. Source: Company reports. Note: Figures calculated for UltraTech Cement.

What sticks out by looking at the sales volumes of cement figures in Graph 2 (below) is that Holcim’s cement sales volumes were about the same as Heidelberg Materials’ were in 2022, at around 120Mt. Remember, Holcim’s cement sales volumes were 200Mt in 2021 and 256Mt in 2015 at the time of the merger with Lafarge. Large divestments have followed with the sale to Adani Group of Holcim’s India-based companies in 2022 being one of the biggest. UltraTech Cement, meanwhile, has been steadily increasing its India-based cement production capacity.

Graph 2: Cement sales volumes from selected cement producers in 2021 and 2022. Source: Company reports. Note: Figures calculated for UltraTech Cement.

By company, Holcim’s diversification and regionalisation strategy appears to be paying off well. Reducing its exposure to the cement market is giving it a strong story to tell as it grows its light building materials division, frames this as a success in sustainability and moves out of developing markets. How well this will work if and when it ends the divestment and investment stage remains to be seen. One point to highlight is that its operating profit fell by 18% year-on-year on a like-for-like basis to US$3.43bn in 2022. As well as contending with high costs in 2022, a subsidiary connected to the group was fined US$778m by the US Department of Justice in late 2022.

Heidelberg Materials’ approach to the current economic conditions in 2022 seems to have been to keep its head down and push on for decarbonisation rather than diversifying its business. So it followed the ‘sales up, costs up but earnings down’ pattern of a few of the other cement companies covered here. Although, that said, it did diversify its name to ‘Materials’ from ‘Cement’ in September 2022.

Cemex experienced the same problems as the other companies for most of 2022 but conditions started to improve in the fourth quarter in most of its territories. In particular, it reported that earnings started to grow in Mexico towards the end of 2022 despite falling sales volumes of cement. It attributed this to its pricing strategy. Of note this week, the Mexican government is preparing to support higher levels of imports of cement into the country due to a shortage in the southeast of the country.

Buzzi Unicem, meanwhile, noticed a faster slowdown in cement deliveries in its key markets in Italy, the US and Eastern Europe in the last quarter of 2022 from a general trend that could also be seen earlier in the year. In its largest market, the US, it reported that investment in residential construction slowed. This was further affected by the growing cost of building materials and the rate of inflation, although increasing spending on infrastructure helped to keep domestic consumption stable. A favourable currency exchange rate between the US and the Euro also helped the company to report provisional earnings growth. Vicat’s US businesses in the US and Brazil helped cushion the group somewhat with a large rise in sales revenue. However, earnings in the US were hit by the costs related to the start up of the new kiln at the Ragland plant in Alabama, as well as general energy cost inflation. Its business in France fought against inflation with ‘significant’ price rises delivering a high increase in sales revenue but this was insufficient to prevent earnings from dropping.

The non-European based cement producers present a different picture. Despite the high energy costs, UltraTech Cement managed to increase its revenue and sales volumes of cement in 2022. Its net profit fell though year-on-year in the nine months to 31 December 2022. The company is targeting a cement production capacity of 159Mt/yr by around the 2025 financial year with the aim of becoming the largest cement producing company in the world outside of China. Dangote Cement managed to raise its prices at home in Nigeria to fight off inflation and hold revenue and earnings up. This was harder internationally though with supply chain disruption, high commodity prices, high freight rates and a plant shutdown in Congo blamed for holding earnings back.

Inflation and the energy markets will be clear concerns in 2023. If energy prices for industry stabilise globally then there is more of a chance for business as usual as markets cope better with higher costs. The continued dilemma for multinational cement companies remains whether to decarbonise through diversification or investment in new processes, and how far to go along either path. Meanwhile, the large regional producers are starting to show themselves outside of China, as UltraTech Cement’s growth trajectory testifies. One test for these companies is balancing the risk of expansion versus potential tighter local environmental regulations. The environmental rules of export markets are also a factor to consider here with the head of AdBri calling this week for an Australian equivalent to the European Union’s border adjustment mechanism to block so-called ‘dirty’ imports.

The next set of financial results from the cement sector in 2022 to look out for will be those from the large China-based cement producers. Once these are released we will examine them in more detail.