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A good week to bury bad news
Written by Global Cement staff
29 June 2016
Back in 2001 a UK government advisor gained infamy for trying to use the terrorist attacks on 11 September 2001 to bury bad news. This week’s column is trying hard NOT to be about the UK vote to leave the European Union (for more on that try our editorial director’s column in the latest issue of Global Cement Magazine). They’ll be plenty of time for that later on when the repercussions for the cement and construction industries sink in. However, it has inadvertently buried some bad news coverage for LafargeHolcim.
The French newspaper Le Monde reported on 21 June 2016 that Lafarge’s Syrian subsidiary paid money to Islamic State (IS) militants in order to keep its Jalabiya cement plant in operation in 2013 and 2014. The paper said that the plant was kept in operation until September 2014 as the result of ‘agreements with local armed groups, including the Islamic State.’ It added, that Lafarge ‘indirectly financed the jihadist organisation.’
LafargeHolcim issued a statement on the story on same day. However, it didn’t deny the accusations. It stated that the company, as Lafarge, was under control of the plant in Jalabiya between 2010 and September 2014 and that the safety of its employees had always been its first priority. Part of the statement read, “Once the conflict reached the area of the plant, the first priority for Lafarge was the safety and security of the employees, while planning for the eventual closure of the plant. In September 2014, Lafarge stopped operating the Jalabiya plant. After that, all employees were evacuated, put on paid leave and were no longer allowed to access the plant. In December 2015, given the evolution of the situation in Syria, the decision was taken to terminate all employee contracts and, where possible, transfer employees to other parts of the group.”
The company may yet face prosecution for the dealings if it is found to have financed any terrorist organisation. Emmanuel Daoud, a specialist in international law quoted by various media sources, speculated that the outcome of any potential investigation might depend on whether the company was protecting its staff or protecting its profits. Additional complications also arise from the subsequent merger of France’s Lafarge and Switzerland Holcim to form LafargeHolcim.
It should be remembered though that cement plants and their staff are often very real targets in regional conflicts. They can also be held under switching jurisdictions. We reported that a Lafarge Syria plant near Aleppo was attacked and set on fire in 2014. Before the site was abandoned to protect the staff the site was first under the auspices of the Syrian army and then the Syrian Kurdish Democratic Union Party. Paying ‘taxes’ to the loosing side in a civil war might well be interpreted as funding terrorists in the aftermath.
A similar story resolved itself this week with the news that seven quarry workers kidnapped in Nigeria were released. Unfortunately there was one death and injuries sustained in the ambush that trapped them. Sy van Dyk, the chief executive of Macmahon, the company involved, refused to comment to local press on whether his company had paid a ransom to release the workers.
This all links to the wider issue of how multinational companies should deal with armed groups and de-facto governments in unstable areas. For example, the UK and US governments discourage paying ransoms to kidnappers because they say it encourages it as a business. Yet, other European nations notably paid to release their nationals during the earlier stages of the Syrian conflict and elsewhere. This in turn offers insight towards why Lafarge, a French multinational company, might have been more likely to negotiate with armed groups in Syria than say a British or American one. If an official investigation into Lafarge’s dealings follows then more details may emerge but there are no easy answers to these kinds of issues.
HeidelbergCement set for acquisition of Italcementi
Written by David Perilli, Global Cement
22 June 2016
The Federal Trade Commission (FTC) gave HeidelbergCement permission to complete its acquisition of Italcementi assets in the US on 17 June 2016. This was the second and final major competition body that could have challenged the purchase, following approval by the European Commission in late May 2016. Although the FTC consent now faces a month for comment the deal is looking likely to complete towards the end of the summer.
HeidelbergCement and Italcementi have gotten away with having to sell just one cement plant and 11 terminals in the US. The Lafarge-Holcim merger in 2015 had it tougher. Those companies were forced to sell two cement plants, two slag grinding plant and a host of terminals. Admittedly LafargeHolcim is now the biggest cement producer in the US (and the world) but HeidelbergCement will hold more integrated cement plants in the US following its acquisition.
As predicted the FTC took exception with the proximity of the company’s assets in West Virginia and Pennsylvania following the acquisition. So the parties have agreed to sell the Essroc Martinsburg integrated cement plant in West Virginia. When Global Cement visited the plant in late 2013 the staff told us that cement from the plant was distributed from central Ohio eastwards to western Pennsylvania and south to southern Virginia. The plant also switched over to a FLSmidth dry production line in 2010 giving it a clinker production capacity of 1.6Mt/yr, making it one of the newer plants in the Essroc stable.
The FTC also flagged up competition concerns in five metropolitan areas: Baltimore-Washington, DC; Richmond, Virginia; Virginia Beach-Norfolk-Newport News, Virginia; Syracuse, New York; and Indianapolis, Indiana. In light of this the proposed consent agreement requires the merged company to divest seven Essroc terminals in Maryland, Virginia and Pennsylvania and a Lehigh terminal in Solvay, New York. Two additional Essroc terminals in Columbus and Middlebranch, Ohio are to be sold at the option of the buyer and subject to FTC approval. Finally, Essroc’s terminal in Indianapolis is to be sold to Cemex.
Funnily enough, the FTC took about a year to approve both the merger of Lafarge and Holcim and HeidelbergCement’s purchase of Italcementi. This compares to the European Commission which took nine months to approve the Lafarge-Holcim deal but which took 11 months to clear the HeidelbergCement-Italcementi one. Given the greater overlap of assets of the Lafarge-Holcim merger in both Europe and the US one might have thought that the approval process would have taken longer. Or maybe bureaucracy moves at a speed all of its own. Read into this what you will. The creation of the world’s second largest multinational cement producer draws closer.
One Chinese cement giant, one massive order
Written by David Perilli, Global Cement
15 June 2016
A Sinoma subsidiary was raking in the big bucks this week with the announcement that it had booked a Euro1.05bn order with the Egyptian government. The order was for six 6000t/day cement production lines plus assorted maintenance contracts from Chengdu Design and Research Institute of Building Materials Industry (CDI).
The order caps a busy month for Sinoma. At the start of June, another subsidiary, CBMI, said that it had picked up deals to build two new lines in Algeria for Groupe des Ciments d’Algérie. Around the same time another project in the country, a joint venture between Lafarge Algeria and Souakri Group, revealed that it had started commissioning its mill. Other assorted cement projects announced so far in 2016 include a waste heat recovery unit for Thai Pride Cement in Thailand, a conversion to coal burning at South Valley Cement in Egypt and various orders for mills via Loesche for Sinoma projects in Vietnam.
The scale of that latest Egyptian order becomes apparent when one looks at Sinoma, or China National Materials Group Corporation’s, annual results. It reported revenue of US$8.08bn in 2015, a slight decrease from US$8.38bn in 2014. Those six lines represent 13% of the group’s entire turnover in 2015. That’s one humongous order. The last time Sinoma signed a cement deal on this magnitude was in August 2015 when Nigerai’s Dangote placed an order at a value of US$1.49bn.
Elsewhere on the balance sheet for 2015, its profit fell markedly by 25% year-on-year to US$150m from US$200m. However, its new order intake grew by 14% to US$5.1bn. Overseas orders accounted for over three quarters of this or US$4.32bn, its highest level on record. This compares to its rival FLSmidth’s new order intake of US$2.8bn in 2015. It declared that it would continue to seek business outside of China in line with the country’s ‘One belt, one road’ policy focusing on Central Asia and South America.
This growth by Chinese engineering companies on the world stage may have been stymied in 2015. The Verband Deutscher Maschinen- und Anlagenbau (VDMA) in Germany reported in April 2016 that the members of its Industrial Plant Manufacturers’ Group (AGAB) had booked orders of Euro19.5bn in 2015, a similar figure to its orders in 2014. This compared to a drop of 63% of large plant orders (not just cement) in 2014 from Euro5.29bn in 2013. AGAB saw opportunity in service industries for its German members as markets stalled in Russia and Brazil, and China’s property market faced its own problems. Research by UBS Evidence Lab, as reported by the Financial Times in May 2016, has taken a different view, suggesting that Chinese construction quarry equipment manufacturers such as Sany, Zoomlion and XCMG were likely to expand their market share outside of China to 15% by 2025. At present the research pegged them at 7%.
Expansion comes with its risks though. In late May 2016 Sinoma International Engineering reported details of a tax dispute it was suffering in Saudi Arabia. The Saudi subsidiary of the company was levelled with a request for unpaid back taxes from 2006 and 2008. At the time it was appealing against a bill of US$18m. In a changing global marketplace some things never change. Global success it seems is taxed.
All change in Sri Lanka?
Written by Peter Edwards, Global Cement
08 June 2016
When a small cement market sits just off the coast of one of the world’s biggest producers, it’s not a recipe for a lot of column inches. Sri Lanka’s cement market, is particularly small, ranked 128th out of 141 clinker producing nations according to the Global Cement Top 100 Report 2015, and is dwarfed by a very dominant neighbour in India. Therefore, when two stories about plant projects and divestments came in from Sri Lanka this week, our interest was suitably piqued.
The first story came from global giant LafargeHolcim, which announced the planned divestment of its 0.6Mt/yr integrated Holcim Lanka plant at Puttalam, its 1.0Mt/yr grinding plant in Galle and associated packing facilities. The second story came from South Korea’s AFKO Group GMEX (AFKO), which has expressed strong intentions to reopen the Kankesanthurai plant in the north of the country.
LafargeHolcim stated that its move was part of its wider divestment strategy following the 2015 merger of Lafarge and Holcim. Considering that the company currently controls 1.6Mt/yr of Sri Lanka’s 3.6Mt/yr cement capacity (around 44%) the potential ramifications are big - A huge position is up for grabs.
Local newspaper The Nation stated that three locally-owned groups were already circling the assets as of Saturday 4 June 2016, but it’s still early days. A major player could easily step in to grab some high-quality assets in this rapidly-growing market, which grew by 4.5% in 2014 and is investing strongly in infrastructure. With its recent history or major purchases, CRH could certainly be interested. Larger Indian and Pakistani players, stifled by continued overcapacity at home, could also be in line to snap up the assets.
Up in the north, the AFKO project sounds massive. It could also have large implications for the shape of the Sri Lankan cement sector but there is a lot of work to be done. The Kankesanthurai plant produced its last cement in 1991 as the civil war raged in the north of Sri Lanka. It had a capacity of just 0.12Mt/yr at that time. However, AFKO chairman Keun Young Lee stated that the company was, “Ready to enter with US$450m as a start.” This is far more than the amount needed to re-start a small, presumably wet process cement plant. The amount strongly suggests an entire new, state-of-the-art facility, but no capacity has been announced.
AFKO sounds very serious but other projects have previously run into trouble on the island. A restart at Kankesanthurai has previously been mooted twice, once by a domestic player and once by a company from the UAE. Meanwhile Thatta Cement has suspended construction of a US$15m, 0.1Mt/yr grinding plant at Rajapaksa, Hambantota. It will be very interesting to see how the AFKO project develops over the coming months – It will also be seeing how the eventual price-tag for the project compares with the revenue that LafargeHolcim raises from its own divestment.
While Sri Lanka remains a small player, its cement sector is very similar to that of India when we take populations into account. Both have room for expansion. India has 310Mt/yr (according to the Global Cement Directory 2016) but, with a population of over 1.25 billion, it has a per-capita capacity of around 250kg/capita. Sri Lanka, with 3.6Mt/yr of capacity and 20.2 million inhabitants, comes in at just under 200kg/capita. There is clearly room for growth in both of these figures and further projects could yet be on the horizon for Sri Lanka. If they play their cards right, AFKO and the successful bidder for the LafargeHolcim assets could be in a great position to benefit from the island’s strong continued growth.
Update on Russia
Written by David Perilli, Global Cement
01 June 2016
Eurocement owner Filaret Galchev has been surprisingly candid on Russian television this week commenting on why his company offloaded shares in LafargeHolcim in February 2016. He described the move as ‘unexpected’ and a reaction to the shares losing nearly half their value in six months.
Eurocement ran a repurchase deal for the stake with Sberbank in late January 2016 before the bank sold it in early February 2016. Galchev’s wallet wasn’t the only casualty of LafargeHolcim’s falling share price. Board chairman Wolfgang Reitzle announced his plans to resign from the company at about the same time. LafargeHolcim’s share price has since rallied somewhat although it remains well below the level it commanded in the summer of 2015 following the merger.
Back on Russia, Galchev also continued Eurocement’s theme of predicting doom and gloom for the domestic cement industry. He forecast a further drop of up to 10% in local demand for cement. This is in line with previous comments Eurocement has made since at least about mid-2015. Although on the plus side the steepness of the fall in demand may be softening at least.
Graph 1 – Cement production in Russia, 2011 – 2015.
As the data above from the Russian Federal State Statistics Service (ROSSTAT) shows, cement production in Russia fell by 9% year-on-year to 62.1Mt in 2015 from 68.5Mt. This follows years of growth. Data for the first four months of 2016 seemed to show an acceleration of this trend with an 18% drop in production to 8.9Mt for the first three months of the year. However, the latest released figures, for April 2016, show that production may be picking up somewhat. We won’t get a better idea until the middle of the year. On the supply side, ROSSTAT doesn’t release any figures on cement consumption but the Russian railways were have reported that their cement volumes to consumers were down by 9.2% to 4.8Mt in the first quarter of 2016. This is a percentage drop close to what Filaret Galchev has been suggesting for 2016 as a whole.
The news from the multinationals supports this picture. LafargeHolcim reported weak construction markets in the first quarter of 2016 following sharp declines in 2015. HeidelbergCement recorded ‘slight’ decreases in its sales volumes in the period. It also noted a knock-on effect in Sweden due to lowering export deliveries to Russia.
All in all it’s a similar picture to fellow BRIC country Brazil, which we covered last week, with falling commodity prices hammering the economy and the local industry battening down the hatches. However, international oil prices are slowly creeping up and the International Monetary Fund (IMF) has predicted lower decreases in its economic output in 2016. Perhaps Filaret Galchev will have some good news to talk about on Russian television sooner than he thinks.