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Cemex takes charge of its debts
Written by David Perilli, Global Cement
16 March 2016
Cemex has taken action towards its debts over the course of the last week. First, it announced that it had amended its credit agreements in order to delay the looming effects of consolidated financial leverage and coverage ratio limits by one year to March 2017 with other similar deadlines also delayed. Then it announced the pricing of US$1bn of Senior Secured Notes due in 2026, a form of secured borrowing. This was followed by confirmation of asset sales in Bangladesh and Thailand. Finally, it announced that it was seeking regulatory permission to sell a minority stake in its subsidiary in the Philippines.
This column has discussed the on-going financial travails at Cemex a few times, notably recently when the group released its fourth quarter results for 2015 and in the wake of HeidelbergCement’s announcement to buy Italcementi. Basically, it all comes down to debt, as the following graph shows.
Figure 1 - Cemex assets, debt and equity, 2006 - 2015
Cemex took on large amounts of debt following its acquisition of Rinker in 2007. Since then the value of its assets have been falling faster than it has been able to reduce its debts. However, its equity (assets minus debts) is looking like it might dip below its debts in 2016. Hence, action needs to be taken. Cemex appears to have attempted to do this over the last week. Will it be enough?
The credit amendment was probably the most pressing issue for the Cemex management given that the terms have been reliant on maintaining a leverage ratio (debt divided by assets) below a set limit. Cemex has extended the terms of the borrowing in its favour so it can keep the leverage ratio higher for longer without penalty from its creditors. Note that the leverage ratio here means the ratio between debt and operating earnings before interest, taxation, depreciation and amortisation (EBIDTA).
Selling assets and shares in Asia is the next step in cutting debt in the window the group has negotiated for itself. It holds minor cement production assets in Thailand and Bangladesh that it is selling to Siam City Cement for US$53m. These include a 0.8Mt/yr integrated cement plant in Saraburi, Thailand and a 0.52Mt/yr cement grinding plant in Madangonj, Bangladesh. Unfortunately for Cemex it purchased the Saraburi plant for US$77m in 2001 from Saraburi Cement making it a loss of at least US$24m.
A minority sale of shares in its Philippines assets is more promising. The group runs two integrated cement plants in the country, the Solid Cement Plant in Rizal and the APO Cement Plant in Cebu with a combined cement production capacity of 6.23Mt/yr and a new 1.5Mt/yr production line on the way at Solid Cement also. Local media estimate that the sale could earn Cemex as much as US$850m from the booming market. The Cement Manufacturer's Association of the Philippines reported that cement sales volumes grew by 14.3% to 24.4Mt in 2015 with more growth predicted for 2016.
The credit amendment and asset sales of US$0.9bn may give Cemex the breathing room it requires to keep the creditors at bay for a while longer. It originally refinanced its debts in 2009 at the height of the financial crisis to keep the business running until the markets picked up again. They haven’t. A question that might be legitimately asked at Cemex’s analyst day later this week, on 17 March 2016, is this: when is Cemex going to seriously tackle its debts? As the situation continues the group may end up devoting more time to managing its debts than it will to actually making cement and other building products.
Crunching the numbers at Dangote Cement
Written by Peter Edwards, Global Cement
09 March 2016
Dangote Cement released its financial results for 2015 this week and certain numbers are more interesting than others. The headline that the company would probably like us to look at is a 14% rise in profit from significantly higher revenues. However, we would like to look at Dangote’s capacity and production figures. We have spoken about Dangote’s ambitions in this column in recent years and it is very likely that the topic will come up again in the future. But Dangote’s ambitions are increasingly becoming a reality for markets all around Africa. How are its pan-African expansion plans turning out?
Dangote Cement reported that cement production volumes were up by 35% in 2015 compared to 2014. This was due almost entirely to Dangote’s new plants outside of its native Nigeria. While its Nigerian cement production volumes rose from 12.9Mt in 2014 to 13.3Mt in 2015, production elsewhere came in at 5.6Mt, more than five times the amount that Dangote produced outside of Nigeria in 2014. This rapid rise was the result of the first cement being produced at its plants in South Africa, Senegal, Cameroon, Ethiopia and Zambia.
As Dangote has expanded into these new markets, we have heard much about the effects of its new capacity from other producers. In South Africa, long-established players have had to deal with falling cement prices due to the inauguration of Dangote’s Sephaku Cement subsidiary. In Zambia, Zambezi Cement was forced to lay off workers in 2015, citing the opening of Dangote’s new facility as a significant contributing factor. More recently, in February 2016, Ghana announced an investigation into Dangote’s operations in the country following accusations of ‘predatory pricing’ by its competitor Diamond Cement. The investigation is ongoing.
However, the complaints heard to date could really start to ramp up over the course of 2016 as Dangote starts to realise its full potential across Africa. Its cement production volumes may have risen by 35% in 2015 relative to 2014 but its capacity rose by an incredible 87%, with Dangote now claiming a capacity of 44Mt/yr! The capacity utilisation rate is just 43% and the inference is that the ex-Nigerian plants have not yet realised anything like their full potential. Local producers the length and breadth of Africa may well be looking at this situation with dread.
And ramping up its production in 2016 is by no means the end of Dangote’s pan-African vision, with new plants under construction in Nepal, Kenya and Zimbabwe. As well as new plants outside of Nigeria, Dangote cement capacity within Nigeria is also set to rise. It recently announced a further 9Mt/yr of capacity at two new plants. With exports to its smaller neighbours already causing consternation, this will surely add fuel to the fire for local producers like Diamond Cement.
So far in 2016, the news continues to be promising for Dangote. January 2016 sales volumes rose by 77.6% to 2.0Mt, with Nigerian sales up by 46.4% to 1.4Mt. February 2016 sales volumes were 38% better than a year earlier, with Nigerian sales up by more than 60% year-on-year to more than 1.5Mt.
At the end of its report, Dangote says that it expects to have around 77Mt/yr of cement capacity by the end of 2019. If realised, this capacity would be enough to put it up to sixth on the Global Cement Top 100 list by 2016 standards. It would have around 28% of Africa’s entire cement capacity, according to the Global Cement Directory 2016 and would be only 10Mt/yr behind the 87Mt/yr of cement capacity currently held by the established multinational player Cemex. That is truly a number to pay attention to!
Looking at the small print
Written by David Perilli, Global Cement
02 March 2016
Small print can cause large consequences. Billion US Dollar consequences. Take the 2015 amendment to India’s Mines and Minerals (Development and Regulation) (MMDR) Act from 1957. Ambiguous wording in the legislation may have held up two prominent cement industry acquisitions in 2015. It also hangs over the recently announced purchase by UltraTech Cement of Jaiprakash Associates’ cement plants.
The MMDR was amended in January 2015. As the Times of India explained in mid-2015, a clause in the amendment said, “The transfer of mineral concessions shall be allowed only for concessions which are granted through auction.” However, it was unclear whether this meant historically allocated mines given via nominations or only newly allocated ones. Given the reliance of clinker plants on reliable mineral reserves this caused havoc. Cue confusion and large legal budgets.
LafargeHolcim’s divestment of two cement plants to Birla Corporation was one casualty. As a condition of the merger between Lafarge and Holcim the Competition Commission of India (CCI) required that the Jojobera and Sonadih cement plants in Eastern India be sold in 2015. Together the plants have a combined cement production capacity of 5.1Mt/yr. However the ambiguity over the 2015 MMDR Act clause on transfer of mining rights held the deal up. By February 2016 Birla Corporation had endured enough. It publicly complained about Lafarge India’s ‘inability’ to complete the deal and threatened legal action. LafargeHolcim retorted by asking the CCI if it could sell all of Lafarge India instead. It received the revised clearance and a new buyer is yet to be announced.
Another victim was UltraTech Cement in a previous attempt to buy Jaiprakash Associates’ cement assets. That time it was down to buy two integrated cement plants in Madhya Pradesh with a combined clinker production capacity of 5.2Mt/yr with associated mineral rights. The deal was agreed in December 2014 and then reported delayed in mid-2015. Finally, on 28 February 2016 the Bombay High Court rejected the deal, citing the MMDR Act as the prime cause.
Luckily for UltraTech Cement the story has a happy ending (so far) as it then announced that it was purchasing the majority of Jaiprakash Associates’ 22.4Mt/yr cement portfolio instead for US$2.4bn. It is hoped that the deal will be finalised by June 2017 but this partly depends on the MMDR Act being amended. Although UltraTech Cement have said they are looking at alternative routes to the deal in case the act isn’t amended.
Poor legal wording kiboshed at least two cement industry deals for over 10Mt/yr production capacity. Roughly, at the price UltraTech Cement is paying for its latest deal, that’s over US$1bn worth of Indian cement assets. Given the hard time the Indian cement industry had in 2015 the question should be asked regarding how much damage the MMDR Act amendment has done. One option for the beleaguered industry is to consolidate and cut its costs. This was massively delayed in 2015.
The proposed 2016 amendment to the MMDR Act reads as follows:
“Provided that where a mining lease has been granted otherwise than through auction and where mineral from such mining lease is being used for captive purpose, such mining lease will be permitted to be transferred subject to compliance with the terms and conditions as prescribed by the Central Government in this behalf.”
Let’s hope it does the trick this time.
When will Saudi Arabia lift the cement export ban?
Written by David Perilli, Global Cement
24 February 2016
The Saudi Cement Company has been complaining in recent weeks about market conditions in Saudi Arabia. Following a meeting of its board of directors in early February 2016, it decided to temporally a 3500t/day production line and halt further upgrades. At the meeting it blamed the local market and the country’s export ban.
In January 2016, the cement producer reported that its net profit had fallen by 35% year-on-year to US$49m in the fourth quarter of 2015 from US$76m in the same period in 2014. The trend for the year as a whole was less pronounced but still downward. Its net profit fell by 14% to US$257m.
Saudi Cement’s experience may be indicative if one looks at wider figures for the industry. Cement output is high, inventory is piling up and government infrastructure spending is falling. If the country’s industry isn’t feeling the pain right now surely it must be wondering what might happen next.
Figure 1 – Saudi Arabian cement production and inventory, 2011 – 2015
As Figure 1 shows data from Yamama Cement for the industry as a whole. Cement output has been steadily growing over the last five years since 2011 to the current declared level of 61.5Mt. However, in the background, cement inventory has also been growing. The particular jump appears to be between 2012 and 2014 when the stock grew from 6.4Mt to 21.5Mt. In mid-2013 King Abdullah bin Abdulaziz Al Saud issued an urgent command ordering 10Mt of cement to cope with a local shortage at that time. Subsequently cement producers were asked to build a 'strategic' reserve of two months inventory at each plant. It looks like they took that message to heart.
Alongside this the Saudi Ministry of Finance slashed its Infrastructure and Transportation budget down to more than half to US$6.37bn in 2016 from US$16.8bn in 2015. Local media reported that value of new contracts won by the Saudi contractor Abdullah A M Al Khodari & Sons in 2015 fell by nearly 50% in the lead-up to the 2016 budget announcement in December 2015. Previously, Al Khodari had typically earned about 95% of its revenue from government-related contracts.
It should be noted that Saudi Cement is based in the east of the country and some regional variation is possible here. The country’s other major cement producers - Yamama Cement, Yanbu Cement and Southern Province Cement have all reported that their net profits rose in 2015. Yet the inventory keeps piling up.
The other reason than Saudi Cement pointed out for its woes was the country’s cement export ban. The government introduced an export ban on cement exports in February 2012. Since then local cement producers have asked on several occasions to have the ban repealed. Most recently the chairman of Saudi Arabia's Cement Association asked in March 2015 to lift the ban so that his producers could supply Egypt with 6Mt of cement. At the time, as now, the chairman would have been well aware of all the cement lying around.
Local press reported in late November 2015 that government bodies were considering cutting the ban on cement exports. The ban was originally introduced in Saudi Arabia to keep prices down and production flowing for large infrastructure projects built using oil revenue. These same projects were designed to wean the economy off its reliance oil revenue. With investment falling as the price of oil stays low the cement industry is in a tight spot. The government and cement producers will need to think very carefully what the consequences are of opening the gates for Saudi cement exports.
Update on HeidelbergCement takeover of Italcementi
Written by David Perilli, Global Cement
17 February 2016
HeidelbergCement has finally provided a little more detail about its acquisition of Italcementi with the releases of its preliminary results for 2015. The key message is that all is well. Expected savings from the takeover are growing, less borrowing is required to make the purchase and the approvals from competition commissions around the world are rolling in.
Looking at the cost savings first, the potential for synergies or operational savings was first estimated at Euro175m at the time of the takeover announcement in late July 2015. At that time HeidelbergCement hoped to be able to deliver almost 30% of this figure in 2016. If it goes ahead this will sweeten the honeymoon period considerably following the completion of the deal. The largest savings were expected to come from the commercial area and in purchasing.
This figure then grew to Euro300m at the time of HeidelbergCement’s third quarter results in November 2015. Now, the effects of financing costs and taxes were included. At this point some more strategy about how HeidelbergCement was planning to use Italcementi’s resources started to emerge in the synergy calculations. HeidelbergCement intends to use its global trading business with Italcementi’s ‘export orientated’ cement plants. Import demand, for example in North America or Africa, that used to be bought from third party sources previously, can now be supplied by Italcementi’s plants after the merger, meeting demand and holding capacity utilisation rates up. With the publication of the preliminary results for 2015 the savings figure has grown to Euro400m with little explanation. If only it were that easy to find Euro100m down the back of my sofa.
The financing has also been proceeding smoothly. The loan value required for the takeover has fallen from Euro4.4bn to Euro2bn. Reasons for this include the exclusion of the risk of a mandatory takeover offer to minority shareholders in Morocco, some of Italcementi’s creditor banks agreeing to waive their change of control clauses and the issuance of a Euro625m bond in January 2016. The bridge financing, available initially from Deutsche Bank and Morgan Stanley, remains at Euro2.7bn.
Finally, competition commission approval has been granted in India, Canada, Morocco and Kazakhstan. Despite holding a cement product capacity of 10.5Mt/yr in India with 4.1Mt/yr additional capacity in development, this was unlikely to be a problem in India, with its total national capacity of 280Mt/yr. The commission implemented the Elzinga Hogarty Test and concluded that there is sufficient competition.
This leaves the possibly trickier approvals outstanding in Europe and the US. Belgium is likely to be the main issue in Europe given that the two companies run 73% or 4.5Mt/yr of the market in production capacity. Divestments are expected here.
In the US, precedent should save HeidelbergCement from interference. HeidelbergCement’s and Italcementi’s combined cement production assets will give it a production capacity of 16.4Mt/yr or around 14% or market share. This will make it the second biggest producer in the country after LafargeHolcim which had its merger approved in 2015. There are no obvious overlaps in their clinker production assets except for a minor one in Pennsylvania which holds both the 2Mt/yr Ordinary Portland Cement Essroc (Italcementi) Nazareth Plant and the 0.13Mt/yr Lehigh White Cement (HeidelbergCement). These two plants are unlikely to be considered in competition with each other.
So, continued smooth sailing is expected for the takeover. Since most of the information regarding the acquisition has come directly from HeidelbergCement it was unlikely to appear otherwise. Let’s see whether this remains the case when Italcementi releases its financial results for 2015 later in the week on 19 February 2016.