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Cement signals – import row in Kenya
Written by David Perilli, Global Cement
08 July 2015
Kenyan cement producers kicked off this week about Chinese cement imports for the Standard Gauge Railway Project in Kenya. Local producers, including ARM Cement and Lafarge, have asked the Kenya Railways Corporation to explain why the Chinese-backed project is importing cement. Project builders the China Rail & Bridge Corporation (CRBC) has imported 7000t of cement so far in 2015 according to Kenya Ports Authority data.
Project completion is planned for 2017 with a requirement of 1Mt of cement. If CRBC carried on this rate then, roughly, the project might only use 42,000t of imported cement if the import rate holds. This is less than 5% of the estimated requirement. However, cement imports increases into Kenya have stayed steady since 2012. Imports rose by 2000t from 2013 to 2014. CRBC's imports will stick out significantly in 2015.
Kenya National Bureau of Statistics (KNBS) data places Kenyan cement production at 5.8Mt in 2014, an increase of 16.3% from 5.1Mt in 2013. Production growth has been steadily building since the late 1990s with, more recently, a dip in the rate of growth in 2011 that has been 'corrected' as the growth has returned. Consumption has risen by 21.8% year-on-year to 5.2Mt in 2014 with imports also rising and exports dropping.
Imports for the railway project are duty free as ARM Cement Chief Executive Officer Pradeep Paunrana helpfully explained to Bloomberg. Producers have also recently upgraded their plants to specifically supply 52.5 grade cement to the project. Given this, it is unsurprising that local Kenyan producers, including ARM Cement and Lafarge, are complaining about this situation, especially given the increasingly pugnacious African response to foreign imports led by Dangote and companies in South Africa. Both ARM and Lafarge hold integrated plants and grinding plants in Nairobi and Mombasa. This is the route of the new railway line.
The backdrop to this is that the Chinese cement industry is struggling at home as it adjusts to lower construction rates and reduced cement production growth. Profits made by the Chinese cement industry fell by 67.6% year-on-year to US$521m for the first quarter of 2015, according to National Development and Reform Commission (NDRC) statistics. At the same time the Shanghai Composite, China's principal stock market, has seen the value of its shares fall by 30% since June.
Although it is unclear where the cement imports in this particular row are coming from, informal or formal business links between large state controlled corporations such as a China's major cement producers will always be questioned by competitors outside of China for both genuine issues of competitiveness and simple attempts to claw more profit. If the Chinese cement producers are sufficiently spooked or they really start to lose money then what is to stop it asking a sister company building a large infrastructure project abroad to offer it some help? Or it might consider asking the Chinese bank providing 90% of the financing towards the US$3.8bn infrastructure project to force the Kenyan government to offer more concessions to foreign firms. Meanwhile one counter argument goes that Kenya has a growing construction market with a giant infrastructure project that may unlock the region's long-simmering low cement consumption per capita boom. The Kenyan government may face some difficult decisions ahead.
How will the Greek cement industry cope with the Greek debt crisis?
Written by David Perilli, Global Cement
01 July 2015
The Greek debt crisis directly hit the local cement industry on Tuesday 30 June 2015 when Titan Cement reported that it was unable to pay a dividend to its shareholders. The leading local cement producer blamed the capital controls introduced by the government.
It is worth looking at the effects on the domestic cement industry as the Eurozone bureaucracy and the Greek government play 'chicken' with each other while Greece starts the default process, having failed to pay the latest International Monetary Fund (IMF) payment on 30 June 2015. Greece will now join a group, possibly even more select than the European Union, of countries that have failed to pay back the IMF, including current defaulters like Sudan and Zimbabwe.
A better comparison might be made with Argentina which defaulted upon its foreign debts in 2001. Its construction industry fell by 12% year-on-year in 2001 and by a further 30% in 2002. Cement consumption and cement production utilisation rates hit 23% in 2002. One key difference with Greece is that the country has had major financial difficulties for far longer than Argentina. Argentina ran into financial depression in 1998 and defaulted in 2001. Greece ran into financial trouble following the 2008 financial crisis and then received its first bailout in 2010.
As the capital controls show, even initial responses to the financial situations are impacting upon the standard transactions a limited company conducts. The Financial Times ran an article in May 2015 examining the potential effects on businesses of a debt default and Greek exit from the Eurozone (Grexit). In short, business and commerce will continue where possible reacting to whatever comes their way. For example, an olive oil producer reported switching to exports to make profits. Crucially though, another company interviewed, a construction contractor, worried about potential cuts to government or EU-led infrastructure projects.
As Titan reported in its first quarter results for 2015, its Greek market has been dependent on road building. In February 2014 Titan Cement reported its first improved operating results in seven years followed by profit in 2014 as a whole. The other major cement producers, Lafarge subsidiary Heracles General Cement and Italcementi subsidiary Halyps Cement, reported an improved construction market in 2014 with rising cement volumes. However, it was noted by Lafarge that it was developing exports to 'optimise kiln utilisation.' Titan also noted the benefits of exports in its first quarter report for 2015, focusing on a strengthening US Dollar versus the Euro. Given on-going events, one suspects there is going to be a lot more 'development' of this kind.
To set some sense of scale of the crisis Jim O'Neill, former head of economics at Goldman Sachs, famously calculated that, at the height of its growth, China created an economy the size of Greece's every three months. What happens next is down to the crystal balls of economists, although the path of least resistance now seems to be pointing at further default, departure from the Eurozone and Euro and further significant financial pain for Greece.
It looks likely that the local construction market will stay subdued and exports will offer a lifeline. How much the EU is prepared to let Greece default on its bills and then try and undercut its own over-capacity cement industries remains to be seen. However, since the main cement producers in Greece are all multinational outfits, it will afford them some flexibility in their strategy in coping with the fallout. Meanwhile a cement production capacity of around 14Mt/yr for a population of 11m suggests over capacity by European standards. If exports can't help then the situation looks grim.
UPDATE: Here is Global Cement's previous take on Greece from June 2012
Self-sufficiency and exports from every African market…? How is this possible?
Written by Peter Edwards
24 June 2015
The small cement industry of Mozambique, in south west Africa must be an interesting place to make cement. On one side the country's producers, like their more vocal South African counterparts, have been fighting off cheap imports from Iran, Pakistan, China et al. On the other side of the coin though, Mozambique has growing domestic demand and is within striking distance of growing markets further into Africa, like Malawi and the Democratic Republic of Congo (DRC).
With the announcement this week that there will be not one but two new integrated cement plants in the country, bringing over 2Mt/yr of new capacity, everything should be set fair for the coming years then, shouldn't it? Domestic production will rise, the price of local cement will fall as a result, competition from imports will drop off and money will be made from new exports.
Except that might not happen. Before the announcement of these two plants, (one of which does not state a capacity), there was around 5.5Mt/yr of grinding and integrated capacity either currently active in Mozambique or due to come onstream in 2015. With the new projects this rises to over 7.5Mt/yr.
The desirable chain of events described above starts to break down due to the fact that domestic demand in Mozambique, while rising, is not currently anywhere near as high as domestic supply. The United States Geological Survey estimated that the country produced just 1.2Mt/yr in 2012. Data for 2013 and 2014, though unavailable, is highly unlikely to show a three-fold increase. Indeed Insitec, a minority shareholder in Cimentos de Moçambique, predicted in 2014 that demand for that year would rise to just 1.5Mt, before hitting the dizzying heights of 1.8Mt in 2018 – And that's still three years away!
So what are the options? Option 1: Some or all of the planned and mooted cement plants will fail to come to fruition. Option 2: Some or all of the plants will be built but will operate at reduced capacity and/or on a campaign basis. Option 3: The Mozambican cement industry becomes a regional powerhouse and starts to export to its neighbours.
Option 1 is certainly possible. Limak Group, one of the parties linked to the new projects, is a Turkish cement producer that is inexperienced outside of Turkey. There has also been a lack of information on the progress of projects by Austral Cimentos ('coming on stream in 2015'), Star Cement and Consolidated Building Materials, although a lack of progress reports does not necessarily imply 'no progress.'
Option 2 is more likely, as some producers already operate on a campaign basis. InterCement's plant at Nacala, formerly an integrated plant, currently operates only as a grinding station. Option 3 is also possible, with Malawi particularly lacking in cement production facilities.
In reality a combination of all three 'Options' is the most likely outcome. However, this will lead to Mozambique becoming yet another player in an increasingly busy African cement market. The desire for self-sufficiency in cement production, a common goal for the region's governments, can easily lead to over-estimates of local demand growth, with resultant over-capacity. Of course the expectation that all African countries can get rid of this extra cement capacity via exports will ultimately backfire.
In southern Africa we already have South Africa exporting. Angola declared 'cement self-sufficiency' in October 2014 and banned imports at the start of 2015. Zambia, Botswana, Zimbabwe and DRC all have large-scale Dangote and/or PCC projects near completion or in production that will greatly reduce their need for imports. Meanwhile, further north, Nigeria is already a gigantic producer and significant cement exporter. Cameroon has recently banned imports and Ghana is thinking of doing the same. Over in the east of Africa, Ethiopia's (and the rest of that region's) rapidly-developing situation was covered in this column just two weeks ago.
Finally, in the north of Africa, Algeria has declared its intention to be self-sufficient in cement by 2016. This news must have 'gone down like a lead balloon' in Italy, Spain and Greece, which have been reliant on north African markets after the bottoms fell out of their own economies. In the north east, Egypt has different problems at present, also described previously. It needs fuel not cement!
So where does this all lead for regional cement dynamics in Africa? Well perhaps the situation in India points the way. There, as in Africa, local and regional producers with the desire to expand grew from their local bases and eventually overlapped. Against a backdrop of lower-than-expected demand, the country now has overcapacity. This has resulted in smaller producers being acquired and leaving the market.
Could this eventually happen in Africa? Only time will tell. However one thing is certain: It's just not possible for every country to export to every other country!
This week brought the news that, following testing by the Food Safety and Standards Authority of India (FSSAI), some 27,402t or US$49.8m of Nestlé's Maggi noodles had to be recalled from the market due to allegedly high levels of lead. But what do you do with 27,402t of noodles deemed unsafe for human consumption?
The solution was incineration. Five cement plants will take 40 days, which started on 9 June 2015, to consume all of the noodles as an alternative fuel. "This was the most environment-friendly solution to destroy the recalled noodles," said Luca Fichera, executive vice president of Nestlé's supply chain in India.
India's fuel supply is notoriously unreliable. Coal is the dominant fuel used for cement and power production in India, however, supplies have been inconstant in terms of both quality and quantity for some time now. To shore up the coal supply, the government cancelled, reallocated and auctioned 214 of the 218 coal blocks in India, starting in September 2014. According to local media, Coal India, which still operates most of the blocks, is now expected to increase its coal production capacity by as much as 60Mt in 2015, following 7% production growth in the 2014 - 2015 financial year. However, there is still a major coal shortage in the country and recent reports by India's coal ministry suggest that the new coal linkages will increase coal costs. The new coal linkage process will see sales go via an auction system instead of a static price. Coal costs for cement producers are expected to rise by as much as 25% as a result.
Given India's long-standing fuel supply problems, its cement producers may wish to learn from the use of Nestlé's Maggi noodles as alternative fuels in cement plants. Instead of viewing the coal shortage as a challenge, it might instead be considered an opportunity to increase alternative fuel use, reducing costs and moving to more environmentally-friendly cement production. In addition to the standard industrial, municipal and household waste, among others, India might look to use some of the large quantities of waste biomass that must surely be produced from its agricultural sector. Like the game, 'Hungry, hungry hippos,' India's cement plants could consume a wide variety of nearby wastes in place of coal.
Ethiopia in focus
Written by David Perilli
10 June 2015
Just one week after Dangote started trial production at its new Mugher cement plant in Ethiopia it announced that it would be doubling capacity at the site. Upgrade work is slated to begin before the end of 2015, according to Nigerian media.
The move shows how much potential Ethiopia is seen to have for the cement industry. With a population of around 90m, it had a cement production capacity of 9.7Mt/yr before the new 2.5Mt/yr Dangote plant comes on line, according to Global Cement Directory 2015 figures. Including the new Dangote plant and even at 100% capacity utilisation this would place cement consumption in the country at 135kg/capita. This is a low figure internationally and hence the continued interest in new capacity. Subsequently, a large number of projects have been rumoured and mooted in Ethiopia over the years. However, many of these publicised projects then fail to make it to construction.
Mebrahtu Meles, the Minister of Industry, said that there were 18 companies engaged in cement production at the 7th Africa Cement Trade Summit that took place in Addis Ababa in April 2015. Meles placed the installed production capacity at 11.2Mt/yr (including the Dangote plant) with the expectation that this will increase to 17.15Mt. However, these cement plants are only producing 5.47Mt/yr, giving the country a capacity utilisation rate of below 50%. This too is low by international standards (60% or more). Cement consumption was placed at just 62kg/capita in 2014.
At the same event, the Ministry of Industry revealed that it was working on a national Cement Industry Development Strategy from 2015 to 2025. The strategy will tackle local industry issues such as unavailability of locally-produced packaging materials, poor transport links, high costs of production and a limited market. Key targets include stimulating cement demand to 12.22Mt/yr by 2020 by moving to concrete road construction and raising capacity utilisation rate to 75% by 2017 and to 80% to 2025.
Despite the publicity Dangote isn't the only player creating new capacity in Ethiopia. Habesha Cement is set to open its 1.4Mt/yr cement plant near to Addis Ababa in 2016. Habesha also has an international angle, given that South African cement producer PPC purchased the majority stake in Habesha Cement in the autumn of 2014 following the project's difficult financial history.
The new Dangote plant predates the country's new cement industry strategy but the upgrade plans demonstrate confidence in both the market and the government's plans. To meet its targets though the country is going to need to increase both its capacity utilisation and build more production capacity. Although muted from previous pronouncements the current target relies on Habesha Cement building its plant and the capacity utilisation rate rising from 50% to at least 75%.
South African weekly newspaper, M&G Africa, has described how Africa faces an infrastructure 'apartheid' whereby 44 of the continent's 58 countries share just 25% of the continent's infrastructure. Building things in Africa costs more because of this infrastructure deficit and it hits cement capacity utilisation rates as well. Ethiopia is one of the region's richer countries in terms of gross domestic product (GDP) but the same issues apply. Hitting its targets for the cement industry may be hard.