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Update on Nigeria, September 2023
Written by David Perilli, Global Cement
06 September 2023
Dangote Cement felt compelled to issue a statement clarifying its prices at the end of August 2023. In the release it stated what its ex-factory price was in Nigeria and added that transport costs and the location of a delivery could add additional expense. It made the declaration in response to alleged “misinformation” on social media channels that the company had been selling its cement more cheaply in the neighbouring country of Benin. A subsequent investigation by the This Day newspaper reported that Dangote Cement does not officially export cement to Benin and that the average price in the country was actually slightly higher than the end prices Dangote Cement provided. Competitor BUA Cement wasted no time though in saying at its annual general meeting that it would ‘crash the price of cement.’
All of this may sound familiar because a similar argument broke out in early 2021. At that time prices were rising following the outbreak of Covid-19, although other factors were at play. Then as now, Dangote Cement, the largest domestic producer, defended itself by publishing its prices and BUA Cement made another showy claim saying that it had no plans to raise the ex-factory price of its cement at the present time or in the future, “…barring any material, unforeseen circumstances.” The government also became involved with the Senate of Nigeria discussing the matter in relation to potential legislation at the time. Part of the problem here has been that Dangote Cement is the biggest producer and it has gradually started exporting cement from Nigeria in recent years and, regardless of any effects to the domestic market, it leaves it exposed to the kind of unsubstantiated scuttlebutt it has faced recently. Back in 2021 it briefly stopped exporting cement for a while before resuming it again in May 2021.
Graph 1: Half-year sales revenue from selected large cement producers in Nigeria. Source: Company reports.
Graph 1 shows how some of the large cement producers in Nigeria did in the first half of 2023. Dangote Cement is the market leader by a considerable margin and the figures here do not even include its sales elsewhere in Sub-Saharan Africa. Despite its market dominance its sales revenue has fallen so far in 2023 and the company blamed election uncertainty, a “cash crunch”, negative currency exchange issues and the weather. That said though it did manage to increase its earnings through initiatives such as using alternative fuels, making efficiencies at its plants and utilised compressed natural gas in its truck fleet.
BUA Cement and Lafarge Africa provided less descriptive context in their release. Both BUA Cement’s revenue and profit after tax rose year-on-year but Lafarge Africa’s profit after tax fell. This may have been due to a rise in fixed production costs such as staffing, by-products costs and electricity, although depreciation was also an issue.
For all of BUA Cement’s talk of “crashing the cement price” it is preparing to commission two new 3Mt/yr production lines at its Obu and Sokoto plants respectively in the first quarter of 2024. Given everything else that is going on in the Nigerian economy, such as inflation, and the large size of the country it seems unlikely to lower the price although it might slow down the rate by which the price continues to rise. In its 2022 annual report BUA Cement’s managing director Yusuf Haliru Binji said that the new production lines would enable it to potentially increase its exports. This is the logical next step for a local sector outgrowing its domestic bounds and this is exactly what Dangote Cement has done. Yet, as the recent price debacle has shown, the price of cement matters to Nigerians. If the price keeps going up all of the local producers may end up facing negative attention whether warranted or not.
Update on China, August 2023
Written by David Perilli, Global Cement
30 August 2023
The first half of 2023 has continued to be a tough period for the major China-based cement producers, with revenue and profits down for many. As CNBM put it, the sector is facing production overcapacity, weak demand, high inventory, low prices and declining profits. However, not every company has followed this trend, with a few such as Anhui Conch, Huaxin Cement and Tapai Group managing to hold operating income up and the latter somehow even managing to increase its net profit. The China Cement Association (CCA) in its financial coverage has memorably described these companies that have bucked the national picture as ‘dark horses.’
Graph 1: Sales revenue from selected Chinese cement producers. Source: Company financial reports. Note: For CNBM, cement revenue shown only.
Graph 1 above summarises the situation for a selected group of cement producers. Anhui Conch avoided the fate of CNBM by managing to grow its non-cement revenue, specifically from aggregates and concrete. Yet it too was unble to avoid its net profit falling by 32% year-on-year to US$928m in the first half of 2023 from US$1.37bn in the same period in 2022. Huaxin Cement pulled off the same trick by raising its concrete and aggregates revenue domestically and by growing its overseas revenue. As well as its subsidiaries in Africa, the company also added Oman Cement to its portfolio, completing the acquisition of a majority stake in April 2023. The CCA has a wider roundup of how well the local cement companies have done.
Graph 2: Cement output in China, 2019 to first half of 2023. Source: National Bureau of Statistics of China.
Data from the National Bureau of Statistics of China suggests that the cement sector is stagnating rather than actively declining. This is an improvement of sorts from the decline in the first half of 2022, at least. Cement output in the first half of 2023 rose ever so slightly to 980Mt from 979Mt in the same period in 2022. On a rolling annual basis cement output has been gently falling below 1% each month since November 2022, although it rose by nearly 1% in March 2023.
The underlying problem for the Chinese cement sector remains the local real estate market. Developer Country Garden has been the latest company to warn of potential losses – of up to US$7.6bn – in the first half of 2023. It is also currently attempting to ask for more time to repay a bond. This follows the financial problems that Evergrande has faced since 2021. Financial analysts have been monitoring the situation for several years and warning of what a larger collapse in the sector could mean for the wider economy, such as the implications for the banks that hold the debts of the developers. Commentary by Goldman Sachs in August 2023, for example, suggested that the real estate sector needs to manage its inventory on a large scale, with over US$2Tn in liquidations, in order to restructure debts in the property sector. It estimated that the whole situation could reduce the country’s entire gross domestic product (GDP) by 1.5% in 2023, although this would be the trough of the downturn in its view.
Cement producers in China continue to be held hostage by the conditions in the real estate market and the effect this has in turn on demand for building materials. Yet all is not lost, as the examples of the CCA’s ‘dark horses’ show, buoyed by business diversification, overseas expansion or even regional differences. How much longer the rest of the other cement companies can cope in this environment remains to be seen. A less regulated market would certainly expect to see mergers and acquisitions taking place as the financial pressure mounts. China, for now at least, remains steadfastly different. With luck the real estate market may reach its lowest point in 2023 and a recovery could follow.
New emissions taxes hit Hungary’s cement industry
Written by Jacob Winskell
23 August 2023
The Hungarian government recently enacted Emergency Decree 320/2023, taxing all CO2 emissions from the country’s 40 or so largest industrial enterprises. The government used emergency powers to set up a new taxation scheme, which undercuts existing free allowances under the EU emissions trading scheme (ETS). The scheme additionally penalises the trade in ETS credits. Cement producers announced that the new regulations will make it impossible for them to keep operating.1
With regard to Hungary’s six active cement plants, the scheme comprises:
1 – A Euro20/t tax on CO2 emissions, effective retroactively from 1 January 2023, payable by any large enterprise that uses EU Emissions Trading Scheme (ETS) free allowances to cover the majority of its CO2 emissions. Plants that decrease their production, or that carry on non-CO2-emitting activities at over 10% of their operations, will pay a higher rate of Euro40/t of CO2.
2 – A 10% transaction fee for the sale of free allocations under the EU ETS, payable to the Hungarian Climate Protection Authority.
Less than three years ahead of full implementation of the EU carbon border adjustment mechanism (CBAM), the Hungarian government has seemingly moved unilaterally against cement production – this in a country surrounded by seven other cement-producing countries. Multiple foreign cement producers connected to the major market of Budapest by rail, river and road will be watching developments with interest. These include CRH, which, besides two smaller plants inside Hungary, operates the 800,000t/yr Cementáreň Turňa nad Bodvou plant, immediately over the border in Slovakia.
This comes at a time when the domestic cement industry is facing historically high costs and low demand, with a 30% year-on-year decline in construction activity in July 2023, following double-digit inflation throughout 2022 and the first half of 2023.
Catastrophising may be a common symptom of environmental regulation in industry associations, but one can understand on this occasion. The Hungarian cement and lime industry association, CeMBeton, backed its members’ gloomy announcement about their future with an estimate for extra annual taxes of ‘several billion forints’ (1bn forint = US$2.84m), in a statement following the decree. Assuming annual CO2 emissions of 565kg/t across its 5.4Mt/yr cement capacity, the sector might expect to pay US$61m/yr in CO2 rates alone.2, 3 According to analyst ClearBlue, the government will raise additional tax revenues worth US$278m/yr across all of the 40 aforementioned heavy emitters in Hungary.4
It may seem surprising that CeMBeton did not even draw up a projected tax bill during consultations over the new tax scheme – but, in fact, no such consultations took place. In its most recent statement, the association said “We do not know the government’s intentions.” Outside of official releases, Hungary’s cement producers have not always been so reserved about the government’s perceived aim.
Global Cement reported in April 2023 that the Hungarian government was allegedly interfering in the cement sector to make producers sell up – as per accusations by an anonymous industry executive.5 There is arguably a course of action on the government’s part which, more or less, appears consistent with this aim:
October 2020 – The Hungarian Competition Authority (GVH) starts competition supervision proceedings against CRH, Duna-Dráva Cement and Lafarge Cement Magyarország.
July 2021 – Emergency Decree 2021/404 imposes a 90% tax on producers’ ‘excess’ profits, based on threshold cement sales revenues of Euro56/t. Additionally, producers must report their exports.
September 2021 – GVH finds insufficient evidence to support the initiation of competition supervisory proceedings in the cement industry.
January 2023 – (Retroactive) entry into force of CO2 emissions tax.
May 2023 – The government of Hungary reportedly initiates negotiations to acquire Duna Dráva Cement and Holcim Magyarország, according to the Hungarian builders’ association, National Professional Association of Construction Contractors (ÉVOSZ). Duna Dráva Cement owners Heidelberg Materials and Schwenk Zement state that they have entered into no such negotiations, while Holcim declines to comment.
July 2023 – The Act on Hungarian Architecture lets the government dictate producers' volumes and prices and require them to supply cement to National Building Materials Stores (a proposed state-owned construction materials retail monopoly).6 Additionally, the government gains a right of first refusal over the divestment of any asset by the cement industry’s foreign owners.
20 July 2023 – The government enacts Emergency Decree 320/2023. ETS transaction fees enter into force.
The government can now expect a legal challenge to its latest move. CeMBeton’s first ally may be the font of all emissions legislation – the EU itself. Within the EU ETS framework, tax rates are down to member states to determine. However, the introduction of a transaction fee may constitute an illegal restriction to free allowances, OPIS News has reported. The association has also indicated its readiness to mount a constitutional challenge, specifically with regard to the legislative retrofit involved in the CO2 emissions tax. The Fundamental Law of Hungary does not generally permit legislation to apply retroactively, though how courts will balance this consideration against the rights of the government is untested.
The government amended the constitution to provide for new emergency powers, and subsequently adopted them in May 2022, in response to the ‘state of danger’ created by Russia’s war in Ukraine – though its actions on the international stage suggest careful neutrality, if not ambivalence. At home, the war has brought a consolidation of the government’s control over various areas of life, including the economy, according to Human Rights Watch.7
Climate protestors around the world might be glad to see governments wield emergency powers against their own heavy industries. In Hungary, however, the wider sustainability goals are not yet clear with regard to a policy that seems, at least partly, politically motivated.
References
1. CeMBeton, Sajtónyilatkozat, 21 August 2023, https://www.cembeton.hu/hirlevel/2023-08-21/202308-mozgalmas-osz-ele-nezunk/116/sajtonyilatkozat/668
2. Heidelberg Materials, ‘Energy and climate protection,’ 2022, https://www.heidelbergmaterials.com/en/energy-and-climate-protection
3. Global Cement, Global Cement Directory 2023, https://www.globalcement.com/directory
4. OPIS News, ‘Hungary's New Carbon Tax Unlikely to Set EU Precedent, Say Analysts,’ 16 August 2023
5. Global Cement, 'Update on Hungary,' April 2023, https://www.globalcement.com/news/item/15572-update-on-hungary-april-2023#:~:text=Heidelberg%20Materials'%20subsidiary%20Duna%2DDr%C3%A1va,the%20country's%20active%20national%20capacity.
6. Daily News Hungary, ‘Hungarian government’s new nationalising plan could violate EU law,’ 27 February 2023, https://dailynewshungary.com/hungarian-govts-new-nationalizing-plan-could-violate-eu-law/
7. Human Rights Watch, ‘Hungary’s New 'State of Danger',’ 8 June 2022, https://www.hrw.org/news/2022/06/08/hungarys-new-state-danger
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Carbon border adjustments being considered in Australia
Written by David Perilli, Global Cement
16 August 2023
Australia’s Climate Change Minister announced plans this week to look at a potential carbon border adjustment mechanism (CBAM). Chris Bowen told an Australian Business Economists forum in Sydney that policies were needed to ensure a level playing field for Australian firms. Mentioning the European Union’s (EU) CBAM by name, he said that his department would prepare a review to assess carbon leakage risks, develop policy options and look at the feasibility of an Australian CBAM, particularly in relation to steel and cement.
The Antipodean nation has past form when it comes to carbon legislation. Back in 2012 it introduced the Clean Energy Act under the Gillard administration. The legislation was intended to introduce an emissions trading scheme with a carbon pricing scheme. However, it faced opposition from rival political parties and the Cement Industry Federation warned that the local cement sector was vulnerable to overseas competitors outside of the scheme. Job losses followed and Adelaide Brighton appeared to react by focusing more on imports. The Abbott administration then abolished the act in 2014 putting forward its Clean Energy Future package instead, which focused more on investing towards change. Jump forward nearly a decade and the Albanese government passed its Climate Change Bill in 2022. This set legally binding targets, including a commitment to cut CO2 emissions by 43% from 2005 levels by 2030. Bowen’s look at a CBAM is an obvious next step from here, addressing one of the main criticisms of the previous Clean Energy Act.
Local building materials company Boral reacted positively to a CBAM in its annual results released earlier this week with chief executive officer Vik Bansal saying that the company was “...advocating for an effective Carbon Border Adjusted Mechanism for Australia.” He also reconfirmed the group’s commitment to a target of net zero emissions by 2050. However, at the same time, Boral also reduced its emissions reduction target to 2025 from 2019 figures to up to 14% from 19% previously. This was blamed on “external factors” such as delays in securing the required regulatory approvals for the next phases of an alternative fuel program. Mining company Rio Tinto also warned in late July 2023, as part of its half-year financial results, that it might potentially miss its emissions target for 2025 unless it resorted to buying carbon credits.
CBAMs became serious in 2023 when the EU passed its own scheme into law in May 2023. The EU CBAM will now enter into a transitional phase from 1 October 2023 until the end of 2025. During this period importers of goods covered by the legislation will be required to report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions) but they will not have to make any financial payments or adjustments. The system will then enter its full format from 1 January 2026, with affected importers being forced to purchase and surrender CBAM certificates, which will be priced at the EU emission trading scheme (ETS) rate, currently at around Euro88/t. Other CBAMs have also been mooted in Canada and the US. In Canada the government ran a consultation on border carbon adjustments in 2021. It is currently considering its next steps. The US meanwhile has had both Republican and Democrat party senators make separate suggestions for a CBAM since at least 2021.
Just because the EU is set to implement its CBAM and other countries are considering their own versions doesn’t mean that they are necessarily a good idea. Cembureau, the European cement association, has been steadily lobbying on the details such as indirect emissions and waste incineration in the EU CBAM for years. Criticisms of CBAMs in general include potential clashes with World Trade Organisation rules, accusations of protectionism, triggering inflation, not being equitable to less developed nations and even failing to stop carbon leakage in the first place. The EU CBAM has also linked itself to the local ETS price. So, even after the transitional period, the carbon price may start to jump about in unpredictable ways once the system fully goes live in 2026.
The game-changer in recent years for international carbon emissions reduction legislation though was arguably when the US government introduced its Inflation Reduction Act in 2022. This is because it served both sustainability and self-interest on a grander scale than seen previously. The act promised US$369bn in subsidies for companies to invest in low carbon technology. However, the catch was that the investment tied supply chains to the US market, much to the ire of some of the US’ trade partners such as the EU. CBAMs offer a similar opportunity to governments around the world if they choose. They can be used to protect domestic carbon emission reduction effects in heavy industry but they can also be used for protectionism. Hence Bowen was due to say during his speech that the Inflation Reduction Act and other policies elsewhere “mean that Australia needs to act to stay in the game.” Australia has the advantage that it can watch how the EU CBAM pans out before it implements its own version.
Update on India, August 2023
Written by David Perilli, Global Cement
09 August 2023
Adani Group announced this week that it was set to acquire a majority stake in Sanghi Cement. Its subsidiary Ambuja Cements said it was going to spend an enterprise value of just over US$600m on buying a 57% share in Sanghi Industries. The acquisition will be fully funded through internal accruals. The transaction works out at about US$99/t of clinker production capacity, a similar amount to what Adani Group paid Holcim to buy Ambuja Cements and ACC in 2022.
The acquisition has generally been perceived as consolidation in a crowded market. Profits have been under pressure in recent years due to the coronavirus pandemic lockdowns, logistics issues and then energy and other input price rises. However, commentators from ICICI Securities, cited in the local press, took the alternative view that Adani Group might be trying to start a price war in the west of India. They noted that demand for cement was 70Mt/yr in the region versus a production capacity of 82Mt/yr. Yet Sanghi Cement has reportedly been operating at less than a third of its capacity. Adani Group also revealed its intention to increase the cement production capacity at Sanghi Cement’s Sanghipuram plant to 15Mtyr by mid-2025 from 6.1Mt/yr at present. If the plant were upgraded it would potentially increase Adani Group’s market share from 19% to 37%.
Another aspect to consider with any large corporate action by Adani Group is the political angle. Adani Group’s chair Gautam Adani is often linked in the local press to the country’s ruling Bharatiya Janata Party (BJP) and Prime Minister Narendra Modi. So, every time Adani Group does something newsworthy, opponents of the BJP play up the perceived connections. This time the Indian National Congress (INC) simply noted publicly that a rival bidder for Sanghi Cement had encountered a tax investigation before it withdrew from the auction. There is no evidence suggesting that anything underhand happened here. Yet the point to consider going forward is that anything that Adani Group does is likely to be subject to more scrutiny than its peers. This may have unexpected consequences.
The financial results for the India-based cement producers covering the first quarter of the 2023 - 2024 year have been released in recent weeks. Generally, revenue and sales are up strongly but profits less so. Due to this, there has been a lot of attention placed on the costs these companies are incurring. Inflation on energy costs reportedly peaked in late 2022, but as Graph 1 below shows, it has been a mixed situation for the larger cement companies.
Graph 1: Comparison of Power & Fuel costs for selected Indian cement producers in first quarter of 2021, 2022 and 2023 financial years. Source: Company financial reports.
UltraTech cement said that its energy cost grew by 3% year-on-year in the first quarter of the 2024 fiscal year and it blamed this mainly on negative currency exchange effects. It also reported higher raw material costs due to the growing price of fly ash and slag. Ambuja Cements (and subsidiary ACC) managed to cut both its fuel costs and increase its earnings, which, while impressive, is not entirely unexpected following the takeover by Adani Group in mid-2022. Similarly to UltraTech Cement, neither Shree Cement nor Dalmia Cement were able to grow earnings faster than revenue, so earnings per tonne of cement fell. Birla Corp, however, did manage to pull off this trick due to a “substantial decline in fuel and power costs.”
One consequence of a competitive cement market with lower profits than previously, is a renewed emphasis on marketing. Adani Group’s subsidiaries Ambuja Cements and ACC both highlighted the companies’ branding and marketing activities in the first quarter. Ambuja Cements has resurrected its television advert with wrestler The Great Khali, ACC is highlighting its part in the building industry since the 1930s with its own campaign and both companies are targeting sporting events such as the India versus Australia World Test Championship. Adani Group is building up brand awareness following the acquisition and potentially leading up to a name change in the future.
The other companies are also doing this but one campaign that sticks out has been Shree Cement’s use of classic video games such as the ‘Shree Cement Bros” video on its website. Computer game character Mario has done a lot of things in his time but he also worked in a cement plant back in the 1980s Game & Watch title ‘Mario’s Cement Factory.’ We are still waiting for the 4k remake with online multiplayer for some reason! Until then, it is worth reflecting that brand awareness is important in the world’s second largest cement market and it may become more so as Adani Group continues to establish itself.