Analysis

Tamil Nadu's subsidised cement scheme attracted negative attention this week when a prominent Indian politician called for it to be investigated. PMK party founder S Ramadoss alleged in a statement covered by Indian press that cement from the scheme is either being not being procured at the levels the state government are declaring or it is being sold on the black market.

Without investigating Ramadoss' comments too deeply in this article the Amma scheme does deserve looking at along with the pressures that have created it in the Indian cement market. The scheme takes its name from the nickname, Amma or mother, of the current Chief Minister of Tamil Nadu J Jayalalithaa. It follows previous populist subsidy schemes such as Amma Vegetables, Amma Water and Amma Theatres. As such it is exactly the kind of initiative you might expect a rival politician might criticise.

The scheme was created in mid-2014 to cope with fluctuating cement prices in the state. At that time Tamil Nadu consumed 1.7 – 1.8Mt/month of cement and around 400,000 – 450,000t was supplied by Andhra Pradesh. Subsequently prices rose in the neighbouring state, the purchases from Andhra Pradesh fell to 150,000 – 300,000t/month and the price went up in Tamil Nadu. The Amma Cement Scheme was created in response. It was intended to purchase 200,000t/month from private manufacturers. This would then be sold in eligibility bands with limits on the number of cement bags that could be bought dependent on size and type of project.

When the scheme launched in January 2015 the Times of India saw it as a politically canny move that would benefit middle-income rural citizens who could afford to build their own homes. Urban residents are less likely to build their own homes and so they wouldn't use the scheme as much. For example, at the start of the scheme sales in one rural district massively overtook sales in the city of Chennai.

Looking nationally, in July 2015 the Cement Manufacturers' Association (CMA) cried out that 100Mt/yr of India's production capacity was not being used due to supply and demand mismatching. It placed the value of this 'dead investment' at US$8.66bn. At present, the CMA places installed capacity at 380Mt/yr and utilisation at 275Mt/yr (70%). Previously utilisation was 94% in 2007 – 2008. Locally, Global Cement Magazine placed cement production capacity in Tamil Nadu at 33.9Mt/yr at the start of 2015. Demand was recorded at 20Mt in 2014, giving the state a capacity utilisation of 60%.

Cement demand was reported down in the southern states of India in 2014. Producers subsequently cut production to hold prices and stem their losses. With the CMA hoping for national infrastructure and housing projects to whip up demand generally, it seems possible that producers have little incentive to provide cement for the Amma scheme. One economist the Times of India quoted wondered whether the private producers would continue to sell cement to the state government at the necessary volumes. Sure enough, one of Ramadoss' criticisms of the scheme is that it may not be procuring the targeted volumes. If this is the case then the state government will have to pay more for their cement to hit the volumes they want.

At today's official launch of LafargeHolcim, CEO Eric Olsen was asked to comment on the group's position in Iran. It doesn't have one, but that won't necessarily always be the case given events in Austria this week.

On Tuesday 14 July 2015, Iran and the P5+1 countries (US, UK, France, China, Russia and Germany) agreed an historic deal to limit Iranian nuclear activity in return for a significant lifting of existing trade sanctions at a meeting in Vienna. The country's cement industry will be delighted by this agreement. The talks, in progress since 2006, could mark what has been termed a 'new chapter' in relations between Iran and the rest of the world by Iranian President Hassan Rouhani. For his part, US President Barack Obama stated that the deal would ensure that 'every pathway to a nuclear weapon is cut off' for Iran, but critics from the US, Iran, Israel and elsewhere, suggest that cutting all routes will not be possible. They are alarmed and have warned that the deal could lead to an arms race between Iran and Saudi Arabia, amid increasing animosity in the Middle East.

While the geopolitical implications of the deal are huge, the lifting of trade restrictions will greatly improve Iran's ability to deal internationally. This includes allowing increased oil exports. An article by Reuters anticipates that Iranian oil production could increase drastically from around 1 million barrels per day (mbpd) at present, possibly to its former peak of 3mbpd. (What this might do to the global oil price could be the subject of an entirely separate column). The easing of banking restrictions will make Iranian products more competitive and increase trade in many sectors.

Against this backdrop sits the Iranian cement industry, the world's third or fourth largest by production in 2014, depending on your source. It has an incredible 84.4Mt/yr of cement production capacity in a country of 77.5 million people. Assuming that it could produce and consume all of that cement at home, this would represent consumption of around 1100kg/capita/yr, far above the 600-800kg/capita/yr rate that is typical of a rapidly-developing economy.

Of course, Iran has not been consuming anything like this level of cement recently. According to figures released by its Employers Guild Association this week, Iran made 66.4Mt of cement in its 1393 calendar year, which ended on 21 March 2015. Assuming the above capacity, this gives Iran a cement utilisation capacity of around 78%.

Much of the cement made in Iran was exported in 2014 and so far in 2015. The country exported an incredible 18.4Mt/yr of cement and clinker in the year to 21 March 2015, up from 18.8Mt a year earlier. A large amount of this cement was available at low cost, to the extent that Iran has been accused (along with Pakistan) of dumping cement in the Middle East and East Africa. (Pakistani producers have even pointed out that Iranian cement is making inroads into the Afghan market, more traditionally a target for exports from Pakistan).

So what might happen to the cement trade dynamic in the region? Some suggest that the easing of sanctions can only increase the potential for Iranian cement imports in the region. Trade should become easier, facilitating exports.

Indeed, this is a factor, but it is only part of the equation. Instead, it is likely that, having earned foreign exchange via increased oil sales, Iran will be able to spend more at home. Reuters anticipates that demand for steel and cement will skyrocket as the country undertakes much-needed construction and infrastructure works. This situation would be similar to Saudi Arabia and other Gulf Cooperation Council (GCC) states. How Saudi Arabia reacts to this, both politically and in terms of cement trade, will be of high interest in the region and around the world.

Instead of increasing cement exports, the effect of the lifting of sanctions may decrease them. This will surely be welcome news to local producers currently being undercut in East Africa, as well as exporters in Pakistan, India and elsewhere. Could Pakistan even find itself exporting to Iran? If a US-Iran nuclear deal is possible, anything can happen...

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.

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

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!