Analysis

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.

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.

Encouraging news from Egypt with the announcement that Lafarge Ecocem has taken on two refuse-derived fuels (RDF) contracts in Suez and Qalyubeya. The RDF plants will have production capacities of 42,000t/yr and 280,000t/yr respectively, after upgrades are built.

The move follows a deal Lafarge struck with Orascom in March 2015 to develop a waste management framework of municipal and agricultural waste. The plan is to achieve an average fuel substitution rate of 25% by the end of 2015. Around the same time Ecocem also signed a cooperation agreement with the German Development Cooperation (GIZ) and the Qalyubeya Governorate to upgrade a recycling plant in Qalyubeya to produce RDF. Part of the deal was intended to reinvest some of the revenue from RDF sales back into the region's waste collection infrastructure.

These production levels compare to SITA UK's new RDF plants in the UK, which has a more mature RDF market. There, the newly opened Malpass Farm plant is planned to produce 200,000t/yr and the Tilbury plant will have an output capacity of 500,000t/yr when it opens. However, the Malpass Farm plant mainly feeds one cement plant, the 1.3Mt/yr Cemex Rugby plant with a mean substitution rate of 61% in 2013. By contrast, Lafarge Cement Egypt runs the massive 10.6Mt/yr El Sokhna plant.

Co-processing at El Sokhna by Lafarge is of particular interest given the links with Egypt's unofficial household waste collectors, the Zabbaleen. Lafarge Egypt recruited and trained 140 Zabbaleen to gather waste material for RDF production. The strategy enabled Lafarge to gather continuous supplies of RDF and strengthen local stakeholder relations, as Lafarge's 2013 sustainability report puts it. Lafarge Egypt's substitution rate was 2.2% in 2012 with significant improvements made since then. The current target of 25% for the end of 2015 shows how much progress Lafarge has made.

Hisham Sherif of the Egyptian Company for Solid Waste Recycling (Ecaru) placed Egypt's municipal solid waste level at 20Mt/yr at a presentation given at the Global CemFuels Conference earlier in 2015. From this 4Mt/yr of RDF could be produced. Together with biomass derived fuel (BDF) Sherif reckoned that the country's cement plants could reach substitution rates of 30 – 40%. Problems though with increasing RDF rates in Egypt include legal complexities, institutional issues, poor services and monitoring and centralised planning with little regard for the country's unofficial waste pickers, such as the Zabaleen.

Lafarge Ecocem appears to be tackling each of these problems in turn as the deals with Orascom and the Qalyubeya Governorate show. However, spare a thought for Egypt's unofficial waste sector workers who are likely to lose their livelihoods as waste management becomes more formalised and personnel rates per tonne of waste collected tumble.

For more information on the Zabaleen, check out the documentary made about them in 2009, called 'Garbage Dreams'.

There was a lot of news out of Lafarge and Holcim this week regarding preparations towards their merger. Just this morning we heard that the partners have entered into a binding agreement with Ireland's CRH regarding the sale of the assets that must be divested. Meanwhile, Lafarge and Holcim have also completed the appointments for the future LafargeHolcim executive committee. Its nine members will be responsible for such tasks as finance, integration, performance and costs, growth and innovation, as well as regional activities in Europe, Asia Pacific, the Middle East and Africa, North America and Latin America.

However, it was other types of personnel that featured in Lafarge and Holcim's earlier press releases. On 19 May 2015 Lafarge came out and announced the first (pre-merger) job losses that will result from the merger. It will cut 380 positions in central and regional corporate roles, with 166 going in its native France. For its part Holcim will make 120 pre-merger job losses, all in Switzerland. Ignoring the clear discrepancy in scale between the different sides, Lafarge and Holcim will have lost at least 500 jobs out of their combined ~130,000. This is just a scratch on the surface, but it does raise an interesting question: How many more jobs will go at LafargeHolcim?

First up are the staff that will go to work for CRH. This probably represents the largest number of staff that will come of LafargeHolcim's books relative to Lafarge and Holcim's current staff levels. According to their 2014 Annual Reports, Lafarge and Holcim employ a combined 81,000 staff in cement roles. Given that they have a combined 425Mt/yr of cement capacity (give or take) this equates to around 190 staff for each 1Mt/yr of capacity.

As the new LafargeHolcim will have control over around 340Mt/yr of cement capacity, we can crudely scale the 190 staff up to 64,600 cement sector staff. This indicates that around 16,400 staff that are currently employed by Lafarge and Holcim will be 'off' to CRH (and others). This leaves 48,100 staff in non-cement roles at LafargeHolcim.

Will more jobs be lost post-merger? Lafarge and Holcim have stated that the new entity will have 115,000 staff. However, with around 42% of future employees employed in non-cement roles - compared to 41% and 34% for Lafarge and Holcim respectively in 2014 - it certainly seems that there could be scope for at least some reduction in overall numbers from LafargeHolcim's non-cement functions. Future job losses could therefore be a possibility, but the exact scale of future consolidations and 'synergies' (if any) will only become apparent post-merger. Maybe LafargeHolcim could end up with around 105,000 to 110,000 staff.

A key time may well be early 2016, when LafargeHolcim will launch a new 'corporate structure.' This term was also used by Lafarge and Holcim in their most recent releases, so further job losses could be on the cards.

One member of LafargeHolcim staff with nothing to worry about now will be Bruno Lafont, current CEO of Lafarge. He received a Euro2.5m bonus this week for his 'key role' in conducting the merger. How LafargeHolcim staff who could be nervous about their jobs will take this remains to be seen.

The Lafarge-Holcim Report from Global Cement is available to order now