Analysis

Industrial energy consumers in Romania have succeeded in extracting concessions from the government's green certificates scheme this week. Cement producers, including Lafarge, Holcim and local HeidelbergCement subsidiary CarpatCement Holding, will benefit now from a 10-year facility to acquire the certificates and they will be allowed to buy up to 85% fewer certificates than at present.

The Romanian government reckons the change will save industry Euro750m. It will be good news for the cement producers and aluminium producer Alro Slatina, one of the chief lobbyists for the change which paid Euro39m for the certificates in 2013, reported losses of Euro17m and threatened production closures.

The debacle strikes a chord with other government-led attempts to nudge society towards lower-carbon emitting energy sources. First a national or international scheme offers economic incentives toward some sort of carbon reduction. Then major industrial users either complain that the system 'unfairly' penalises them or they find a way to play the system. The latest example of the adjustments in Romania is an example of the former, as is the current Australian government's intention to remove its carbon tax. Multinational companies surrendering carbon offsets into the European Union's (EU) emissions trading scheme (ETS) is an example of the latter.

In defence of government-industry negotiation, the EU ETS is now in its third phase of trying to make the scheme work as the EU tries to reach its target of a 20% cut in emissions compared to 1990 levels by 2020. In late 2013 environmental group Sandbag accused the target of containing a loophole that allows for a much smaller cut in emissions due to a slack in carbon budgets, of potentially 2% of 1990 levels. However, the EU confirmed in early June 2014 that it is on track to beat its target and cut down total emissions by 24.5% by 2020.

Alongside all of this arguing, overall energy costs have steadily risen over the last decade, as have the rates of co-processing at European cement plants. As a secondary major fuels consumer, behind energy generation and transportation, the cement industry is particularly susceptible to energy prices being jolted around behind various market trends, such as increases in natural gas supply in the US market. In effect the cement industry hops between different 'next best' options, after the leading energy consumers have taken the premium fuels. The interplay between legislators and heavy industry over carbon taxes prompts the following question: what encourages cement producers more to move to reduce their carbon emissions – legislation or fuel prices?

In other news this week, the chief executive of African producer Bamburi Cement, Hussein Mansi, has announced his plans to move on to Lafarge Egypt. In his memo to staff he mentioned, '...five very interesting years leading the Kenya – Uganda business.' Telling words perhaps given the Kenyan government's attention on Bamburi Cement and the East Africa Portland Cement Company, a producer minority-owned by Lafarge. Of course Mansi may discover that 'interesting' is relative in Egypt, a country on the other side of the energy subsidy spectrum to Europe and its carbon taxes.

The creation of Lafarge Africa, the clearance of the Cemex West acquisition by Holcim in Germany and the sale of Lafarge's assets in Ecuador all hint at the scale of business that LafargeHolcim will command when it comes into existence. Despite the media saturation of coverage on the merger the implications in developing markets are still worthwhile exploring, especially in Latin American and Africa.

In sub-Saharan Africa, Lafarge is merging its cement companies in Nigeria and South Africa to create Lafarge Africa. Analysts Exotix have described the move as, 'the birth of a leading player on a continental scale'. Indeed, if Lafarge wanted to grow Lafarge Africa to encompass its many other African cement producing subsidiaries it could hold at least 17 integrated cement plants (including plants in north Africa) with a cement production capacity of at least 40Mt/yr in 10 countries and infrastructure in others. That puts it head-to-head with Dangote's plans to meet 40Mt/yr by the end of 2014 through its many expansion projects. Following these two market leaders would come South African-based cement producer PPC with its expansion plans around the continent.

Meanwhile across the Atlantic in Latin America the Lafarge-Holcim merger threatens Cemex. Unlike in Africa where Lafarge has a ubiquitous but disparate presence, Lafarge and Holcim's cement assets are more evenly scattered around the Caribbean, Central and South America. In terms of cement production capacity Cemex and Lafarge-Holcim will both have around 30Mt/yr, with Cemex just in front. The next biggest cement producers in Latin America will be Votorantim (present mainly in Brazil) with just over 20Mt/yr and Cementos Argos (Columbia) with about the same. This includes some new acquisitions in the United States for the growing Columbian producer. In Ecuador Lafarge and Holcim held over 50% of the market share, hence the sale by Lafarge of its assets to Union Andina de Cementos for US$553m.

Depending on how well the merger integrates the two companies, corals the various subsidiaries and implements strategic thinking the merger could just create business as usual with little disruption to the existing order. Yet in both continents the merger has the opportunity to shake up and reinvigorate the cement markets as existing players suddenly discover serious new competition and react accordingly.

Africa has a population of 1.1bn and it had a Gross Domestic Product (GDP) of US$2320/capita in 2013. South America had a population of 359m in 2010 and a GDP of US$8929/capita. This compares to US$27,250/capita in Europe and US$54,152/capita in the US. The economic development potential for each continent is humongous. Post-merger, LafargeHolcim will be first or second in line for some of this potential in Latin America and Africa.

The Brazilian cement industry took a knock last week when the competition watchdog Cade (Administrative Council for Economic Defence) confirmed its intention to issue the sector with fines worth a combined US$1.4bn.

Under the terms of the ruling, Votorantim will have to pay US$672m, Cimpor will pay US$133m, InterCement Brasil will pay US$108m, Itabira will pay US$184m, Holcim will pay US$227m and Itambé will have to pay US$39.4m. The companies involved will be forced on average to sell 24% of their assets. Votorantim, for example, will be compelled to divest 35% of its cement assets or 11Mt/yr of production capacity. In addition a fine of nearly US$2m is to be imposed on the cement associations ABCP and SNIC.

To give these figures some context, Votorantim reported a net profit of US$105m in 2013 across all its business lines including cement, metals, mining and pulp. The fine Cade wants to impose is over six times greater than this! A fine of this size will be a serious setback for Votorantim if it goes through. Votorantim's net revenue for its cement business in 2013 was about US$5.5bn. This places the fine at just over 10% of company annual turnover, a common upper limit for fines imposed by anti-competition authorities around the world. 10% of turnover, for example, is the maximum percentage fine that European Union competition regulators can impose.

Although hard to compare with the other Brazilian cement producers due to differences in financial reporting, the proposed fines seem equally tough on the other companies. Before the acquisition of Cimpor inflated its financial figures, InterCement reported a net revenue of US$1.2bn in 2011. This places its fine at 9% of annual turnover. Holcim's net sales in its Latin American region as a whole, including operations in Brazil, totalled US$3.73bn in 2013.

Both Holcim and Cimpor have issued corporate rebuttals to Cade insisting that they followed and still follow all the necessary competition laws. Both companies intend to fight the decision. Votorantim went further in its response saying that it considering the fine 'unjust and unprecedented' and it warned that the ruling would cripple any investments in the Brazilian cement sector. The ruling also forbids the company from opening new factories within the next five years, places limits on the company taking out new loans and prevents it from consolidating its market share.

Internationally, the Cade fine surpasses the US$1.1bn Competition Commission of India penalty imposed against 11 producers in India in 2013. Other recent anti-trust fines against the cement industry include a Euro80m fine in Poland that was upheld on appeal in 2013 and the US$19.3m Lafarge was charged in South Africa in 2012.

The prosecutors pointed out that work on public roads had been inflated by nearly US$8m. Overall they reckon that the cartel cost the Brazilian economy US$6.3bn. Examples likes this are unlikely to gain sympathy for the accused cement producers from a Brazilian public already angry about the amount of public money spent on building excessive sports stadiums and the like for the Football World Cup later in June 2014 and the Olympic Games in 2016. In the meantime though – over to the lawyers.

One of the ideas aired by several speakers at last week's 6th Brazilian Cement Congress was that using cement as a construction material is inherently a sustainable option.

The reasons for this included the durability of cement's construction products and the role cement plays in improving the living standards of a country. For example, under the onslaught of extreme weather like hurricanes, concrete structures are more likely to remain standing. Or, for a country like Brazil with sections of society living in long-term 'temporary' buildings in its favelas or shanty towns, providing affordable cement to help the country build better housing for its inhabitants is the only sustainable future that could be considered.

Perhaps in line with this concept of cement-as-sustainable-construction-material we see Semen Indonesia this week announcing expansion plans in three countries in South and Southeast Asia.

In West Sumatra a Semen Indonesia subsidiary has started building a 3Mt/yr cement plant in Padang. Then in Bangladesh Semen Indonesia revealed its intention to buy a 1Mt/yr plant. Finally, the state-owned Indonesian cement producer said that its Semen Gresik subsidiary was planning to build a new cement plant in Central Java at Rembang in June 2014. From previous press releases we can see that both new plants are FLSmidth builds. Both orders were announced in early 2014. Each has a capacity of 8000t/day.

The plans to expand outside of Indonesia echo reports that Semen Indonesia was set to buy a minority share in a Myanmar cement producer. Although the producer was unnamed as of early May 2014, Semen Indonesia CEO Dwi Soetjipto valued the stake at US$30m and the producer's production capacity at 1.5Mt/yr in comments to the Jakarta Globe.

Altogether the two new plants in Indonesia will place Semen Indonesia's total cement production capacity at 40Mt/yr by 2017 according to company figures. This would be enough to place the company within the top 20 of the world's largest cement producers by production capacity following the research from Global Cement's 'Top 75 global cement companies'.

In a nice coincidence, the company with a production capacity of 40Mt/yr on that list was Eurocement. Last week the Russian cement producer announced that it had signed contracts worth Euro387m with Chinese companies - including Sinoma, CNB, Sinomach and CAMC Engineering Co - to add 17Mt/yr cement production capacity across six plants in Russia. Another six or seven more construction agreements for cement plants are also expected to be signed in the coming months.

Certainly for the countries Semen Indonesia is focusing on – Indonesia, Bangladesh and Myanmar, with low gross domestic product per capita – providing the raw material for stronger and more durable buildings covers some of the sustainability bases. Yet if all these new plants only use fossil fuels and are subject to few environmental restrictions then that undermines some of this. However, whether all this expansion is sustainable or not, the cement industry never remains stationary.

Following the Standards Industry of Nigeria's (SON) decision earlier this week to ban 32.5 grade cement for all applications except for plastering, the country's cement industry is likely to be faced with some difficult decisions. The new rules state that 42.5 grade cement must be used for casting of columns, beams, slabs and for moulding blocks, while 52.5 grade cement is now mandatory for building bridges. As a developing country, Nigeria is home to a large number of construction and infrastructure projects. To ensure safety this means that the construction industry must be well-regulated.

Arguments against the use of low quality cement in Nigeria have been long drawn out as low quality cement has been blamed for a spate of building collapses, resulting in the deaths of 297 people in 1974 – 2010.

In support of the country's cement producers, SON's director general Joseph Ikem Odumodu was eager to point out that low quality cement is not to blame for Nigeria's building collapses. He said that cement grades 32.5, 42.5 and 52.5 are designed for different applications, which are not being adhered to by builders. While 42.5 grade cement is the minimum suitable grade for multi-story building construction like residential homes, 32.5 grade cement is frequently used instead as it is cheaper and more readily available.

Dangote Cement is currently the only company producing 52.5 grade cement in the country, which it sells at the same price as its 42.5 grade cement. The new SON decision is therefore expected to be good news for Dangote, potentially increasing sales volumes and improving the company's reputation.

With regards to the rest of Nigeria's cement producers, unless they are able to convert their production process for 42.5 and 52.5 grade cement extremely rapidly, Nigeria's cement imports and prices for domestic 42.5 and 52.5 grade cements are likely to increase, in contrast to recent trends. The new regulations, which SON has said will be strictly enforced, provide an excellent opportunity for market share expansion to those cement producers that respond rapidly. It might also be considered the ideal moment for companies to begin exploring brand identities and marketing campaigns. Lookout for our new report on cement branding in a future issue of Global Cement Magazine.