Analysis

It's been an expensive few weeks for Holcim. First, the Venuezuelan state-run outfit Corporación Socialista Del Cemento failed to pay its last instalment of US$97.5m in compensation for its forced nationalisation in 2008. Then the European Court of Justice dismissed Holcim's lawsuit against the European Commission over the theft of 1.6 million emissions allowances in 2010. Here we concentrate on the second story.

Holcim Romania's CO2 accounts held within the Romanian National Registry for Greenhouse Gases were illegally accessed by hackers in November 2010. 1,000,000 CO2 allowances were transferred to an account in Liechtenstein. Another 600,000 CO2 allowances were transferred to a company in Italy, which had account registries in Italy and the UK. Parts were then transferred to accounts in the Czech Republic, the UK and France before being sold on to emissions exchanges in Paris and Amsterdam.

Holcim then tried to sue the Commission, which administers the bloc's electronic emissions trading network, in 2012 for failing to freeze the accounts containing the stolen units, for not returning them and for allowing other companies to turn them in for compliance under the EU Emissions Trading System (ETS). The multinational building materials producer tried to force the commission to pay it Euro17.6m for damages associated with the theft. The amount was equivalent to the 905,000 allowances that remain unaccounted for at a spot price of Euro14.6/unit and an interest rate of 8%.

Other registries were also targeted in early 2011. As much as Euro30m in carbon allowances were stolen at the time, leading to exchanges having to stop trading temporarily.

Although this is a relatively small amount for a multinational company that reported net sales of over Euro16bn in 2013, it feels harsh. If a personal investor had assets stolen from a bank or investment scheme they would expect some sort of compensation.

It should be noted though that it is unclear how the hackers gained entry to Holcim's account details. Successful 'phishing' for account logins via fake emails and the like might suggest lax security on Holcim's side. Or a more conventional hack on the registry server might suggest loose security on the registry's side. Add to this the fact that the price of carbon allowances has fallen since 2010. Reuters estimated that the outstanding allowances would be worth Euro5.1m today.

Hopefully the thefts in late 2010 and early 2011 can be marked down as teething problems. Yet the European Union Emission Trading Scheme is compulsory for 11,000 power stations and manufacturing plants. Any European company that may be less keen on the scheme is unlikely to have its fears settled by high profile cases of carbon credit thefts or the current low price of trading.

Meanwhile, companies and investors involved with China's Guangdong Province carbon emission trading scheme, the world's second biggest such scheme after Europe, may well be watching what happens in Europe closely.

Energy costs for cement producers in India are set for volatility following the Supreme Court's decision this week to cancel the vast majority of allocated coal blocks. After ruling that the allocation process by the Indian government was illegal and arbitrary the court stopped 214 out of 218 coal blocks. The affected operators working on the blocks have six months until 31 March 2015 to wind down production. At this point the government intends to auction off the blocks.

The background to this decision lies in the so-called coal allocation scam or 'Coalgate.' Over 80% of coal in India is produced by the state owned company Coal India. Since 1993 though the Indian government has been allocating coal blocks or leases to mine coal for captive use by industries such as cement, steel and power generation.

However, the allocation process was accused of lacking transparency compared to an open bidding process. The Comptroller and Auditor General of India estimated the loss to the government was an incredible US$30bn. The allocation process received further scrutiny as Indian coal imports rose leading to accusations of inefficiency on the Coal India side and corruption on the coal block side. Meanwhile, major power cuts such as those in the summer of 2012 focused both domestic and industrial users' minds on the state of the country's coal industry.

Following the power cuts in 2012, an inter-ministerial panel recommended the de-allocation of two coal blocks held by five companies, including Gujarat Ambuja Cement, Grasim Industries and Lafarge India.

India's coal imports started to increase rapidly around 2009 with an annual growth rate of around 5% and a demand growth of 25% from 2009 – 2014. The majority of its imported coal comes from Indonesia, Australia and South Africa. In 2012 its coal imports were over 150Mt.

With Indian cement producers facing production overcapacity and falling profit margins in recent years, any disruption to input costs such as power is bad news. The growing import rates point to an increasing supply-demand mismatch. A more open process for the allocation of India's vast coal reserves should be good news for industrial users in the medium to long term. However, in the meantime they may face a jolt.

A significant amount of recent news has come from the fallout from the proposed LafargeHolcim merger. Lafarge and Holcim, as well as a raft of global cement producers, are stepping up activity and those outside the deal are starting to jostle for position. They will want to take advantage of the many opportunities to snap something up from the long list of assets to be sold.

First up, Turkey's Sabançi Holding has been reported to be investigating the LafargeHolcim divestments, although the actual targets were not reported. There are none on offer in Turkey itself but potential Sabançi interests could lie in nearby Romania, Serbia or Hungary. Of course, it isn't possible to rule out any wider ambitions.

Next we have Elementia, which has acquired Lafarge's former stake in their Mexican joint venture, prior to the announcement of its initial public offering there. In Singapore, CVC Partners and the Government entered discussions over the purchase of assets. It was earlier agreed by the Singaporean competition authorities that Lafarge and Holcim would be able to merge due to them being relatively small players in that market.

Meanwhile, in the UK and the US, HeidelbergCement is positioning itself via share deals in its subsidiary Hanson Building Products so that it may bid for the LafargeHolcim divestments in the US and UK. Hanson Building Products has filed for an Initial Public Offering in the US in preparation for HeidelbergCement to sell it later in the year. This sounds like a case of HeidelbergCement focusing on its core markets of cement.

There have also been moves by Lafarge and Holcim, most notably their approach this week to the European Union (EU) prior to the merger. The multinationals plan to iron out possible EU concerns over the merged company's market power before filing for approval of the deal, the step that starts an EU review.

Activity seems to be hotting up ahead of the LafargeHolcim merge and it will only intensify. It will be interesting to see which other multinational and regional players decide to 'show their hand' through the rest of the merger process. There are many more assets in Austria, France, Germany, the UK, Canada, Mauritius, the Philippines and Brazil to be divided up before the LafargeHolcim merger can be completed.

Tomorrow (18 September 2014) the residents of Scotland, one of the UK's four 'home nations', will vote in a referendum. The question will be whether or not the country should leave the UK and become fully independent. Rival 'Yes' and 'No' campaigns have spent the best part of two years trying to convince the electorate of the benefits of either leaving or staying in the UK.

Leaving the political discussion to one side, where would a 'Yes' vote leave the Scottish cement industry? The only cement plant in Scotland is the 1Mt/yr Lafarge Tarmac plant at Dunbar, East Lothian, so on the face of it, Scotland's cement industry would be 100% owned by one operator. At this stage, however, it is (hopefully) fair to assume that relations between Scotland and the rest of the UK should be cordial enough to allow normal supply chains and contracts to continue over the border. Lafarge Tarmac, or any future operator, should expect business as (mostly) usual.

However, there are potential issues when it comes to the ongoing UK Competition Commission's (CC) investigation into competition in the UK cement and blast furnace slag markets. The removal of Dunbar from the list of UK cement assets is small but significant. Would the CC come to the same conclusion regardless of the outcome of the Scottish vote? And (how) would any decisions filter into the EU-wide investigations into the LafargeHolcim merger disposals?

Part of the discussion around Scottish independence has been the suggestion that Welsh nationalists might ask for a similar referendum in the event of a Scottish 'Yes.' In our cement plant thought experiment, this has much more of an effect on the current UK situation, with two Welsh plants at Mold, Flintshire and Aberthaw, Roose, which is also a Lafarge Tarmac plant. This would really re-shape the former UK's cement industry and pose new questions for regulators. Elsewhere, Northern Ireland's only cement plant is also a Lafarge Tarmac facility.

Also, a 'Yes' for Scotland has the potential to reverberate around the rest of the European Union (EU). Catalonia, the autonomous region in Spain, has a long-standing and separate identity to the rest of Spain. By contrast to Scotland, its cement industry is massive, with Ciment Català listing eight plants across four operators. If it left Spain, there would be 30 plants in the country instead of 38.

More provocatively, Belgium is a country that, while at the centre of Europe, is often divided at home. French-speaking Wallonia has all five of Belgium's cement plants, but separation between this region and the Dutch-speaking Flemish region would require a number of unlikely changes.

Elsewhere, there are calls to separate the north of Italy from the south, although cement plants are roughly in proportion throughout the country. In France, Brittany also has its fair share of nationalist sentiment. However, any moves here would not trouble the French operators - there are no cement plants in Brittany. Normandy is in the same situation, although a Breton would probably claim that Normandy is 'just part of France.'

The above is only a scratch on the surface. A quick internet search for 'separatist movements in Europe' leads to a large number of hits. The most illustrative of the links is this map: http://en.wikipedia.org/wiki/List_of_active_separatist_movements_in_Europe#mediaviewer/File:Active_separatist_movements_in_the_European_Union.png
It appears that many EU residents would like the map of Europe redrawn.

Looking outside of the EU, the cement industry of Texas has the largest cement industry of all US states. With huge oil reserves, a large and growing population and fast development, Texas' cement industry would thrive in the event of its secession. Discussion of this was particularly strong following the re-election of President Barack Obama in 2012.

Of course, much of the above is hypothetical... or is it? Just two year's ago nobody was talking about Scottish independence. We will find out tomorrow if Europe will get a new (Scottish) cement industry.

There were two telling stories from Vietnam this week that show the level to which demand has been overestimated in the centrally-planned cement sector. Firstly, the country reported that exports in the period between January and July 2014 increased by nearly a quarter year-on-year to 13.1Mt. Secondly, the Prime Minister announced that another five cement plant projects were to be axed, following nine others that bit the dust in 2013.

All this is against a backdrop of chronic lower-than-expected domestic cement demand. When we look at the figures, it’s not hard to see that domestic consumers have had trouble consuming all the cement produced in Vietnam. The government forecast for cement production in 2015 is in the region of 75 - 76Mt. If this was spread evenly between Vietnam’s 88.8m people, each person would have to consume ~850kg of cement. That’s possible but it is quite a lot for a lower middle income economy. However, separate reports state that a 10% rise in domestic sales on 2013 levels would lead to just 60Mt of domestic cement sales in 2015. This equates to a more realistic 675kg/capita.

These figures leave a massive and increasing amount of cement for export. Read again that figure from the first seven months of 2014 – 13.1Mt – Roughly the capacity of South Africa (~12.5Mt/yr), Tunisia (12.9Mt/yr) of Colombia (12.9Mt/yr)! Also, while cement exports volumes were up by nearly a quarter, the value of those same exports rose by only 20%. This indicates a drop in export prices and represents additional pressure to halt capacity expansion.

Against a backdrop of 90Mt/yr expected capacity in 2015 and falling export prices, the latest cement project cull certainly makes sense but even in a best-case scenario the country is looking at a capacity utilisation rate of just 66 - 67%. Some cement plant project owners have even found themselves trapped by the situation. Having indebted themselves on the promise of ever-increasing cement demand, they now face the prospect of throwing good money after bad, continuing to build and operate just to service debts. This is a very unenviable position indeed. The lifting of trade restrictions within the ASEAN Community on 1 January 2015 might help export volumes, but might also also drive prices down further.

Culling new cement plant projects is one thing, but could the next step be more drastic? North of the border, China is gradually reducing its overcapacity by removing older and less efficient capacity. Perhaps Vietnam would do well to follow suit.