Analysis

As 2012 draws to a close the challenges posed by the Australian carbon tax to the Australian cement industry are starting to show. First, Holcim Australia announced it was to lay off 150 staff. Then Boral released the news that it was planning to cut 90 jobs at its Waurn Ponds cement plant.

Following years of debate the Gillard government introduced the Clean Energy Act in July 2012. Heavy polluters were initially charged US$23/t of CO₂ emitted, more than twice the cost of similar schemes in Europe where it is US$10/t. A key criticism of the scheme was that it would damage the Australian domestic cement industry with cheap imports. However the Australian government cushioned the move with compensation packages for major polluters, including cement producers, currently set to last five years.

Although the Australian cement industry hasn't totally collapsed, with the loss of 1800 jobs as the Australian Federal Opposition warned of in 2011, imports have been favoured in recent months. Boral's suspension of clinker production at Waurn Ponds will increase imports. The change will result in 25-30% of Boral's clinker being imported. It's worth noting that Boral pointed out in its press release that this was 'in-line' with the Australian industry.

Adelaide Brighton, the country's third biggest producer after Holcim and Boral, may not have laid anybody off but it has secured a 10-year supply of foreign clinker. On 5 December 2012 the building materials producer announced that it was going to a buy a 30% stake in Malaysian white clinker and white cement producer, Aalborg Portland Malaysia. In the accompanying press statement the company's chief financial officer explicitly blamed the carbon tax as one of the reasons for the acquisition.

Whether the job losses at Boral and Holcim can be totally blamed on the carbon tax remains to be seen. Boral's second-half profit for the year ending 30 June 2012 suffered a fall of 59% to US$35.7m. Holcim noted weaker demand outside of mining regions for the third quarter of 2012. By contrast, Adelaide Brighton reported steady gains in its half-year report for 2012 although cement sales only increased 'marginally'. Elsewhere in its report Adelaide Brighton stated that it would cope with the impact of the carbon tax by reducing reliance on domestic manufacturing. These can hardly be comforting words for the Australian cement industry.

Step forward UltraTech Cement into the vertical rumour mill! The Indian cement producer is the latest company reported as wanting to buy Jaypee Group's cement business in Gujarat. It follows Italcementi, Aditya Birla and CRH, who announced in October 2012 that negotiations had been 'terminated' as the parties had been unable to agree terms.

This time the asking price has risen, with Ultratech allegedly offering US$160-165/t and Jaypee holding out for US$180-185/t. Whilst UltraTech hasn't publicly confirmed the move, it pointedly hasn't denied it either. The Aditya Birla Group subsidiary only commented to the Bombay Stock Exchange that it had not issued any press releases on the subject. Aditya Birla Group itself was reported in October 2012 as pursing interest at US$130/t for Jaypee's 9.8Mt/yr operations in Gujarat and Andhra Pradesh.

Given the number of rumours and cash-rich CRH's very public failure to strike a deal it seems likely that Jaypee has a specific price in mind and it's sticking to it. Prasad Baji of Edelweiss Securities stated in a television interview with CNBC-TV18 that he thought that the cement industry cycle was starting to look up. Crucially he predicted that India's capacity utilisation was set to rise from its current level of 78% to 82% despite price declines in the current quarter.

This is in sharp contrast with Fitch Ratings which rated the Indian cement industry with a negative outlook at the start of 2012 and reports in late May 2012 that capacity ultilisation had actually fallen from 76% to 71%. Since then ICRA Research reported in late September 2012 that it expected Indian capacity ultilisation to stick to 76% for 2012 with prices showing 'resistance' in some regions to cost increases due to rising input costs.

With all this in mind it seems likely that UltraTech will join the growing list of Jaypee's spurned buyers when it fails to reach terms or when the rumours simply fizzle out. However if UltraTech does strike a deal the Indian industry will be the one to watch in 2013. According to data in the Global Cement Directory 2013, an acquisition of nearly 10Mt/yr production capacity would boost UltraTech's capacity to 62Mt/yr making it the 12th largest cement company in the world.

The outgoing chief executive of PPC (Portland Pretoria Cement) officer, Paul Stuiver, summed up the dilemma facing cement producers on the east coast of Africa. Building near the coast leaves you vulnerable to imports.

In a recent interview with the South African business weekly, 'Financial Mail', Stuiver said that imports are not a threat to African expansion, provided that a facility is not built within 200km of a port. Exactly the same issue was raised by Yves De Moor in his column in the November 2012 issue of Global Cement Magazine.

Countries along Africa's east coast receive imports, but Stuiver said that Africa's high logistics costs mean the prices increase steeply as the cement is transported inland. He commented that the markets in Mozambique and KwaZulu Natal in South Africa were especially vulnerable and that most imports to South Africa come through Durban. Unsurprisingly both of PPC's big recent investments have been in landlocked countries, Zimbabwe and Ethiopia respectively. In July 2012 it also tried to invest in CINAT, the Democratic Republic of Congo's state-owned cement producer.

The import issue to South Africa reignited last week when the South African National Regulator for Compulsory Specifications (NRCS) confirmed that it had confiscated 'sub-standard' cement imported from Vietnam. As we covered in August 2012 in this column this follows a row in July 2012 about whether cement from Pakistan's Lucky Cement was complying with South African standards.

Although standards still lead the argument, more honesty has emerged with the use of the word 'dumping' in the complaints. Stuiver explained that "...the price of cement from Pakistan, India and Vietnam is low because electricity, fuel and transport rates are subsidised." Whilst PPC can report that its revenue has risen by 9% to US$837m for the first nine months of 2012, complaints against foreign imports seem overly protective. In 2009 PPC confirmed the existence of a cartel in the country. PPC has even gone to the Advertising Standards Authority to stop imports with elephants on their bags!

With reports that Nigerian producer Dangote is building a new US$389m plant in South Africa, thoughts turn to what will happen once South Africa becomes 'self-sufficient' in cement, like Nigeria which has proudly announced this recently. Giant infrastructure projects are one way to use all that excess cement and this is what Lafarge WAPCO has been asking the Nigerian government to do recently, in a road building drive. Better transport links in South Africa would wreck Stuiver's maxim about not building near a port.

Two solutions from this week's news might appeal to the industry on the south and east coasts of Africa. The first is to use inventive export barriers just like the Bureau of Indian Standards have imposed to slow down exports from Pakistan. The second is to persuade importers to do what a North Korean ship reportedly did with its consignment of cement this week off the coast of Somalia: dump it in the sea.

Back in May 2012 we asked who would buy Lafarge's Hope cement plant in Derbyshire. The answer was, of course, a company with an Indian background: Mittal Investments.

The sale was a condition of the UK Competition Commission in response to the proposed joint venture between Lafarge and Tarmac. It also included 172 ready mix concrete plants, five aggregates quarries, two asphalt plants, one marine aggregates wharf, one rail-linked aggregates depot and the sale of Tarmac's 50% ownership interest in Midland Quarry Products. Mittal has paid Euro339m for the assets, including up to Euro37m dependent on the performance of the assets over the next three years.

At the time we predicted that it might be a company from a fast growth area, with excess cash and a desire for technical knowledge, perhaps from China or the Middle East. Far more fitting for the UK, however, was a company with Indian roots, especially considering the cultural links between the two countries dating back to the colonial era.

Originally from India but based in London, owner Lakshmi Mittal runs steel multinational ArcelorMittal and he frequently tops UK rich lists. The Mittal family even own shares in Premier League football team Queens Park Rangers. The sale follows acquisitions of well-known British brands such as car manufacturers Jaguar Land Rover and British Steel/Corus to the Tata Group.

The sale to Mittal leaves the UK cement market with four companies. Mittal's new plant in the UK joins Lafarge's four plants, Cemex's two plants, Hanson Cement's three plants and Tarmac Buxton, Lime & Cement's single plant, which is soon to join with Lafarge's plants in the joint-venture. Geographically the sale to Mittal breaks up a concentration of three Lafarge and Tarmac plants in Derbyshire in the southern Pennines. Presumably this was the aim of the Competition Commission in the first place.

Selling the Hope plant makes sense for Lafarge and Tarmac. The sale leaves Lafarge's generous spread of plants across the UK in key locations except the south of England. The combined cement production capacity of Lafarge and Tarmac will fall from 4.35Mt/yr to 3.85Mt/yr. The reduction may actually help Lafarge, given its 9% fall in cement sales volumes so far in 2012 and the pessimistic outlook for the UK cement sector in 2013. The reduction in capacity manages this decline closely at 11%.

The UK cement industry has likely become more competitive with the range between the production capacities of the four companies reduced. However the price Lafarge and Tarmac have paid the Competition Commission for their joint venture was almost certainly worth it. Lafarge-Tarmac retains Lafarge's dominant position in a streamlined shape now matching the market reality.

Update: This article was corrected on 27 November 2012. The UK temporarily has five cement producers until the Lafarge-Tarmac joint venture gains approval from the UK Competition Commission. Then it will return to four.

The results are in from the European cement majors and the news from the Mediterranean producers is grim. A common phrase found in most of these financial reports was the 'challenging economic environment' in western Europe. Here's what this means.

In Spain, Cemex saw its net sales in its Mediterranean region (consisting mainly of Spain) slump by 17% to Euro1.10bn. Cementos Portland Valderrivas (CPV) posted a loss of Euro83m for the first nine months of 2012, almost 10 times the loss for the same period in 2011. In July 2012 the Spanish cement association Oficement noted that demand had fallen by 60% year-on-year.

In Italy, Italcementi reported a 92% crash in net profit, to Euro17.1m, for the first nine months of 2012, and a drop in revenue of 4%, to Euro3.39bn, for the first nine months of 2012. Buzzi Unicem reported a 21% decline in sales volumes of cement and clinker, and a drop in sales of 15% to Euro430m. Vicat reported that Italian sales across all its business lines were down by 9% for the year.

By contrast, beleaguered Greek producer Titan has finally started to show a (slight) increase in its revenue. It has been able to report a second consecutive quarter where turnover has risen year-on-year. Although Titan's net profit for the same period still plummeted by 96% to Euro2m.

Elsewhere progress of a kind is being made despite the ongoing European slump, mainly due to profitable assets held outside of western Europe.

Lafarge reported that its overall sales were up by 4% to Euro4.39bn in 2012 so far. Yet its income has fallen by 44% to Euro332m and its profits are suffering from its restructuring programme. In western Europe Lafarge noted that cement volumes were down by 11% to 12.5Mt so far in 2012 and that sales were down by 9% to Euro2.43bn.

Holcim reported a 5% increase in overall net sales and a 7% increase in operating profits to Euro1.57bn. In western Europe Holcim's sales volumes were down by 4.6% (like-for-like) to 20.1Mt and sales were down by 6% to Euro3.68bn.

HeidelbergCement reported a 2.5% increase in overall sales but pre-tax profits have fallen by 5% to Euro601m. HeidelbergCement's revenue from its cement business in western and northern Europe was down by 5% to Euro1.3bn. Buzzi Unicem reported overall flat sales at Euro2.15bn but net profit rose by 50% to Euro85m. Despite this Buzzi Unicem reported a drop of 8.5% in Germany.

Vicat reported little change in sales at Euro1.73bn for the year so far. Vicat's financial reporting made it hard to tell how much was lost in Europe but French cement sales were noted as being down by 12%. Cemex's sales volumes were down by 13% in northern Europe, with net sales down by 15% to Euro3.09bn. Italcementi's cement sales volumes in central and western Europe fell by 16.8% to 12.2Mt.

Of the major producers only Lafarge failed to state the obvious in its outlook about western Europe: that sales will continue to decline in 2012 and 2013. If Titan has set the bar for how much more pain the other European producers have yet to face then conditions are likely to get worse. Get ready for even more 'challenges' in 2013.