Analysis

Last week Lafarge received a US$20m slap-in-the-face for cartel-like activity in South Africa. The case, which has been running since 2008, has investigated dealings at Lafarge, Pretoria Portland Cement, AfriSam and Natal Portland Cement-Cimpor. Yet the question remains: are cartels ever a good thing for the industry?

Back in December 2011 we covered the Common Price Agreement (CPA) in an article on cement price trends in the UK in Global Cement Magazine. This legally-approved cartel, operated by the UK Cement Makers' Federation, ran from 1934 until 1987. It was dissolved to allow UK producers to compete with cheaper foreign imports. Its supporters argued that it kept prices down in remote areas and stabilised the industry, a situation that cement buyers faced with escalating prices in Tanzania and Saudi Arabia might sympathise with this week. Despite this, prices in the UK fell after the CPA ended in 1987.

An uncited 'fact' on Wikipedia – itself a virtual monopoly on online knowledge – suggests that the median price increase achieved by cartels over the last 200 years could be 25%. Lafarge's fine represented 6% of its 2010 annual turnover in the region. Depending on how Lafarge's sales relate to its turnover this raises the possibility that even with its hefty fine Lafarge may still be in profit over the venture.

Cartels dog the cement industry given the prevalence of small groups of sellers in many markets. Throw in the current economic pressures in regions with over-capacity and the temptation must be irresistible. When one makes a link from this week's story from Pakistan about over-capacity to January's headline of 'inexplicably high' prices, the feeling occurs that Lafarge's chastening in South Africa is just the tip of the iceberg.

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Lafarge UK has scored a notable success recently at its Cookstown Works reaching 10 years without a lost-time injury (LTI). It has emerged that this is the longest a Lafarge Group plant anywhere in the world has gone without a LTI. Cookstown also set the record the previous year in 2011, showing how far ahead it is of the rest of the group.

LTIs are generally defined as any work related injury or illness which prevents a worker from doing any work the day after the accident. Another similar measure is Lost Time Injury Frequency Rate (LTIFR), which takes into account hours worked by staff.

For example, in April 2011 Global Cement Magazine interviewed the safety manager at the Ste. Genevieve plant in Missouri, USA. He revealed a rate of zero lost-time incidents rate over the last 1.2 million-man hours and no LTIs over the last 700 days. Through construction the plant employed 2300 personnel and then 200 operational employees when it went live. By comparison Cookstown employs only 80 workers. Its LTIFR will be much lower.

The Mineral Products Association recorded a 81% reduction in LTIs between 2004 and 2009 for the UK cement industry. It has since set itself the further target to halve the LTIFR between 2009 and 2014. As of 2009 the UK LTIFR for direct employees was 3.59 per million hours worked. The MPAs target LTIFR for 2014 is 1.79 or lower.

Regardless of how you present the figures the Cookstown Plant LTI achievement is impressive. The challenge, as ever, lies in bettering it.

A US environmental pressure group is reportedly claiming that Ash Grove has started the process to close two of its wet kilns in Midlothian, Texas. Ash Grove has retorted that the decision is not final yet.

The move fits with a new emissions timetable imposed by the Environmental Protection Agency (EPA) due to come into effect in 2013. Yet Ash Grove's response also suggests that it is keeping an eye on the impending Cement Sector Relief Act. Approved by the US House of Representatives in October 2011 with strong Republican support, if this bill makes it to law then the EPA will be forced to recind some of its existing rules concerning emissions from cement plants. This situation could help Ash Grove to manage its kiln investment. Either way, it's no wonder that Ash Grove hasn't committed yet.

All this democratic uncertainty contrasts rather nicely with the last missive from the Chinese Ministry of Information and Technology announcing more cement industry targets as part of the latest Five-year Plan. China's cement industry will source 65% of its electrical needs from waste materials by 2015. Simple! China is currently dealing with wet kilns in a similar fashion. They are being 'eliminated.'

Before we become too fixated on supposed Western decline, our third kiln-related story this week follows a test run at the Lafarge-Strabag plant in Hungary. Billed as one of the most environmentally friendly plants in Europe, the 1Mt/yr facility is due to be finished by 2015. Just in time for China's next Five-Year Plan.

Lafarge's annual report summed up the European malaise this week: too much debt; too little growth.

The world's biggest cement company posted a Euro3m loss for the fourth quarter of 2011 compared to a Euro62m profit for the same quarter in 2010. Overall for the full year in 2011 its income fell by 28%. Yet all of this occurred in the same year that the group sold the bulk of its gypsum assets for over a quarter of a billion Euros! All of which went into the group's debt reduction of Euro2bn.

Compare this to 2010 when Lafarge recorded a 12% increase in net profit for the year and the group was expecting an increase in cement demand of 6%. Chief Executive Bruno Lafont's words were, "The steps we have taken in 2010, ranging from structural cost savings to strategic investments in growing markets such as Brazil will provide the foundation for further improvement and growth as we enter 2011."

6% growth did happen in 2011 but only in the emerging markets in the Middle East and Africa, Central and Eastern Europe, Latin America and Asia. Overall sales growth remained at 3%, dragged down by sales decreases in North America and western Europe. Understandably Lafarge's outlook for 2012 remains muted.

All this gloom was compounded by the UK Competition Commission raising its concerns about the joint-venture between Anglo-American and Lafarge. With Lafarge expecting 'higher pricing' for 2012 any move with even a whiff of anti-competitive behaviour will draw in the watchdogs. With western European sales down by 2% in 2011 the challenge remains for the group, and for all cement producers, to somehow find profit once more in the mature markets.

It's official: Dangote Cement intends to build the 'biggest cement plant in the world' at Obajana, Nigeria by 2014! What exactly does this mean?

The news emerged at the opening of the company's new Ibese plant on Thursday 9 February 2012. Itself no minnow, the Ibese plant has a capacity of 6Mt/yr, boosting Dangote's production by 40% in Nigeria. Yet within the next two years Dangote plans to increase Obajana's capacity from 10Mt/yr to 15Mt/yr, making it the largest by installed capacity, according to company chairman Aliko Dangote.

Unfortunately Obajana's mighty ambition to meet 15Mt/yr looks miniscule compared to the total capacity of Anhui Conch Cement in China with its gargantuan 70Mt/yr from 36 dry kilns. Flicking through the Global Cement Directory 2012 reveals at least five plants with capacities over 15Mt/yr in Japan and China. Dangote likely meant 'capacity per kiln' but the comment reveals the variety of ways that scale in a cement plant can be determined.

Regardless, there is no question that Dangote's cement is needed. In January 2012 Global Cement Weekly reported Nigerian price rises of 25%. Around the same time of the Ibese opening Nigeria's National Bureau of Statistics reported that 60.9% of Nigerians in 2010 were living in 'absolute poverty', a rise from 54.7% in 2004. From national infrastructure improvements to jobs (as mentioned in our other Dangote news story this week from Zambia) 6Mt/yr of extra cement is sure to be welcome, especially if the extra capacity brings prices down to affordable levels.