Displaying items by tag: CRH

Yesterday, on 14 April 2020, the International Monetary Fund (IMF) forecast a 3% gross domestic product (GDP) growth contraction in 2020 due to negative economic effects from the coronavirus outbreak and its containment. Most regions around the world may experience negative growth in 2020 with exceptions only in so-called Emerging and Developing Asia and Low-income Developing Countries. This is just one projection among many coming out at the moment but the prognosis is downward. This begs the questions: how will cement companies cope?

Markets for building materials are not going to disappear in these conditions but demand looks likely to be reduced. Added to this, an industry that’s been facing increasing production overcapacity over the years may be challenged by additional competition effects. Here we will look at the debt profile of some of the major multinational cement producers outside of China. Please note that this is a cursory examination of corporate debt that only looks at simple financial indicators. Company financial officers want to present themselves in best possible light and will have alternatives that point to their strengths. For a detailed view we refer readers to the credit rating agencies and the companies’ published financial information directly.

Graph 1: Net debt and EBITDA for selected multinational cement companies in 2019. Source: Company financial reports and investor presentations. Note, Conversion for reporting currencies to US$, HeidelbergCement uses Result from Current Operations Before Depreciation and Amortisation (RCOBD) and UltraTech Cement results from 2018 – 2019 financial year.

Graph 1 presents a comparison between net debt and earnings before interest, taxation, depreciation and amortisation (EBITDA) in real terms. The bigger the gap between debt and earnings then the more one starts to wonder how it can be repaid. One feature to note in this graph is the size of the debt of the three largest producers – LafargeHolcim, HeidelbergCement and Cemex – despite the fact that the companies are of different sizes. Cemex’s high debt to earnings ratio has been much commented on previously following its acquisition of Rinker just before the financial crash in 2007 and 2008. Unfortunately though, despite strenuous mitigation efforts, it remains prominent. Other positions to note are those of Buzzi Unicem and Dangote Cement, which have higher earnings than debts. These are envious positions to be in.

Graph 2: Net debt/EBITDA and EBITDA Margin for selected multinational cement companies in 2019. Source and notes as in Graph 1.

Graph 2 shows the ratio of net debt and EBITDA and the EBITDA Margin, a company’s earnings divided by its revenue. This graph better shows the relationship between debt and earnings. This can be seen well in a comparison between LafargeHolcim and HeidelbergCement. The latter has higher debts with respect to its earnings. Its debt jumped in 2016 following its acquisition of Italcementi. LafargeHolcim’s debts ballooned followed its formation by merger in 2015 but this was in line with the jump in its equity. Where it struggled was with slow earnings in the years afterwards. However, bold divestments in South-East Asia in 2018 and 2019 appear to have fixed this.

Other companies to watch in the higher Net debt/EBITDA category include India’s UltraTech Cement and both of the large Brazilian multinationals, Votorantim and InterCement. In recent years UltraTech Cement has been busy buying up other cement producers in India. The difference between the Brazilian companies may reflect the fallout from their fight to buy Cimpor back in 2012. InterCement and its parent company Camargo Corrêa won the battle to acquire the Portuguese company but Votorantim was given selected international assets outside of Brazil. Unfortunately, the Brazilian market then collapsed and Camargo Corrêa has reportedly been trying to sell some or all of its cement assets ever since.

The other financial indicator in Graph 2 is EBITDA margin or earnings/operating profit as a percentage of revenue. Higher is generally seen as better here in comparison to other companies in the same sector. Note how LafargeHolcim is ahead of HeidelbergCement and Cemex, possibly due to its cost cutting and synergies since the merger. InterCement also has a relatively high EBITDA margin, boosted by a pickup by the Brazilian economy in 2019. Again, Buzzi Unicem and Dangote Cement stand out. Both of these are public companies but are associated with family or individual ownership, although in very different markets. Neither has really indulged in any large-scale acquisitions in recent years. Dangote Cement has been steadily expanding but through building its own plants and distribution networks.

We’ve not mentioned CRH as its figures seem ‘average’ compared to the other cement producers discussed here. Average is of course relative for one of the world’s biggest building materials manufacturers with a net of debt of US$7.4bn in 2019! Yet, despite battles with activist investors over board member pay aside, CRH might be the rare producer that knows when to stop expanding. Notably in 2018 after an expansion phase, including acquisitions of Ash Grove Cement and LafargeHolcim assets previously, it publicly decided in 2018 to take a pause. There may be weaknesses in the company’s balance sheets yet to be revealed but they are not apparent using these metrics.

In summary, we’ve focused on corporate acquisitions here as the main source of debt in cement producers. This is simplistic but timing is everything when taking on a large amount of debt. Cemex is still carrying the scars from buying Rinker over a decade ago and InterCement and HeidelbergCement, to a lesser extent, are ones to watch through the next bad patch. Other things to consider are a general move to a more regional model for these producers away from a global one. UltraTech Cement’s focus on the Indian sub-continent or Dangote Cement’s work in Africa are examples of this. This approach could go wrong if the sole regions they operate in suffer disproportionately from the economic fallout from coronavirus. Or, if any producer, even one with high debts, has the good fortune to be present in a territory that suffers less from the downturn it may benefit. On a final note, it is worth mentioning that government data reports that China’s domestic cement production capacity utilisation in the two-week period ending on 10 April 2020 bounced back to 95% following the relaxation of the lockdown.

Ireland: The Irish Times newspaper has reported examples of shareholder advisory companies expressing concern about the scale of CRH chief executive officer (CEO) Alfred Manifold’s pay package in the face of mounting financial pressure due to the coronavirus pandemic. Glass Lewis has said in a report that it remains ‘particularly concerned’ about the size of Manifold’s pension benefits, while Institutional Shareholder Services has expressed similar reservations about his remuneration. Manifold had a total reported pay, performance and long term incentive package totalling Euro9.3m in 2019.

Institutional Shareholder Services previously recommended that investors vote against an executive pay rise at CRH in 2018. The multinational building materials company plans to hold its annual general meeting on 23 April 2020.

Building materials companies around the world are expected to face financial pressure as construction markets suffer due to national and regional lockdown measures in response to the coronavirus epidemic.

US: Oldcastle APG, a subsidiary of CRH, has acquired dry mix manufacturer US MIX. The purchase adds to APG's dry mix manufacturing footprint and expands its network of facilities to the Denver, Colorado market. In addition, the acquisition provides APG with materials science expertise and adds another brand, US SPEC, to its existing dry mix product portfolio of Sakrete and Amerimix. No value for the acquisition has been disclosed.

US MIX primarily operates out of a manufacturing facility in Denver, with a secondary specialty bagging location in Fontana, California. Founded in 1968, US MIX has been privately owned by the Peterson family for over 50 years. Its products include bagged concretes, mortars and specialty cement mixes, in addition to liquid repair products.

US MIX currently operates as a Sakrete and Amerimix licensee and offers a variety of specialty products under the well-known US SPEC brand. US SPEC products are professionally engineered concrete and masonry repair products used in a variety of applications, formulated and tested in laboratory conditions under ASTM testing methods and specifications.

Ireland: CRH recorded sales of Euro28.3bn in 2019, up by 6% year-on-year from Euro26.7bn in 2018. Earnings before interest, taxation, depreciation and amortisation (EBITDA) rose by 25% year-on-year to Euro4.20bn from Euro3.36bn. The company said that the results were supported by a positive demand backdrop in the Americas and in key regions in Europe. It also set out a new CO₂ emissions roadmap with target of 520kg/t of cement by 2030, a 33% reduction compared to 1990 levels.

Australia: National press in Australia has reported that the Irish building materials giant CRH has approached Boral regarding a possible takeover. CRH snapped up US$6.5bn of assets from Lafarge and Holcim in 2015 following their merger to become LafargeHolcim, and it consequently became the third-largest building materials supplier by market value internationally.

The speculation comes amid market expectations that Boral could be broken up if a takeover does not unfold soon. Suitors have looked at Boral before but a deal has never eventuated. The company’s market value is US$3.9bn, so it could be within the grasp of a cash-rich strategic player or private equity firm from overseas. Three years ago Boral was worth more than US$4.8bn.

Meanwhile, Australia's devastating recent bushfires have affected Boral’s Berrima plant in New South Wales, likely leading to lower production and margins. This was due to extended leave for staff and road closures.

UK: Tarmac has marked the UK’s national squirrel day (21 January 2020) by renewing its commitment to conservation at one of England’s rare red squirrel habitats: its Harden quarry in Northumberland. Harden quarry manager Gareth Williams said, “The team has set up a feeding station and has been working to monitor the number of visitors.”

Two Tarmac employees are trained squirrel wardens and are responsible for keeping track of the resident red population.

Brazil: Ireland-based CRH has engaged the US-based bank Citigroup to seek buyers for its Brazilian business, which consists of the integrated 0.7Mt/yr Arcos plant and 0.6Mt/yr Cantaglo plant and the 1.0Mt/yr Santa Luzia grinding plant, according to the Brazilian Valor newspaper. CRH acquired the assets from Holcim and Lafarge at the time of the merger of the Swiss and French companies.

It’s the end of the year so it’s time to look at trends in the sector news over the last 12 months. It’s also the end of a decade, so for a wider perspective check out the feature in the December 2019 issue of Global Cement Magazine. The map of shifting production capacity and the table of falling CO₂ emissions per tonne are awesome and inspiring in their own way. They also point towards the successes and dangers facing the industry in the next decade.

Back on 2019 here are some of the main themes of the year in the industry news. This is a selective list but if we missed anything crucial let us know.

European multinationals retreat

LafargeHolcim left the Philippines, Malaysia and Indonesia, HeidelbergCement sold up in Ukraine and reduced its stake in Morocco and CRH is reportedly making plans to leave the Philippines and India, if local media speculation can be believed. To be fair to HeidelbergCement it has also instigated some key acquisitions here and there, but there definitely has been a feel of the multinationals cutting their losses in certain places and retreating that bit closer to their heartlands.

CRH’s chief executive officer Albert Manifold summed it up an earnings meeting when he said, “…you're faced with a capital allocation decision of investing in Europe or North America where you've got stability, certainty, overlap, capability, versus going for something a bit more exotic. The returns you need to generate to justify that higher level of risk are extraordinary and we just don't see it.”

The battle for the European Green Deal

One battle that’s happening right now is the lobbying behind the scenes for so-called energy-intensive industries in Europe as part of the forthcoming European Green Deal. The cement industry is very aware that it is walking a tightrope on this one. The European Union (EU) Emissions Trading Scheme (ETS) CO₂ price started to bite in 2019, hitting a high of Euro28/t in August 2019 and plant closures have been blamed on it. The rhetoric from Ursula von der Leyen, the new president of the European Commission, has been bullish on climate legislation and the agitation of Greta Thunberg internationally and groups like Extinction Rebellion has kept the issue in the press. Cembureau, the European Cement Association, is keen to promote the industry’s sustainability credentials but it is concerned that aspects of the proposed deal will create ‘uncertainty and risks.’ Get it wrong and problems like the incoming ban on refuse-derived fuel (RDF) imports into the Netherlands may proliferate. What the Green Deal ends up as could influence the European cement industry for decades.

The managed march of China

Last’s week article on a price spike in Henan province illustrated the tension in China between markets and government intervention. It looks like this was driven by an increase in infrastructure spending with cement sales starting to rise. Cement production growth has also picked up in most provinces in the first three quarters of 2019. This follows a slow fall in cement sales over the last five years as state measures such as consolidation and peak shifting have been implemented. The government dominates the Chinese market and this extends west, as waste importers have previously found out to their cost.

Meanwhile, the Chinese industry has continued to grow internationally. Rather than buying existing assets it has tended to build its own plants, often in joint ventures with junior local partners. LafargeHolcim may have left Indonesia in 2018 but perhaps the real story was Anhui Conch's becoming the country's third biggest producer by local capacity. Coupled with the Chinese dominance in the supplier market this has meant that most new plant projects around the world are either being built by a Chinese company or supplied by one.

India consolidates but watches dust levels

Consolidation has been the continued theme in the world's second largest cement industry, with the auction for Emami Cement and UltraTech Cement’s acquisition of Century Textiles and Industries. Notably, UltraTech Cement has decided to focus its attention on only India despite the overseas assets it acquired previously. Growth in cement sales in the second half of 2019 has slowed and capacity utilisation rates remain low. Indian press reports that CRH is considering selling up. Together with the country's low per capita cement consumption this suggests a continued trend for consolidation for the time being.

Environmental regulations may also play a part in rationalising the local industry, as has already happened in China. The Indian government considered banning petcoke imports in 2018 in an attempt to decrease air pollution. Later, in mid-2019, a pilot emissions trading scheme (ETS) for particulate matter (PM) was launched in Surat, Gujarat. At the same time the state pollution boards have been getting tough with producers for breaching their limits.

Steady growth in the US

The US market has been a dependable one over the last year, generally propping up the balance sheets of the multinational producers. Cement shipments grew in the first eight months of the year with increases reported in the North-Eastern and Southern regions. Imports also mounted as the US-China trade war benefitted Turkey and Mexico at the expense of China. Alongside this a modest trade in cement plants has been going on with upgrades also underway. Ed Sullivan at the Portland Cement Association forecasts slowing growth in the early 2020s but he doesn’t think a recession is coming anytime soon.

Mixed picture in Latin America

There have been winners and losers south of the Rio Grande in 2019. Mexico was struggling with lower government infrastructure spending hitting cement sales volumes in the first half of the year although US threats to block exports haven’t come to pass so far. Far to the south Argentina’s economy has been holding the cement industry back leading to a 7% fall in cement sales in the first 11 months of the year. Both of these countries’ travails pale in comparison to Venezuela’s estimated capacity utilisation of just 12.5%. There have been bright spots in the region though with Brazil’s gradual return to growth in 2019. The November 2019 figures suggest sales growth of just under 4% for the year. Peru, meanwhile, continues to shine with continued production and sales growth.

North and south divide in Africa and the Middle East

The divide between the Middle East and North African (MENA) and Sub-Saharan regions has grown starker as more MENA countries have become cement exporters, particularly in North Africa. The economy in Turkey has held back the industry there and the sector has pivoted to exports, Egypt remains beset by overcapacity and Saudi Arabian producers have continued to renew their clinker export licences.

South of the Sahara key countries, including Nigeria, Kenya and South Africa, have suffered from poor sales due to a variety of reasons, including competition and the local economies. Other countries with smaller cement industries have continued to propose and build new plants as the race to reduce the price of cement in the interior drives change.

Changes in shipping regulations

One of the warning signs that flashed up at the CemProspects conference this year was the uncertainty surrounding the new International Maritime Organistaion (IMO) 2020 environmental regulations for shipping. A meeting of commodity traders for fuels for the cement industry would be expected to be wary of this kind of thing. Their job is to minimise the risk of fluctuating fuel prices for their employers after all. Yet, given that the global cement industry produces too much cement, this has implications for the clinker and cement traders too. This could potentially affect the price of fuels, input materials and clinker if shipping patterns change. Ultimately, IMO 2020 comes down to enforcement but already ship operators have to decide whether and when to act.

Do androids dream of working in cement plants?

There’s a been a steady drip of digitisation stories in the sector news this year, from LafargeHolcim’s Industry 4.0 plan to Cemex’s various initiatives and more. At present the question appears to be: how far can Industry 4.0 / internet of things style developments go in a heavy industrial setting like cement? Will it just manage discrete parts of the process such as logistics and mills or could it end up controlling larger parts of the process? Work by companies like Petuum show that autonomous plant operation is happening but it’s still very uncertain whether the machines will replace us all in the 2020s.

On that cheery note - enjoy the winter break if you have one.

Global Cement Weekly will return on 8 January 2020

India: Ireland’s CRH is planning to sell its 50% stake in My Home Industries, according to sources quoted by investor information services group VCCircle. It is reportedly in talks to sell the stake to My Home Group, the company that owns the other half of the subsidiary. My Home Industries operates two integrated plants and two grinding plants with a production capacity of 10Mt/yr. It also runs two ready-mixed concrete plants.

In November 2019 CRH was reported to be looking to sell its assets in the Philippines. At the time of its second quarter results in 2019 chief executive officer (CEO) Albert Manifold described emerging markets as a small part of the group’s business with, “too much disruption, too much dislocation, too much uncertainty.” He added that the company’s focus was on its developed market businesses.

US: Ireland’s CRH’s subsidiary Ash Grove Cement has engaged the education technology services provider Zovio Employer Services for the development of its higher education opportunities programme in partnership with Ashford University. “This provides employees with access to education to gain the right skill-set to advance into management positions. We also see the programme as a tool to attract new talent,” said Darcy Pugh, Ash Grove Cement Employment and Compensation Manager. Ash Grove plans to offer a tuition assistance benefit to 3000 employees for bachelor’s or master’s degrees at Ashford University. The university will also provide some full tuition grants.