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Sandbag, a climate policy think tank, published its report on the European cement sector entitled ‘Cement - The Final Carbon Fatcat’ last week on 16 March 2016. Amongst its findings the report accused the European Union (EU) Emissions Trading Scheme (ETS) of pushing up emissions created by the cement industry. Unsurprisingly, Cembureau, the European Cement Association, took exception to some of the content of the report and issued a rebuttal. Notably, it said that ‘allegations that the ETS has incentivised overproduction are based on thin air.’

Here we present a section of the executive summary of Sandbag’s report that describes the current situation with the EU ETS and how Sandbag argue this has distorted the European cement industry.

The depressed carbon price under the EU ETS has done little to effect a reduction in emissions from the European cement sector. A surplus of more than 2bn EU allowances (EUAs) has built up in the European carbon market since 2008 with no expectations for the situation to change significantly over the medium term. Industry sources cite that the costs of upgrades to best available technology are tantamount to greenfield investments. The current low carbon price alone is not enough to render such investments economic, especially in the context of a depressed cement market. This applies even more so in the case of capturing and storing/using direct emissions (CCUS) which at this stage seems to be an expensive technology merely in the development stages across Europe.

Figure 1: Expected development of allowance surpluses for major industrial sectors until the end of Phase 3. Source: EUTL (Sandbag calculations).

The rules governing free allocation of allowances have failed to incentivise abatement in the cement sector. In particular, the sector’s inclusion on the list of sectors exposed to the risk of carbon leakage, as well as insensitivity to production changes, will cause its over-allocation to balloon. As we reveal in Figure 1, if activity levels continue at 2014 levels, by 2020 this surplus will be larger than 2.5 years’ worth of emissions. This is more than would be the case for almost any of the other major industrial sectors, practically all of whom expect to lose all or most of their earlier surpluses by the end of this decade.

The chronic oversupply of EUAs to the cement sector is partly due to the fact that cement firms are able to optimise their production of different products across different facilities to maximise their free allocation. Free allocation to cement installations is based on benchmarks relating only to the manufacture of clinker, an intermediate product. Many firms have been able to retain maximum free allocation, corresponding to peak production, by keeping a range of their facilities operating at just above 50% of their historic activity levels – the level required to retain 100% free allocation.

Figure 2: EU net clinker trade. Source: UN COMTRADE (Sandbag calculations).

This free allocation loophole has resulted in both windfall profits and a de facto production subsidy for highly carbon-intensive clinker. This clinker is then either blended in higher than necessary shares into cement or, as we show in Figure 2, actually exported, as EU cement subsidised by free allowances has a competitive advantage compared to manufacturers outside the ETS. This creates a net import of emissions to the EU – the complete reverse of the carbon leakage threat that many industry groups have emphasised. As we show in Figure 3, this stimulation of clinker exports to countries outside the EU has been the single most damaging factor to the decarbonisation of this sector, pushing 2013 emissions nearly 15Mt higher than they could have been.

Figure 3: Different factors’ contribution to cutting the cement sector’s emissions EU-wide during 2005 - 2013. Source: Cement Sustainability Initiative ‘Getting the Numbers Right’ database (Sandbag calculations).

As well as causing a surge in emissions, the insufficiently responsive free allocation rules leave cement companies strongly over-allocated. Table 2 shows the surpluses we estimate that the five cement majors have accumulated (or monetised) since the beginning of Phase 2.

Table 2: Largest cement companies’ surpluses and emissions (millions of EUAs, euros and tonnes). Source: EUTL (Sandbag calculations).

These five companies from the cement sector have collectively received nearly Euro1bn worth of spare EU allowances (EUAs) for free between 2008 and 2014. As the number of free allowances available to all industry is fixed, over-allocation to cement companies reduces the allowances available to other sectors that might really need protection.

The ETS therefore provides few incentives for these firms to invest in decarbonisation technologies. Given widespread expectations for an over-supplied carbon market well in to the 2020s and, consequently, a low carbon price, the opportunity cost of holding onto allowances is negligible when compared to the high cost of investment in abatement technologies.

Thanks to Alex Luta and Wilf Lytton at Sandbag for letting Global Cement publish this extract of their report. The full version of ‘Cement - The Final Carbon Fatcat: How Europe’s cement sector benefits and the climate suffers from emissions trading flaws’ is available to download from Sanbag’s website.

Ireland: CRH appointed William J Teuber, Jr as a non-executive Director with effect from 3 March 2016.

Teuber, aged 64 years and a US citizen, is the Vice Chairman at EMC Corporation, a global leader in enabling businesses and service providers to transform their operations and deliver IT as a service. In previous roles he was responsible for EMC’s global sales and distribution organisation (2006 – 2012) and served as Chief Financial Officer leading the company’s worldwide finance operation (1996 - 2006). Prior to joining EMC he was a partner in the audit and financial advisory services practice of Coopers & Lybrand.

Teuber is a member of the Board of Directors of Popular, a diversified financial services company, and Inovalon Holdings, a healthcare technology company. He holds an MBA degree from Babson College, a Master of Science in Taxation from Bentley College, and a Bachelors Degree from Holy Cross.

Tajikistan: The Huaxin Gayur – Sughdcement 1Mt/yr cement plant in northern Tajikistan has been commissioned. The plant was built by the Tajik Ghayur-Sughd Cement company in partnership with the Chinese Huaxin Gayur Cement company. President Emomali Rahmon was present at the event.

Construction of the plant started in 2014 on the area of 48 hectares and it had an investment of US$127m. The plant employs more than 1300 people with over 90% from Tajikistan. A 25MW hydropower plant was also built to provide the plant with a regular electricity supply.

Cambodia: The Chip Mong Insee Cement (CMIC) company has started building a US$262m cement plant in Kampot province. The plant will have a cement production capacity of 1.5Mt/yr when completed in 2018. CMIC is a joint venture, formed in 2012, between Chip Mong Group and Thailand’s Siam City Cement, according to Cambodia Daily.

“Kampot is an ideal location for cement factories because of access to the necessary limestone raw material and logistics,” said Nhan Ken, general sales and marketing manager at the Chip Mong Group. He added that the new plant will face competition from other local cement producers in Kampot including Kampot Cement, co-owned by the local Khaou Chuly Group and Bangkok-based Siam Cement, and the Chinese-funded Cambodia Cement Chakrey Ting Factory.

Bahrain: The Abu Dhabi Financial Group (ADFG) has signed a sale agreement with GFH Financial Group to buy a 10% stake in the Falcon Cement Company, according to Gulf News.

“With Falcon Cement’s strong market position and potential for future growth following the completion of a second production line later in 2016, the company represents an attractive investment opportunity for ADFG,” said Jassim Al Seddiqi, chief executive officer of ADFG.

Falcon Cement has a cement production capacity of 0.35Mt/yr. Production capacity is expected to increase to 0.85Mt/yr when the second production line launches at the end of 2016.

Austria: A TEC will install a Rocket Mill at a treatment plant of A.S.A. in Wiener Neustadt to produce refuse-derived fuel (RDF). The 7 – 9t/hour plant will be taken into operation in August 2016. RDF will be supplied from the plant to the cement industry with an output size of up to 15mm.

The Rocket Mill will be mainly produced at A TEC’s production site in Eberstein. It will have a 2 x 315kW drive unit and a rotor speed of c580rpm. A TEC Group focused on the optimisation and efficiency improvement of cement plants.

Germany: HeidelbergCement has issued a Eurobond with a value of Euro1bn and a maturity date of 30 March 2023. The international bond has a fixed coupon of 2.25%/yr.

The proceeds from the bond will be used to pre-fund the upcoming Italcementi acquisition and other general corporate purposes. Subsequently, the bridge financing for the takeover will be reduced from Euro2.7bn to Euro2bn. The bridge financing will be refinanced by free cash flow, the sale of production sites and the issuance of bonds.

South Korea: Eugene Group intends to increase its stake in Tongyang up to 25%. The South Korean conglomerate has expressed its interest in leading Tongyang, including its cement subsidiary, according to Maeil Business.

“Tongyang has tens of thousands of shareholders without a significant major shareholder after its workout program,” said Chung Jin-hak, head in charge of construction materials unit of Eugene Group. “As of late last year, among 34,000 shareholders, only four companies including Eugene Group and Pine Tree Investment and Management own more than 1% stake each.”

Tongyang’s largest shareholder Eugene Group holds a 10.01% stake in the company, followed by the 9.74% owned by Pine Tree Investment and Management. Eugene Group plans to buy shares through all possible measures such as purchasing shares directly from major shareholders, in a block trade or in the market. Eugene Group has highlighted potential synergies between its own concrete business and Tongyang.

Rwanda: PPC says its 600,000t/yr Cimerwa cement plant in Bugarama, Rusizi will reach full production by mid-2018. The greenfield plant is part of its strategy to make 40% of its turnover from outside of South Africa by 2018, according to Business Daily. At present the plant is running at about 60% of its production capacity.

Cimerwa sales volumes have exceeded 100,000t from commissioning to February 2016. Further sales, marketing, and distribution efforts are expected to improve this. The plant sells cement domestically in Kigali and it exports to the Democratic Republic of Congo and Burundi.

PPC is growing cement production capacity in Africa with plants being built in the DRC, Ethiopia and Zimbabwe. Capacity is expected to reach 12.7Mt/yr in 2018 from 8.6Mt/yr in 2015.

Malawi: Malawi has relaxed its ban on importing cement, to prevent local consumers being exploited. The price of cement in the southern region where cement is produced locally is higher than the central region where cement is imported from Zambia. The Ministry of Trade and Industry has issued licenses to some importers to enhance competition on the market, according to All Africa.

"The ministry will always commit itself to fight smuggling and give strong support to all stakeholders such as Malawi Revenue Authority and the Malawi Police Service in this fight," said Ministry of Industry and Trade spokesperson, Wiskes Mkombezi. The ministry is encouraging importers to pay import duty and has asked the public to help combat smugglers. The country introduced licenses for cement importers in early 2000 to regulate the local market and promote the local industry.