Displaying items by tag: Intercement

Argentina: Loma Negra’s sales of cement, masonry and lime fell by 26% year-on-year to 1.13Mt in first quarter of 2020. The decline was driven by the coronavirus lockdown in Argentina, where the subsidiary of Brazil’s InterCement has most of its sales. Concrete and aggregate sales volumes declined also. The company’s new revenue dropped by 29.6% to US$115m and its adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) fell by 17.9% to US$38.6m. However, the company’s accountant adjustment for use in so-called ‘hyperinflationary economies’ made a negative impact on these figures. With this adjustment removed both revenue and earnings reportedly rose in the first quarter.

“By the end of the first quarter the coronavirus broke out, bringing additional challenges to the already adverse background,” said Sergio Faifman, Loma Negra’s chief executive officer (CEO). He added that cement demand in Argentina nationally contracted by around 29% year-on-year in the first quarter of 2020.

The cement producer temporarily suspended its production facilities and its L´Amalí Expansion project in late March 2020 due to the government lockdown. Production and dispatches of cement were restarted in early April 2020 following the implementation of new sanitation protocols. The company has now resumed working on its upgrade project at L´Amalí.

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.

Argentina: Loma Negra plans to restart cement production at its plants depending on local demand. It is currently supplying public infrastructure projects from existing stocks, according to Infoeme. The subsidiary of Brazil’s InterCement stopped production following a national quarantine due to the coronavirus outbreak in late March 2020. However, the building materials producer has been included by the government on a list of essential activities so it can resume operation when it wants.

There have been rumours in the press this week that LafargeHolcim is weighing up its options in South Africa. Reports in the local press allege that the building materials company has tasked Credit Suisse Group with finding a buyer for its business. This may or may not be true, only time will tell, but South Africa certainly feels like a market where LafargeHolcim should be considering its future.

As a prominent but smaller producer in the country, Lafarge South Africa is behind PPC and AfriSam in terms of clinker production capacity. InterCement’s subsidiary Natal Portland Cement and Dangote’s subsidiary Sephaku Cement have a similar production base with an integrated plant each and one or two grinding plants. Halfway through 2019 LafargeHolcim was describing market conditions as ‘difficult’ in the country with it being the sole Sub-Saharan market holding back regional growth for the group. By the third quarter the situation had reportedly improved but net sales and cement sales volumes were flat for the year to date. A clearer picture should emerge when LafargeHolcim publishes its fourth quarter results at the end of February 2020.

PPC provided its view of the market in its half-year results to 30 September 2019. Its estimate was that the South African cement industry declined by 10 - 15% for the period, creating a competitive environment. It added that the situation had been, ‘exacerbated by imports and blender activity.’ Both its revenue and earnings fell year-on-year, although a 30% rise in fuel costs didn’t help either. Sephaku Cement suffered a similar time of it, with a 19% fall in cement sales volumes during the first half, although it reported improvement in the subsequent quarter. Overall, it blamed falling infrastructure investment for pressurising the market and allowing blending activity to mount. Sephaku Cement was also wary of the local carbon tax that started in June 2019 warning of a potential US$2.8m/yr bill.

PPC noted that cement imports had risen by 5% to 0.85Mt in the year to August 2019. This followed a lobbying effort by The Concrete Institute (TCI) in mid-2019 to implore the International Trade Administration Commission (ITAC) to look into rising imports levels. At the time the TCI’s managing director Brian Perrie expressed incomprehension that a country with six different cement production companies with an over-capacity rate of 30% could be facing this problem. This latest broadside tails South Africa’s previous attempt to fend off imports when it instituted anti-dumping duties of 17 – 70% against importers from Pakistan in 2015. Imports duly fell in 2016 but rose again in 2017 and 2018, mainly from Vietnam and China.

All of this sounds familiar following LafargeHolcim’s departure from the ‘hyper-competitive’ South-East Asian countries in 2019. Those countries also suffered from competition and raging imports. Bloomberg pointed out in a report on the local industry in 2016 that PPC’s, AfriSam’s and LafargeHolcim’s kilns had an average age of 32 years, suggesting that efficiency and maintenance were going to be concerns in the future. Also of note is LargeHolcim’s decision to move its South African operations from one subsidiary, Lafarge Africa, to another, Caricement, in mid-2019.

Some level of market consolidation would certainly help local overcapacity. Plus, surely, LafargeHolcim’s mix of inland integrated capacity and a grinding plant near the coast could prove enticing to some of the Asian companies pumping out all of those imports. The thought on the minds of potential buyers everywhere must be, if LafargeHolcim chief Jan Jenisch was bold enough to sell up in South-East Asia, how can he not in South Africa?!”

Paraguay: Cement has been entering Paraguay at a rate of 6000t per month, up by 400% from 1000t per month upon the removal of restrictions on 19 November 2019, as importers move to fill the supply gap created by falling domestic production. ABC has reported that the construction sector requires 0.1m bag/day of cement, of which the state-owned Industria Nacional del Cemento (INC) is currently providing 20,000 and Intercement 30,000. ABC has named neighbouring Argentina as a source of Paraguay’s incoming cement.

Paraguay: Paraguay’s main cement producer, state-owned Industria Nacional del Cemento (INC), has ‘significantly’ slowed production at its 1.0Mt/yr integrated Puerto Vallemi plant to a rate of 12,000 bags/day, creating a supply gap that imports and Intercement’s 0.4Mt/yr integrated Asunción plant have been unable to fill. Esmerk Latin American News has reported that the shortage has precipitated a 33% price rise in the cost of a bag of cement in the country to US$10.20 from US$7.00 when the shortage began in October 2019.

SNIC, the Brazilian national cement industry union, was being cautious this week but signs of improvement were there. Its cement sales data showed a 3% year-on-year rise to 40.5Mt for the first nine months of 2019 from 39.4Mt in the same period in 2018. SNIC President Paulo Camillo Penna was keen to pour cold water over the figures with a reminder that the truck driver’s strike and an economic slowdown in 2018 had unnaturally depressed industry sales. He didn’t want to ruin the party too much though. Comments followed about a National Confederation of Industry (CNI) survey forecasting growth for the next six months and market research supporting growing residential construction.

Graph 1: Cement sales in Brazil for Q1 – 3, 2014 – 2019. Source: SNIC.

As Graph 1 above shows the local industry has been through the wringer in recent years. Cement sales peaked in 2014 before the national economy was hit by falling commodity and oil prices that contributed to a recession as well as the Petrobras political crisis. At the start of 2017 Camillo Penna described the situation as the worst in the industry’s history. From the peak to the trough cement sales plummeted by 27%.

Camillo Penna’s caution now may have something to do with his previous prediction that the industry was going to recover from the second half of 2018. The sales may not have perked up but merger and acquisition activity did, with the European multinationals Buzzi Unicem and Vicat buying stakes in BCPAR (Grupo Ricardo Brennand) and Cimento Planalto (Ciplan) respectively. So far in 2019 it has been quietly optimistic but not without the odd hiccup. There have been a few new plant project announcements from Brennand Group, Votorantim and CSN Cimentos. Yet, InterCement converted its integrated Pedro Leopoldo plant in Minas Gerais to a terminal. Cimento Tupi reportedly ran into trouble with its investors when it tried to merge with its parent company following defaulting on loan payments in 2018. Notably, the country’s two cement associations also released a Cement Technology Roadmap to 2050 in April 2019. It plans to reduce specific CO2 emissions by over 30% from 2014 to 375kg CO2/t of cement in 2050 amongst other ambitions.

On the corporate side, Votorantim’s domestic sales rose by 3% year-on-year to US$771m in the first half of 2019 from US$745m in the same period in 2018. It attributed the growth to improved prices. Other news of note included the acquisition of a mortar plant in Belém, Pará state and plans to upgrade its clinker grinding unit at Pecém in Ceará. InterCement’s cement and clinker sales volumes rose by 6.8% to 4.04Mt from 3.78Mt. It declared that this was way ahead of the industry average of 1.5%. Sales revenue fell slightly, possibly due to high production overcapacity and competition on prices. Earnings were also reported as having improved in the second quarter partly due to a ‘significant’ reduction in its cost structure.

On the supplier side, refractory manufacturer RHI Magnesita reported that its margin recovery was ‘going quite well’ in Brazil during the first half of 2019. Stefan Borgas, RHI Magnesita’s chief executive officer (CEO) forecast that the margin in that country would help drive its business in the second half of 2019 and that the business was returning to the global average. RHI Magnesita also announced a Euro57.1m upgrade to its plant at Contagem, Belo Horizonte in Minas Gerais this week, including building a new regional headquarters for its South American business.

Everything seems to be coming together slowly for Brazil’s cement industry. Yet Camillo Penna and SNIC are right to be careful for another reason. The United Nations (UN) and various analysts are warning about the growing risk of global recession in 2020 based on indicators like the US yield curve. This could be especially devastating for an economy like Brazil’s that is heavily dependent on commodity markets. History may not repeat itself but the strength of that recovery may be tested sooner than anyone would like.

Argentina: Loma Negra plans to close its Olavarría integrated cement plant. The unit has 45 employees who will be relocated elsewhere in the business, according to the Buenos Aires Económico newspaper. In recent years the plant has been operating solely as a grinding and bagging unit. The cost of upgrading the plant and the relative distance of its raw materials were factors in the decision to close it. The Olavarría cement plant was the first to be built in the country.

In September 2019 the subsidiary of Brazil’s interCement said it was converting its San Juan integrated cement plant to grinding and bagging only. Earlier in the year it came close to closing its Barker plant as it was unable to reach an agreement with the local union over staff redundancies. Alongside this it is building a new production line at its L'Amalí cement plant.

Argentina: Loma Negra says that a minor fire broke out at an auxiliary building for the second production line at the L'Amalí integrated cement plant on 1 August 2019. No casualties or injuries were reported in the incident. The subsidiary of Brazil’s InterCement said that the causes of the accident are yet to be determined but that no significant impacts are expected. The plant is currently being upgraded with a new production line that is scheduled for completion in early 2020.

Brazil: InterCement is to stop production at its integrated Pedro Leopoldo plant in Minas Gerais. It plans to temporarily run the unit as a cement terminal, according to Por Dentro De Tudo. The plant has 53 employees. 28 will be relocated to other plants in the company and the remaining 25 will be made redundant.