Displaying items by tag: International Monetary Fund

The Coronavirus Disease 2019 (COVID-19) took on direct implications for the international cement industry this week when an Italian vendor infected with the virus visited Lafarge Africa in Ogun state, Nigeria. The cement producer said that it had ‘immediately’ started contact tracing and started isolation, quarantine and disinfection protocols. This included initiating medical protocols at its Ewekoro integrated plant, although local press reported the unit’s production lines were still open. Around 100 people were thought to have had contact with the man.

Global Cement has been covering the epidemic since early February 2020 when the virus’ effect on the construction industry in China started to become evident. First, an industry event CementTech was postponed, financial analysts started forecasting negative financial consequences for producers and plants started going into coronavirus-related maintenance or suspension cycles. Then at least one plant started to dispose of clinical waste and now China National Building Material Group (CNBM) is considering how to restart operations at scale. Also, this week Hong Kong construction companies reportedly laid off 50,00 builders due to a lack of cement due to the on-going production suspension in China.

The major cement companies have identified that their first business risk from coronavirus comes from simply not having the staff to make building materials. LafargeHolcim’s chief executive officer Jan Jenisch summed up the group’s action in its annual financial results for 2020 this week when he said, “We are taking all necessary measures to protect the health of our employees and their families.” Other major cement producers that Global Cement has contacted have placed travel restrictions for staff and reduced access to production facilities.

The next risk for cement companies comes from a drop in economic activity. The Organisation for Economic Co-operation and Development (OECD) forecasts a global 0.5% year-on-year fall in real gross domestic product (GDP) growth to 2.4%, with China and India suffering the worst declines in GDP growth at around 1%. The global figure is the worst since the -0.1% rate reported by the International Monetary Fund (IMF) in 2009. The OECD blamed the disease control measures in China, as well as the direct disruption to global supply chains, weaker final demand for imported goods and services and regional declines in international tourism and business travel. This forecast is contingent on the epidemic peaking in China in the first quarter of 2020 and new cases of the virus in other countries being sporadic and contained. So far the latter does not seem to have happened and the OECD’s ‘domino’ scenario predicts a GDP reduction of 1.5%. All of this is likely to drag on construction activity and demand for cement and concrete for some time to come.

Moving to cement markets and production, demand is likely to be slowed as countries implement various levels of isolation and quarantine leading to reduced residential demand for buildings directly and as workforces are restricted. Business and infrastructure projects may follow as economies slow and governments refocus spending respectively.

The UK government, for example, is basing its coronavirus action plan on an outbreak lasting four to six months. This could potentially happen in many countries throughout 2020. This has the potential to create a rolling effect of disruption as different nations are hit. Assuming China has passed the peak of its local epidemic then its producers are likely to report reduced income in the first quarter of 2020. The effect may even be reduced somewhat due to the existing winter peak shifting measures, whereby production is shut down to reduce pollution. Elsewhere, cement companies in the northern hemisphere may see their busy summer months affected if the virus spreads. The effect on balance sheets may be visible with indebted companies and/or those with more exposure to affected areas disproportionately affected. The wildcard here is whether coronavirus transmits as easily in warmer weather as it does in the cooler winter months. In this case there may be a difference, generally speaking, between the global north and south. Exceptions to watch could be cooler southern places such as New Zealand, Argentina and Chile. Shortages, as mentioned above in Taiwan, potentially should be short term, owing to global overcapacity of cement production, as end users find supplies from elsewhere.

The cement industry is also likely to encounter disruption to its supply chains. Major construction projects in South Asia are already reporting delays as Chinese workers have failed to return following quarantine restrictions after the Chinese New Year celebrations. As other countries suffer uncontrolled outbreaks then similar travel restrictions may follow. Global Cement has yet to see any examples of materials in the cement industry supply chain being affected. On the production side, raw mineral supply tends to be local but fuels, like coal, often travel further. Fuel markets may prove erratic as larger consumers cut back and suppliers like the Organisation of the Petroleum Exporting Countries (OPEC) react by restricting production.

On the maintenance side cement plants need a wide array of parts such as refractories, motors, lubricants, gears, wear parts for mills, ball bearings and so forth. Some of these may have more complicated supply chain routes than they used to have 30 years ago. On the supplier side any new or upgrade plant project is vulnerable if necessary parts are delayed by a production halt, logistics delayed and/or staff are prevented from visiting work sites. Chinese suppliers’ reliance on using their own workers, for example, might well be a hindrance here until (or if) international quarantine rules are normalised. Other suppliers’ weak points in their supply chains may become exposed in turn. This would benefit suppliers with sufficiently robust chains.

Chinese reductions in NO₂ emissions in relation to the coronavirus industrial shutdown have been noted in the press. A wider global effect could well be seen too. This could potentially pose problems to CO₂ emissions trading schemes around the world as CO₂ prices fall and carbon credits abound. This might also have deleterious effects on carbon capture and storage (CCS) development if it becomes redundant due to low CO₂ pricing. In the longer-term this might undesirable, as by the time the CO₂ prices pick up again we will be that much nearer to the 2050 sustainability deadlines.

COVID-19 is a new pandemic in all but name with major secondary outbreaks in South Korea, Iran and Italy growing fast and cases being reported in many other countries. The bad news though is that individual countries and international bodies have to decide how to balance the economic damage disease control will cause, versus the effects of letting the disease run unchecked. Yet as more information emerges on how to tackle coronavirus, the good news is that most people will experience flu-like symptoms and nothing more. Chinese action shows that it can be controlled through public health measures while a vaccine is being developed.

Until then, frequent handwashing is a ‘given’ and many people and organisations are running risk calculations on aspects of what they do. It may seem flippant but even basic human interaction such as the handshake needs to be reconsidered for the time being.

More movement in Italy this week with Buzzi Unicem’s purchase of three cement plants from HeidelbergCement. Buzzi acquired the Testi integrated cement plant at Greve and the Borgo San Dalmazzo and Arquata Scrivia grinding plants in Piedmont. No value for the transaction was disclosed but HeidelbergCement trumpeted that it was ‘well on our way’ to reach its target of Euro1.5bn of disposals by the end of 2020. This follows last week’s purchase of Cemitaly's Spoleto cement plant in Perugia by Colacem. Cemitaly, in case readers don’t know, is another of HeidelbergCement’s Italian subsidiaries.

Upon completion of these deals, Buzzi Unicem will own 10 integrated plants and five grinding plants in Italy. It continues the company’s consolidation drive in Italy from mid-2017 when it bought Cementizillo and two of its integrated plants for the knock down price of up to Euro125m.

The two other leading cement producers are now Germany’s HeidelbergCement with its local subsidiaries (led by Italcementi) and Colacem. HeidelbergCement has 10 integrated plants and 10 grinding plant. Colacem has seven integrated plants and one grinding plant. All three companies have integrated production capacities of around 9 – 14Mt/yr. Since 2012 the market has shifted from six major producers to three. Sacci, Cementir and Cemenzillo have left the field following acquisitions by their competitors. Italcementi was taken over by HeidelbergCement in 2016.

Graph 1: Cement production in Italy, 2006 – 2017. Source: Italian Cement Association (AITEC).

Data from the Italian Cement Association (AITEC) shows that the impetus for this consolidation trend was the reduction in Italian cement production to 19.3Mt in 2017 from a high of 47.9Mt in 2006. Despite this though the country still has a total production capacity of 37.7Mt/yr, according to Global Cement Directory 2019 data, giving it an utilisation rate of just over 50%. Production picked up again in the north and central regions of Italy in 2017 but this was insufficient to counter declines in the south and Italy’s islands. Exports have held steady in this time at around 2 – 3Mt/yr but this represents a doubling share of production from 5% in 2006 to 10% in 2017. Production has been steadily dwindling year-on-year since 2006 but domestic consumption rallied a little to 18.7Mt in 2017.

The Italian government instituted its ‘Industry 4.0’ policy in early 2017 to boost competitiveness. This included modest growth forecasts of 1%. International Monetary Fund (IMF) data shows that the country managed gross domestic product (GDP) growth of 0.9% in 2018. Yet, Buzzi Unicem reported like-for-like net sales contraction of 0.9% in 2018. HeidelbergCement was more circumspect in its reporting on Italy for 2018 but it did describe a ‘moderate’ increase in sales volumes of cement excluding its acquisitions.

With the IMF diagnosing the Italian economy as ‘weak’ and cutting its growth forecast to 0.1% in 2019 the prospects aren’t looking encouraging for the cement sector. AITEC data placed cement consumption at 309t/capita in 2017. This is on the low side for Western European standards suggesting that, although more consolidation could be coming, the market may also be down too. Its not great news for cement producers but the Italian market is edging ever closer to recovery.

The Federación Interamericana del Cemento (FICEM) held its 2018 technical congress in Panama City last week and was attended by Global Cement. We’ll run a full write-up of the event in the October 2018 issue of Global Cement Magazine. The short version is that the conference was technically good but, from our perspective, it could have done with more regional analysis. Given that the event is for the local industry this is not a big issue as most of the delegates will know their own markets inside out and many were happy to discuss just this when asked. Likewise, FICEM’s in-house publication also included plenty of local data.

The nearest the presentations came to this was a global overview of the cement industry by Arnaud Pinatel of On Field Investment Research ahead of a market report the analysts are about to release. Although it covered the global cement industry the key local news was that the Latin American sector’s production capacity had grown by 3% from 2010 to 2018 but that prices had fallen in this time. The forecast suggested that cement sales volumes were expected to grow by 3% in 2019 - supported by Brazil, Peru and Bolivia - but that prices were also expected to fall by 1%, mainly due to issues in Argentina.

That last point is especially interesting over the last week because the Argentine cement body, the Asociación de Fabricantes de Cemento Portland (AFCP), released its figures last week to reveal that cement despatches rose by 4.2% year-on-year for the first eight months of 2018. However, at the same time the general news broke that the International Monetary Fund (IMF) was providing an emergency loan to support the country’s economy. The government was keen to shore up confidence in the economy and attributed the growth in the cement sector to the ‘most ambitious infrastructure plan in history.’

Only last year in 2017 the industry was riding a construction boom with cement shortages, new production capacity announced and the initial public offering of Loma Negra. Bailouts from the IMF don’t fit this picture of the poster boy for the South American construction industry. And, if a financial correction is pending, the new capacity that has been ordered may arrive at a bad time. This is a pretty worrying situation.

Meanwhile, across the Uruguay River into Brazil something long expected and hopefully more encouraging has occurred: the acquisition of cement plants. Italy’s Buzzi Unicem revealed that it had struck a deal to buy a 50% stake in the Brazilian company BCPAR from Grupo Ricardo Brennand for Euro150m. The arrangements cover two integrated plants: one 2.4Mt/yr unit at Sete Lagoas in Minas Gerais and a 1.7Mt/yr unit at Pitimbu in Paraíba. Buzzi has also added an option to buy the other half of the business until 2025.

It’s hard to place a value on the sale, but it looks as if Buzzi has picked up the capacity for just under US$100/t, subject to future variation on how well the company does. At that price though this a low figure and a bargain for Buzzi. Given the pain the Brazilian cement industry had been through in recent years some form of traction is welcome. Unfortunately, Grupo Ricardo Brennand has surely lost money on the deal given that the two plants were commissioned in 2011 and 2015 respectively. The complexity of the financial arrangements suggest that Ricardo Brennand is fighting to stay in the game if and when the recovery comes. If Buzzi has moved in then this suggests that it thinks it will make their money back and that it reckons that the bottom of the construction industry trough has been reached. A Brazilian take on this situation would be fascinating.

With these kinds of events happening the same week as the FICEM technical congress it really shows how vibrant and varied the region’s cement industry is. Next year’s conference will surely be even more interesting as market events in Brazil, Argentina and other countries develop.

The Greek debt crisis directly hit the local cement industry on Tuesday 30 June 2015 when Titan Cement reported that it was unable to pay a dividend to its shareholders. The leading local cement producer blamed the capital controls introduced by the government.

It is worth looking at the effects on the domestic cement industry as the Eurozone bureaucracy and the Greek government play 'chicken' with each other while Greece starts the default process, having failed to pay the latest International Monetary Fund (IMF) payment on 30 June 2015. Greece will now join a group, possibly even more select than the European Union, of countries that have failed to pay back the IMF, including current defaulters like Sudan and Zimbabwe.

A better comparison might be made with Argentina which defaulted upon its foreign debts in 2001. Its construction industry fell by 12% year-on-year in 2001 and by a further 30% in 2002. Cement consumption and cement production utilisation rates hit 23% in 2002. One key difference with Greece is that the country has had major financial difficulties for far longer than Argentina. Argentina ran into financial depression in 1998 and defaulted in 2001. Greece ran into financial trouble following the 2008 financial crisis and then received its first bailout in 2010.

As the capital controls show, even initial responses to the financial situations are impacting upon the standard transactions a limited company conducts. The Financial Times ran an article in May 2015 examining the potential effects on businesses of a debt default and Greek exit from the Eurozone (Grexit). In short, business and commerce will continue where possible reacting to whatever comes their way. For example, an olive oil producer reported switching to exports to make profits. Crucially though, another company interviewed, a construction contractor, worried about potential cuts to government or EU-led infrastructure projects.

As Titan reported in its first quarter results for 2015, its Greek market has been dependent on road building. In February 2014 Titan Cement reported its first improved operating results in seven years followed by profit in 2014 as a whole. The other major cement producers, Lafarge subsidiary Heracles General Cement and Italcementi subsidiary Halyps Cement, reported an improved construction market in 2014 with rising cement volumes. However, it was noted by Lafarge that it was developing exports to 'optimise kiln utilisation.' Titan also noted the benefits of exports in its first quarter report for 2015, focusing on a strengthening US Dollar versus the Euro. Given on-going events, one suspects there is going to be a lot more 'development' of this kind.

To set some sense of scale of the crisis Jim O'Neill, former head of economics at Goldman Sachs, famously calculated that, at the height of its growth, China created an economy the size of Greece's every three months. What happens next is down to the crystal balls of economists, although the path of least resistance now seems to be pointing at further default, departure from the Eurozone and Euro and further significant financial pain for Greece.

It looks likely that the local construction market will stay subdued and exports will offer a lifeline. How much the EU is prepared to let Greece default on its bills and then try and undercut its own over-capacity cement industries remains to be seen. However, since the main cement producers in Greece are all multinational outfits, it will afford them some flexibility in their strategy in coping with the fallout. Meanwhile a cement production capacity of around 14Mt/yr for a population of 11m suggests over capacity by European standards. If exports can't help then the situation looks grim.

UPDATE: Here is Global Cement's previous take on Greece from June 2012