Displaying items by tag: LafargeHolcim

Eurocement owner Filaret Galchev has been surprisingly candid on Russian television this week commenting on why his company offloaded shares in LafargeHolcim in February 2016. He described the move as ‘unexpected’ and a reaction to the shares losing nearly half their value in six months.

Eurocement ran a repurchase deal for the stake with Sberbank in late January 2016 before the bank sold it in early February 2016. Galchev’s wallet wasn’t the only casualty of LafargeHolcim’s falling share price. Board chairman Wolfgang Reitzle announced his plans to resign from the company at about the same time. LafargeHolcim’s share price has since rallied somewhat although it remains well below the level it commanded in the summer of 2015 following the merger.

Back on Russia, Galchev also continued Eurocement’s theme of predicting doom and gloom for the domestic cement industry. He forecast a further drop of up to 10% in local demand for cement. This is in line with previous comments Eurocement has made since at least about mid-2015. Although on the plus side the steepness of the fall in demand may be softening at least.

Graph 1 – Cement production in Russia, 2011 – 2015.

As the data above from the Russian Federal State Statistics Service (ROSSTAT) shows, cement production in Russia fell by 9% year-on-year to 62.1Mt in 2015 from 68.5Mt. This follows years of growth. Data for the first four months of 2016 seemed to show an acceleration of this trend with an 18% drop in production to 8.9Mt for the first three months of the year. However, the latest released figures, for April 2016, show that production may be picking up somewhat. We won’t get a better idea until the middle of the year. On the supply side, ROSSTAT doesn’t release any figures on cement consumption but the Russian railways were have reported that their cement volumes to consumers were down by 9.2% to 4.8Mt in the first quarter of 2016. This is a percentage drop close to what Filaret Galchev has been suggesting for 2016 as a whole.

The news from the multinationals supports this picture. LafargeHolcim reported weak construction markets in the first quarter of 2016 following sharp declines in 2015. HeidelbergCement recorded ‘slight’ decreases in its sales volumes in the period. It also noted a knock-on effect in Sweden due to lowering export deliveries to Russia.

All in all it’s a similar picture to fellow BRIC country Brazil, which we covered last week, with falling commodity prices hammering the economy and the local industry battening down the hatches. However, international oil prices are slowly creeping up and the International Monetary Fund (IMF) has predicted lower decreases in its economic output in 2016. Perhaps Filaret Galchev will have some good news to talk about on Russian television sooner than he thinks.

LafargeHolcim has officially opened a new cement line at its Barossa cement plant in Brail. It is unfortunate timing given that the Brazilian cement industry has not had an easy time of it of late. The wider economy in the country has been in recession since it was hit by falling commodity and oil prices and gross domestic product (GDP) fell by 3.8% in 2015. The International Monetary Fund (IMF) has predicted currently that the GDP will fall by a similar amount in 2016. Alongside this, the Petrobras corruption inquiry has enveloped construction companies and led to the suspension of president of Dilma Rousseff. The Instituto Brasileiro de Geografia e Estatística (IBGE) reported that the national construction industry contracted by 7.6% in 2015.

Graph 1: Brazilian cement production from 2011 to 2015. Source: SNIC.

Graph 2: Brazilian cement production by quarter from 2015 to March 2016. Source: SNIC.

Graph 1 summarises, with National Union of the Cement Industry (SNIC) data, what happened to cement production in 2015. It fell by 9.6% to 64.4Mt in 2015 from 71.3Mt in 2014. Unfortunately, as Graph 2 shows, the downward production trend is accelerating into 2016. Production fell by 5.76% year-on-year to 15.6Mt in the first quarter of 2015 from 17.1Mt in the first quarter of 2014. Now, production has fallen by 11% to 13.9Mt in the first quarter of 2016. April 2016 figures also appear to be following the same trend.

Amidst these conditions Votorantim somehow managed to hold its cement business revenue up; increasing it by 6% to US$3.82bn in 2015. Despite this its cement sales volumes fell by 6% to 35Mt. As a result, Votorantim announced plans to temporarily shutdown kilns and plants and sell off selected concrete assets. Cimento Tupi reported that its cement and clinker sales volumes fell by 23% to 1631Mt in 2015 from 2119Mt in 2014. It blamed the fall of the ‘retraction’ of the cement market and a wide-scale maintenance campaign it had implemented on its kilns. Its revenue fell by 26% to US$98.8m from US$134m.

LafargeHolcim pulled no punches when it blamed challenging conditions in Brazil for dragging its financial results down globally in 2015. It didn’t release any specific figures for the country but it described its cement volumes as falling ‘significantly’ with competition and cost inflation adding to the chaos. This has gotten worse in the first quarter of 2016 with volumes further affected. Its cement sales volumes in Latin America fell by 10.7% year-on-year for the period principally due to Brazil. Companhia Siderúrgica Nacional (CSN) has reported an 8% rise in production to 531,000t in the first quarter of 2016 and an 8% rise in sales volumes to 571,000t in the same period. This was partly achieved by the ramp-up of production at its new plant at Arcos in Minas Gerais.

In the wider cement supplier sector the knock-on from falling cement demand has hit refractory manufacturer Magnesita. Its revenue fell by 17% year-on-year to US$66.9m for the first quarter of 2016. This was due to falling steel production in various territories and the negative effects of the construction market in Brazil hurting its cement customers.

It is unsurprising that companies like LafargeHolcim commissioned new capacity in Brail a few years ago given the promise the market seemed to hold. Both the CSN project at Arcos and Holcim’s Barroso project were announced in 2012 near the height of the market. Both are also based in Minas Gerais, the country’s biggest cement producing state. Predicting both the drop in the international commodities markets and a local political crisis would have been hard to predict. All these producers can do now is sit back and wait out the situation with their efficiency gains until the construction rates pick up again. Hopefully the first quarter results for Brazil’s two leading cement producers, Votorantim and InterCement, will not be too depressing.

Switzerland: LafargeHolcim has appointed Caroline Luscombe as the group’s new Head of Organisation and Human Resources and member of the Executive Committee. Her role starts from 1 July 2016 and she will be based in Zurich. She succeeds Jean-Jacques Gauthier.

Luscombe joins LafargeHolcim from Syngenta where she has been Head of Human Resources since January 2010 and a member of the Executive Committee since 2012. Prior to joining Syngenta, Luscombe held senior human resource roles in the financial and healthcare businesses of the GE Group, and in the speciality chemical company, Laporte.

Having led the human resource integration between Lafarge and Holcim, Jean-Jacques Gauthier will be appointed as the Country Chief Executive Officer in Algeria from 1 September 2016. On taking up his new role, Jean-Jacques will relinquish his position on the Executive Committee.

Nigeria: Lafarge Africa has appointed Michel Puchercos as its new group Managing Director and chief executive officer. He assumed his post on 1 April 2016. He replaces Peter Hoddinott.

Puchercos, a French national, started his career in 1982 at the French Ministry of Agriculture before working at other companies in the biochemistry and food industry. He joined Lafarge as Head, Strategy and Purchasing in Orsan, Lafarge Biochemistry, and in 1998 became Director of Cement Strategy and Information Systems, Lafarge Gypsum. Puchercos became the Director of Cement strategy, Lafarge Group in France in 2003 before becoming the CEO for Lafarge operations in Kenya and Uganda in 2005. He then became the CEO of Lafarge South Korea in 2009.

Puchercos is a graduate of Ecole Polytechnique, and the National School of Rural Engineering, Waterways & Forests, France.

Nigeria: AshakaCem, a subsidiary of Lafarge Africa and member of the LafargeHolcim group, has appointed Alhaji Rabiu Abdullahi Umar as its new managing director. AshakaCem said in a statement that Umar was appointed to succeed Leonard Palka, a Polish national, who has resigned from the company.

AshakaCem in Gombe State is one of the four cement companies controlled by Lafarge Africa in Nigeria. Formerly the companies were known as Lafarge Cement WAPCO Nigeria before the name was changed in 2014.

In April 2016 the shareholders of BP voted against a pay package of US$20m for the company's chief executive officer (CEO) Bob Dudley. The vote was non-binding to BP but it clearly sent a message to the management. Subsequently, the chairman Carl-Henric Svanberg acknowledged the mood amongst the company's investors and stated in his speech at the annual general meeting that, "We hear you. We will sit down with our largest shareholders to make sure we understand their concerns and return to seek your support for a renewed policy."

The link to the cement industry here is that many of the world's major cement producers are public companies. Similar to BP they internally set CEO and leading executive pay and remuneration packages. Just like BP, cement companies too could run into similar complaints from their shareholders, for example, should the construction and cement markets have similar jolts that the oil industry has faced since mid-2014.

To be clear: this article is not attempting to pass judgement on how much these CEOs are being compensated. It is merely seeing how compensation compares amongst a selection of leading cement companies. LafargeHolcim's revenue in 2015 was greater than the gross domestic product of over 90 countries. Running companies of this size is a demanding job. What is interesting here is how it compares and what happens when it is perceived to have grown too high, as in the case of BP.

It should also be noted that this is an extremely rough comparison of the way CEO pay and wage bills for large companies are presented. For example, the CEO total salary includes incentives, shares and pension payments. The staff wage bills includes pension payments, social charges and suchlike.

Graph 1: Comparison of CEO total remuneration from selected cement companies in 2015. Source: Company annual reports. 

There isn't a great deal to comment here except that compared to the average wage these are high from a rank-and-file worker perspective! The total salary for Eric Olsen, the CEO of LafargeHolcim, is lower than HeidelbergCement and Italcementi, which seems odd given that LafargeHolcim is the bigger company. However, Olsen has only been in-post since mid-2015. By contrast, Bernd Scheifele became the chairman of the managing board of HeidelbergCement in 2005. Carlo Pesenti, CEO of Italcementi and part of the controlling family, took over in 2004. Albert Manifold, CEO of CRH, also sticks out with a relatively (!) low salary given the high revenue of the company.

Graph 2: Comparison of CEO remuneration to average staff cost and total company revenue in 2015. Source: Company annual reports. 

This starts to become more interesting. HeidelbergCement's higher CEO/staff and CEO/revenue ratios might be explained by Scheifele's longer tenure. Yet Italcementi definitely sticks out with a much higher CEO wage compared to both the average staff wage and the company's revenue. Again, CRH stands out with a much lower CEO/staff ratio. Dangote's CEO/staff ratio is low but its CEO/revenue ratio is in line with the other companies' figures.

Consider the figures for China Resources and this suggests that CEO/revenue ratio may be more important than the CEO/staff ratio. The implication being that the market will only tolerate a ratio of up to about 0.05%. Any higher and the CEO's family has to own the company. Which, of course, is the case with Carlo Pesenti and Italcementi. Until HeidelbergCement takes over later in 2016 that is.

That’s as far as this rough little study of CEO remuneration at cement companies will go. So, next time anybody reading this article from a cement company asks for a pay rise, consider how much your CEO is receiving.

Kenya: Central Bank of Kenya (CBK) deputy governor Sheila M’Mbijiwe is seeking re-election to the board of LafargeHolcim majority-owned Bamburi Cement. A notice sent to shareholders stated that the CBK senior executive will be seeking a new mandate when the company holds its 65th annual general meeting on 2 June 2016 in Mombasa. The 58-year-old senior CBK executive, who also sits on the regulator’s Monetary Policy Committee, was set to retire by rotation but is seeking to retain the seat.

Others seeking re-election are Daniel Patterson and D Drouet who are also retiring by rotation but are eligible to seek to be elected again.

Dalmia Cement (Bharat) threw a spanner in the works of the sale of Lafarge India this week. The cement producer, part of Dalmia Group, appealed against the Competition Commission of India’s (CCI) revised approval of the sale in February 2016. Dalmia challenged the CCI’s approval on procedural grounds querying both the revised and original order for the sale. Subsequently the sale has been delayed until a hearing in May 2016.

Dalmia’s objections concern how the CCI’s original approval in March 2015 interacts with the revised approval given in February 2016. Lafarge India was originally asked by the CCI in February 2015 to sell off 5.2Mt/yr of cement production capacity in Chhattisgarh and Jharkhand in eastern India. The request was a condition to allow the merger of Lafarge and Holcim in the country. Lafarge lined up Birla Corporation to buy the two cement plants but an ambiguous amendment to the Mines and Minerals (Development and Regulation) (MMDR) Act killed the deal. Then Lafarge India, a subsidiary of LafargeHolcim, announced that is was selling all of its assets in India. This includes three cement plants and two grinding stations with a total capacity of around 11Mt/yr.

Dalmia’s appeal may be planned to slow down the sale of a rival in the Indian cement business. Dalmia Group is the fifth largest cement producer in India with a capacity of 14.5Mt/yr. Lafarge India is, to an extent, a lame duck rival whilst the legal wranglings drag on.

However, the appeal may have a more serious side. A statement from the lawyers representing Dalmia also mentioned a challenge against the purchase requirements from the original CCI approval in March 2015. Specifically that any purchaser, “shall not have (directly or indirectly) operational capacity exceeding 5% of the total installed capacity in the relevant geographic market.” The confusion here is where that ‘relevant’ area refers to.

Originally the CCI designated this as Chhattisgarh, Odisha, Jharkhand, Bihar and West Bengal. And unsurprisingly, Dalmia holds more than 5% of production capacity in that region. If the CCI expands the relevant geographic area to more regions of the country then Dalmia’s market share is likely to fall. Local media reported that a bid for the Lafarge India assets by private equity firm KKR, which holds equity in a Dalmia subsidiary, was denied by the CCI. Cue the legal challenge.

It seems unlikely that the appeal by Dalmia will slow the sale down too much. If it is accepted then the CCI will have to reissue its approval for a second time and the sale will be delayed by a few months. If it is denied then the sale will proceed after a delay of one month. Either way the affair demonstrates how prized the Lafarge India assets have become. Indian local media reported that at least nine bids were made. It will be fascinating to see the price the winning bid makes when it is released.

LafargeHolcim was the last of the major non-Chinese cement producers to report its annual financial results when it did so on 17 March 2016. With the full set in, as it were, Global Cement will compare the progress of the world’s largest multinational cement companies in 2015.

The first thing to note is that whilst cement production growth rates have hardly been inspiring in 2015, growth or holding the status quo is occurring. The emerging markets have faced challenges in 2015 following the prolonged depression in the construction sector in Europe since 2008. As Wolfgang Reitzle and Eric Olsen put it in the forward of the 2015 LafargeHolcim annual report, “…our share price has been significantly affected, mainly by the volatility associated with emerging markets.”

Figure 1: Cement & clinker sales volumes from five major cement producers, 2011 – 2015. Source: Annual reports. Note: Sales volumes are calculated for LafargeHolcim for 2011 – 2013.

Figure 1 shows cement and clinker sales volumes for the major cement producers from 2011 to 2015. This graph isn’t quite as depressing as it looks because it shows a drop in cement production for the major producers and it has started to show remedial action being taken. Where growth isn’t happening in a market, pressure builds to find it through mergers and acquisitions.

So, Lafarge and Holcim merged and the decision may be now starting to show promise with its sales volumes remaining static year-on-year in 2015 rather than falling. It should be noted here that the drop from 2013 to 2014 is due to the divestments Lafarge and Holcim both made before the merger to satisfy competition bodies and because the sales volumes were calculated here from the separate Lafarge and Holcim annual reports.

Even more so, HeidelbergCement’s plan to buy Italcementi may be a good idea here. Already it has been growing its cement production each year since 2013. The acquisition could potentially speed up the growth considerably. Elsewhere, both Cemex and Buzzi Unicem are showing signs of picking up cement production since 2013.

Figure 2: Earnings before interest and taxation (EBIT) for five major cement producers, 2011 – 2015. Source: Annual reports. Note: Cemex and LafargeHolcim figures have been converted from US Dollars and Swiss Francs respectively at current exchange rates.

Figure 2 shows one indicator of profitability for the major cement producers by comparing their earnings before interest and taxation (EBIT). This is less useful than cement sales volumes because it covers the producers’ entire businesses including aggregate and concrete sectors. However, it does show the problems Italcementi has faced and it offers one reason why the company might have allowed itself to be taken over. Note also how Cemex has continued to increase its EBIT despite its high levels of debts.

Returning to the LafargeHolcim comments about volatile emerging markets, most of the producers reported tough trading in their Asian territories in 2015. The exceptions were Cemex with its reliance on the Philippines booming market and Buzzi with its limited assets in the region. However, Cemex suffered in its own major emerging market in South and Central America. Despite these setbacks though all of the producers featured here benefitted from growing sales volumes in North America, particularly in the US.

Both LafargeHolcim and Cemex announced divestments promptly following their results announcements suggesting that they feel they need to do more to regain the profitability they once had. LafargeHolcim plans to sell assets in South Korea and Saudi Arabia. Cemex has agreed to sell cement plants in Bangladesh and Thailand and a minority stake in its business in the Philippines. This last decision may suggest how serious Cemex is about tackling its debts considering the strong market in that country at present. HeidelbergCement is due to complete its acquisition of Italcementi in the second half of 2016.

Finally, the major changes to the multinational cement producers will continue in 2016 as CRH asserts itself following its major acquisitions from Lafarge and Holcim in 2015. Already its Europe Heavyside Divison reported sales revenue of Euro3.61bn in 2015 surpassing that of Buzzi Unicem. Other international producers such as Eurocement, InterCement and Votorantim were also poised for continuing growing but poor domestic markets (Russia and Brazil) may cripple their ambitions in the short term.

Small print can cause large consequences. Billion US Dollar consequences. Take the 2015 amendment to India’s Mines and Minerals (Development and Regulation) (MMDR) Act from 1957. Ambiguous wording in the legislation may have held up two prominent cement industry acquisitions in 2015. It also hangs over the recently announced purchase by UltraTech Cement of Jaiprakash Associates’ cement plants.

The MMDR was amended in January 2015. As the Times of India explained in mid-2015, a clause in the amendment said, “The transfer of mineral concessions shall be allowed only for concessions which are granted through auction.” However, it was unclear whether this meant historically allocated mines given via nominations or only newly allocated ones. Given the reliance of clinker plants on reliable mineral reserves this caused havoc. Cue confusion and large legal budgets.

LafargeHolcim’s divestment of two cement plants to Birla Corporation was one casualty. As a condition of the merger between Lafarge and Holcim the Competition Commission of India (CCI) required that the Jojobera and Sonadih cement plants in Eastern India be sold in 2015. Together the plants have a combined cement production capacity of 5.1Mt/yr. However the ambiguity over the 2015 MMDR Act clause on transfer of mining rights held the deal up. By February 2016 Birla Corporation had endured enough. It publicly complained about Lafarge India’s ‘inability’ to complete the deal and threatened legal action. LafargeHolcim retorted by asking the CCI if it could sell all of Lafarge India instead. It received the revised clearance and a new buyer is yet to be announced.

Another victim was UltraTech Cement in a previous attempt to buy Jaiprakash Associates’ cement assets. That time it was down to buy two integrated cement plants in Madhya Pradesh with a combined clinker production capacity of 5.2Mt/yr with associated mineral rights. The deal was agreed in December 2014 and then reported delayed in mid-2015. Finally, on 28 February 2016 the Bombay High Court rejected the deal, citing the MMDR Act as the prime cause.

Luckily for UltraTech Cement the story has a happy ending (so far) as it then announced that it was purchasing the majority of Jaiprakash Associates’ 22.4Mt/yr cement portfolio instead for US$2.4bn. It is hoped that the deal will be finalised by June 2017 but this partly depends on the MMDR Act being amended. Although UltraTech Cement have said they are looking at alternative routes to the deal in case the act isn’t amended.

Poor legal wording kiboshed at least two cement industry deals for over 10Mt/yr production capacity. Roughly, at the price UltraTech Cement is paying for its latest deal, that’s over US$1bn worth of Indian cement assets. Given the hard time the Indian cement industry had in 2015 the question should be asked regarding how much damage the MMDR Act amendment has done. One option for the beleaguered industry is to consolidate and cut its costs. This was massively delayed in 2015.

The proposed 2016 amendment to the MMDR Act reads as follows:

“Provided that where a mining lease has been granted otherwise than through auction and where mineral from such mining lease is being used for captive purpose, such mining lease will be permitted to be transferred subject to compliance with the terms and conditions as prescribed by the Central Government in this behalf.”

Let’s hope it does the trick this time.