Displaying items by tag: New Zealand

After a couple of weeks looking at the capacity-rich cement markets of Angola and Vietnam, we turn our attention this week to some of those countries on the receiving end of overcapacity.

Costa Rica is an unlikely place to start but it came to our attention this week due to a short but significant news item. In summary, the amount of cement imported into Costa Rica increased by a factor of 10 between 2014 and 2016, from around 10,000t to over 100,000t. This is around 5% of its 2Mt/yr domesitic capacity, so the change is already fairly big news. The fact that an incredible 97% of this came from just one country, China, makes the story far more interesting as it shows the effects that Chinese overcapacity can have on smaller markets.

But when we look at how the value of the cement imports has changed over time, we see an even more dynamic shift. While the amount of cement imported into the country increased by nearly 10-fold, the value of the same imports only increased by around half as much between 2014 and 2016. If these figures can be taken at face value, the implication is stark. Taking the very low base as effectively ‘zero,’ each tonne of cement imported must cost around half as much as it used to.

Digging a little deeper and the picture gets more complicated. While they have fallen, Costa Rican cement prices have not fallen by 50% and why the sudden deluge of imports anyway? In 2015 the country changed its rules on cement imports to facilitate more flexible imports and lower prices for consumers. It did this by changing a regulation relating to how long cement can be stored, previously set at just 45 days, with the aim of allowing cement to come from further afield and, crucially, in bulk rather than bags.

The effects on price were immediate. Previously as high as US$13/bag (50kg) in December 2014, fairly high by global standards, Sinocem, the first Chinese importer, immediately sold its first shipment at US$10/bag. This effect of lower prices has now forced the average sales prices down to around US$10/bag across the country by 2017. This is good for consumers but not necessarily the local plants.

Back in 2015, the two local integrated plants operated by Cemex and Holcim warned that cement quality would suffer if cement bags were not used within 45 days. This apparently self-serving ‘warning’ went unheeded by the Ministry of Economy, Industry and Trade (MEIC), which pointed out that other countries in South America, as well as the European Union and United States, had no analogous short use-by dates for cement bags.

The rule remains in place, although discontent rumbles on. Indeed LafargeHolcim noted in its third quarter results for 2016 that ‘Costa Rica was adversely affected by increased foreign imports.’  This may well be a little bit of posturing and it doesn’t square with the fact that Costa Rica exported three times more cement that it imported in 2016. Of total exports of 0.34Mt, over 95% went to neighbouring Nicaragua, which has a single 0.6Mt/yr wet process plant owned by Cemex. It seems that the two Costa Rican plants have found a way to keep a little bit of the Chinese producers’ margin for themselves.

Of course, Chinese cement overcapacity doesn’t only affect the Central American market. It has been rippling all around the Pacific Rim. In July 2017, this column looked at the decision by Cementos Bío Bío to stop making clinker at its Talcahuano plant in Chile. It now favours grinding imported clinker from Asia. Before that, Holcim New Zealand closed its Westport cement plant in 2016, finally admitting that domestic clinker was not viable.

In the grand scheme of things, this all makes sense. The market has forced those operating on thin margins to adjust. Ultimately, the end consumer is likely to benefit from lower prices, at least for as long as reliable low-cost imports can be secured. What happens, however, if China actually gets round to curtailing its rampant cement capacity, or simply decides to charge more for its cement? Flexible imports, the main aim of the Costa Rican rule change, may then prove vital, as long as there is more than one international supplier of cement.

This week we got our first real sense of how things are going at the new global cement leader LafargeHolcim. The group released its first 'combined' results, which cover the third quarter of the year and the nine month period to 30 September 2015.

First impressions are that LafargeHolcim is having a tough time of it, struggling, as many cement industry players are, with an increasingly tricky and uneven global market. It reported a fall in net sales and adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) for the first nine months of 2015, compared to the same period of 2014. Cement sales were also down by 1.3%. The group said that lower than expected demand was the reason behind lower sales, particularly in China and Brazil, which continue to struggle economically. It also picked out India as a country where momentum was lacking.

Of course, it's not all bad. While net sales were down, they were only down very slightly, by 0.6% year-on-year in the first nine months. Many a cement producer would love to pull in Euro20.4bn in sales and ship 189Mt of cement in just nine months! And, after a sticky start to the year, the picture is improving in some regions, with third quarter performance buoyed by improving fortunes in Asia, excluding China and India. LafargeHolcim was able to continue banking on the strong recovery in North America and parts of Europe, where some markets, such as the UK, continue to buck the otherwise depressing trend.

While these results will be a concern they are by no means horrific. However, they have already given rise to (or at least sped up) LafargeHolcim's future divestment plans. According to Dow Jones, LafargeHolcim plans to raise Euro3.23bn in 2016 from selling off assets, around half as much as Lafarge and Holcim had to sell to allow the merger to go through. The company has reportedly started discussions with interested parties, including private-equity firms and industry rivals about some of the assets. The proceeds will be returned to shareholders through dividends or share buybacks, according to CEO Eric Olsen.

Which assets will be divested remains to be seen. However, it reportedly won't involve LafargeHolcim's assets in Australia and New Zealand, at least in the short term. In the past week or so local media has reported that LafargeHolcim's assets in the two countries were to be sold off. However, since then Holcim Australia's Chief Executive Mark Campbell said the company was 'not currently being sold.' Campbell also added that he couldn't rule out a possible sale in the future.

So, while being clear that LafargeHolcim has no plans to sell its Australian and New Zealand assets at the moment, what could happen if it did? The starting point is complex, especially in Australia. According to the Global Cement Directory 2016, there are six operational integrated cement plants and 12 grinding plants in the country, which share a combined 13.9Mt/yr of cement capacity. LafargeHolcim has a 50% interest in Cement Australia's 4.0Mt of cement capacity, giving it 2Mt/yr of capacity and around 14% of national capacity. The other 50% of Cement Australia is owned by HeidelbergCement. Other major players include Adelaide Brighton, which has 2.3Mt/yr in its own name and a 50% stake in Independent Cement, and Boral Cement, which owns 2.3Mt/yr of capacity outright and 50% of SunState Cement's 1.5Mt/yr of capacity. In New Zealand there are two integrated plants, one operated by Golden Bay Cement and one by LafargeHolcim. The latter, however, is due to be closed in 2016.

If LafargeHolcim was to leave the mix in Australia, it is possible that neither Adelaide Brighton nor Boral would be able to take over its share, due to their already-large market presences. This may leave the door open for other regional players, perhaps a Chinese player looking to exit that country's rapidly-declining domestic market? Cemex is contracting and still heavily indebted, leaving it out of the running. While it is also possible that assets could be sold to private equity firms, another interested player could be Ireland's CRH, with 'cash to burn' and recent disappointment from its failure to buy Lafarge and Holcim's former assets in India.

Of course, if the assets aren't for sale, it won't be possible to buy them, meaning that for now the above is just speculation. However, the quick analysis above does highlight the relative lack of viable cement industry suitors in this region. If LafargeHolcim does ever decide to sell in this region, it might find the assets hard to shift.

Bad news for both cement workers and local clinker production in Australia and New Zealand this week with the announcement of job cuts and planned closures of clinker plants. Holcim New Zealand has confirmed that around 120 jobs will go when its Westport cement plant closes in 2016 along with the rationalisation of a few management jobs when the company integrates its Australian and New Zealand businesses. Meanwhile, Boral announced that it will cut 28 jobs from its Maldon Cement plant in Australia when it ceases clinker production at the end of 2014.

With these planned closures cement production capacity in the antipodes will shrink by just over 1.5Mt/yr to around 7.5Mt/yr, a reduction of over 15% Alongside the drop in native cement production players are re-focusing on an import market.

The trend is highlighted by the fact that Boral's Maldon site will retain its grinding mill. Earlier in June 2014 it was reported that Vue Australia is planning to convert a brownfield site on Kooragang Island, New South Wales into a cement storage and transfer plant. In February 2014 Cockburn Cement cut 44 jobs at its Munster cement plant as it started to restructure its operation for grinding using imported clinker. Also in February 2014 Cement Australia, the joint-owned company between Holcim and HeidelbergCement, had a US$17m expansion of its cement loading and storage facility for processing at Osborne approved by local authorities.

Following its restructuring in 2013, which has seen clinker production cease at Waurn Ponds and soon to cease at Maldon, Boral reported that its cement revenues grew in its 2012 – 2013 financial year. This is likely to continue when the 2013 – 2014 year is reported in August 2014. Likewise, Adelaide Brighton reported growing revenues in 2013. Cement Australia reported growing cement sales year-on-year in the first quarter of 2014 following reduced sales in 2013.

All in all the local cement industry in Australia and New Zealand has taken quite a knock in recent years. Reasons for this have included a poor recovery for the local building materials market, high-energy costs, the Carbon Tax in Australia, competition concerns and the spectre of cheap clinker imports from East Asia undercutting everything. However the return to revenue and then profit suggest that the worst of the job cuts and clinker production shrinkage is over.

In this business environment, revelations such as a China Resources spending upwards of US$300,000 on golf are unlikely to garner sympathy for any measures that appear to reduce international competiveness for Australian industry. The current Australian government led by Tony Abbott is set to make good on its promise to repeal the Carbon Tax from July 2014. The environmental effects will be unclear given that the tax may have cut emissions from participating companies by 7%, falling from 342Mt in 2011 – 2012 to 321Mt in 2012 – 2013, according to the Investor Group on Climate Change. As is usual with localised carbon taxation or legislation, whether global emissions fell during this period or whether emissions grew in looser jurisdictions to compensate is hard to calculate. The trend towards clinker imports suggests that there may be a significant contribution from the latter.

This week's news that Boral's operations have been disrupted by the Construction, Forestry, Mining and Energy Union (CFMEU) in the Australian state of Victoria highlights an increasingly difficult situation for the company and the Australian cement industry in general.

Boral's worksite at Footscray, near Melbourne, was allegedly blockaded by the CFMEU last week over the union's separate and long-running dispute with site contractor Grocon. The CFMEU wants Boral to stop supplying Grocon sites. Boral says that it has been forced to address the issue at Footscray and two other sites by issuing injunctions against the union. After its first half results announcement last week, which showed a loss of US$192m for the year ending 30 June 2013, this is clearly the last thing that Boral needs to be dealing with.

So far, 2013 has seen mainly trouble for Boral. In January it announced that it would shed 1000 jobs across its global operations, including 885 in its native Australia. In February it announced that the company made a US$25m loss in the half year to 31 December 2012. In March, it restructured by merging production divisions to save additional cash. It also had to suspend production at its Waurn Ponds plant. However, revenues have been rising. Boral is not Titan.

Elsewhere in Australia, Adelaide Brighton announced that its first half 2013 profit fell by 9% year-on-year. It expects no improvement over 2012 in the rest of the year.

With the onset of the carbon tax, cement manufacturing is increasingly expensive in Australia, a fact that is especially difficult when combined with lower demand. China, Indonesia and Vietnam all produce similar quality cement 'nearby' at considerably lower cost, making the long-term future of cement manufacturing in Australia look fragile. Indeed, this is a trend that Australia shares with its antipodean neighbour. In New Zealand, after years of indecision, Holcim recently decided to not build a new cement plant at Weston. A new import terminal is its new preferred strategy. Could Australia, a country with such vast reserves of fuels and minerals, also be gradually heading towards cement import dependency?

Weston is off. The 'will-they, won't they' of the New Zealand cement industry took a more decisive turn this week with the announcement that Holcim New Zealand intends to import cement instead.

Once Holcim's existing cement plant at Westport winds down there will be no more indigenous cement production on New Zealand's South Island. Golden Bay Cement on North Island will be left as the nation's sole cement producer. Instead Holcim now plans to build US$80m on an import terminal and related infrastructure.

Given a previous price tag of US$400m for the Weston project, switching to an import strategy makes sense for Holcim which has had a hard time of late with a poor first quarter following a tough year in 2012. Despite the benefits that the construction sector in New Zealand has seen with the rebuilding following the 2011 Christchurch earthquake, Holcim is thinking of its wider strategy. Although, as one of the largest multinational cement producers, Holcim has a wide supply chain for clinker, Australia reported poor sales in 2012 and it would be an obvious hub to keep New Zealand topped up with sufficient product.

Last week's doubts about the Indian cement market – when Holcim announced major business restructuring in India – may also have an effect as Vicat too has reported problems in the country this week. The question to ask when Holcim releases its half-year results in mid-August 2013 is how much excess capacity does the company have?

Coincidentally, importing cement is one issue that has come up in the UK Competition Commission's on-going investigation into the UK cement industry. An Irish cement importer has alleged that unnamed European cement producers have blocked his attempts to import cement to Ireland. The UK Competition Commission will continue its investigation until late 2013. Whilst we are not suggesting that the New Zealand cement industry has any problems of this kind, as the market adjusts to a higher level of imports it will encounter new challenges.