Displaying items by tag: Overcapacity

Egypt: Suez Cement has recorded a loss of US$18.0m in the first three months of 2020, compared to a profit of US$11.0m in the first three months of 2019. Sales fell by 27% year-on-year to US$80.6m from US$110m in 2019. Domestic demand in relation to Egypt’s production overcapacity fell in March 2020 due to the coronavirus outbreak. Daily News Egypt has reported that the second quarter 2020 results will carry greater losses for Suez Cement due to coronavirus lockdown measures and seasonal factors such as Ramadan, with cement volumes down by 27% year-on-year in May 2020.

Egypt: Misr Cement Qena’s first quarter sales were US$50.4m in 2020, up by 2.0% year-on-year from US$49.1m in the first quarter of 2019. Daily News Egypt has reported that the company’s debts on 31 March 2020 were US$30.0m, down by 20% from US$37.5 on 31 December 2019. Misr Cement Qena managing director Tarek Talaat said, “The extraordinary performance in the quarter will contribute to alleviating the repercussions of the coronavirus outbreak on the company’s 2020 results.” Talaat urged the “revitalisation of demand” to boost prices. Egyptian producers produced 78.0Mt of cement in 2019, 29.3Mt surplus to the domestic cement demand of 48.7Mt/yr.

China: The Ministry of Industry and Information Technology (MIIT) has reported net profit growth for the entire domestic cement sector of 20% year-on-year to US$26.6bn in 2019 from US$22.3bn in 2018. Total revenues reached US$144bn, representing an increase of 13% from US$128bn. Xinhua China Economic Information Service has reported that the MIIT attributed the profit growth to a reduction in overcapacity throughout the year due to supply-side structural reform.

Announcements from two very different countries serve to highlight the global cement sector’s on-going and seemingly intractable overcapacity issues this week.

First up, India, the world’s largest democracy and second-largest cement market, will reportedly struggle to exceed 70% capacity utilisation in the forthcoming 2020-2021 fiscal year, according to the credit ratings agencies ICRA, India Ratings and Crisil. In the same week, however, we have heard that UltraTech Cement will launch a 3.5Mt/yr capacity expansion at its Bhogasamudam plant in Andhra Pradesh, while ACC committed to launching a 2.5Mt/yr plant in Chandrapur, Maharashtra early last week. In February 2020 Deccan Cements firmed up plans to expand its Mahankaligudem plant in Telengana and JSW wants to turn its Bilakalagudur plant into a 6Mt/yr beast. Back in January 2020. Shree Cement launched ambitious plans to spend US$1.3bn on upgrades in the period to 2023. With Indian capacity estimated to hit 500Mt/yr by the close of 2020, what do all of these producers know that ICRA et al don’t?

Second on the list is centrally-planned Vietnam, the world’s third-largest producer, having produced 96.5Mt of cement in 2019. Here, long-standing excessive capacity is looking increasingly ridiculous following a massive collapse in export sales in January and February 2020 due to the coronavirus outbreak. This, of course, continues to affect cement producers and users alike.

Just today, Nguyen Quang Cung, chairman of the Vietnam Cement Association (VNCA) said that demand is expected to remain high throughout 2020 as a whole. The Ministry of Construction (MoC) currently stands by its autumn 2019 forecast that Vietnam will produce a whopping 103Mt of cement this year. It expects domestic consumption to be around 70Mt, with exports of 33Mt. A 2.5Mt/yr plant in Tân Thắng Commune in the central province of Nghệ, and a 4.6Mt/yr plant in Bỉm Sơn Commune, Thanh Hóa, will come online in 2020, further adding to the country’s capacity. Exports were touted as the saviour of the sector back in January 2020. This assertion may now have to be revisited.

The drivers behind the overcapacity are different in each country. Indian producers have a long history of capacity addition in order to maintain or improve their market share. Standing still is tantamount to walking (or even running) backwards, so the biggest producers (and those that want to become big producers) tend to go ‘over the top’ with their expansion aims. Market forces eventually catch up with the smaller players, which find themselves bought up or shut down. This has the seemingly inevitable effect of maintaining low capacity utilisation rates.

In Vietnam, the overcapacity is due to central targets, which, as noted previously, are an entirely alien concept for cement producers across much of the rest of the world. As Vietnam’s obsession with high cement production has developed, it has become hooked on exports, entering a void recently vacated by Chinese exports. It often sells at scarcely-believable prices and now, with the introduction of the coronavirus into the mix, even these seem to be too high. After all, Vietnam’s cement association cannot ‘set targets’ for cement demand in other countries.

So… how to reduce capacity? There are two examples, again from different types of market. China has, of course, reduced its overcapacity massively to eliminate outdated capacity and improve the country’s environmental performance. This has been possible due to orders from the top of government. The other example can be found in Europe, where the EU Emissions Trading Scheme has finally found its teeth, with the oldest and least efficient plants now feeling the financial bite of their CO₂ emissions.

It remains to be seen whether the collapse of the export market will force the Vietnamese cement sector to rationalise its inventory. From a market-based mindset it is clear that it should follow China’s lead. India, meanwhile, has a massive overcapacity that market forces seem slow (or indeed unable) to clear. The EU route may be more applicable here, but one might expect resistance from cement producers. Also, the development and demographic differences between India and Europe are stark, indicating that there may be a need, at some point in the future, for 500Mt/yr of capacity. The Indian majors are counting on this and laying the groundwork for a step-change in the future. Indeed, in a few years, 500Mt/yr may look vanishingly small if demand increases rapidly. What are the chances of that?

Semen Indonesia’s third quarter results this week give us a reason to look at one of the world’s largest cement producing countries, Indonesia. As the local market leader, Semen Indonesia’s financial results have been positive so far in 2019 following its acquisition of Holcim Indonesia at the start of the year. Analysts at Fitch noted that gross margins for Semen Indonesia and its rival Indocement grew in the first half of 2019 as coal prices fell and cement sales prices rose.

Sales volumes, however tell a story of local production overcapacity and a move to exports. Domestic sales volumes fell by 2.05% year-on-year to 48.8Mt in the first nine months of 2019. Cement and clinker exports nearly compensated for this by rising by 15.4% to 4.8Mt. This is brisk growth but slower than the explosion of exports in 2018. Semen Indonesia’s local sales from its company before the acquisition fell faster than the national rate at 4.9% to 18.7Mt. The new sales from Solusi Bangun, the new name for Holcim Indonesia, partially alleviated this. It’s been a similar story for HeidelbergCement’s Indocement. Its sales revenue and income have risen so far in 2019. At the mid-year mark its sales volumes fell by 2.3% year-on-year to 29.4Mt.

Graph 1: Indonesian cement sales, January – September 2019. Source: Semen Indonesia.

Geographically, Indonesia Cement Association (ASI) data shows that over half of the country’s sales volumes (56%) were in Java in the first half of 2018. This was followed by Sumatra (22%), Sulawesi (8%), Kalimantan (also known as Indonesian Borneo, 6%), Bali-Nusa Tenggara (6%) and Maluku-Papua (2%). By cement type the market is dominated by bagged cement sales. It constituted 74% of sales in September 2019. The main producers have been keen to point out growth in bulk sales as its share has increased over the last decade.

Graph 2: Indonesian cement sales by type, 2010 – 2019. Source: Semen Indonesia/Indonesia Cement Association.

Previously the main story from the Indonesian market has been one of overcapacity and this has continued. It had a utilisation rate of 70% in 2018 from production volumes of 75.1Mt and a capacity of 110Mt, according to ASI data. This was likely to have been a major consideration in LafargeHolcim’s decision to leave the country and South-East Asia (see GCW379) with no end in sight to the situation in the short to medium term. At the end of 2018 it felt like consolidation was in progress following this sale and the reported sale of Semen Panasia. So far though this has been all and perhaps the upturn in the second quarter might buy the producers more time.

As mentioned at the start, another aspect of the Indonesian market deserving comment is that it is one of the first countries with a large cement sector where a Chinese company has made a significant entry. Conch Cement Indonesia, a subsidiary of China’s Anhui Conch, became the third largest producer following the acquisition of Holcim Indonesia. Semen Indonesia and Indocement control 70% of local installed capacity across both integrated and grinding plants with 51Mt/yr and 25.5Mt/yr respectively.

Conch Cement Indonesia is the next biggest with 8.7Mt from three integrated plants and a grinding unit. It’s in a tranche of three smaller producers locally, along with Semen Merah Putih and Semen Bosowa. Fitch also picked up on this in a research report on the cement sector published in August 2019. It pointed out that, although Holcim Indonesia and Indocement had gained pricing power through their leading market share, this is being eroded by local producers owned by Chinese companies.

Depending on how you look at it, Indonesia has the ‘fortune’ to be only the second largest producer in South-East Asia, after Vietnam. China, the world’s largest producer, is not too far away either. As can be seen above this can be a mixed blessing for local producers as the market changes. Overcapacity abounds, a major multinational has moved out, a local firm has consolidated the market as a result and Chinese influence grows steadily. Indonesia could well be an example of things to come for other markets.

Egypt: Medhat Istafanos, the head of the Cement Division at the Federation of Egyptian Industries (FEI), says that the market is only supporting 40% of local production. He blamed this on a slowdown in building activity and a lack of government-backed infrastructure projects to make up the shortfall, according to the Al-Ahram newspaper. Noha Bakr, an executive director at the cement division of the FEI, also blamed a construction ban on agricultural land.

The country’s 24 cement plants have a production capacity of 85Mt/yr but only 48Mt were sold in 2018. Cement sales have fallen since 2017 and are expected to reach 49Mt in 2019.

Producers are exploring options to increase cement exports. Walid Gamaleddin, the president of the Export Council for Building Materials and the Metallurgical Industries, has called for the government to support industry exports. The minister of trade and industry discussed a programme for cement-export subsidies with officials from the sector in late July 2019 that would include encouraging agreements to export cement to the African countries. The Central Bank of Egypt (CBE) has also instructed the banking sector to support cement companies that needed to restructure their debts. The merger of smaller companies to form larger conglomerates has also been encouraged.

However, growing exports of Egyptian cement is challenged by its relative high cost compared to other countries. Istafanos said that Egyptian cement is US$12/t higher than its competitors.

Two new stories from Algeria this week highlight a changing industry. Firstly, Groupe Industriel des Ciments d’Algérie (GICA) started marketing cement from its new Sigus integrated plant. The unit was commissioned earlier in the year. Secondly, clinker export figures for the sector show 10-fold growth year-on-year to a value of US$30m for the first five months of 2019.

Graph 1: Cement production and capacity in Algeria, 2012 - 2018. Source: Algerian National Office of Statistics, United States Geological Survey, Global Cement Directory 2013 - 2019. Estimates supplied for 2017 and 2018.

Graph 1 above depicts the moment that lots of new production capacity started to be ordered and then commissioned in 2017. The Global Cement Directory lists new plant projects as they are announced so the trend from 2016 to 2017 may not be as pronounced as it seems but the general destination remains the same. A Ministry of Industry and Mining report estimated that production capacity would reach 40Mt/yr in 2020. Consumption was reported at 26Mt in 2016.

To cope with this the cement industry in Algeria has been moving towards an export model over the last few years. Industry and government figures started to warn of an end to imports in 2016. This quickly flipped to prognostications of production overcapacity in 2017. This then became a stream of news stories about export operations from the local industries to places like West Africa. One consequence of this were problems for foreign exporters in Tunisia and Spain, for example, as the Algerian market was shut off. Indeed, it must have been satisfying for state-producer and market leader GICA to announce that it was exporting cement to Europe in 2018!

Notably the local market has no cement grinding plants, yet this too has started to change. In May 2019 Algematco Steel ordered a modular Ready2Grind MVR vertical roller mill from Germany’s Gebr. Pfeiffer. Target markets for the exports identified by the Ministry of Industry and Mining included neighbouring Mali, Libya, Mauritania and Niger. However, only two of these countries are accessible by sea. Unfortunately, Libya’s resurgence in violence since April 2019 is unlikely to help the export market. The other countries share land borders with Algeria but no rail links. An overland export operation to Niger from a plant near Adrar was reported in early 2019 but feasibility on a large scale seems unlikely given the distances involved.

LafargeHolcim said in its 2018 financial report that its net sales were down in its Middle East and African region due to price pressure and lower volumes in oversupplied markets, particularly in Algeria, Iraq and Jordan. Bloomberg reported in February 2019 that LafargeHolcim was considering divesting assets in the region. However, LafargeHolcim’s exit from Southeast Asia may have since bought it some financial breathing room.

With Algeria facing a production capacity gap of at least 10Mt/yr it seems likely that foreign-backed producers like LafargeHolcim will suffer despite potential in the local economy. Nationally, the race is on to see if the industry can bring its cement to the sea and find new export markets.

Algeria: The value of clinker exports grew to US$30m in the first five months of 2019 from US$3.2m in the same period in 2018. The country is hoping to increase its exports of cement and clinker to around US$500m/yr by the mid-2020s, according to Télévision Algérienne. It is facing a significant production overcapacity with the manufacturing base expected to reach 40.6Mt/yr in 2020. Consumption was 26Mt in 2016.

Egypt: El Nahda Cement has suspended production at its 1.7Mt/yr plant at Quena for six months. It has taken the decision due to lower sales and increased supply in the local market, according to Mist News. The local industry has reported production overcapacity in recent years. In mid-2018 the 13Mt/yr government/army-run El-Arish Cement plant at Beni Suef was fully opened

China: The China Building Materials Federation has released plans to cut cement production capacity by 70Mt in 2019 as part of its efforts to reduce air pollution and increase industry efficiency through consolidation. Ideally the federation’s work plan wants the largest 50 national producers to cut all production lines with a capacity below 2000t/day and tp upgrade old technology on the remaining lines, according to Yicai Global. Typically larger cement production lines in the country manufacture 5000 – 7000t/day.

China produced 2.2Bnt of cement in 2018. The new work plan will order all cement companies to shut down production lines producing below 2000t/day in areas where pollution is high. The Beijing-Tianjin-Hebei region in northern China has been identified as one of these areas. The scheme also encourages industry consolidation, aiming to bring over 60% of national production to the top 10 cement makers, and wants to eliminate poor-quality cement products so that they make up less than half of all cement made. It wants to use mergers and restructuring to do this and it supports integration through cross shareholdings and asset exchanges.