Displaying items by tag: Overcapacity

Indonesia: Semen Indonesia’s revenue grew by 1.2% to US$1.13bn in the first half of 2021 from US$1.12bn in the same period in 2020. Its sales volumes of clinker and cement rose by 5.7% to 19.2Mt from 18.1Mt. Earnings before interest, taxation, depreciation and amortisation (EBITDA) increased by 2.1% to US$247m from US$242m. The state-owned cement producer said that sales volumes were supported by growing domestic sales volumes and improving exports. It added that the national cement production capacity utilisation rate had fallen to 56% in 2020 from a high of 82% in 2014 due to new cement plants being built and a drop in domestic demand growth due to the coronavirus pandemic in 2020.

Egypt: The Egyptian Competition Authority has approved a request by 23 cement producers for permission for a temporary reduction in their cement output by 11%, with additional cuts of 3% per kiln line. Reuters has reported that the reduced quotas will be in force between 15 July 2021 and 15 July 2022. Previously, two cement executives quoted by the source said that the proposed cuts seemed unfair on multinational companies, like them, that operate older plants.

Reporting from Egypt this week suggests that the government may be finally taking action to aid the country’s beleaguered cement sector. Sources quoted by Reuters indicate that a production cut of at least 14% has been proposed. One of the cement industry sources broke it down into a 10.5% baseline reduction with a further 3.7% reduction per production line at a cement plant with an additional cut of 0.7% per year of operation. The Ministry of Trade and Industry has declined to comment on the story.

Graph 1: Cement production and capacity utilisation in Egypt. Source: Cement Division of the Building Materials Chamber of the Federation of Egyptian Industries.

Graph 1 above shows the key problem facing the sector: cement production has fallen each year since 2016. Added to this, local capacity utilisation took a knock when the 13Mt/yr government/army-run El-Arish Cement plant at Beni Suef opened in 2018. Before it opened the natural utilisation rate was around 80%. By 2020 it had sunk to 60%.

The coronavirus pandemic was another problem that the building materials market didn’t need and the last time this column covered Egypt (GCW 475), HeidelbergCement was restructuring its local subsidiaries in the country. Most producers were holding on for better days in the future but hoping for some form of government intervention such as production limits or an export subsidy programme. Meanwhile, analysts have been waiting for divestments. However, the prospect of the situation becoming worse was also present, in the guise of the Egyptian Cement Group’s new integrated 2Mt/yr plant, scheduled to open at Sohag later in 2021. Since then there’s not been much of a change until now.

Some very rough calculations by Global Cement suggest that the alleged government measures could have created an artificial utilisation rate of 78% in 2020 before the age of the plants was taken into account. For example, the El-Arish Cement plant with its six production lines would potentially see its production cut by around 33% and capped at 8.7Mt/yr. In theory a measure like this could better share out the market between the smaller producers or those with less market share. However, how this would play out with actual plant running costs or existing market share is unknown, although, as mentioned above, some of the multinational producers have been publicly calling out for these kinds of controls.

Playing around with the proposed caps could potentially create some absurd situations. For example, if a single line plant had been running for over 120 years (!) then it wouldn’t be allowed to produce any cement at all. It is lucky then that the earliest plant in the country opened in 1911 and it’s likely long gone. It’s a silly example, but the point is, if production limits do come in, there are likely to be winners and losers. The question for the local producers then is whether a system like this would be better than the current situation.

Egypt: The Egyptian government has reportedly proposed that cement companies cap production by at least 14%. Multiple sources quoted by Reuters reveal that a formula was discussed in April 2021 proposing that cement plants cut production by a base amount of 10.5%. An additional cut of 3.7% would then be made for each production line a plant has and another 0.65% for each year they have been in operation. However, it is unclear how the age of a plant or production line would be determined. The Ministry of Trade and Industry has not commented on the story.

The measures have been suggested in order to help the sector cope with falling consumption and production overcapacity. Cement sales fell by 5% year-on-year to 41.7Mt in 2020 from 43.8Mt in 2019. However, two of the cement executives quoted said that the proposed cuts seemed unfair on multinational companies like their own that had older plants.

Global Cement Weekly celebrates its 500th edition this week. This corresponds to nearly a decade’s worth of news and comment upon the cement industry, since the first edition went out in early June 2011. Time is brief, so the quick version of all of this is as follows: China; production growth; production overcapacity; grinding; corporate mergers; regionalisation; CO₂; digitisation; and coronavirus.

Those looking for the longer version should read Peter Edwards’ review of the 2010s in the December 2019 issue of Global Cement Magazine. Although be warned, few were expecting a global pandemic to rock markets and possibly hasten future trends when that article was written. Those looking for the even longer version should read the last 10 years of the magazine and the website… and then let us know what we missed.

Looking back at the first few editions of Global Cement Weekly brings to mind the LP Hartley quote, “the past is a foreign country; they do things differently there.” It’s all very familiar until one comes across the little things that makes one realise how much has actually changed.

For example, countries were imposing import tariffs on cement, companies were buying each other, national cement associations were lobbying hard for their members and cement plants were investing in alternative fuels equipment. All that stuff has been happening continually over the last decade and right into this week, with Russian media announcing who has won the auction to buy Eurocement and LafargeHolcim closing its deal to buy Firestone Building Products. Yet, Lafarge and Holcim were still separate companies and Italcementi was independent in 2011. On the sustainability side, Norcem and its parent company HeidelbergCement Group, with the European Cement Research Academy (ECRA), had just started a partnership agreement with Aker Clean Carbon (ACC) to study post-combustion CO₂ capture technology at Norcem’s plant in Brevik, Norway. Jump forward nine years and Norcem signed a deal with Aker Solutions in mid-2020 to order a full scale CO₂ capture, liquification and intermediate storage plant at Brevik.

The big numbers from the United States Geological Survey (USGS) show that global cement production grew by 24% to 4.1Bnt in 2020 from 3.3Bnt in 2010. However, the big growth had stopped by around 2013 and production has hovered between 4.0Bnt/yr and 4.2Bnt/yr ever since. Alongside this, Getting the Number Right (GNR) data indicates that net CO₂ emissions for cementitous products fell by 4% to 610kg/t in 2018 from 636kg/t in 2010. The former may show a levelling off of production as the Chinese market stabilised in the 2010s but the latter shows the progress that has been made in reducing cement-related CO₂ emissions and the scale of the challenge that remains ahead.

Graph 1: Embodied energy versus embodied CO₂ of building materials. Source: Hammond & Jones, University of Bath, UK.

Cement industry readers should not lose heart about the future of the industry though, while environmental pressure continues to mount. Graph 1 above shows the embodied CO₂ and energy of common building materials. Cement has been rightly identified as a major emitter of CO₂ but any society that desires to build strong structures cheaply and at scale requires concrete to do so whilst the data above remains unchallenged. The ratios may change, such as the perennial energy-cost influenced tug-of-war between asphalt and concrete roads, but concrete remains the only game in town. For now. At which point cement production becomes all about reducing the CO₂ emissions or capturing them, and determining who exactly pays for this. This then brings us to the present with the European Union Emissions Trading Scheme carbon price of over Euro40/t and other schemes popping up all around the planet. One echo from one of the early editions of Global Cement Weekly was the furore over Australia’s attempt at a carbon tax in the early 2010s. It was repealed in 2014.

One prediction about how the 2020s might be summarised for the cement industry is this: how to get away with pumping out all that CO₂? Let’s see what the next decade will bring.

Many Saudi Arabian cement producers have reported increased annual sales and profits in recent weeks. Southern Province Cement’s sales revenue rose by 27% year-on-year to US$440m in 2020 from US$347m in 2019. Net Profit after zakat and tax increased to US$162m from US$123m. Other producers enjoyed similar boosts. The reason can be seen in the country’s domestic cement sales. They rose by 21% year-on-year to 51Mt in 2020 from 42Mt in 2019. After a promising start to the year the coronavirus pandemic hit local production hard in the second quarter of 2020. However, it nearly doubled year-on-year in June 2020 and kept up the pace thereafter.

Graph 1: Domestic cement sales in Saudi Arabia, 2010 – 2020. Source: Yamama Cement.

Graph 1 above puts the cement sales in 2020 into context over the last decade. Sales hit a high in 2015 but then started to wane as infrastructure spending dried up due to lower oil prices and decreased government spending. A ban on exporting cement was subsequently relaxed but the general market appeared to adapt to the new situation. This changed significantly in 2020 with analysts attributing the turnaround to programs organised by the Ministry of Housing. This growth has carried into 2021 with NCB Capital forecasting an increase of 3.5% in local cement sales in 2021 due to the ongoing housing programs, the country’s so-called ‘Giga’ projects and investment by its sovereign wealth fund, the Public Investment Fund (PIF), as part of its 2021 - 2025 strategy. They reported that demand created by the country’s large-scale projects began to be felt along the supply chain in the fourth quarter of 2020 and associated contracts have started to be issued.

To give an example of the scale of some of these schemes, one of the proposed giga projects is to build a new city called Neom from scratch near the Red Sea coast. The resulting conurbation is intended to showcase new technologies and diversify the Saudi Arabian economy away from hydrocarbons. It has a price tag of US$500bn. An airport was built in 2019 and a next step was announced in January 2021, introducing a 160km linear city without roads called ‘The Line.’ Doubtless it will require lots of cement to realise the dream in whatever forms it happens to end up taking.

The wider picture here is that global oil prices hit a low in April 2020 as coronavirus lockdowns triggered a worldwide drop in demand although they then started to recover. The International Monetary Fund (IMF) estimates that Saudi Arabia’s gross domestic product fell by just under 4% in 2020. In response the PIF has upped its investment in the local economy including in the ‘Giga’ projects like Neom. There has been scepticism internationally about whether these projects will progress any further beyond press releases and actually get built. However, the cement producers’ financial results, cement sales figures and reporting from analysts like NCB Capital show that some investment is happening and it’s having results. The sector still faces a battle against overcapacity. It had a production utilisation rate of just under 70% despite the increase in cement production in 2020. Yet cement producers in Saudi Arabia have done well. While the Saudi Arabian government continues to spend on infrastructure in order to rebalance its economy this looks set to continue.

Algeria: The Ministry of Trade has drawn up a plan for the export of Algeria’s 20Mt/yr surplus cement, over 1.0Mt/yr of which is already being exported to Niger and other West African neighbours. Algeria Press Service has reported that the plan involves the country opening its land and sea borders for the cement, which constitutes 50% of the country’s 40Mt/yr total cement production.

Trade Minister Kamel Rexig said, “The surplus production will be exported and will thus guarantee an inflow of money amounting to US$900m/yr. The ministry has identified 10 national zones of production, including the export of cement, as a strategy for the year 2021.” He added, “The efforts made by economic and industrial operators to increase the volume of production intended for export in cement deserve to be encouraged.”

Algeria’s cement capacity first exceeded domestic consumption in 2017, prior to which it relied on cement imports from Tunisia.

The one thing that the Egyptian cement industry really didn’t need this year was any more jolts. Since the gargantuan 13Mt/yr government/army-run El-Arish Cement plant at Beni Suef opened in 2018, the sector has been stuck in production overcapacity and struggling to catch up. Yet, like the rest of us, they got one nasty surprise in the shape of the coronavirus pandemic. This has added stress to the whole situation and we can see some of this in various news stories that Global Cement has covered recently.

HeidelbergCement’s local subsidiary Suez Cement has been busy in recent days making changes to its corporate structure in the form of a tender offer to buy a 100% stake in Egyptian Tourah Portland Cement. Production stopped at Tourah Cement in June 2019 due to market conditions. This follows yet more lacklustre financial results earlier in September 2020 that show the pain that it and other cement producers have been enduring. Suez Cement’s loss nearly doubled year-on-year to Euro38m for the first half of 2020 and its sales fell by 18% to Euro145m. This was blamed on production overcapacity and a coronavirus-related lockdown. Other producers, both multinational and local, have experienced a similar situation.

Suez Cement also announced in mid-September 2020 that its Ready Mix Beton subsidiary had secured a contract for the supply of concrete for the construction of two new monorail lines connecting the country’s new city projects. Unfortunately, as Suez Cement’s chief executive officer (CEO) Jose Maria Magrina explained in an interview to Daily Egypt News in July 2020, “the New Administrative Capital (NAC) is a very big project, but in the end it has not offset the decrease in informal buildings that have been stopped.” Despite Suez Cement being a major supplier and the proximity of its plants to the site, overall sales have gone down.

Graph 1: Cement consumption in Egypt. Source: Cement Division of the Building Materials Chamber of the Federation of Egyptian Industries.

Magrina’s gloom is shared by other industry figures with a general assumption that perhaps up to a quarter of the country’s 20-something cement plants may have to close in the next year or so. Coronavirus has only deepened this view as the government’s response was to cease issuing construction licences for private buildings in Greater Cairo, governorate capitals and major cities from late May 2020 for six months. Solomon Baumgartner Aviles, the CEO of Lafarge Egypt, said in July 2020 that local cement demand fell by 6.5% year-on-year in the first half of 2020. He added that coronavirus had ‘strongly’ impacted the building materials sector with a big effect on the individual market, and with the licence halting exacerbating the situation further. As data from the Cement Division of the Building Materials Chamber of the Federation of Egyptian Industries shows above in Graph 1 demand peaked at 56.5Mt in 2016 and has since declined to a low of 48Mt in 2019. By month the sector recovered in January and February 2020 respectively with growing cement sales on a year-on-year basis but this has since declined with losses in most months subsequently. This is set against a production capacity of 81.2Mt/yr in 2018, giving an excess of 30Mt/yr and a utilisation rate of 59%.

One story that was mentioned in the local press this week is that Arabian Cement Company (ACC) had started negotiations with the European Bank for Reconstruction and Development and the Commercial International Bank – Egypt to secure new loans worth over US$20m. The ACC has denied this publicly in a statement to the Egyptian Exchange but it’s a sign of the trouble that is expected in the sector given the current circumstances.

All of this leaves cement producers scrabbling to hold on until the market picks up again, takes action in other ways or the government intervenes. Some analysts expect the market to stabilise in the medium to longer term as work on large infrastructure projects like the NAC mounts. Suez Cement’s Jose Maria Magrina has said that, “the government must, within the law, dictate norms that will rationalise the market, while making sure that companies survive since current prices do not cover the costs of production.” Local press has since reported that the Ministry of Trade and Industry has started trying to help cement companies, including measures such as limiting production to balance supply and demand, and decrease the surplus in the market. Another option is a coordinated export subsidy programme in coordination with the government but nothing appears to have happened yet after several years of discussion. Unhelpfully for any export aspirations, Egypt finds itself in a very cement export-heavy part of the world, wedged as it is between North Africa, Turkey and Southern Europe.

Hope springs eternal though as, almost unbelievably, Egyptian Cement Group’s CEO Ahmed Abou Hashima surfaced last week to remind everyone that his company still plans to inaugurate its new integrated cement plant in 2021. The project to build a new 2Mt/yr unit in Sohag has been brewing since 2017 when it was announced with China-based Sinoma on board as the engineering partner. It was originally scheduled to open in the first half of 2020 but it was delayed by coronavirus. Let’s hope the picture looks better when it finally opens.

Vietnam: The government has adopted a cement industry development strategy under which all plants below 0.9Mt/yr capacity must make investments to improve their productivity, product quality, energy saving and environmental protection by 2025. In order to facilitate this, the government says it will improve institutions and policies and improve the efficiency of raw materials exploitation, scientific research and industrial application, promoting domestic consumption, increasing available training and tightening environmental protections, according to Việt Nam News. Plants which fail to increase productivity in the specified ways will face closure.

The government says that strategy aims, “to develop the cement industry to an advanced and modern level, to produce cement of international standard quality with economical and efficient use of energy, giving high competitiveness in the international market, while meeting the needs of the domestic market, completely eliminating out-dated, natural resource-consuming and polluting technology for production.” The measure specifically targets the country’s overcapacity issue in its efforts to develop demand and its emphasis on product quality.

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.