Global Cement News

South Africa: PPC has appointed Peter Nelson as its interim chairman following the retirement of Bheki Sibiya. A permanent replacement for Sibiya is expected to be recruited by September 2016.

Nelson was appointed to the Board as an independent non-executive director on 25 January 2015. His experience covers manufacturing, mining, telecommunications, healthcare, leisure, property, packaging and the motor industry in listed and private entities in South Africa, the United Kingdom, Zimbabwe and Nigeria. He has served as chief financial officer on several Boards including Telkom, Netcare and Mondi.

Austria: A TEC Group has appointed Wolfgang Hammer as its new managing director. The former Global Sales Manager at the company replaces Hans Joachim Grieb who retired on 31 March 2016. Stefan Kern has been appointed his deputy. He is responsible for the markets Northern Europe, Eastern Europe and South Africa. These appointments are effective from 1 April 2016.

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.

UK: Hanson Cement has appointed Robert Keough as technical development manager at its cement plant in Ketton, Lincolnshire. His role will involve promoting the sustainability credentials of concrete specifications and emphasising the use of ground granulated blast furnace slag (GGBS) as a sustainable cement replacement product.

Keough has two years’ experience working for Hanson UK’s parent company, HeidelbergCement Group, as an engineer in training, giving him a firm foundation in the organisation’s values. During this time he worked in the continuous improvement team where he focused on reducing costs and increasing operational performance across the aggregates business.

Keough, aged 26 years, holds a bachelors degree in chemistry with management from the University of Bath and a master’s degree in minerals engineering from the University of Exeter. He holds experience with the financial services company Hargreaves Lansdown.

Sandbag, a climate policy think tank, published its report on the European cement sector entitled ‘Cement - The Final Carbon Fatcat’ last week on 16 March 2016. Amongst its findings the report accused the European Union (EU) Emissions Trading Scheme (ETS) of pushing up emissions created by the cement industry. Unsurprisingly, Cembureau, the European Cement Association, took exception to some of the content of the report and issued a rebuttal. Notably, it said that ‘allegations that the ETS has incentivised overproduction are based on thin air.’

Here we present a section of the executive summary of Sandbag’s report that describes the current situation with the EU ETS and how Sandbag argue this has distorted the European cement industry.

The depressed carbon price under the EU ETS has done little to effect a reduction in emissions from the European cement sector. A surplus of more than 2bn EU allowances (EUAs) has built up in the European carbon market since 2008 with no expectations for the situation to change significantly over the medium term. Industry sources cite that the costs of upgrades to best available technology are tantamount to greenfield investments. The current low carbon price alone is not enough to render such investments economic, especially in the context of a depressed cement market. This applies even more so in the case of capturing and storing/using direct emissions (CCUS) which at this stage seems to be an expensive technology merely in the development stages across Europe.

Figure 1: Expected development of allowance surpluses for major industrial sectors until the end of Phase 3. Source: EUTL (Sandbag calculations).

The rules governing free allocation of allowances have failed to incentivise abatement in the cement sector. In particular, the sector’s inclusion on the list of sectors exposed to the risk of carbon leakage, as well as insensitivity to production changes, will cause its over-allocation to balloon. As we reveal in Figure 1, if activity levels continue at 2014 levels, by 2020 this surplus will be larger than 2.5 years’ worth of emissions. This is more than would be the case for almost any of the other major industrial sectors, practically all of whom expect to lose all or most of their earlier surpluses by the end of this decade.

The chronic oversupply of EUAs to the cement sector is partly due to the fact that cement firms are able to optimise their production of different products across different facilities to maximise their free allocation. Free allocation to cement installations is based on benchmarks relating only to the manufacture of clinker, an intermediate product. Many firms have been able to retain maximum free allocation, corresponding to peak production, by keeping a range of their facilities operating at just above 50% of their historic activity levels – the level required to retain 100% free allocation.

Figure 2: EU net clinker trade. Source: UN COMTRADE (Sandbag calculations).

This free allocation loophole has resulted in both windfall profits and a de facto production subsidy for highly carbon-intensive clinker. This clinker is then either blended in higher than necessary shares into cement or, as we show in Figure 2, actually exported, as EU cement subsidised by free allowances has a competitive advantage compared to manufacturers outside the ETS. This creates a net import of emissions to the EU – the complete reverse of the carbon leakage threat that many industry groups have emphasised. As we show in Figure 3, this stimulation of clinker exports to countries outside the EU has been the single most damaging factor to the decarbonisation of this sector, pushing 2013 emissions nearly 15Mt higher than they could have been.

Figure 3: Different factors’ contribution to cutting the cement sector’s emissions EU-wide during 2005 - 2013. Source: Cement Sustainability Initiative ‘Getting the Numbers Right’ database (Sandbag calculations).

As well as causing a surge in emissions, the insufficiently responsive free allocation rules leave cement companies strongly over-allocated. Table 2 shows the surpluses we estimate that the five cement majors have accumulated (or monetised) since the beginning of Phase 2.

Table 2: Largest cement companies’ surpluses and emissions (millions of EUAs, euros and tonnes). Source: EUTL (Sandbag calculations).

These five companies from the cement sector have collectively received nearly Euro1bn worth of spare EU allowances (EUAs) for free between 2008 and 2014. As the number of free allowances available to all industry is fixed, over-allocation to cement companies reduces the allowances available to other sectors that might really need protection.

The ETS therefore provides few incentives for these firms to invest in decarbonisation technologies. Given widespread expectations for an over-supplied carbon market well in to the 2020s and, consequently, a low carbon price, the opportunity cost of holding onto allowances is negligible when compared to the high cost of investment in abatement technologies.

Thanks to Alex Luta and Wilf Lytton at Sandbag for letting Global Cement publish this extract of their report. The full version of ‘Cement - The Final Carbon Fatcat: How Europe’s cement sector benefits and the climate suffers from emissions trading flaws’ is available to download from Sanbag’s website.