Global Cement News

India: ACC has appointed Jan Jenisch as an additional director to its board. Jenisch, a German national, was appointed as the chief executive officer (CEO) of ACC’s parent company LafargeHolcim in mid-2017. Previously he was the CEO of Sika. He graduated from the University Fribourg, Switzerland and holds an MBA degree.

Oman: Al Wusta Cement Company has appointed Abdullah Abbas Ahmed as its chairman and Ahmed bin Yousuf bin Alwai Al Ibrahim as its vice-chairman. The officials were nominated at a meeting of the representatives of two joint venture partners Raysut Cement Company and Oman Cement Company. The new cement company plans to build a plant at Duqm in 2018.

Well it doesn’t normally happen like this. In late September 2017 Ash Grove Cement announced that it was set to be bought by Ireland’s CRH. The words it used were a ‘definitive merger agreement.’ Then suddenly this week on 5 October 2017 Ash Grove said that it had received a higher offer from an unnamed third party and that it was extending its so-called ‘window shop period.’ So much for definitive! The following day Reuters revealed that the new bid was from Summit Materials.

The on-going board machinations at LafargeHolcim and the PPC-AfriSam merger saga in South Africa show that the cement industry has its moments of boardroom high drama. Indeed, both of these long-rumbling stories have had murmurs this week with the early departure of LafargeHolcim’s finance director Ron Wirahadiraksa after less than two years and Dangote Cement’s decision to exit the ring from the PPC bidding. However, it’s rare that cement companies are publicly announced as sold and then get gazumped instead.

The Ash Grove debacle also carries a personal dimension. Ash Grove chairman Charlie Sunderland initially described CRH as his company’s biggest customer and one with a close relationship to the firm. Yet a US$300m higher bid suggests how much those ‘kind’ words were actually worth. To add insult to injury the chief executive officer (CEO) of Summit Materials, Tom Hill, used to work for CRH. This no doubt gave him an idea of how the management of CRH thinks. CRH’s public response so far has been that it has noted the extended shareholder approval period at Ash Grove.

At first glimpse Summit Materials and CRH have a similar cement production base in the US. Both companies operate two integrated plants in the country. Summit Materials runs plants at Hannibal, Missouri and Davenport, Iowa. CRH runs plants at Sumterville, Florida and Trident, Montana. Summit then has 10 cement terminals along the Mississippi River from Minnesota to Louisiana compared to CRH US’ five cement terminals in Detroit, Michigan, Cleveland, Ohio, Dundee, Michigan, Buffalo, New York and Duluth, Minnesota.

Yet, CRH also has two plants in Canada. Then the sheer scale of CRH’s other operations in North America simply dwarfs Summit’s. CRH Americas reported sales of US$16.7bn in 2016, more than 10 times higher than the US$1.6bn that Summit Materials declared. Both companies cover aggregates, asphalt, readymix concrete and cement but CRH is by far the larger of the two. So much so in fact that Summit Materials might potentially be taking on a serious amount of debt to finance the Ash Grove sale. As such any blip to the US cement market over the next few years could have serious repercussions to an overleveraged Summit Materials.

On face value the possible engagement with Summit Materials might appear to show that there is a lack of trust between CRH and Ash Grove. However, this cannot be inferred. As its shares are traded over the counter, Ash Grove’s shareholders have allowed a two-week shop window to enable other companies to counter-offer. This is to ensure that they get the best possible value. Talking to Summit is part of this process and may, or may not, mean that the last remaining US-owned cement producer stays based in the US after all.

Switzerland: Géraldine Picaud has been appointed as the Chief Financial Officer (CFO) of LafargeHolcim and member of the Executive Committee with effect from 1 February 2018. She succeeds Ron Wirahadiraksa, who is described as leaving the company for ‘opportunities outside the group.’ He leaves after less than two years in the role.

Picaud, a French national, joins the group from Essilor International, an ophthalmic optics company, where she has been Group CFO and member of the Executive Committee since 2011. Prior to joining Essilor, she spent four years working for the ED&F Man group in Winterthur, Switzerland following 13 years as CFO at international specialty chemicals group, Safic Alcan. She originally trained as an auditor.

It’s been a pessimistic month for the Indian cement industry with Ministry of Commerce & Industry data showing that cement production has fallen year-on-year every month since December 2016. This was followed by the Cement Manufacturers Association (CMA) saying that the industry was sitting on 100Mt/yr of excess production capacity. Now, the credit ratings agency ICRA has followed the data and downgraded its forecast for cement demand growth to not more than 4% for the 2017 - 2018 financial year.

Graph 1: Annual cement production in India. Source: Ministry of Commerce & Industry.

Graph 2: Monthly cement production growth rate year-on-year in India: Source: Ministry of Commerce & Industry.

Graph 1 shows a production peak in the 2015 - 2016 financial year before falling monthly production broke the trend in the 2016 - 2017 period. Graph 2 pinpoints the month it started to go wrong, November 2016, when the government introduced its demonetisation policy. Production growth went negative the following month in December 2017 and it hasn’t managed to right itself since then and grow. It’s convenient to blame the government for the slump in production but it troughed in February 2017 before taking a lower level of decline since then.

The Reserve Bank of India (RBI) annual report in August 2017 suggests that the policy failed in its principal purpose of reducing the kind of corruption that a cash heavy economy can hide such as tax avoidance. People reportedly managed to find ways to bypass the bank deposit limit and may have successfully laundered large amounts of cash without being caught. However, as commentators like the Financial Times have pointed out, the longer term implications of forcing the economy towards digital payments and increasing the tax base could yet be beneficial overall.

Graph 3: Cement production capacity utilisation rates in India. Source: UltraTech Cement.

Moving on, the CMA has blamed production overcapacity for the current mess and Graph 3 shows the problem starkly. If anything the CMA appears to have downplayed the over capacity crisis facing India, as UltraTech Cement’s figures (using data from the Department of Industrial Policy and Promotion) show an overcapacity of 155Mt in the 2016 – 2017 year and this will grow to a forecast 157Mt in the next financial year, even though the utilisation rate is expected to rise slightly. UltraTech Cement’s estimates don’t see the utilisation rate topping 70% until the 2020 – 2021 financial year. Analysts quoted in the Mint business newspaper concur, although they reckoned it would the rate would bounce sooner, in 2019 - 2020. Last month when the CMA moaned about the industry's excess capacity it pinned its hopes on infrastructure schemes like the Mumbai-Ahmedabad bullet train. This prompted an official at JK Cements to say that he didn't think that one train line was going to make much of a difference.

This is one reason why ICRA’s and the other credit agencies’ growth rate forecasts for cement demand are important, because they indicate how fast India might be able to close the gap between production capcity and demand. Unfortunately demonetisation scuppered ICRA’s growth prediciton for 2016 – 2017. It forecast a rate of 6% but it actually fell by 1.2%! So downgrading its forecast for 2017 – 2018, with fears of weather and the implementation of the Goods and Services Tax (GST) in the second half of the year, is ominious. Major cement producers such as Ultratech Cement and Ambuja Cement have based their road to recovery in their latest investor presentations on a 6% growth rate or higher. Pitch it lower and the gap doesn’t close. Here’s hoping for a brisk second half.