Global Cement News

The Saudi Cement Company has been complaining in recent weeks about market conditions in Saudi Arabia. Following a meeting of its board of directors in early February 2016, it decided to temporally a 3500t/day production line and halt further upgrades. At the meeting it blamed the local market and the country’s export ban.

In January 2016, the cement producer reported that its net profit had fallen by 35% year-on-year to US$49m in the fourth quarter of 2015 from US$76m in the same period in 2014. The trend for the year as a whole was less pronounced but still downward. Its net profit fell by 14% to US$257m.

Saudi Cement’s experience may be indicative if one looks at wider figures for the industry. Cement output is high, inventory is piling up and government infrastructure spending is falling. If the country’s industry isn’t feeling the pain right now surely it must be wondering what might happen next.

Figure 1 – Saudi Arabian cement production and inventory, 2011 – 2015

As Figure 1 shows data from Yamama Cement for the industry as a whole. Cement output has been steadily growing over the last five years since 2011 to the current declared level of 61.5Mt. However, in the background, cement inventory has also been growing. The particular jump appears to be between 2012 and 2014 when the stock grew from 6.4Mt to 21.5Mt. In mid-2013 King Abdullah bin Abdulaziz Al Saud issued an urgent command ordering 10Mt of cement to cope with a local shortage at that time. Subsequently cement producers were asked to build a 'strategic' reserve of two months inventory at each plant. It looks like they took that message to heart.

Alongside this the Saudi Ministry of Finance slashed its Infrastructure and Transportation budget down to more than half to US$6.37bn in 2016 from US$16.8bn in 2015. Local media reported that value of new contracts won by the Saudi contractor Abdullah A M Al Khodari & Sons in 2015 fell by nearly 50% in the lead-up to the 2016 budget announcement in December 2015. Previously, Al Khodari had typically earned about 95% of its revenue from government-related contracts.

It should be noted that Saudi Cement is based in the east of the country and some regional variation is possible here. The country’s other major cement producers - Yamama Cement, Yanbu Cement and Southern Province Cement have all reported that their net profits rose in 2015. Yet the inventory keeps piling up.

The other reason than Saudi Cement pointed out for its woes was the country’s cement export ban. The government introduced an export ban on cement exports in February 2012. Since then local cement producers have asked on several occasions to have the ban repealed. Most recently the chairman of Saudi Arabia's Cement Association asked in March 2015 to lift the ban so that his producers could supply Egypt with 6Mt of cement. At the time, as now, the chairman would have been well aware of all the cement lying around.

Local press reported in late November 2015 that government bodies were considering cutting the ban on cement exports. The ban was originally introduced in Saudi Arabia to keep prices down and production flowing for large infrastructure projects built using oil revenue. These same projects were designed to wean the economy off its reliance oil revenue. With investment falling as the price of oil stays low the cement industry is in a tight spot. The government and cement producers will need to think very carefully what the consequences are of opening the gates for Saudi cement exports.

Zimbabwe: Kelibone Masiyane has been appointed as the managing director of PPC Zimbabwe. He replaces Njombo Lekula, who recently became the managing director of PPC's international operations. Previous to the appointment, Masiyane’s was the general manager of the Colleen Bawn and the Bulawayo cement plants.

"Kelibone's promotion will see him assume overall responsibility for PPC Zimbabwe's business, with his key focus our Harare factory," said Lekula. Other recent promotions include those of Iain Sheasby and Karen Mhazo to the roles of Commercial Director and General Manager of Finance respectively, and that of current Group Human Resources Manager designate Trust Mabaya in March 2016.

China: Wang Shizhong has resigned as an executive director and a member of the Strategic Committee of BBMG Corporation with immediate effect. He resigned due to the re-designation of his work. The board of BBMG expressed its appreciation for Wang’s contribution to the company development in a statement.

HeidelbergCement has finally provided a little more detail about its acquisition of Italcementi with the releases of its preliminary results for 2015. The key message is that all is well. Expected savings from the takeover are growing, less borrowing is required to make the purchase and the approvals from competition commissions around the world are rolling in.

Looking at the cost savings first, the potential for synergies or operational savings was first estimated at Euro175m at the time of the takeover announcement in late July 2015. At that time HeidelbergCement hoped to be able to deliver almost 30% of this figure in 2016. If it goes ahead this will sweeten the honeymoon period considerably following the completion of the deal. The largest savings were expected to come from the commercial area and in purchasing.

This figure then grew to Euro300m at the time of HeidelbergCement’s third quarter results in November 2015. Now, the effects of financing costs and taxes were included. At this point some more strategy about how HeidelbergCement was planning to use Italcementi’s resources started to emerge in the synergy calculations. HeidelbergCement intends to use its global trading business with Italcementi’s ‘export orientated’ cement plants. Import demand, for example in North America or Africa, that used to be bought from third party sources previously, can now be supplied by Italcementi’s plants after the merger, meeting demand and holding capacity utilisation rates up. With the publication of the preliminary results for 2015 the savings figure has grown to Euro400m with little explanation. If only it were that easy to find Euro100m down the back of my sofa.

The financing has also been proceeding smoothly. The loan value required for the takeover has fallen from Euro4.4bn to Euro2bn. Reasons for this include the exclusion of the risk of a mandatory takeover offer to minority shareholders in Morocco, some of Italcementi’s creditor banks agreeing to waive their change of control clauses and the issuance of a Euro625m bond in January 2016. The bridge financing, available initially from Deutsche Bank and Morgan Stanley, remains at Euro2.7bn.

Finally, competition commission approval has been granted in India, Canada, Morocco and Kazakhstan. Despite holding a cement product capacity of 10.5Mt/yr in India with 4.1Mt/yr additional capacity in development, this was unlikely to be a problem in India, with its total national capacity of 280Mt/yr. The commission implemented the Elzinga Hogarty Test and concluded that there is sufficient competition.

This leaves the possibly trickier approvals outstanding in Europe and the US. Belgium is likely to be the main issue in Europe given that the two companies run 73% or 4.5Mt/yr of the market in production capacity. Divestments are expected here.

In the US, precedent should save HeidelbergCement from interference. HeidelbergCement’s and Italcementi’s combined cement production assets will give it a production capacity of 16.4Mt/yr or around 14% or market share. This will make it the second biggest producer in the country after LafargeHolcim which had its merger approved in 2015. There are no obvious overlaps in their clinker production assets except for a minor one in Pennsylvania which holds both the 2Mt/yr Ordinary Portland Cement Essroc (Italcementi) Nazareth Plant and the 0.13Mt/yr Lehigh White Cement (HeidelbergCement). These two plants are unlikely to be considered in competition with each other.

So, continued smooth sailing is expected for the takeover. Since most of the information regarding the acquisition has come directly from HeidelbergCement it was unlikely to appear otherwise. Let’s see whether this remains the case when Italcementi releases its financial results for 2015 later in the week on 19 February 2016.

Colombia: Camilo Restrepo has been appointed the Vice President of the Caribbean and Central Region for Cementos Argos. He replaces Mauricio Ossa, who recently became president of the Colombia construction company Odinsa.

Restrepo was educated at the University of Maryland and is currently completing MBA studies at Emory University's Goizueta Business School in Atlanta, US. He joined Cementos Argos in 2005 as a research and development analyst. He became the Vice President of Innovation in 2012.