Global Cement News

Switzerland: Onne van der Weijde, Area Manager for India until 25 April 2014, and member of Holcim Senior Management, will leaves Holcim effective from 1 June 2014. The member of the Holcim Executive Committee, Bernard Terver, responsible for the Indian Subcontinent, will take over direct responsibility for the country.

Mexico: Lorenzo Zambrano, CEO of Cemex died on 12 May 2014 in Madrid aged 70. There were no immediate details about the cause of death in a statement released by Cemex and there had been no reports of illness. The company added that it will continue to operate normally.

Founded by Zambrano's grandfather more than a century ago, the company started producing cement in the northern city of Monterrey, which later became one of Mexico's industrial hubs. Zambrano was born on 27 March 1944. He joined the company after graduate school in 1968, when he earned his master degree in business administration at Stanford University. By 1985 the board of directors give him full power as CEO. Then, through a series of acquisitions, Zamrano extended Cemex's reach to five continents with operations in 50 countries.

However a US$16bn acquisition of Australian building materials company Rinker in 2007 subjected Cemex to the subprime housing crisis. At the time, Zambrano put a brave face on it. "We've shown that a company that is born in a developing country can compete in the whole world and we want to keep doing it," he said. Cemex spent the following years coping with large debt obligations, struggling to make deals with lenders and trimming costs by outsourcing and restructuring jobs.

Article updated: 14 May 2014

Egypt's cement producers have taken their fight to use coal to the opposition in recent weeks. Producers like Suez Cement and Titan have started pushing the benefits of using coal including its place as an international mainstay and highlighting the potential savings for the state.

In March 2014 the Minister of Trade and Industry Mounir Abdel Nour announced that cement companies could start using coal from September 2014. However, with pressure from environmental activists and even the Minister of Environment voicing disapproval for coal this seems to be a long way off. Fuel issues continue to bedevil Egyptian cement producers as reports emerged this week that gas supplies to 10 cement plants were cut. The plants, which represent 70% of the country's production base, have been forced to close temporarily. Egypt is one of the largest non-OPEC (Organisation of the Petroleum Exporting Countries) oil producers in Africa and the second largest dry natural gas producer on the continent.

The Egyptian government has been planning a reduction in the use of natural gas by industry. Yet the scale of the reduction has shifted. At first the Ministry of Petroleum intended to reduce supplies to cement plants by 35% in January and February 2014. Reportedly the price of cement then shot up by 30% in March 2014 to offset the rise in energy prices. Then the gas was cut completely, leading to the shutdowns.

In response Egyptian cement producers are investing in converting to using coal. This week Suez Cement announced a planned investment of US$40m to convert two of its four plants to use coal instead of natural gas subject to approval from the Ministry of Environment. Back in November 2013 Suez Cement announced similar plans to spend US$72.5m on converting its plants for coal. Similarly, Lafarge's preparations to use petcoke were also delayed by the ministry in February 2014.

Users of Egypt's gas supplies are caught between the reform of energy subsidies, a shortage in gas supplies and an increase in local demand. Industrial users like cement plants are stuck in a queue behind export markets and power plants. In addition international events such as the political instability in Ukraine might potentially rock the Egyptian gas market if Russian supplies were affected. The European markets would then start scrambling to secure their gas from other places such as Egypt.

In this situation, moving to the use of imported coal makes sense for cement producers. Yet groups like the 'Egyptians Against Coal' campaign argue that the issue is also about Egypt's sovereignty over its energy sources, not just pollution. Despite the optimism of the activists it seems unlikely that they can resist market pressures for long, especially with producers such as Suez Cement and the Arabian Cement Company announcing plans for increased alternative fuels substitution rates alongside their bigger plans for coal. Whether this is more than a sop remains to be seen.

Once dubbed 'King Coal' for its leading place in British industry before the second half of the 20th Century, coal is looking likely to take the crown as the fuel of choice in the Egyptian cement industry. How long it retains its crown though depends on the on-going competition between coal and gas use around the world.

India: Ashish Guha, chief executive officer (CEO) and managing director (MD) of HeidelbergCement India has resigned.

"Ashish Guha, CEO and MD of the company has notified the board at its meeting held on 2 May 2014 that he had tendered his resignation to HeidelbergCement Group," said HeidelbergCement.

Holcim released its first quarter results for 2014 this week and benefits of a merger seemed clear: both sales and profit were down. Net sales fell by 5.4% to Euro3.35bn and net income fell by 57.5% to Euro65.6m. However, Chief Financial Officer Thomas Aebischer was upbeat on meeting the regulatory requirements of any merger and the prospect of divestment opportunities.

This week we have a guest contributor - Andy Gboka, an analyst at Exotix LLP, a London-based broker specialised in Frontier markets – writing about the impact in Africa from the Lafarge-Holcim merger:

No change in Sub-Saharan Africa cement markets

Looking at (1) the location and size of the assets that both groups operate across the region but also (2) the expansion projects recently announced, we do not anticipate any upheaval in the competitive landscape, at least in the medium term.

Potential reshuffle of African assets

We identify Nigeria and Morocco as the main countries where the two companies are likely to reorganise their operations post-deal.

After the market excitement Lafarge / Holcim's price gains have averaged 9% since the announcement versus +8% the same day (04/04/14). We think it timely to discuss, from a competition angle, the likely impact on sector dynamics in Africa.

Starting with Sub-Saharan Africa where Lafarge and Holcim have been present for decades, the two groups have grown their output capability over time to reach a combined ~20.7Mt/yr. Holcim is a much smaller cement producer through its ~2.6Mt/yr in Ivory Coast, Guinea and Nigeria, whereas the French manufacturer is a regional leader with ~18.1Mt/yr capacity across 10 different countries. North African exposure paints a similar picture, as the Swiss company's installed capacity is ~9.6Mt/yr versus ~21.6Mt/yr for Lafarge (including their respective shareholdings in Lafarge Cement Egypt).

Although we do not believe the proposed merger will significantly alter Africa's competitive environment, business reorganisation is likely in:

(1) Nigeria. LafargeHolcim would control more than ~70% of the United Cement Company of Nigeria Ltd (UNICEM, 2.5Mt/yr in Calabar) which, in our view, is a suitable context for minorities' buyout.

(2) Morocco. More than ~50% of the industry's production capacity is controlled by the two players, a situation that may lead to asset disposals after review by the local competition commission.

Beyond the corporate implications, this announcement also puts into perspective the multiples investors are willing to pay for companies operating in Africa. Indeed, for 2014/2015 financial year the enterprise multiple (enterprise value / earnings before depreciation and amortisation) and price-to-book ratio for the main stocks listed in Nigeria and Kenya average 10.3x and 2.9x respectively, vs. 8.4x and 1.3x for LafargeHolcim (Bloomberg). While demand growth prospects in the teen digits or margins above ~25% (especially in Nigeria) would support a premium for the former names, we think the extent of that premium is questionable.

The best illustration is Dangote Cement, whose market capitalisation stands at ~US$25bn for total capacity estimated at 50 – 55Mt/yr by the 2016 financial year, relatively high when compared to the expected ~US$55bn market capitalisation for LafargeHolcim with (1) 427Mt/yr cement capacity globally and (2) ~60% of its revenue from emerging markets. This underpins our cautious stance on the sector.

Source: Andy Gboka, analyst at Exotix LLP (London-Based broker specialised in Frontier markets).

Andy Gboka will be speaking at the forthcoming Global CemTrader Conference, taking place in London on 2 -3 June 2014.