The British cement industry in 2011 and 2012

This article outlines the major developments in and the challenges faced by the British cement industry in 2011 and the opening months of 2012. The period, characterised by continuing adjustment to post-recession levels of activity and corporate debt, has seen a modest recovery in the economic fortunes of the UK and the cement industry but both still face an uncertain future.

Introduction

The lie of the land

 In the British cement industry restructuring has been prompted partly as a response to the ongoing challenge of weak market conditions. In 2009 the UK saw a sharp decline into recession, in 2010 it saw the first tentative suggestions of a return to stability and in 2011 it saw hopes of a modest revival, albeit at much lower level than in the early to mid-2000s.

2011 saw surprisingly robust performance in the first two quarters, with a subsequent tailing off of confidence, greater fragility and now a slip into a new 'double-dip' recession at the start
of 2012.

Construction activity was reasonably buoyant in Great Britain in 2011 and the first part of 2012, which, along with Germany, bucked the general European construction trend. British sales of cement in the first three months of 2011 were 16% higher than those in the first quarter of 2010, with the Mineral Products Association (MPA) commenting that the market had been stronger than expected. It also warned, however, that similar levels could not be expected throughout the rest of the year.

The fortunes of minerals in general were more mixed in the second three months. While aggregate and asphalt volumes fell, cement and concrete continued to grow, though levelling off during the quarter. Year-on-year growth in cement was 1% in the second quarter of 2011. Levels remained flat in the third quarter of 2011, with cement again 1% higher than in 2010. Year-to-date cement growth was 5% at the end of the third quarter of 2011.

The latest MPA statistics, collated by the UK government from industry returns, are published in Table 2 with acknowledgement.¹ They are published in arrears and so no data is yet available for 2012. The cells with green text highlight peak values over the two-year period of recovery. Pre-recessionary figures are included in Table 1 for comparison.

Table 1: MPA statistics for 2007 - 2011. (Figures in thousands of tonnes).

Table 2: MPA quarterly statistics for 2010 and 2011. (Figures in thousands of tonnes).

Above: Integrated cement facilities in Great Britain and Northern Ireland.

Lafarge Cement UK Ltd
1. Cookstown Works, 0.5Mt/yr.
2. Dunbar Works,1Mt/yr.
3. Hope Works, 1.3Mt/yr.
4. Cauldon Works,1Mt/yr.
5. Aberthaw Works, 0.55Mt/yr.

Cemex UK
6. Rugby Plant, 1.3Mt/yr.
7. South Ferriby Plant, 0.75Mt/yr.

Hanson Cement Ltd (HeidelbergCement)
8. Ribblesdale Factory, 0.88Mt/yr.
9. Padeswood Factory, 0.8Mt/yr.
10. Ketton Factory, 1.27Mt/yr.

Tarmac Buxton Lime & Cement
11. Tunstead Plant, 0.8Mt/yr.

Mergers, acquisitions, disposals, competition and restructuring

Lafarge and Tarmac

The underlying story of past 12 months has been the proposed merger of Anglo American and Lafarge's UK operations, namely Tarmac and Lafarge UK, and the ongoing investigations into this and the competitiveness of the British minerals industry in general.

In the proposed Lafarge/Anglo American joint-venture (JV) Euro740m worth of asset disposals are required in order for the partners to avoid anti-competitive action by the regulators. Lafarge's Hope Works cement plant is among the assets being considered
for sale.

Potential bidders were being sought in August 2011 in an attempt to pre-empt regulatory action, particularly as on 16 August 2011 the Office of Fair Trading (OFT) announced that it proposed to refer the wider cement, aggregates and concrete market to the Competition Commission (CC) for more detailed investigation. The OFT expressed reservations about several factors in the industry, namely: High barriers to entry; high and increasing concentration with five majors accounting for 90% of the cement market, 75% of aggregates output and 68% of ready-mixed concrete production; The effects of vertical integration; Multiple contacts and information exchanges, with cross-supplying, joint ventures and asset swaps; An apparent squeeze between rising cement prices and static or falling, ready-mixed concrete prices.

On 2 September 2011 the OFT's consideration specifically of the proposed Anglo American/Lafarge JV resulted in a parallel referral to the CC. The OFT had found a number of overlaps in the partners' product markets at local, regional and national level and had expressed concern at the impact of a tie-up on other companies' ability to buy bulk cement at competitive prices. Key issues identified were: overlaps in the supply of aggregates, asphalt and concrete in many localities; overlaps in the supply of bulk cement at regional and/or national level; possible foreclosure of independent ready-mixed concrete producers by making it 'substantially more difficult' for them to purchase bulk cement at
competitive prices.

OFT senior director, Ali Nikpay, said, "Although the parties did offer to divest a variety of assets in order to try to resolve the issues identified, we are not confident that the package proposed would clearly remove our concerns in all areas." Within days the CC had invited evidence from all interested parties with a view to conducting a more detailed analysis of the proposal by 16 February 2012 and to decide whether the JV may be expected to result in a substantial lessening of competition.

Anglo American responded by saying, "The referral marks the next stage in the regulatory process and in no way prejudges the outcome. Anglo American will work with the CC with the aim of achieving clearance for the JV as soon as possible."

Until the anticipated completion, Tarmac insisted that, "It's business as usual. There will be no change in the way we currently work with our customers, stakeholders and supply chain."

After a period of public consultation following the provisional decision in August 2011, the OFT formally referred the cement, aggregates and ready-mixed concrete markets of Great Britain to the CC on 18 January 2012. The OFT remained of the view that 'competition may not be working well' in the specified markets as a result of the features previously identified and considered that there were reasonable grounds for suspecting that they were 'preventing, restricting or distorting competition.' However, it decided not to refer these markets in Northern Ireland, as the structural features were, in its view, 'not present to the same degree.' Tarmac, as previously, expressed its belief in the competitiveness of the industry and moved to distance its JV from the wider investigation.

On 21 February 2012 the CC published its provisional ruling that the proposed JV might "be expected to result in a substantial lessening of competition in markets for aggregates, asphalt, cement and ready mix concrete, which may be expected to lead to a worsening of the competitive offering." Concern focused on the following materials: bulk cement; rail ballast; high purity limestone used for the desulphurisation of flue gases; primary aggregates for construction applications in 23 local markets; asphalt in two local markets; ready-mixed concrete in seven local markets.

Linking concern over the JV to the wider investigation into the market, the investigator said, "We have not reached a view on whether or not there has been coordination in the bulk cement market, but we are concerned that the proposed tie-up would increase the susceptibility of this market to coordination." He noted that "there are currently only four UK producers and there is evidence that the market is not as competitive as it could be. Prices and profit margins haven't been affected in the way we would have expected following the big falls in the demand for cement in the past
few years."

At the end of April 2012 the CC announced that Lafarge's Hope Works cement plant was among Euro740m-worth of assets that would have to be sold in order for the JV to proceed.

Other acquisitions and disposals

Aside from the much publicised JV proposal between itself and Tarmac, Lafarge also sold its UK gypsum assets as part of divestments in Europe and South America. Anglo American, meanwhile has been looking to expand in coal and other minerals with bids for American and Australian mining firms during the summer and autumn of 2011.

Elsewhere, Cemex UK sold its Russell Roof Tiles operation to a buy-out team, prompted by the need to reduce its global debt.

Internal restructuring

Within the UK Hanson, owned by Germany's HeidelbergCement, has restructured its Quarry Products business along three operational lines, namely Hanson
Aggregates, Hanson Concrete and Hanson Asphalt & Contracting. All will be managed nationally. The move is part of an effort to improve efficiency and customer service in anticipation of a challenging year ahead.

Lafarge has announced that its product-line-based organisation is to be replaced by a country-based structure. Management and support functions will serve all cement, aggregates and concrete operations, with the transfer in Britain already complete.

Prices, suppliers and jobs

Cement prices

The price of cement in Britain has experienced a considerable increase in recent years. Setting index values against a 2005 base of 100, the annual averages show a continual increase until a reverse in 2009-2010.

Monthly figures from the Department of Business, Innovation and Skills are set out in Table 3 and show a steady, if unspectacular rise. While the average is higher than that for 2010, it is still below 2009.

Table 3: Indexed cement prices for 2005-2011 and monthly cement prices for 2011. (2005 prices = 100).

Job losses at Ribblesdale

HeidelbergCement's British business Hanson anticipates a year of tough trading conditions. To rebalance its cement operations Hanson has announced the loss of 30 jobs at Ribblesdale, reducing the workforce from 108 to 78, amid a 30% cut in cement output. However, an internal review, now concluded, proposes to increase production proportionally at its Padeswood site.
Jon Morrish, the Managing Director, has insisted that "all three plants are vitally important to the long term future of the business and there is no intention to close any of them."

Capital projects and contracts

With high levels of debt and rising energy costs, investment capital has been cut back since the recession. Those awarded in the period under review are listed in Table 4.

Table 4: Supply contracts to the British cement industry in 2011 and the start of 2012.

Developments at suppliers

Suppliers to the British cement industry have had varied fortunes over the year. Promanex was acquired by Costain Group in August 2011 and Phillips Rema was bought by Denmark's FLSmidth. Bucyrus was taken over by Caterpillar and Finning has assumed the distribution of Bucyrus equipment. Terex Fuchs has taken over the distribution of materials handling equipment in Britain from Blue Group and Beumer UK has similarly taken over from Crisplant.

Grantham Engineering has appointed Huw Williams as its new Technical Director and FLSmidth has appointed a new vice president for its bulk division. B&W Mechanical Handling has a new managing director in Andy Blythe and also appointed Andrew Mitchell as its UK agent for its interests in the
cement sector.

Malvern Instruments is supplying Holcim in France with online particle size analysers and Primasonics is installing its newly-developed sonic cleaners at plants in Nigeria. Precia Molen has supplied a belt weigher to Lafarge's Dowlow Quarry.

Dunlop Conveyor Belting is making its biggest-ever single investment in capacity and BPI Visqueen has developed a UK£12m factory at Scotland. Donaldson has opened three new test laboratories overseas.

Operational changes

Alternative fuels

One area of expenditure that is constantly evolving is the adoption of new fuel streams for cement kilns. Trials of new fuels have for some years been a standard and expected aspect of cement manufacture in Britain. Lafarge's Cauldon Works and Cemex's South Ferriby were making the headlines in 2011 and over the past few months it has been Lafarge that has made moves to introduce alternative fuels at three of its cement works.

It is notable how many waste streams are now being used. If approved, Hope Works would be burning solid recovered fuel in addition to tyre chips, meat and bone meal and processed sewage pellets; Dunbar would be burning processed sewage pellets, tyres and recycled liquid fuel. Returns from the organisation Carpet Recycling UK shows that 52% of the 66,000t of waste carpet that was generated in 2011 was used for energy recovery, mainly in the cement industry.

Increasingly wood pellets are also being used as a substitute for coal, though in power generation rather than in cement manufacture. It has been argued, however, that subsidies rewarding electricity firms for burning biomass rather than coal have led to an increase in prices. The price of British-grown wood has risen from Euro37.54/t to Euro62.44/t since 2007. Wood interests have been lobbying to remove the subsidies that facilitate the switch from coal and have been obstructing the likes of Drax, RWE and others from pursuing lower-carbon schemes.

Table 5: Progress of alternative fuel use at three Lafarge Cement UK production sites.

Mobile plant

With further EU legislation in prospect aimed lowering the permitted emission levels of non-road mobile machinery there has been growing interest in the use of alternative fuels for such machinery. Emissions limits for particulates have already been reduced by 96% and the price of plant set to rise by 12% to cover the cost of meeting existing requirements.

Tarmac has been working with clean fuel company ITM to trial the use of hydrogen through its proprietary Transportable Hydrogen Refuelling Station.
In the summer of 2011 Lafarge signed a Euro62m contract with Babcock International to manage and maintain the entire fleet of heavy mobile equipment across its British cement and aggregates businesses.

In another initiative by Lafarge Cement UK, the company has invested in the UK's first Sleipner 970 units, which are used for transporting tracked excavators within the quarry at Hope Works. These Finnish-made 'dollies' are attached to the rear of the excavator and plant then towed by dump truck, saving movement time and expensive repair to worn undercarriages and crawler gear.

Logistics

Lafarge Cement UK has awarded logistics firm Wincanton a national contract to deliver bulk and bagged product in close partnership with its in-house fleet. For its part Hanson has recently purchased an additional six Renault tractor units for its company-owned fleet.

Marketing and sales

Over the year Hanson has initiated the restyling of its ground granulated blast-furnace slag products under a new 'Regen' brand. Cemex, having invested in a new packing plant, has started to market its Rugby Premium packed cements in waterproof plastic bags.
In the summer of 2011 Lafarge also launched an iPhone App for customers in the DIY market.

Environment and safety

Government Policy

In the spring of 2011 the UK government agreed to set its fourth carbon budget, as proposed by the Committee for Climate Change, making Britain the first country with legally binding targets for greenhouse gas emissions beyond 2020. It pledged to introduce a carbon floor price of Euro19.98/t in 2013, rising to Euro37.51/t in 2020.

The move to introduce a carbon floor price was immediately opposed by the think-tank Civitas and by the Institute for Public Policy Research in its report,
'Hot Air.' Industrial companies claimed that such a move would force high-energy production abroad, while representative bodies such as the MPA warned of the dangers of reducing the competitiveness of energy-intensive industries.

Within weeks the vocal dissent of industry transformed into calls by the Confederation of British Industry (CBI) for exemptions and by the Manufacturers Organisation for UK Manufacturing (EEF) for 'direct compensation' for the estimated Euro1.49bn/yr paid by its members under the carbon floor price proposals by 2020. The EEF also sought
Euro50m/yr from 2013 onward in compensation for the Climate Change Levy. Both organisations continued to apply pressure in September and October 2011, ahead of the Chancellor's Autumn Statement.

At the end of November 2011 that Statement confirmed a UK£250m package for energy-intensive industries such as cement and steel to help with rising power costs and environmental legislation such as the British carbon price floor and the EU emissions trading system (ETS). This issue of support for industry arose again in February 2012 when the CBI called for further measures such as tax reductions and a merger of the Climate Change Levy and Carbon Reduction Commitment (CRC). In the event the Chancellor refused to abolish the price floor, but pledged to review the CRC.

The issue of greater carbon regulation is all the more contentious in the light of the Committee on Climate Change's third progress report in summer 2011, which revealed that the country would have missed government emissions targets had it not been for the effects of recession on production levels.

Britain is forecast to miss these very targets by increasingly wide margins over the next 20 years unless it introduces radical policy measures, warns a report by Cambridge Econometrics. However the government's Carbon Plan suggests that the rebalancing of Britain's economy away from carbon is 'progressing well.' Compared with 1990 levels, emissions have been cut by more than 25%. Figures released by the DECC in early 2012 revealed that British emissions of CO₂ fell to 456Mt in 2011, the lowest level since records began.

Emissions Trading

The lucrative disparity between carbon allowances granted and companies' actual requirements from declining production has been a controversial consequence of the 2008/2009 recession and its aftermath. A report from the think-tank Sandbag in June 2011 claimed that 10 cement and steel companies, including Lafarge, Cemex, Holcim, HeidelbergCement and Italcementi, had amassed 240 million carbon emissions permits.

Of the cement companies Lafarge had the greatest number of surplus carbon credits, ranking second in the ETS with 29.4 million credits valued at Euro501m in total. Since that time a committee at the European Parliament has approved measures to address the oversupply of allowances that had caused the carbon market to plunge in 2011.

However, 2011 ended with greater promise. In December 2011 the government confirmed that Euro1.24bn is still available for suitable projects,
Southern & Scottish Energy (SSE) and Shell announced an alliance to build a plant at Peterhead, Scotland and a pilot plant at SSE's coal-fired station at Ferrybridge, West Yorkshire began siphoning emissions.

The Ferrybridge plant, designed by SSE, Doosan Power Systems and Vatenfall, will capture 100t/day in an effort to prove the technology on an industrial scale in Britain. Further plans have since been announced for a CCS plant at Grangemouth, near Edinburgh, Scotland. This would capture emissions on more than 90% of its production capacity if the project goes ahead. Meanwhile a research project, enabling advanced pre-combustion capture techniques and plants, has received EU backing.

Other environmental research

Cemex has contributed funding to work at Imperial College on the potential for 'calcium looping' as a means of reducing CO₂ emissions. The latest results suggest that spent sorbent from CO₂ capture retains the appropriate chemistry for inclusion in cement, saving 50% of the CO₂ produced during cement production. Also backing low-carbon work at Imperial College, Lafarge claims to commit 1% of its annual turnover to research and development on assorted sustainability issues.

Environmental achievements

Although all the cement makers issue social responsibility reports, Tarmac has been the most widely reported. In July 2011 Martyn Kenny, the company's Director of Sustainability, was shortlisted as 'Sustainability Executive of the Year' at the BusinessGreen awards. He was joined by Andy Swain who was appointed Sustainability Manager in August 2011. August also saw the publication of Tarmac's 2010-2011 Sustainability Report highlighting progress towards its Sustainability Framework targets.

Tarmac's work on carbon reduction at its Tunstead Works was highly commended by judges at the national Green Business Awards in November 2011 and won the company recognition in the 'Carbon Reduction' category for its waste fuels programme. Carbon emissions at Tunstead have been reduced by 41% per tonne of cement.

Additionally, Tarmac claimed in February 2012 to be the first company in its sector to achieve the five-star rating from Achilles BuildingConfidence, the independent third-party accreditation scheme that validates supply chain management, health and safety, responsible sourcing and environmental performance.

Tarmac is of course not alone in its environmental endeavours. Lafarge has publicised its seventh-ranked place in the UK's first league of 'green' organisations to be published by the Environment Agency. Lafarge also maintained its place on the FTSE4Good Index, the ethical investment index, reflecting its continuing commitment to corporate responsibility. In November 2011 Lafarge was runner-up in the MPA's Restoration Awards for its work to transform its former fluorspar quarry at Dirtlow Rake, which adjoins the quarry at its Hope Works in Derbyshire.

These and similar developments were reflected in the MPA's latest Performance Report, which was published in the autumn of 2011. The report measures collective progress against social and environmental targets. Dr Pal Chana, Executive Director for Cement at the MPA describes industry performance compared with the Environment Agency-agreed Sector Plan as a 'landmark' for the industry, surpassing its targets by a 'considerable margin.'

Health and safety

Health and safety continues to be a preoccupation for the industry, as indicated by the recurrence of statements to the press in celebration of long periods without lost time injuries: Lafarge Cauldon Works announced 900 days without a lost-time injury (LTI) in July 2011; Cemex Rugby Plant completed one year without an LTI in November 2011; Lafarge Aberthaw Works made it to three years LTI-free in December 2011 and Lafarge Cookstown Works completed a decade-long stretch without an LTI in February 2012.

Further evidence of this concern is provided by the MPA's activities in this field. In the autumn of 2011, it published a new edition of its Guidance to prevent over-pressurisation of storage silos during the delivery of (non-explosive) powders. It again promoted its prestigious Health & Safety Awards, at which 28 companies took part, including the major cement makers. A record 126 entries were up for consideration.

Tragically, after completing a year without an LTI, the Cemex Rugby plant was the scene of an industrial accident resulting in the death of one man in early 2012. One of two contractors working on scaffolding, the 29-year old was killed during the annual shutdown on 18 January 2012. Cemex is co-operating with an investigation by the Health and Safety Executive.

Elsewhere the conclusions of a 20-month investigation into the possible impact of Hanson's Padeswood plant in Wales on the health of local residents have been announced. The probe by Public Health Wales, reporting in December 2011, cleared the company of causing any adverse effects. It said that employees were not exposed to hazardous substances and there was no evidence suggesting that its employees had suffered raised levels of cancer.

References and notes

1. MPA website, http://cement.mineralproducts.org.

Note: This article has been prepared from back numbers of Cement Industry News, the monthly news bulletin issued to members of the Cement Industry Suppliers' Forum by the Concrete Society's Information Services. For more information, please contact Global Cement Magazine, which can provide contact details for the author.

Note: Financial figures are presented in Euros for clarity and were converted from British Pounds Sterling on 23 May 2012.