Global Cement (GC): What was your first reaction to hearing that the UK public had decided to leave the European Union (EU)?
Edwin Trout (ET): It was one of surprise because, when I went to bed at midnight on the Thursday night, everyone was reporting that there would be a narrow victory for the Remain camp. I had only seen one result come in, for Gibraltar, which predictably enough was for ‘Remain.’ If I had stayed up for a few more hours, I might have been a little less surprised. There was certainly an element of unease too, because, whatever anyone says, this is a major change for the UK and the rest of the EU.
GC: How do you think UK cement production will be affected?
ET: Production is based on demand and the ability to pay and neither is reversed by the Leave vote. I don’t see that the UK would stop doing things because of fears over the state of the economy or future trading relationships.
The UK desperately needs housing, which will continue to be a major driver of cement consumption in future. The office sector is similarly booming and I think that will continue. Of course, orders placed recently will take a couple of years to be delivered, by which time we will have a much better picture of the future trading relationship with the EU.
There will certainly be an element of economic ‘wobble,’ as people postpone short-term decisions, but construction is a long term undertaking. We might see a dip in a year or two but after that confidence will be back up.
The early moves made by the Bank of England and the statements from the government have been quite effective at stemming panic. There have been reassurances that house-building is a top priority and that major infrastructure projects will remain on-track.
One potential area of concern is the loss of EU-funded projects. We just don’t know the point at which the money will get turned off. The extent to which the British government will shift the money that currently goes to Brussels into these projects remains to be seen. The Welsh government is certainly worried about a future shortfall in funding. It wrote to Westminster within hours of the result to request assurances that it wouldn’t lose out. This is an area of concern.
GC: Will there be changes to imports or exports?
ET: Imports and exports tend to be a short-term fix to a short-term problem. For example, the 2013 flooding at South Ferriby meant that Cemex was suddenly forced to import into the UK to fulfill its commitments. However, Brexit is not a short-term decision and the industry will adapt to fit the needs of the economy.
With respect to exports, the UK hasn’t exported cement in any meaningful quantity since 1984 and it won’t suddenly start again unless the Pound crashes very badly indeed. At the moment production is committed domestically and I think that will continue. If there is a big surplus further down the line, the producers are more likely to shut down capacity, as they did in the 2008 crisis, rather than export.
Imports, on the other hand, could be more changeable. If the exchange rate makes for a weaker Pound over the long term, imports will be more expensive, but there will also be less need to import, because the weak Pound would be representative of a weakened economy.
I would say that the single biggest difficulty for international trade could come at the Irish border. Cement currently flows north or south depending on the economic conditions in the UK and the Republic of Ireland. Whether that border will become more ‘opaque’ again remains to be seen. It could be problematic for Irish producers in particular; Quinn Cement is setting up terminals in England and Ecocem’s new terminal in Runcorn has only just come online.
GC: What about investment at UK cement plants - Will produers ‘hold fire’ due to uncertainty?
ET: I am less confident with my ability to ‘forecast’ in this area but investment has been down across the industry since the crash in 2008. What we certainly won’t see is any multinational rushing to build a new cement works, but that wasn’t going to happen anyway!
However, those in a position to invest in existing plants have been doing so. They may well be in good positions to handle lower demand, if we see that. Hope Construction Materials, for example, has invested heavily in alternative fuels, bagging plants and new terminals. It could be that Hope has come to the end of that period of heavy investment regardless of the Brexit decision, but of course I can’t be sure.
HeidelbergCement subsidiary Hanson has also been investing. It has spent a lot of money on its Padeswood facility and has been improving efficiency across its operations. I think that this sort of ‘efficiency gain’ investment will be increasingly important if demand does fall.
It sounds harsh but, for Cemex, the flood at South Ferriby actually prompted investment. The plant is now refurbished and in great shape for the future. It is unlikely that Brexit will put off investment here, because it’s a case of ‘job done.’
As for the other players, I don’t see CRH rushing to spend new money at the moment, as it is probably focussed on integration and is spending on other acquisitions around the world. Again, this is due to non-Brexit factors. LafargeHolcim might be the most exposed to the effects of any Brexit-related slowdown.
GC: Do you think that there is a risk one or more of the major players could decide to leave the UK as the result of Brexit?
ET: No, I don’t think this is on the radar. The UK population, businesses and economic activity aren’t ‘going anywhere,’ so I don’t think the producers will want to walk away. This is especially the case for those that have just invested.
It’s worth remembering that the UK cement industry is already quite small per capita compared to that of Germany, Italy, Turkey and quite a few others in Europe. It has already undergone significant restructuring since the 2008 crisis and ownership has increased in three or four spasms of change. The sector is very efficient, with no ‘flab’ and I can’t see that any of the players would want to leave such a market.
I think that the largest threat to the sector could be the imposition of regulations. If it becomes more difficult to make cement in the UK then a multinational might be tempted to scale-down production in the UK and import. It has happened elsewhere!
GC: Do you expect that UK cement producers would continue to be bound by EU-wide regulations, for example REACH or those regarding health and safety and chromium VI?
ET: Again, I don’t see this a major area of change in practice. It makes sense for a multinational to operate under similar conditions across its different jurisdictions from an operational perspective. All of the equipment to handle chromium VI, for example, is in place and I can’t see that any responsible producer would back-track on such investment, even if was allowed to do so.
I would like to highlight that the UK has a strong health and safety culture. Taking away a legislative requirement doesn’t mean that health and safety stances will be abandoned. We are talking about a culture that is now well ingrained.
GC: What about the EU Emissions Trading Scheme (ETS)?
ET: The EU ETS was based largely on a British initiative. As such it represents a characteristically British response to the problem of CO2. I don’t know how or whether the UK will be allowed to continue within the EU ETS but I would strongly expect that the producers would want to continue with it or something similar. There is little advantage in changing things for change’s sake. The UK cement sector certainly won’t be pushing for any unnecessary changes.
GC: Edwin, Thank you for your time.
ET: You are very welcome!