It never ceases to amaze me that you can buy a tonne of cement so cheaply. The standard worldwide price of 42.5 cement is only US$60-80/t. In a few countries it might nudge $100/t and in some out-of-the-way spots, generally land-locked and a long way from competition from importers, it will peak at past US$200/t. However, for most producers, the most they will receive for their efforts in producing this miracle material is a measly hundred bucks - max. Take away the costs of production (especially the ever-increasing costs of raw materials, electrical energy, fuel, transport, labour, maintenance and finance*) and a cement producer is lucky to manage a 10% margin. If there is competition in a particular market then margins will drop below 5% - perhaps even below 0% (and that is when the trouble starts).
Of course, if cement producers were to enjoy 'bonanza' levels of margins of above 10%, then potential market entrants will look greedily at the markets and will decide that they too would like a 'slice of the pie.' An honest margin of 10% or below will make potential market entrants think very seriously about risking their money in cement. After all, you might be able to earn more money by investing in a higher-yielding industry altogether, like biotechnology or telecommunications.
What I want to ask in this month's column though is, even at a steady profit margin of 10% of the selling price, is cement correctly priced? Does its selling price include all of the costs associated with its production? On the other hand, is the industry being fairly paid (or paid enough) for making such a wondrous material?
At first glance, the list of costs above (*) seems fairly complete, but there are other costs that are entirely absent from the list that very many cement plants around the world also incur. For example, just as a noisy car levies an unpaid-for cost on those that it disturbs (you might, after all, be willing to pay to avoid the noise, and houses close to a noisy road are worth less than those that are quieter), a cement plant will impose an unpaid-for cost on its neighbours, in terms of noise, dust, odours, vibrations, lorry movements, air and water quality impacts and loss of visual amenity. These costs are not included in the cost of the cement (unless you count land-taxes and local taxes that would need to be distributed proportionately to those most inconvenienced by the cement plant). Air and water quality impacts are possibly yet more controversial, since they are felt more widely and less predictably than, for example, lorry movements. Maybe there should be more locally-levied environmental taxes that are then disbursed to those affected most.
Risk also has its own cost, but is risk included in the price of cement? If your cement plant employer has a reckless approach to risk and safety, the cost of your injury/death will only be included in the price of the cement if the victim and their family are fully recompensed and the company adequately (financially) punished. In how many countries is this the case? For the unlucky gentleman killed in a cement plant in Nigeria (see page 84) - and in many other fatalities that we have reported in these pages over the years - we suspect that the full cost is not borne by the cement company. It should be.
Other costs that are incurred by the cement company but not necessarily paid-for might include the effect of fuels and electricity on GHG levels (unless a carbon tax is in effect) and environmental impacts of quarrying (although rehabilitated quarries can be biodiversity hot-spots, particularly for birds), amongst others. I argue that the price of cement should be higher, reflecting all of the costs that go into making this sophisticated building material. Producers need to be held to account for all their costs, including 'externalities.'
On the other had, cement is a near-miraculous material with myriad benefits: ease of use, strength, durability, fire-resistance, thermal capacity, reliable quality and widespread availability. There are substitutes, but none with all the benefits of cement. After all, would you build a bridge out of glass or a dam of aluminium? No way! Cement producers need to be paid fairly (more) for the long-term benefits that cement brings to society.
However, the one factor that holds back the price is that there is often too much cement. Markets that are over-supplied will see producers fighting for sales through price reductions. At the moment, it is often illegal to arrange to try to balance supply with demand in order to support prices, since this will inevitably involve collusion and cartelisation of the markets. However, a cartel in a growing healthy market that leads to excess profits is surely different from an arrangement that prevents producers from making losses (negative margins) in a depression. Perhaps there is a case for cement makers to point out to law-makers that unless 'arrangements' are allowed in an over-supplied and therefore loss-making market, that companies will not make money, possibly leading to plant closures, job losses and a reduction in tax revenue. What do you think? This email address is being protected from spambots. You need JavaScript enabled to view it.