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PPC faces Congolese haircut
Written by David Perilli, Global Cement
20 June 2018
South African cement producer PPC reported this week that its annual profits rose due to ‘strong’ performance in Rwanda and Zimbabwe. Unfortunately it had no such luck in the Democratic Republic of the Congo (DRC) where its new plant near Kimpese in Kongo Central province has suffered from political instability, lower cement demand and subdued selling prices.
As the group went on to describe the local market as ‘challenging’ with production capacity above market demand. Research from the International Finance Corporation (IFC) suggests that the country will only reach a cement supply deficit by 2022. On top of this the country’s elections have been delayed from December 2017 to December 2018, creating uncertainty in the construction market and delaying infrastructure projects. Following an impairment assessment PPC took an impairment cost of US$14m on the unit. Or in other words it concluded that the value it might gain from selling its new 1.2Mt/yr plant was less than the estimated US$280m it cost to build it.
This outcome is depressing given that the plant was only commissioned during the last quarter of 2017 and the fundamental need for development in the DRC. The unit is run by local subsidiary PPC Barnet DRC, a joint venture 69% owned by PPC, 21% owned by Barnet Group, with the remaining 10% owned by the IFC. The plant was 60% debt funded by the IFC and Eastern and Southern African Trade and Development Bank. In January 2018 PPC agreed with its lenders to reschedule debts from the project until 2020. Then in April 2018 it was reported that PPC was in talks with China National Materials (Sinoma) over selling its stake in the plant. PPC chief executive officer (CEO) Johann Claassen said that the deal was dependent on the price and the on going merger between Sinoma and China National Building Material (CNBM).
With the merger between the Chinese cement giants close but yet to be confirmed, PPC remains stuck with a cement plant it’s losing money on. No doubt also the Chinese producers will aim for a bargain on the unit, especially since Sinoma built the plant. This also raises one potential method how the merged Sinoma-CNBM might expand internationally by scooping up plants it builds that have subsequently gotten into financial trouble.
All in all it’s a cautionary tale about how fast cement companies are able to expand in Sub-Saharan Africa. The demographics are enticing to investors but if the market isn’t there or if competitors get there first then building cement plants can go wrong. A 1.8Mt/yr joint-venture plant run by Lucky Cement started up in late 2016 also in the Kongo Central province. On top of this neighbouring countries have targeted DRC for exports. A local ban on imports of cement was implemented in mid-2017 and reportedly renewed in the west of the country for another six months in February 2018. However, Nigeria's Dangote Cement said in its first quarter results for 2018 that its operations in the Republic of Congo were targeting exports at the DRC. As PPC has discovered, investing in Sub-Saharan African has its risks.
Could Knauf corner the market in gypsum for cement plants?
Written by David Perilli, Global Cement
13 June 2018
Germany’s Knauf announced this week that it is set to buy North American wallboard producer USG. The news is relevant for the cement industry because both companies are prominent gypsum producers. They are leading gypsum wallboard producers, with assets around the world, including gypsum mines. Although their focus is on wallboard a significant proportion of raw gypsum ends up being used in cement production. Hence, the takeover of a major North American producer by a European one deserves attention.
First a little background on the deal between Knauf and USG. The takeover has been a particularly acrimonious one at times, with both parties throwing strong language at each other and, although it has avoided being a hostile takeover, at times it seemed close. The deal became public in March 2018 when USG publicly said that it had rejected a bid of US$5.9bn from Knauf. It described the offer at the time as ‘wholly inadequate.’ Knauf then fought back by sending a letter to USG’s shareholders urging them to vote against director nominees at the next annual general meeting. Knauf owns 10.5% of USG’s shares. Then, in April 2018, Warren Buffett, the chief executive officer of Berkshire Hathaway, USG’s largest shareholder with a 31% stake, swung behind Knauf’s scheme. At this point it was revealed that Buffett had facilitated the initial talks between USG and Knauf. He even described the investment in USG as ‘disappointing.’ Buffett’s public move against USG in April 2018 signalled the death knell to USG’s independence. The US$7bn deal between Knauf and USG was agreed and announced on 11 June 2018. The transaction is expected to complete in early 2019.
USG operates 12 mines or quarries in North America. It also has other assets around the world including three gypsum mines in Oman, Thailand and Australia respectively that it runs in conjunction with its USG Boral joint venture in the Middle East and Asia. By contrast Knauf held over 60 quarries in 2014 with a focus on Europe.
The interesting implications from the merger may arise from what Knauf plans to do in certain regions. North America for example saw a reduction in raw mined gypsum production since the financial crash in 2008 as building markets suffered. Rising levels of synthetic gypsum production from coal power plants partly compensated for this. Buying USG gives Knauf a truly global base of natural gypsum production with which it can supply both itself and any cement customers. Knauf has a real shot of cornering the market in raw gypsum production provided it can keep the price low enough to stop enough rival mines being opened. Knauf might decide, as the construction market continues to recover in the US, to bring in the extra gypsum from elsewhere if it proved cost effective. Hooking up USG-Boral gypsum resources in Asia with Knauf’s might have implications for cement producing countries that lack sufficient gypsum supplies such as India. Oman is building itself up as the major gypsum exporter to Asia and USG-Boral is a part of it, with major gypsum resources in the country.
In terms of the cement industry it seems likely that there will be no immediate shakeup of gypsum supply. Long term supply contracts with either USG or Knauf should remain as they were and will stransfer to the new enlarged company. Knauf’s main market for gypsum is to use it to make wallboard but gypsum use for cement is a significant market as well. The ‘fun’ starts when or if Knauf starts to reorganise its supply chains. As its focus is on the wallboard business there may be implications thereafter for cement users. And since Knauf’s only major competitor at scale is Saint-Gobain, the market has just shrunk.
Could cement fall victim to the carbon bubble?
Written by David Perilli, Global Cement
06 June 2018
CRH announced changes to its structure this week. The changes to its divisions follow the rapid growth of the company and may also anticipate the new cement assets it is about to take on-board once its acquisition of Ash Grove Cement completes in the US. Buried in one its regulatory filings covering the news were two graphs of changes in cement demand in the US and Europe through various financial depressions since the 1930s.
Graph 1: Changes in cement demand in US and Europe during financial depressions. Source: CRH with data from US Geological Survey, PCA, United Nations, Morgan Stanley etc.
The graphs serve their purpose for a public company as they show both markets in the current downturn starting to rise again. In other words it looks like the perfect time to invest in a building materials company! However, thinking more broadly the graphs give a timely reminder of how bad the last decade has been for the cement market, particularly in Europe. The period only really compares to the 1930s in decline and duration if the figures are accurate. It must be considered though that while the West has suffered, markets in the East, notably led by China and India, have boomed.
The financial crash in 2008 was precipitated by the US subprime mortgage market. Other potential market killers lie ahead no doubt. One such might be the so-called ‘Carbon Bubble.’ This idea has gained media traction this week with the publication of a paper in the Nature Climate Change journal examining the economic impact of decarbonisation, if or when it happens.
It’s not a new argument but it makes the assertion that as new technologies that replace fossil fuels start to influence the markets, traditional fuel producers like oil companies may face being stuck with ‘stranded’ assets as legislation toughens up and technology mounts. This in turn could cause a financial crash and it’s this aspect that the paper has looked at.
The ace in the hole from the Nature Climate Change paper is that the modelling here suggests a way out of the usual prisoner’s dilemma approach to climate change action. Once sufficiently-low carbon technologies hit a certain level of adoption, then any country holding out and using fossil fuels instead of taking of action may start to suffer economically. Or in other words cheating won’t pay.
The carbon bubble theory is pretty convenient for the climate change lobby as it gives it a financial reason to fight its enemies by targeting investors. One counter argument is realistically how fast and deep would the decarbonisation technologies actually have to be to cause significant financial disruption. Surely the oil producers would get out of risky assets before it was too late. Then again, maybe not.
The cement industry is in exactly the same situation as the oil producers as it too depends on carbon rich assets, in this case limestone, for its business to operate. If limestone assets become ‘stranded’ due to toughened legislation then how can production continue? In addition though, volatility in the fuels and secondary cementitious materials (SCM) markets already being observed from the cement industry may make one wonder about the existence of the carbon bubble. Markets for waste-derived fuels and granulated blast furnace slag are currently changing in the wake of the tightening of Chinese legislation both in and out of the country. In theory this could mean cheaper inputs for cement production but the market is hard to predict. The other classic recent example is how the US natural gas boom from fracking has reduced global oil prices with further effects on the coal and gas that cement producers use. This in turn has placed pressure on various countries that are reliant on their petrodollars and caused pain to their local cement industries, like Saudi Arabia for example. The price of Brent Crude may be rising at the moment but once it hits a certain threshold, the hydraulic fracking of gas wells in the US will resume pumping. Of course both waste inputs and fracking could just be attributable respectively to market distortions by a large country changing policy and a new technology finding its feet.
If the carbon bubble theory carries any weight then CRH’s cement demand graph during recessions may carry a warning to producers about what might happen if decarbonisation leaves the fossil fuel producers behind. With good timing for this theme South Korea’s Ssangyong Cement announced this week that it is close to completing a waste heat recovery (WHR) unit at its Donghae plant, one of the biggest in the world with seven production lines. The interesting detail here is that the WHR unit will work in conjunction with an energy storage system to form a microgrid. This kind of setup is well suited to using energy from renewables as well as from conventional sources like a national electricity grid. In other words, this is exactly the kind of development at a cement plant that might in a small way lessen its reliance on fossil fuels in the face of any potential supply issues.
Is the Holcim takeover of Lafarge complete?
Written by David Perilli, Global Cement
30 May 2018
LafargeHolcim’s announcement this week that it is to close its headquarters in Paris is the latest sign of the tension within the world’s largest cement producer. The decision is rational for a company making savings in the aftermath of the merger of two rivals – France’s Lafarge and Switzerland’s Holcim – back in 2015. Yet, it also carries symbolic weight. Lafarge was an iconic French company that had been in operation since 1833. Its hydrated lime was used to build the Suez Canal, one of the great infrastructure projects of the 19th century.
In the lead up to the merger in 2015 the union of Lafarge and Holcim was repeatedly described as one of equals. However, the diverging share price between the two companies killed that idea on the balance sheets in early 2015. Renegotiation on the share-swap ratio between the companies followed with an exchange ratio of nine Holcim shares for 10 Lafarge shares. In the end Holcim’s shareholders ended up owning 55.6% of LafargeHolcim. Lafarge’s Bruno Lafont lost out on the top job as chief executive officer (CEO) in the frenzy but the role did go to another former Lafarge executive. The new company also retained its former corporate offices in both France and Switzerland.
Since the merger LafargeHolcim has underperformed, reporting a loss of Euro1.46bn in 2017. Former senior executives from Lafarge have become embroiled in a legal investigation looking at the company’s conduct in Syria. LafargeHolcim’s first chief executive officer Eric Olsen resigned from the company in mid-2017 following fallout from a review into the Syria affair. Both Olsen and Lafont are currently under investigation by the French police into their actions with respect to a cement plant that the company kept operational during the on-going Syrian conflict. Olsen’s replacement, Jan Jenisch, is a German national who previously ran the Swiss building chemicals manufacturer Sika.
Regrettably the closure of LafargeHolcim’s corporate office in Paris will also see the loss of 97 jobs although some of the workers in Paris will be transferred to Clamart, in the south-western suburbs of the city. Another 107 jobs will also be cut in Zurich and Holderbank in Switzerland.
One more knock at the local nature of cement companies in the very international arena they operate in doesn’t mean that much beyond bruised national pride. British readers may mourn the loss of Blue Circle or Rugby Cement but the country still has a cement industry even if it mostly owned by foreign companies. France’s industry is doing better as it recovers following the lost decade since the financial crisis in 2008.
Jump to 2018 and LafargeHolcim is being run by a German with links to Switzerland, Holcim shareholders had the advantage during the merger, its former Lafarge executives and assets are facing legal scrutiny over its conduct in Syria and Lafarge’s old headquarters in Paris are being closed. LafargeHolcim in France still retains the group’s research and development centre at Lyon and a big chunk of the local industry. Yet Holcim has held an advantage ever since the final terms of the Lafarge-Holcim merger agreement were agreed so this slow slide to Switzerland is not really a surprise. From a distance it feels very much like the Holcim acquisition of Lafarge is finally complete.
UltraTech Cement aims for world’s third producer spot
Written by David Perilli, Global Cement
23 May 2018
UltraTech Cement’s deal to buy the cement business of Century Textiles & Industries could see it become the world’s third largest cement producer by production capacity outside of China.
It announced this week that it had entered into an acquisition agreement to buy the cement subsidiary of BK Birla Group for US$1.26bn. If the deal completes then it will gain three integrated plants in Madhya Pradesh, Chhattisgarh and Maharashtra respectively with a combined production capacity of 11.4Mt/yr and a 1Mt/yr grinding plant in West Bengal. At this point UltraTech Cement will increase its production capacity to 106Mt/yr seeing it become the third largest cement producer in the world in Global Cement’s Top 100 Report.
This latest deal is subject to the usual regulatory approval from competition bodies and the like. Bustling past this step seems far from clear at this stage given that UltraTech Cement owns cement plants already in each of the four states the proposed purchases are in. It has described the purchase as giving it, …”the opportunity for further strengthening its presence in the highly fragmented, competitive and fast growing East and Central markets and extending its footprint in the Western and Southern markets.” Synergy savings from procurement and logistics are expected to follow with further benefits to be gained from the company’s distribution network. Local and national competitors may not see it the same way and the fallout from a price war could be damaging for smaller producers.
As covered previously, UltraTech Cement seems hell bent on winning its on-going fight against Dalmia Bharat to buy Binani Cement. Rightly or wrongly UltraTech Cement tried to muscle its way into buying Binani by making a bid directly to its owners after it lost an auction for it. Legal wrangling has followed as the insolvency process for Binani Cement has clashed against the auction process of the administrator. At the time of writing it is still far from clear which company will win.
Comparing the prices of the two latest acquisition targets by UltraTech Cement may offer some insight of its motivations. The Binani Cement assets roll in at just over US$125/t of production capacity. Although, as noted below, some of this is located outside of India. The Century Textiles & Industries assets are being purchased for a little over US$100/t. This is interesting as it is lower that the Binani cost, although the close links between BK Birla Group and UltraTech Cement’s owner Aditya Birla may help to explain this.
UltraTech Cement’s milestone as it surpasses the 100Mt/yr capacity level will mark a continuing change in the world’s cement industry as it moves away from Europe and North America to developing economies. As ever the classification is a bit of a fudge given that Global Cement’s top producers list excludes Chinese producers. Partly this arises from the difficulty obtaining reliable data on the Chinese industry. Partly this comes from top producer’s list looking at multinational companies over (extremely) large national ones. Due to this UltraTech Cement remains a regional player. Or it will at least until it (or if it) manages to buy Binani Cement. Some of the assets included in that sale include plants in both the UAE and China. At this point UltraTech Cement’s claim to be the third biggest cement producer in the world will be secure.