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A change of course or an ‘action replay’ in South Africa?
Written by Global Cement staff
30 August 2017
There have been sounds of discontent coming out of South Africa this week, as AfriSam and PPC continue to (apparently) fail to come to an agreement on the terms of their long-discussed proposed merger. The pair have formally been in discussion since February 2017 but the situation now looks precarious. AfriSam has cancelled the heads of terms that had stood since that month. PPC has now hit back by giving AfriSam until this Friday (1 September 2017) to come up with a new and ‘sufficiently interesting’ deal for it and its shareholders. AfriSam’s acting Chief Executive Rob Wessels said, "AfriSam remains firm that a transaction between AfriSam and PPC will greatly benefit the stakeholders of both companies.” However, PPC’s chairperson Peter Nelson said that his shareholders were ‘frightened about the prospect’ of the merger.
If you think all of this to-and-fro sounds a bit familiar, that’s because it should. AfriSam and PPC have been courting not just since February 2017, but since December 2014. At that time, following the surprise resignation of CEO Ketso Gordhan, discussions lasted until the end of March 2015 before fizzling out. PPC’s (then) new CEO Daryll Castle confirmed that neither party could agree on terms. The two parties were also able to save some face by pointing out that the merged entity would have had around 60% of all South African cement capacity. While this is a pretty big potential stumbling block, it would been pretty obvious before discussions started and is by no means insurmountable. One gets the feeling that, given more enthusiastic partners, the discussions might have found a way forward.
At the time PPC and AfriSam played their cards close to their chests and we can’t be sure quite why the discussions really broke down. However, regardless of what happened last time, there do appear to be a lot of parallels with the current situation.
Firstly, PPC is, once again, in a state of transition. CEO Darryll Castle announced in July 2017 that he would be leaving to ‘pursue other interests,’ although neither an exact departure date nor destination was provided. Johan Claassen, the current managing director of PPC, has been appointed to the role, but only on an interim basis, presumably in anticipation for the expected merger. Other positions in the group’s executive team were reshuffled in the past couple of weeks and there was also the resignation of Tito Mboweni, a non-executive director, rumoured to be over a difference of opinion regarding the merger. On top of this, AfriSam’s CEO Wessels is also on a short-term contract. Could all of these pre-merger moves now be in vain?
Secondly, PPC continues to suffer from a combination of a poor domestic construction market and increasing competition and from imports coming in from rampantly over-productive markets across the Indian Ocean. Arguably both of these effects are now worse than they were in 2015, although PPC did recently say that the second quarter of 2017 had been a lot better across South Africa than the first. However, PPC saw its full-year earnings collapse by 93% year-on-year in the first quarter of 2017, after it was awarded ‘junk’ status in May 2016 by credit-rating agencies. Is it this result alone that has gotten AfriSam thinking? Despite this, PPC remains the larger of the two parties. It certainly wants to be seen to be calling the shots with its 1 September ultimatum.
However, the two producers now share less than 50% of the integrated cement capacity in South Africa, not 60% as in 2015. According to the Global Cement Directory 2017 they share around 7.8Mt/yr of integrated capacity against 8Mt/yr in the hands of others. This is due to the commissioning of the monster 3.5Mt/yr Anganang clinker plant and associated Delmas grinding plant by Sephaku Cement (Dangote Cement) and the full commissioning of Mamba Cement, part of Jidong Development. Could this smaller combined market share make it easier for PPC and AfriSam to identify those assets that can be sold to appease the competition authorities? Could this yet save the discussions?
Whatever happens after Friday, it is apparent that some form of consolidation is essential for PPC (and the wider southern African market) if the industry is to ‘right-size’ for the future. The region is awash with cement. News from PPC Zimbabwe this week even hinted that the effects of imports are now so strong in that country that it is considering shutting down clinker production at its Colleen Bawn plant, which has operated for more than 70 years. This effect is in play all the way down the coast from the Horn of Africa to Capetown and has been discussed previously with reference to Kenya, Tanzania and Mozambique.
Even if it doesn’t get the ‘right answer’ from AfriSam this week, PPC may still stand to gain from the merger, even if it’s only in the short term. In March 2015 its shares jumped up 5% on the news that the merger talks had collapsed. Given its recent performance, another 5% boost would probably not be turned down.
Half-year update on China
Written by David Perilli, Global Cement
23 August 2017
There is plenty to mull over on the Chinese cement market at the moment as the half-year reports for the major cement producers are being published. Anhui Conch revealed this week a glowing balance sheet with a 33% jump in its sales revenue to US$4.79bn. It attributed the boost to a ‘significant’ increase in prices and continued discipline with production and operation costs. Although CNBM is scheduled to release its results at the end of August 2017, Anhui Conch appear to be well ahead of its next largest rivals locally as can be seen in Graph 1.
Graph 1: Sales revenue of major selected Chinese cement producers. Sources: Company financial results.
Beyond the headline figures it is interesting to pinpoint the areas in China where Anhui Conch says it isn’t doing as well. Its South China region, comprising Guangdong and Guangxi provinces, suffered from competition in the form of new production capacity, which also in turn dented prices. Despite this ‘black spot’ in the company’s regional revenue still grew its sales in double-digits by 14%.
The other point to note is the growing number of overseas projects with the completion of a cement grinding plant in Indonesia, new plants being built in Indonesia, Cambodia and Laos, and projects being actively planned in Russia, Laos and Myanmar. The cement producer also opened seven grinding plants at home in China during the reporting period. It’s not there yet but it will mark a serious tipping point when the company starts to open more plants outside of China than within it. With the government still pushing for production capacity reduction it can only be a matter of time. On that last point China Resources Cement (CRC) reckoned in its half-year results that only four new clinker production lines, with a production capacity of 5.1Mt/yr, were opened in China in the first half of 2017.
After a testing year in 2016 CRC’s turnover has picked up so far in the first-half of 2017 as its sales revenue for the period rose by 17% to US$1.67bn. Despite its cement sales volumes falling by 9% to 33.6Mt, its price increased. Given that over two thirds of its cement sales arose from Guangdong and Guangxi it seems likely that CRC suffered from the same competition issues that Anhui Conch complained about.
Graph 2: Chinese cement production by half year, 2014 – 2017. Source: National Bureau of Statistics of China.
Graph 2 adds to the picture of a resurgent local cement industry suggesting that the Chinese government’s response to the overcapacity crisis may be starting to deliver growth again. After cement production hit a high in 2014 in fell in 2015 and started to revive in 2016. So far 2017 seems to be following this trend.
Returning to the foreign ambitions of China’s cement producers brings up another story from this week with news about the Nepalese government’s decision to delay signed an investment agreement with a Chinese joint venture that is currently building a cement plant in the country. With the prime minister visiting India the local press is painting it as a face-saving move by the Nepalese to avoid antagonising either of the country’s main infrastructure partners. This is relevant because the cement industries of both China and India are starting look abroad as they consolidate and rationalise. Once China’s cement producer start building more capacity overseas than at home, conflicts with Indian producers are likely to grow and present more awkward situations for states caught in the middle.
Chinese ripples on the Pacific Rim
Written by Global Cement staff
16 August 2017
After a couple of weeks looking at the capacity-rich cement markets of Angola and Vietnam, we turn our attention this week to some of those countries on the receiving end of overcapacity.
Costa Rica is an unlikely place to start but it came to our attention this week due to a short but significant news item. In summary, the amount of cement imported into Costa Rica increased by a factor of 10 between 2014 and 2016, from around 10,000t to over 100,000t. This is around 5% of its 2Mt/yr domesitic capacity, so the change is already fairly big news. The fact that an incredible 97% of this came from just one country, China, makes the story far more interesting as it shows the effects that Chinese overcapacity can have on smaller markets.
But when we look at how the value of the cement imports has changed over time, we see an even more dynamic shift. While the amount of cement imported into the country increased by nearly 10-fold, the value of the same imports only increased by around half as much between 2014 and 2016. If these figures can be taken at face value, the implication is stark. Taking the very low base as effectively ‘zero,’ each tonne of cement imported must cost around half as much as it used to.
Digging a little deeper and the picture gets more complicated. While they have fallen, Costa Rican cement prices have not fallen by 50% and why the sudden deluge of imports anyway? In 2015 the country changed its rules on cement imports to facilitate more flexible imports and lower prices for consumers. It did this by changing a regulation relating to how long cement can be stored, previously set at just 45 days, with the aim of allowing cement to come from further afield and, crucially, in bulk rather than bags.
The effects on price were immediate. Previously as high as US$13/bag (50kg) in December 2014, fairly high by global standards, Sinocem, the first Chinese importer, immediately sold its first shipment at US$10/bag. This effect of lower prices has now forced the average sales prices down to around US$10/bag across the country by 2017. This is good for consumers but not necessarily the local plants.
Back in 2015, the two local integrated plants operated by Cemex and Holcim warned that cement quality would suffer if cement bags were not used within 45 days. This apparently self-serving ‘warning’ went unheeded by the Ministry of Economy, Industry and Trade (MEIC), which pointed out that other countries in South America, as well as the European Union and United States, had no analogous short use-by dates for cement bags.
The rule remains in place, although discontent rumbles on. Indeed LafargeHolcim noted in its third quarter results for 2016 that ‘Costa Rica was adversely affected by increased foreign imports.’ This may well be a little bit of posturing and it doesn’t square with the fact that Costa Rica exported three times more cement that it imported in 2016. Of total exports of 0.34Mt, over 95% went to neighbouring Nicaragua, which has a single 0.6Mt/yr wet process plant owned by Cemex. It seems that the two Costa Rican plants have found a way to keep a little bit of the Chinese producers’ margin for themselves.
Of course, Chinese cement overcapacity doesn’t only affect the Central American market. It has been rippling all around the Pacific Rim. In July 2017, this column looked at the decision by Cementos Bío Bío to stop making clinker at its Talcahuano plant in Chile. It now favours grinding imported clinker from Asia. Before that, Holcim New Zealand closed its Westport cement plant in 2016, finally admitting that domestic clinker was not viable.
In the grand scheme of things, this all makes sense. The market has forced those operating on thin margins to adjust. Ultimately, the end consumer is likely to benefit from lower prices, at least for as long as reliable low-cost imports can be secured. What happens, however, if China actually gets round to curtailing its rampant cement capacity, or simply decides to charge more for its cement? Flexible imports, the main aim of the Costa Rican rule change, may then prove vital, as long as there is more than one international supplier of cement.
Update on Indonesia
Written by Global Cement staff
09 August 2017
One of the surprises from the recent round of half-year results has been HeidelbergCement’s struggle to grow its sales so far in 2017. Part of this has been down to a variable market in Indonesia where the German cement producer runs the second largest player, Indocement.
Cement consumption for the country as a whole dropped by 1.3% year-on-year to 29Mt in the first half of the year, according to Indonesian Cement Association figures. This appears to be due to a particularly poor month in June 2017 where local consumption fell by 27% to 3.7Mt. Prior to that, consumption was actually showing 4% growth up until the end of May.
Fairly reasonably HeidelbergCement blamed the decline in part on this year’s timing of Ramadan. Unfortunately this could not explain everything, as its total sales volumes including exports fell by 2.4%. Remove the exports and its sales volumes fell by 4.4%, more than the national average. It said this was due to its concentration in weaker markets in Jakarta, Banten, and West Java where competition pressures had forced prices down ‘significantly.’
They weren’t alone in feeling the pain in June 2017 with both Semen Indonesia and LafargeHolcim reporting reduced sales. However, LafargeHolcim also raised the issue of production overcapacity creating increased sales volumes and pushing down prices. This was reflected in lower earnings for its Asia Pacific division. HeidelbergCement too saw its earnings crumble.
Graph 1: Cement production capacity and consumption. Source: Semen Indonesia investor presentation, March 2017.
Graph 1 shows quite nicely the fix the Indonesian cement market is in at present. Consumption surpassed production capacity in the early 2010 before incoming capacity jumped ahead again around 2013. You can also view Global Cement’s version of this graph here. Even at an optimistic annual growth rate of 8%, consumption won’t get close to capacity until 2020. Yet before the market collapsed in June, consumption was growing at 4%, which is the weakest of Semen Indonesia’s growth scenarios.
Admittedly the graph is in an investor document so we can forgive ebullience but they are going to need a magic bullet to dodge this one. Lucky then that the graph also has infrastructure highlighted. The cement producer says that the Indonesian government earmarked US$26bn for infrastructure spending in 2017 and that this spending campaign can be seen in the changing ratio of bulk to bagged cement it has been selling. Independent of Semen Indonesia, the Fitch credit rating agency was also predicting rising consumption off the back of infrastructure plans in a report it put out in June.
However, as more cement plants are being built, cement plant utilisation rates seem destined to stay subdued for the foreseeable future unless the government seriously ups its infrastructure investment or unless the economy goes into overdrive. Unsurprisingly exports have shot up so far in 2016, by 74% to 1.14Mt. Cement producers in neighbouring countries beware!
Half year multinational cement producer roundup
Written by David Perilli, Global Cement
02 August 2017
Cement sales volumes are down at the larger multinational cement producers so far in 2017. As the first half-year results emerge, a picture seems to be appearing of sluggish growth at best for the major internationals. Reduced working days and poor weather have been blamed for the underwhelming performance.
Graph 1: Cement sales volumes for selected multinational cement producers during the first half of 2017. Source: Company financial reports.
True, LafargeHolcim’s sales rose by 0.4% year-on-year on a like-for-like basis, probably due to the assets the group has been sloughing off since the merger, but this is hardly the dynamic growth shareholders may have hoped for. Meanwhile, HeidelbergCement, following its acquisition of Italcementi in late 2016, has only been able to increase its cement and clinker sales by 1% for the first half of 2017 once consolidation effects were excluded. Here the problem appears to be reduced sales in both the US and Indonesia at the same time. This then leaves Cemex with a 2% drop in sales volumes to 33.9Mt with a big drop in the US despite a promising construction market otherwise. It blamed the decline on a high comparison base in 2016 and the weather.
The larger regional players examined here appear to have fared better. Both UltraTech Cement in India and Dangote in sub-Saharan Africa reported flat or falling sales volumes. However, delve a little deeper and there’s more going on. UltraTech didn’t offer any reason for the decline although it was likely focused on its acquisition of assets from Jaiprakash Associates and the knock-on from the demonetisation process last year. That purchase increased its cement production capacity by nearly 40% to 91.4Mt/yr from 66.3Mt/yr and it seems keen, to investors at least, that it will be able to rocket up the capacity utilisation rate at the new plants.
Dangote meanwhile has taken a blow from the poor economic situation in Nigeria, where it still produces most of its cement. Here, sales fell by 21.8% to 6.86Mt from 8.77Mt, causing its overall sales to fall by 11.3% to 11.5Mt. Almost incredibly though, as Graph 2 shows, Dangote upped its sales revenue by a whopping 41.2% to US$1.13bn off the back of improved efficiencies and a much better fuel mix in Nigeria. The turnaround is impressive considering the pressure the company faced in 2016. Today’s news that the firm has sold a 2.3% stake to foreign investors adds to the impression of a company on the move.
Graph 2: Sales revenue for selected multinational cement producers during the first half of 2017. Source: Company financial reports.
Looking at overall sales revenue shows a happier picture for most of the producers detailed here, with the exception of HeidelbergCement. Although Graph 2 shows declines for LafargeHolcim and Cemex on a like-for-like basis, at least growth is occurring. HeidelbergCement though has reported static revenue on an adjusted basis for the period. This suggests that the producer has hit problems just as it is starting to integrate the Italcementi assets into its portfolio. In theory the geographic spread of its new production units should shield it from lowered growth elsewhere but if this doesn’t happen it may be in for a rougher ride than LafargeHolcim following its merger.
In summary, being a large-scale multinational cement producer doesn’t quite seem to be offering the balanced growth one might expect so far in 2017. Cement sales volumes are slipping and revenue is also down on a direct comparison basis. It’s barely a case for comparison but smaller regionally based producers like UltraTech Cement and Dangote, in the right locations, seem to be capitalising on their positions. We’ll see how the big Brazilian producers Votorantim and InterCement, Buzzi Unicem and CRH fit this trend when they release their financial results over the next few weeks.