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Indonesia faces overcapacity
Written by David Perilli, Global Cement
23 November 2016
Holcim Indonesia inaugurated a new cement terminal in Lampung last week. Unfortunately, the spectre of industry overcapacity haunts the country at present and the subsidiary of LafargeHolcim may be late to the party. The Indonesian Cement Association (ASI) has been publicly warning the government of overcapacity since the end of the summer. Its first line of action has been to lobby for restrictions on producer permits to slow the growth of new plants.
ASI figures show that cement sales in September 2016 fell by 3.3% to 5.64Mt compared to August 2016 due to lower residential sector demand. Domestic cement sales rose by 2.95% year-on-year to 44.7Mt in the first nine months of 2016 and the ASI expects sales growth of 3 – 4% for 2016 overall. Yet, the risk of overcapacity is stark. Cement production capacity has nearly doubled from 59.3Mt/yr in 2012 to 92.7Mt/yr in 2016 but demand is projected to only reach 65Mt in 2016, leaving a production oversupply of 27.7Mt. Regional consumption has fallen in Jakarta, Banten and West Java, particularly in the first two. Elsewhere, it has grown, particularly in Central Java, as well as Yogyakarta and East Java to a lesser extent.
Initial Global Cement Directory 2017 research places active production capacity at 66.3Mt/yr suggesting that the ASI may be exaggerating the risk of overcapacity. The additional c30Mt/yr capacity arises from plants that have been proposed, that are actually under construction or that have been mothballed. However, the ASI data should be more accurate as it represents the local producers. Either way, capacity is growing faster than consumption as can be seen in graph 1.
Graph 1: Cement consumption and production capacity in Indonesia, 2012 – 2016. Source: Indonesian Cement Association, Global Cement Directory 2012 – 2017.
Semen Indonesia, the country’s largest producer, reported that its revenue fell very slightly to US$1.4bn in the first nine months of 2016 and its net profit fell by 8.4% to US$215m. It blamed this on a fall in sales volumes and prices due to rising competition. The other large producers have said similar in the past. Indocement, the country’s second largest producer after Semen Indonesia, saw its revenue fall by 11.9% to US$837m in the first nine months of 2016 and its profit fell by 2.2% to US$231m. LafargeHolcim described the market as affected by overcapacity and ‘a difficult competitive environment.’
Back in May 2016 a feature on the predicament facing the Indonesian cement industry in the Jakarta Post suggested that producers were building new capacity despite the risks of overcapacity to win market share. Cement producers are about to find out whether this will work or not. Meanwhile it seems unlikely that the measures the ASI is suggesting will do much to alleviate the looming crisis. Still, on the positive side, it’s looking like a good time to buy cement as a consumer.
For more information about the cement industry in Indonesia view the first part of the Association of South East Asian Nations (ASEAN) feature in the October 2016 issue of Global Cement Magazine
Before and after the merger
Written by David Perilli, Global Cement
16 November 2016
The other shock news from the US last week was LafargeHolcim’s poor cement sales volumes in North America so far in 2016. HeidelbergCement’s third quarter financial results followed and they give us an opportunity to compare the fortunes of the world’s two largest cement producers either side of a high profile merger.
Graph 1 - Changes in cement sales volumes for LafargeHolcim, HeidelbergCement and selected European multinational producers in the first three quarters of 2016 compared to the same period in 2015 (%). Data labels are the volumes reported in 2016. Source: Company reports.
Graph 1 shows the effect of HeidelbergCement’s completion of its acquisition of Italcementi in mid-October 2016. Now that the purchase is complete its sales volumes have taken a whopping 20% boost to 73Mt. LafargeHolcim by comparison is struggling to hold sales. Although do note the difference in sales volumes between the two largest cement producers in the world. LafargeHolcim has sold nearly 2.5 times the amount of cement as HeidelbergCement so far in 2016.
Graph 2 - Changes in sales revenue for LafargeHolcim, HeidelbergCement and selected European multinational producers in the first three quarters of 2016 compared to the same period in 2015 (%). Data labels are the sales reported in 2016. Source: Company reports.
The point to take away from Graph 2 is the huge difference turbulent currency exchange rates are having on the financial returns of these companies. Like-for-like reporting of sales revenue hasn’t helped LafargeHolcim to grow but it is making a big difference to the sales of Cemex and Vicat.
Focusing on LafargeHolcim, the group has had a tough time of it so far in 2016 with falling cement sales volumes and falling sales revenue year-on-year on both a straight comparison basis and like-for-like one. Like many European cement producers negative currency effects have plagued its financial reporting. However, unlike many of its European-based competitors its like-for-like sales figures have also declined.
Particular problems have been noted in Nigeria as well as Brazil, Indonesia and Malaysia. It has managed to keep its profit indicators such as earnings before interest, taxation, depreciation and amortisation (EBITDA) mostly rising through the first three quarters of 2016 on a like-for-like basis. Yet, to give an idea of the effect fuel supply problems had in Nigeria in the third quarter of 2016 on the group’s entire bottom line, excluding Nigeria from its results would have seen its adjusted operating EBITDA rise significantly. With regard to the rest of the world, cement sales volumes have fallen in every one of the group’s territories so far in 2016 including, worryingly, its North America region. Here, falling cement sales volumes have been blamed on delays to infrastructure projects and bad weather.
By contrast, HeidelbergCement has reported rising sales revenue and profit indicators such as earnings before interest and taxation (EBIT) although its profit has fallen. Most of the good financial cheer has been derived from the new Italcementi assets although most of its territorial cement sales revenues have grown even when the effects of the new purchase have been excluded. The exception has been Africa where the group mentioned problems in Ghana due to local competition and imports.
The comparison between the world’s largest European-based cement producers is stark. LafargeHolcim made a big show of announcing the merger between Lafarge and Holcim in mid-2015. Today it is battening down the hatches as its tries to claw profit from asset sales and synergy savings. HeidelbergCement almost casually announced that it had finalised its acquisition of Italcementi in October 2016 and it has proceeded to rack up the profits at its first subsequent financial report. However, HeidelbergCement may be waiting for the regulators to finish approving parts of the deal before it makes a final announcement. For example, the Federal Trade Commission only approved the sale of various US assets on 15 November 2016. Meanwhile, the credits ratings agencies passed their own judgement when Standard & Poor upgraded its rating of HeidelbergCement earlier this week.
LafargeHolcim remains a much larger company than HeidelbergCement despite the problems it is facing so provided it can keep the investors happy it should be fine as its whittles itself down to a more sustainable shape. To this end the Swiss press has been speculating whether chief executive officer Eric Olsen will announce job cuts and plant closures at an investors meeting on 18 November 2016.
Like him or loathe him, Trump will boost the US cement industry
Written by Robert McCaffrey, Global Cement
09 November 2016
In June 2016, the polls said that the UK would remain in the European Union (EU), but now we have the prospect of Brexit. Democrat supporters in the US now know how the UK's 'Remainers' feel. The unthinkable has happened: the so-called 'Deplorables' have taken over the asylum. Donald Trump has won the US presidential election and he will be the 45th US president, after confounding all the polls, the media, the analysts and the commentators. He'll be able to appoint a swathe of right-leaning office-holders, including a crucial replacement for the late Antonin Scalia on the US Supreme Court. This will change the direction of US law-making for years, possibly decades, towards a less-liberal and more conservative outlook.
Trump will also be aided by having Republican majorities in both the Senate and the House of Representatives and will actually be able to get things done. President Obama had to fight hard for eight years to achieve anything, and finally had to fall back on enacting laws by presidential dictat or 'Executive Orders.' 'The Donald' will not have to stoop so low, and once he takes office will effectively be 'sweeping with the wind.'
Trump looks set to change US policy in a number of areas, including being less conciliatory towards America's foes ("I'm going to bomb the s••t out of ISIS"), taxing imports and tearing up trade agreements and rolling back US environmental efforts (he has promised to abolish the US Environmental Protection Agency, to cancel the Paris climate change deal, to sanction more drilling for oil and to approve the Keystone XL oil pipeline the fourth phase of which was recently rejected by President Obama). Who knows what else he has planned?
Well, one thing that we do know is that Trump's election is very probably great news for the US cement industry.
Early on in his victory speech, moments after receiving a telephone call from Hillary Clinton conceding defeat, Trump laid out the first step of his plan to 'Make America Great Again:' building US infrastructure. Trump said: "We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it." He didn't actually mention cement (nor did he mention a 'big beautiful wall'), but all of these projects will require plenty of cement and concrete. Whether they voted for him or not (and Trump noted that there are those 'who have chosen not to support me in the past, of which there were a few people'), workers in the cement industry will be celebrating the prospect of fuller order sheets, higher prices, better profitability and more overtime. From a current GDP growth rate of around 1%, some have suggested a surge past 3%/yr and beyond during a Trump presidency. The crucial question, often overlooked, is "How are we going to pay for all this investment?" With the US debt heading towards US$20Tn, perhaps Trump's history as a Democrat - and all the tax-raising territory that comes with that position - might come in handy after all.
Trump has indicated that he's already looking to a second term ("I look very much forward to being your president, and hopefully at the end of two years or three years or four years, or maybe even eight years...") based on what he might achieve in his first term. Well, let's see. Donald Trump's deeds now need to speak louder than Donald Trump's words.
Japan relies on cement exports
Written by David Perilli, Global Cement
02 November 2016
Two of Japan's largest cement producers have reported reduced domestic cement sales in the country this week. First, Taiheiyo Cement revised its forecast for its 2017 financial year, ending on 31 March 2017, bringing its estimated net sales down by 2.3%. Then, Ube Group reported that its cement sales had fallen by 7.2% year-on-year to US$1.05bn in the first half of its financial year. Both producers blamed poor weak demand locally, but Ube also cited a poor export market.
Graph 1: Domestic and export cement sales in Japan, 2006 - 2015. Source: Japanese Cement Association.
This last point is interesting because it differs from the latest data released by the Japanese Cement Association (JCA). As can be seen in Graph 1 JCA figures show that exports of cement have been rising since 2013. So far this trend looks likely to continue in 2016. Ube's different experience may arise from its market mix and its distribution of cement plants and transport infrastructure. Both of its cement plants are based in the south of the country. Commentators have attributed the boost in exports to the devaluation of the Yen in 2015 as well as strong brand perception overseas. Unfortunately, this overall rise in exports has been matched by a fall in domestic sales at the same time and this is causing a headache for the major producers. Production too has started to drop since 2014 (Graph 2).
Graph 2: Cement production in Japan, 2006 - 2015. Source: Japanese Cement Association.
Japan's cement market is dominated by four producers - Taiheiyo Group, Mitsubishi Materials, Ube Industries and Sumitomo Osaka Cement - which hold nearly three quarters of the nation's production capacity between them. According to Global Cement Directory 2016 data, Taiheiyo Cement and its subsidiaries is the market leader with over 30% market share with the other three holding 10 - 20% each.
Graph 3: Cement production capacity share in Japan (Mt). Source: Global Cement Directory 2016.
Taiheiyo's downgraded forecast follows poor first quarter results, in which its net sales for its cement business fell by 16% to US$1.19bn. This follows a slight rise in net sales for its cement business in its 2016 financial year due to a boost in sales from its overseas subsidiaries, particularly in the US, that surpass a fall in domestic sales. Sales volumes were 14.7Mt domestically and 4Mt in exports in 2016. Mitsubishi Materials has posted a similar picture with cement sales and profits rising in 2016 before suffering in the first quarter of 2017. Mitsubishi Materials blamed the poor market on a delay in construction work mainly due to labour shortages and sluggish growth in demand from the public sector. Ditto Sumitomo Osaka Cement.
As highlighted by such decision as Tokyo Cement's move to resume exporting clinker to Sri Lanka in early 2015, Japan's cement industry is working hard to compensate for falling demand at home. Increasing exports in Asia Pacific among other massive exporters such as China, Vietnam and South Korea is impressive, although the prominent foothold by Japanese companies in the recovering US market may offer some advantage here. On-going weak demand in China though cuts out one major market for Chinese exporters. However, being a major exporter in a region of major cement producers must be a concern. Although commentators such as Ad Ligthart dismiss the chances of China flooding the world with cheap cement, if they are wrong and Japan continues its reliance on exports it may find itself in deep water. The other risk is if the US authorities decide to get tougher on foreign exports it may knock out one more market for Japanese exports. Too much reliance on exports is always dangerous. In this context, it’s no surprise that Japanese cement producers are blaming the government for insufficient infrastructure spending.
When to call it a day…?
Written by David Perilli, Global Cement
26 October 2016
One fascinating statistic stands out in a study on how the Islamic State of Iraq and Syria (ISIS) pays its bills: cement represented 4% of its revenue in 2015 or around US$100m. The Centre for the Analysis of Terrorism (CAT) came up with this figure as part of its analysis on how the group finances itself. Its data was based on available information such as local sources, internal ISIS documents and reports from governments and institutions.
What’s more, the previous year in 2014, CAT estimated that ISIS brought in US$300m from cement sales. The difference in revenue between 2015 and 2014 came about from the group losing control of territory. In late 2014 it controlled four cement plants: the Lafarge Al-Jalabiya plant in Ayn al-Arabin, the Al-Raqqah Guris Cement plant and Fallujah, Kubaisa and Al-Qa’im plants in Iraq. Altogether it had a cement production capacity of 7.5Mt/yr, a higher capacity than 62% of the cement producing nations that are recognised formally by the United Nations. Briefly it had production parity with countries like Angola, Uzbekistan and Kuwait.
However the loss of the Al-Jalabiya and Kubaisa plants has stifled this revenue stream. At its peak ISIS couldn’t have been selling cement for more than something like US$40/t (capacity / revenue) if the plants were operating at full capacity. Yet it’s much more likely that the plants were chronically under-utilised and prices significantly higher in the heat, dust and confusion of a militant group attempting to form a state in a warzone.
Global Cement Weekly has covered previously the furore that erupted when French media accused Lafarge of cutting deals with ISIS to keep its Jalabiya cement plant during the early stages of the Syrian Civil War. At the time of the revelations in June 2016 LafargeHolcim said that its first priority was the safety and security of its employees at the plant before it eventually closed it, although it did not deny accusations directly.
Since then the plant’s former security manager Jacob Waerness has popped up in an interview with Bloomberg in connection with a book he wrote about the affair. According to Waerness, Lafarge stayed in the country for too long before the plant was finally seized by ISIS in September 2014.
The problem for Lafarge, as other multinational companies left the warzone, was that the US$680m plant had only been operational since late 2010 before hostilities broke out in 2011. Essentially, it tried to wait out the conflict and then got left behind. Pertinent to the start of this column, Waerness says that as the more extreme groups took control of the surrounding area he was offered and declined a meeting with the IS finance chief in Raqqa in the summer of 2013. However else one might describe IS, it was and clearly is well aware of the revenue to be gained from functioning cement plants.
LafargeHolcim has since started an internal review into the reported allegations under the auspices of its Finance & Audit Committee. In September 2016 the Iranian-backed Fars News Agency was reporting that US special forces were using the Jalabiya plant as a base. If and when peace comes to the region it will be intriguing to find out what condition the plant is in. Until then, LafargeHolcim will have to wait and take the loss on its investment.