Displaying items by tag: Tax

It’s been a pessimistic month for the Indian cement industry with Ministry of Commerce & Industry data showing that cement production has fallen year-on-year every month since December 2016. This was followed by the Cement Manufacturers Association (CMA) saying that the industry was sitting on 100Mt/yr of excess production capacity. Now, the credit ratings agency ICRA has followed the data and downgraded its forecast for cement demand growth to not more than 4% for the 2017 - 2018 financial year.

Graph 1: Annual cement production in India. Source: Ministry of Commerce & Industry.

Graph 2: Monthly cement production growth rate year-on-year in India: Source: Ministry of Commerce & Industry.

Graph 1 shows a production peak in the 2015 - 2016 financial year before falling monthly production broke the trend in the 2016 - 2017 period. Graph 2 pinpoints the month it started to go wrong, November 2016, when the government introduced its demonetisation policy. Production growth went negative the following month in December 2017 and it hasn’t managed to right itself since then and grow. It’s convenient to blame the government for the slump in production but it troughed in February 2017 before taking a lower level of decline since then.

The Reserve Bank of India (RBI) annual report in August 2017 suggests that the policy failed in its principal purpose of reducing the kind of corruption that a cash heavy economy can hide such as tax avoidance. People reportedly managed to find ways to bypass the bank deposit limit and may have successfully laundered large amounts of cash without being caught. However, as commentators like the Financial Times have pointed out, the longer term implications of forcing the economy towards digital payments and increasing the tax base could yet be beneficial overall.

Graph 3: Cement production capacity utilisation rates in India. Source: UltraTech Cement.

Moving on, the CMA has blamed production overcapacity for the current mess and Graph 3 shows the problem starkly. If anything the CMA appears to have downplayed the over capacity crisis facing India, as UltraTech Cement’s figures (using data from the Department of Industrial Policy and Promotion) show an overcapacity of 155Mt in the 2016 – 2017 year and this will grow to a forecast 157Mt in the next financial year, even though the utilisation rate is expected to rise slightly. UltraTech Cement’s estimates don’t see the utilisation rate topping 70% until the 2020 – 2021 financial year. Analysts quoted in the Mint business newspaper concur, although they reckoned it would the rate would bounce sooner, in 2019 - 2020. Last month when the CMA moaned about the industry's excess capacity it pinned its hopes on infrastructure schemes like the Mumbai-Ahmedabad bullet train. This prompted an official at JK Cements to say that he didn't think that one train line was going to make much of a difference.

This is one reason why ICRA’s and the other credit agencies’ growth rate forecasts for cement demand are important, because they indicate how fast India might be able to close the gap between production capcity and demand. Unfortunately demonetisation scuppered ICRA’s growth prediciton for 2016 – 2017. It forecast a rate of 6% but it actually fell by 1.2%! So downgrading its forecast for 2017 – 2018, with fears of weather and the implementation of the Goods and Services Tax (GST) in the second half of the year, is ominious. Major cement producers such as Ultratech Cement and Ambuja Cement have based their road to recovery in their latest investor presentations on a 6% growth rate or higher. Pitch it lower and the gap doesn’t close. Here’s hoping for a brisk second half.

Congratulations are due to India’s UltraTech Cement this week for finally completing its US$2.5bn asset purchase from Jaiprakash Associates. The deal has been around in some form or another since at least 2014 when UltraTech arranged to buy two cement plants in Madhya Pradesh for around US$750m. That deal, publicly at least, became a victim of the 2015 amendment to India’s Mines and Minerals (Development and Regulation) (MMDR) Act. The Bombay High Court eventually rejected it in early 2016 after a period of delays. However, the deal bounced back in a much larger form around the same time and since then everything has gone relatively smoothly.

As chairman Kumar Mangalam Birla put it in his letter to shareholders in the company’s 2016 – 2017 annual report the, “move is essentially for geographic market expansion.” He then went on to mention all the usual keywords like ‘synergy’ and ‘economies of scale’ that you expect from an acquisition. Quite rightly he finished with, “It is with great pride that I record, that UltraTech is the largest cement player in India and the fifth largest on the world stage.” On that last point he meant outside of China but UltraTech does have a small number of assets outside of India, notably in the UAE, Bahrain, Oman and Bangladesh, hinting at an international future for the cement producer.

Map 1: UltraTech Cement’s plants in India. Source: UltraTech Cement Corporate Dossier, January 2017.

To give a scale of the deal, UltraTech has increased its number of integrated cement plants in India to 18 from 12 and its cement grinding plants to 21 from 16. Its overall cement production capacity will increase by nearly 40% to 91.4Mt/yr from 66.3Mt/yr. The new assets are in Himachal Pradesh, Uttar Pradesh, Uttarakhand, Madhya Pradesh and Andhra Pradesh. The main regions that will benefit are the North, Central and South zones. In particular the Central Zone will see its capacity jump to 21.1Mt/yr from 6.2Mt/yr. This area also includes a new 3.5Mt/yr plant at Dhar in Madhya Pradesh that is scheduled for commercial production in late 2019.

The completion of the Jaiprakash Associates deal was followed by the introduction at the start of July 2017 of the Goods and Services Tax (GST), a rationalisation of some of the country’s central and state taxes. UltraTech promptly said it had reduced its product prices by 2 – 3% in light of tax reductions under the new regime. Some producers were warning of a rise in cement prices in the run-up to the introduction of the GST and the Cement Manufactures’ Association said that the new tax rate was insufficient. However, UltraTech said that the new tax rate of 28% was better than 30 – 31% previously. Other Indian producers also reduced their prices this week following the introduction of the GST.

UltraTech’s expansion and the start of the new tax scheme auger well for the Indian cement industry in 2017. Demonetisation knocked cement production at the start of the year and it may have lowered UltraTech’s capacity utilisation rate as well as reducing domestic sales by cutting housing demand. However, sector rationalisation and a simpler tax approach should help to remedy this. Not all government interaction has been helpful to the cement industry in recent years as the MMDR amendment and demonetisation show but the signs are promising.
Roll on the next set of financial reports.

Check out this great graph that the UK Mineral Products Association (MPA) released in its latest sustainable development report this week. It lays out where the MPA says the various direct and indirect costs come from climate change policies per tonne of cement.

Graph 1: The cumulative burden of direct and indirect cost of climate change policies on the cement sector (per tonne of cement). GBP£1 = Euro0.94 at time of writing. Source: MPA. 

If it’s correct then the two biggest contributors from carbon taxes on the price of cement in the UK arise from the Carbon Price Support (CPS) mechanism and the Renewable Obligation (RO). Between them the two policies account for around two-thirds of the carbon tax burden on the price of cement. Of note to an industry advocacy body like the MPA, both of these derive from local legislation and they could be changed or dispensed with separate to the Brexit negotiations to extricate the UK from the European Union that have just officially started.

The MPA then goes on to warn that these added costs could rise from GBP£3.24/t at present to GBP£4/t in 2020 and then the truly terrifying (to energy intensive manufacturers at least) GBP£17/t. Subsequently the MPA has flagged these potentially mounting costs as the biggest threat to the UK cement industry in the near future. Failure to act could mean more foreign imports, loss of jobs and damage to the security of supply. All very heavy stuff. The MPA’s warning was nicely timed to precede the UK government’s response to a consultation on another decarbonisation scheme, the Contracts for Difference (CfD) scheme. Here, the government is about to exempt high-energy users, including cement producers.

Essentially, the key message from the MPA’s report is that the cement sector is picking up but it is still below sales levels in 2007. At the same time it has made all these environmental improvements and, now, steadily tightening regulations threaten its future. Just compare this with the situation in the US where the Portland Cement Association (PCA) recently applauded President Donald Trump’s executive order to roll back environmental legislation from the Obama administration. Despite this it insisted that its members were committed to manufacturing products with a ‘minimal’ environmental footprint.

Funnily enough the MPA didn’t mention environmental issues when it released its updated Brexit priorities for the UK government. This is understandable given the graph above that suggests that the majority of the carbon costs on cement production come from UK legislation. However, sharing a land border with the EU south of Northern Ireland may give rise to all sorts of market skulduggery once any sort of post-Brexit deal becomes clear. And this doesn’t even take into account moving secondary cementitious materials about, like slag, or the UK’s international market in solid recovered fuels (SRF) and the like. Differences in UK and EU overall carbon costs on cement may start to have acute implications for producers in both jurisdictions as the negotiations build. In this atmosphere moves like Ireland’s Quinn Cement’s last month, to build a terminal on the UK side of the Irish border, make a lot of sense.

Bad news for both cement workers and local clinker production in Australia and New Zealand this week with the announcement of job cuts and planned closures of clinker plants. Holcim New Zealand has confirmed that around 120 jobs will go when its Westport cement plant closes in 2016 along with the rationalisation of a few management jobs when the company integrates its Australian and New Zealand businesses. Meanwhile, Boral announced that it will cut 28 jobs from its Maldon Cement plant in Australia when it ceases clinker production at the end of 2014.

With these planned closures cement production capacity in the antipodes will shrink by just over 1.5Mt/yr to around 7.5Mt/yr, a reduction of over 15% Alongside the drop in native cement production players are re-focusing on an import market.

The trend is highlighted by the fact that Boral's Maldon site will retain its grinding mill. Earlier in June 2014 it was reported that Vue Australia is planning to convert a brownfield site on Kooragang Island, New South Wales into a cement storage and transfer plant. In February 2014 Cockburn Cement cut 44 jobs at its Munster cement plant as it started to restructure its operation for grinding using imported clinker. Also in February 2014 Cement Australia, the joint-owned company between Holcim and HeidelbergCement, had a US$17m expansion of its cement loading and storage facility for processing at Osborne approved by local authorities.

Following its restructuring in 2013, which has seen clinker production cease at Waurn Ponds and soon to cease at Maldon, Boral reported that its cement revenues grew in its 2012 – 2013 financial year. This is likely to continue when the 2013 – 2014 year is reported in August 2014. Likewise, Adelaide Brighton reported growing revenues in 2013. Cement Australia reported growing cement sales year-on-year in the first quarter of 2014 following reduced sales in 2013.

All in all the local cement industry in Australia and New Zealand has taken quite a knock in recent years. Reasons for this have included a poor recovery for the local building materials market, high-energy costs, the Carbon Tax in Australia, competition concerns and the spectre of cheap clinker imports from East Asia undercutting everything. However the return to revenue and then profit suggest that the worst of the job cuts and clinker production shrinkage is over.

In this business environment, revelations such as a China Resources spending upwards of US$300,000 on golf are unlikely to garner sympathy for any measures that appear to reduce international competiveness for Australian industry. The current Australian government led by Tony Abbott is set to make good on its promise to repeal the Carbon Tax from July 2014. The environmental effects will be unclear given that the tax may have cut emissions from participating companies by 7%, falling from 342Mt in 2011 – 2012 to 321Mt in 2012 – 2013, according to the Investor Group on Climate Change. As is usual with localised carbon taxation or legislation, whether global emissions fell during this period or whether emissions grew in looser jurisdictions to compensate is hard to calculate. The trend towards clinker imports suggests that there may be a significant contribution from the latter.

The Mineral Products Association (MPA), which looks after the interests of the cement industry (and other allied industries) in the UK, has said that it welcomes a temporary tax-freeze relating to climate change announced in the UK Budget of 20 March 2013. The MPA singled out the decision to freeze the indexation of the Aggregates Levy until April 2014 and the decision to introduce the Climate Change Levy mineralogical and metallurgical exemption for energy-intensive industries such as cement and lime.

Both of these moves by UK Chancellor George Osborne have been welcomed because they bring some relief to the UK cement industry and wider construction activities. MPA members make money from such activites and any potential cost that can be eliminated or delayed, even for a short time, is welcome amid the current slump that is the UK economy. This is especially true as the UK weathers the one of the longest and most severe winters for 50 years. So far, so much sense.

However, how does this reaction to the Climate Change Levy exemption tie in with the MPA's February 2013 announcement that it thinks that the UK cement industry's total CO₂ emissions should be reduced by 81% by 2050? What should UK cement producers make of this?

The MPA's cement industry CO₂ reduction targets are certainly bold. On the face of it, they look achievable given the progress that has been made to date by the UK cement industry, although much is left to the imagination as to which areas could and should contribute most to the reduction target. The 81% reduction target includes the successful future commercial development of carbon capture and storage (CCS) technologies. It also relies on an increased proportion of renewable sources for the electricity that the cement industry will receive in 2050, something else that is totally out of the industry's control.

However, much hard work has already been done by cement companies in the UK. As in other EU countries and developed nations, total dust and toxic emissions have fallen dramatically in the UK cement industry since 1990. The country's alternative fuel substitution rate has now hit ~40%. Yet, as the MPA highlights in its document detailing the targets for 2050, much of the low-hanging fruit has already been taken. Further reduction in overall CO₂ emissions will be significantly affected by both regulations and cement company progress. 

Cement companies can increase their consumption of 'wastes' and fit waste-heat recovery systems. Through such measures they can achieve further reductions in emissions. Some kilns have hit alternative fuel substitution rates of 100% for limited periods and examples from the near continent show that 80% alternative fuels can be the norm. However, unlike these 'bottom-up' approaches, which can be introduced at a plant in a period of months, regulations take years to evolve and come into force, often involving slow and lengthly debate by politicians, associations and consumers.

To discourage the government from seeking to impose stricter environmental regulations for the cement industry by welcoming the exemption, is the MPA undercutting its own calls to reduce CO2 emissions in the UK cement industry? From a cement producer's perspective, it looks like the MPA could hold two contradictory opinions on the same subject: that you can welcome reductions in climate regulation while also calling for stricter emissions regulations. This phenomenon was famously termed 'double think' by George Orwell in his classic novel '1984,' but the MPA's situation is far more subtle. Often the regulators and those being regulated can agree on the same target but not on how that target should be reached. The next 37 years will show whether or not this target is even possible.