The past 12 months have been relatively quiet for the UK, as the nation entered a kind of post-Brexit-vote ‘phoney war,’ defined by the evolving consequences of the EU Referendum in June 2016. The economy has been stable, except for a sharp downturn in the months surrounding the referendum campaign itself, with reasonable prospects for modest growth in construction activity over the next couple of years. Here Edwin Trout of the Cement Industry Suppliers’ Forum looks back over the UK cement sector in the past year...
Breedon on the march
Hope Cement: Breedon’s acquisition of Hope Construction Materials was the biggest structural change in the UK cement industry in 2016. It became the latest of several mergers and disposals arising since Hope’s own spin-off from the merger of Lafarge and Tarmac in 2013. The Board of Breedon Aggregates proposed to purchase Hope Construction Materials late in 2015. During the first half of 2016 the sale of 14 ready-mixed concrete plants (mainly to Tarmac) was arranged to counter likely objections on competition grounds. The firm secured approval in principle from the Competition and Markets Authority (CMA) and, after a public consultation ended on 15 July 2016, the deal was finally sealed on 1 August 2016.
The enlarged group changed its company name from Breedon Aggregates Ltd to Breedon Group plc, and was restructured into three autonomous divisions: Breedon Northern, Breedon Southern and Hope Cement, the latter with Hope’s former Industrial Director Ashley Byran appointed as Managing Director. Subsequent financial results suggest that synergies within the combined business were coming through earlier than expected.
Sherburn Minerals: In November 2016, Breedon entered into a binding agreement to acquire Sherburn Minerals Group for a total consideration of up to Euro18.3m. Based in County Durham, the formerly independent Sherburn operated four quarries and five ready-mixed concrete plants, importing cement and ground granulated blast furnace slag (GGBS) from terminals at Blyth and Dundee. It has 21Mt of mineral resources and a workforce of 110 employees. Former MD Paul Allison remains with the business as a consultant.
Pro Mini Mix: Breedon announced the purchase of Pro Mini Mix at the start of May 2017. The acquisition process is ongoing.
Construction output
The period of review opened with further evidence of an ongoing tension over the accuracy of the official government figures. When, in April 2016, the Office for National Statistics (ONS) indicated that construction output in March 2016 had fallen by 3.6% month-on-month, by 4.5% year-on-year and that output in the first quarter of 2016 was down by 1.1% quarter-on-quarter and by 1.9% year-on-year, the Construction Products Association (CPA) commented, “Contrary to today’s report, all other surveys of activity across the entire construction industry supply chain, from the largest contractors to the smallest SMEs, have reported an increase in activity during the first quarter of the year compared to the previous quarter and the previous year, albeit at a slower rate than previously.”
This view was shared by Richard Threllfall, Head of Infrastructure Building & Construction at KPMG. They both expected the ONS data to be revised upwards. Subsequent figures for the first quarter were down by 1.2% compared with both the preceding quarter and for the first quarter of 2015, and a 0.4% decline in the second quarter put construction into a formal recession, even before the destabilising outcome of the EU Referendum was known. This continued and new orders in the fourth quarter were 2.8% lower than in the third quarter.
Given the publicly-voiced scepticism surrounding ONS figures, it is worth examining the construction sector’s own data and conclusions. The Construction Products Association (CPA), in which the cement industry is represented, regularly publishes a state of trade survey and periodic forecasts.
In May 2016, the CPA’s state of trade survey indicated continued growth in sales of construction products during the second quarter of 2016, the thirteenth consecutive quarter, though manufacturers displayed a growing pessimism about prospects for the coming year ahead, even ahead of the EU Referendum. Subsequent forecasts anticipated a broadly flat level of construction activity in 2017 and 2018, with growth in infrastructure and education offsetting falls in the commercial and industrial sectors. Private housing was expected to remain stable in 2017 with a 2% fall in 2018.
However, when the latest state of trade survey was reported in April 2017, it showed that sales of construction products had risen for a 16th consecutive quarter in the first three months of 2017, having seen an increase in activity across all sections of construction. The latest forecasts are that construction output will continue to grow by 1.3% in 2017, 1.2% in 2018 and 2.3% in 2019. Growth is thought to be driven principally by an expected 28% increase in infrastructure activity and a 6.1% rise in private house building.
Against this renewed optimism, the CPA has expressed concern about the potentially inflationary threat of rising wages and the cost of imported material. 78% of heavy side manufacturers reported a rise in raw material costs as 2016 drew to a close.
Production of building materials
A slowdown in early 2016 is also apparent in the production returns issued by the Mineral Products Association (MPA), the cement industry’s own trade body. The MPA identified a ‘disappointing flattening of construction work’ in the first quarter of the year, with sales of mineral products providing hard evidence, though it argued the general indicators remained positive.
This optimism continued into the second quarter, as sales of heavy building materials were better than expected, in contrast with the official ONS statistics mentioned above. Sales of aggregates, asphalt and ready-mixed concrete all improved in the second quarter. Annual sales volumes were generally positive in the 12 months to June 2016. Aggregates and ready-mixed concrete rose by 3-4% and mortar sales increased by 2% over the year. Figures for cement production are not yet available for 2016.
However, market demand was lower in the third quarter of 2016. Sales of ready-mixed concrete fell by 1.4%, while aggregates and asphalt fell by 0.5%. After two quarters of flat volumes, mortar sales rose by 1% over the quarter. Once again, the MPA argued that the long-term prospects remained positive and indeed demand rose again in the fourth quarter, indicating some momentum in construction activity at the start of 2017. Sales of ready-mixed concrete grew by 4% compared with 2015, matched by a 4.2% increase in aggregates and a 4.6% rise in mortar sales. Overall, the Association claimed, “It is clear that MPA markets, construction and the general economy have been more resilient than anticipated.”
Other indicators
Rather more bearishly, market research firm Leading Edge has substantially downgraded its expectations for construction output in 2017, pitching growth at only 1.3% compared with 2016. However, the forecast is still for growth and, like other commentators, the consultancy argues that the UK economy is still sound, with GDP forecasts in line with those of the Eurozone.
Providing a comparison with the UK’s closest Eurozone economy, Ireland, is the Construction Purchasing Managers’ Index (PMI) from Markit/CIPS and the Ulster Bank respectively (See Table 1). In the monthly indices issued by each, any reading below 50 signifies contraction in the market. The Brexit effect on confidence and decision-making during the summer of 2016 is made strikingly clear by the figures, but otherwise modest growth has remained fairly consistent. In the Republic of Ireland there have been wider fluctuations, but at a noticeably higher level of growth.
Year | Month | UK | ROI | Comments UK | Comments ROI |
2016 | Apr | 52 | 56.4 | The lowest since mid-2013, reflecting stagnating new business | |
May | 51.2 | 55.9 | Residential, commercial and infrastructure struggled. Output growth in output weakest for nearly three years |
||
Jun | 46 | 59.7 | First below 50 in three years; weakest for seven years | ||
Jul | 45.9 | 61 | Total construction activity has risen continually for 35 months | ||
Aug | 49.2 | 58.4 | Signs that the industry may be stabilising after the Referendum | ||
Sep | 52.3 | 58.7 | Above the 50 value for the first time in four months | Civil engineering returned to growth but was weakest sector | |
Oct | 52.6 | 62.3 | Housing activity has remained as the key driver of growth | ||
Nov | 52.8 | 59.8 | |||
Dec | 54.2 | 58.9 | 11-month high led by the fastest rise in new orders since Jan 2016 | ||
2017 | Jan | 52.2 | 55.7 | The first drop in growth since post-referendum recovery began | |
Feb | 52.5 | 57.9 | Civil engineering, rather than housebuilding, is the main driver | Employment index is near record levels | |
Mar | 52.5 | 60.8 |
Above - Table 1: Comparison of Construction Purchasing Managers’ Index for the UK (Markit/CIPS) and Republic of Ireland (Ulster Bank). Values over 50 indicate growth, with values under 50 representing contraction.
The Brexit effect on material costs
A recent analysis of the ONS figures suggests that the cost of building materials in general could rise by Euro664m in 2017 as a consequence of Brexit. Several other commentators have expressed similar concerns.
Whether or not this inflationary pressure is making its way through to cement is reflected in the Government’s Price Indices of Construction Materials. The trend in cement prices appears relatively flat, with slight spikes in October 2016 and January 2017:
Unrelated to production costs, but rather to output, the supply of some materials has tightened over the past year, most particularly fly ash, as coal-fired power stations close, and as a result of a fire at a ferrous sulphate processing plant.
Commercial performance
Despite the economic landscape, the various cement businesses in the UK appear to be performing steadily. However, with most of the industry controlled by the major multinationals, it is not a straightforward matter to disentangle the fortunes of domestic cement operations from announcements of group performance. The following are simply highlights and suggest that, for the most part, returns on cement production in the UK are stable or improving.
Hope Cement (Breedon Group): Breedon delivered a strong performance in the 10 months to 31 October 2016. Both volumes and revenues in the former Breedon Aggregates business were greater than in the previous year, supplemented by a three-month contribution from the former Hope Construction Materials business. Total group revenue for the 10-month period increased by 31% to approximately Euro420.6m. By the end of 2016, the inclusion of Hope helped generate a 50% increase in pre-tax profit to Euro54.5m, on group revenues that were up by 43% to Euro529.7m.
Tarmac (CRH): Tarmac’s parent company CRH reported a 35% increase in global sales for the first six months of 2016, achieving Euro12.7bn. It doubled its earnings before interest, tax, depreciation and amortisation (EBITDA) to Euro1.12bn in the first half. Growth was, however, attributed principally to American and Asian markets.
By the end of 2016 CRH announced that global revenue and margins were ahead in all business divisions and that group sales amounted to Euro27.1bn, a rise of 15% on 2015. Gross profits were up by 69% at Euro1.74bn, helped by disposals. Operating profits were Euro2.03bn compared with Euro1.28bn in 2015. Operations in the UK, Ireland and Spain delivered strong cement volumes for CRH.
Cemex UK: Cemex has announced that, on a like-to-like basis for the ongoing operations and adjusting for currency fluctuations, consolidated global net sales increased by 4% in 2016 compared to 2015, rising to Euro12.1bn compared with 2015. Operating EBITDA on a like-to-like basis increased by 15% for the full year to Euro2.44bn versus 2015.
Fernando A Gonzalez, Cemex’s Chief Executive, said, “2016 was a very good year for Cemex. Despite continued volatility and uncertainty in the markets, we were able to deliver strong underlying operational and financial results by remaining focused on the variables that we control.”
During the year it was reported that UK performance over the first nine months was generally better than that of its European counterparts. In the UK cement deliveries grew by 7% and yielded a 2% rise in prices. Deliveries of aggregates grew by 6%, though prices were stable. Ready-mixed concrete volumes fell by 3%, but were offset by rising prices.
Hanson Cement (HeidelbergCement Group): HeidelbergCement has reported that its global cement volumes increased by 50% year-on-year to 30.8Mt from 20.5Mt in the fourth quarter of 2016, with aggregate sales volumes rising 16% year-on-year to 73.3Mt. Total ready-mixed concrete deliveries rose by 27% to 12.1Mm³ and group revenue was up by 25% to Euro4.2bn. Earlier in the year, the UK was considered one of the improving markets in an overall European market described as ‘robust.’
Aggregate Industries / Lafarge Cement (LafargeHolcim): Fortunes have fluctuated at LafargeHolcim, with global sales of Euro6.65bn in the second quarter and a 6% increase in operating EBITDA to Euro1.55bn. Annual figures released since then show that net profits doubled to Euro1.95bn in 2016, from Euro995m in 2015.
Eric Olsen, the CEO at the time, claimed that a ‘focus on pricing and synergies’ is delivering visible earning momentum and expected synergies of Euro503m. He has since resigned over the handling of the company’s business interest in Syria.
Capital investment
Major investment in expanded capacity or enhanced performance has been limited since the recession led to the mothballing of entire works in 2008, with the upgrade of the Hope works latterly being the obvious exception. Over the past few months, however, Hanson has announced several major projects, following on from work on the bag filters at Ketton. In January 2017 it announced an investment of Euro29m in a seven-year project to improve production efficiency and to reduce emissions at Ribblesdale in the company’s biggest investment at the site since the 1990s. Then in March 2017 came the news that it is to invest Euro23.3m in a new cement finishing mill at Padeswood. The site currently has four mills and these would be replaced by the new mill, which would be fully-enclosed with the latest extraction technology.
Customer | Location | Supplier | Contract |
Aggregate Industries | Import Terminals | Simon Gibson | Bulk cement haulage |
Nationwide | Eddie Stobart | Five year concrete product haulage | |
Hanson | Ketton | Fairport Engineering | Installation of bag filters |
Padeswood | Greenbank | Installation of GWF Feeder | |
Frindsbury Wharf | SCS | Sand screening and washing system | |
Nationwide | Wincanton | Ready mix concrete delivery by 70 trucks | |
Hope Cement | Dagenham Depot | Haver & Boecker | Adams 10 spout Roto-Packer |
Newtec Palletizing | Palletiser | ||
HLC | 150,000 timber pallets per year | ||
Tarmac | Tunstead | Haver & Boecker | Adams 2000 packing plant |
Mountsorrel Quarry | Ermewa | Lease of 53 77t hoppers and 48 boxes | |
Nationwide | Rail Freight Services | Four year rail offloading contract | |
Cemex | Dagenham Wharf | Fuchs | Crane |
Nationwide | IBM | Customer-focused Apps | |
Francis Flower | Runcorn Terminal | SN Engineering | Construction of 3000t silo |
Above - Table 2: Major contracts signed by UK cement producers in 2016 and 2017.
Dust emissions: Hanson Cement has recently replaced two electrostatic filters with new bag filters at Ketton works to reduce particulate emissions and improve dust recovery, with Fairport Engineering acting as main contractor. Its follow-on plans at Ribblesdale will see Euro12.8m spent in the first six months on improvements to enable the plant to meet new dust-emission regulations, and includes Euro2.33m to replace the filters on two cement-grinding plants. According to plant manager, Terry Reynolds, Ribblesdale will operate well below the new dust emission levels that are being introduced in April 2018, down from 30mg/Nm3 to 10mgNm3.
Import facilities: There has been considerable investment in import and storage facilities, packing plants and inland haulage over the past year. Twin features have been the increased presence of GGBS import facilities and terminals run by Irish firms.
Combining both is the Irish GGBS specialist, Ecocem. This company has invested considerably in port facilities in England, at both Runcorn on the Mersey and Sheerness in Kent. The Runcorn plant officially opened in April 2016, although work has since continued on site. Sheerness followed later. In September 2016 Ecocem’s Conor O’Riain was quoted as saying, “We’ve invested in state-of-the-art equipment to demonstrate to the market that we’re here for the long term.”
In a parallel development Quinn Cement has undertaken a similar expansion of its products into the UK market, investing Euro2.9m in establishing an export hub at Warrenpoint Harbour, in Northern Ireland, to complement the company’s recently upgraded import facility in Rochester, Kent and Runcorn II opened in April 2017.
Runcorn is the focus of not only the Ecocem terminal, but also a significant investment in harbour storage by Francis Flower for its new GGBS business. Construction of a new 3000t silo has added 200,000t/yr of storage capacity at the company’s distribution terminal on the Mersey. Competing with Francis Flower is the former owner of the business, Hanson Cement, which recently re-opened its previously mothballed grinding plant at Teesport Docks in Middlesborough. The plant was taken out of production in 2009 but an upturn in demand prompted Hanson to return to the site in 2016 and prepare it for reopening in February 2017. The project cost Euro2.3m.
Such developments in the supply of cement contradict fears voiced for the future of the UK’s 90 bulk terminals, many of which face an uncertain future as imports of key dry bulk commodities fall following the high profile closure of coal-fired power stations and steel works. However, as coal and other commodities decline, so the demand for building materials, cement and the related lines of aggregate and ready-mixed concrete appears to be taking up the slack and providing an alternative trade.
Riverside aggregate terminals: Not only has Hanson re-opened its Regen operation at Teesport, but it is planning to invest Euro14m in its Victoria Deep Water Terminal at Greenwich, London for the supply of concreting materials. The proposals include replacing two existing concrete batching plants with three new ones, enclosed within a new building that will also provide closed storage for raw materials. Not only will the new plants play a role in the redevelopment of Greenwich, but will also make precast components for infrastructure projects such as the Thames Tideway Tunnel and Crossrail 2.
Also on the Thames is Dagenham Wharf, where Cemex has taken delivery of a new Fuchs crane. The Euro1.8m investment comes after the wharf re-opened in November 2015 as an aggregates processing plant. Other Fuchs material handlers have been sold to Rail Freight Services Ltd to unload aggregates at a number of locations on the Thames in London. One of these is a new multi-modal terminal for building materials being developed by the Armitt Group.
Railway haulage: There is no doubt that the cement industry’s use of the railways for economic and sustainable distribution is on the rise, in contrast to a decline in the overall volume of rail freight. Recent findings by BDS Marketing Research indicate that, for aggregates at least, the proportion of total output transported to market this way has increased and producers are planning additional depots to handle the expansion.
Cemex, for instance, reached its benchmark of 2Mt of material transported by rail earlier in the year in 2016 than in previous years, which is the equivalent of 65,000 truck movements being taken off the road network. The company even established a temporary depot in Warrington in 2016 to help meet growing demand in the north west. As it is, Cemex, in partnership with DB Cargo UK, runs 40 train loads a week to 11 locations around the country.
Reflecting and facilitating this growing interest, the MPA is actively lobbying MPs for access to and investment in rail freight facilities, including land for depots. Planning for such depots is not without its challenges. The proposed development of a distribution hub at the Olympic Park, currently leased to and operated by DB Schenker as a rail-freight depot, prompted a petition in the summer of 2016 that was signed by 10,000 people objecting to the establishment of concrete production facilities at the site.
Perhaps the biggest user of the railways for bulk building materials is Tarmac, which has haulage contracts with Freightliner among others and transports 9Mt/yr of material by train. Tarmac has certainly been investing in its rail freight operations over the past few months. In July 2016 the first 23 brand new MWA (102t) open box wagons, developed by Greenbrier Europe from redundant coal hoppers, became available for use by Freightliner to service its contract with Tarmac. In September 2016 Tarmac added a new fleet of railway wagons to haul aggregates from its Mountsorrel Quarry in Leicestershire. The 53 hoppers and 48 boxes, leased from French hire company Ermewa and each with a carrying capacity of 77t, increased Tarmac’s train capacity by more than 15%.
A national rail-offloading contract was awarded to Rail Freight Services in October 2016, which was claimed at the time to illustrate Tarmac’s ongoing commitment to railway logistics. The contract was to run for four years, with Rail Freight Services using equipment with the latest low-emission engine technology. To conclude the year with a development specifically for bulk cement, Tarmac opened a rail-freight facility at Aberthaw, Wales that will remove 2500 truck movements each year, reducing its road usage by 25%.
Given the industry’s interest in the railways it seems appropriate, therefore, that a cement maker should feature in the 2016 Global Freight Awards. Hope Cement, with VTG Rail UK, won the Environment Award for their tailor-made, state-of-the-art, lightweight aluminium JPA cement wagons. These have improved Hope Cement’s ability to transport over 1Mt/yr of cement a year by rail, removing over 33,000 truck loads from the road network.
Road Transport: With such an emphasis on the railways, investment in road haulage has diminished correspondingly, with outsourcing a feature of the year and an ongoing commitment to safety demonstrated. In May 2016 the then Hope Construction Materials signed a six-year contract with Wincanton to out-source its road haulage of nearly 1Mt/yr of bulk and bagged cement, roughly 600 road journeys per day. Wincanton also has contracts with Cemex and Tarmac.
Aggregate Industries, one of the largest importers of cement in the UK, signed a contract with Simon Gibson Transport in December 2016 for the collection of bulk cement from six import terminals, including Chatham, Ellesmere Port, Glasgow, Goole, Plymouth and Ridham. The Yorkshire-based haulier will increase its fleet from 85 to 147 vehicles. Earlier in the year, Aggregate Industries signed a five-year deal with Eddie Stobart, with the result that from October 2016 deliveries of concrete products transferred to Stobart’s manufacturing and industrial business unit. Bradstone, Charcon and Masterblock products from 14 UK sites are now being carried by specialist curtain-siders, flat trailers or mechanical off-load vehicles.
Although the issue of cyclist safety has been less prominent in the press than it was a couple of years ago, it continues to inform policy, prompt improvements in vehicle design and to exercise haulage operations in the industry. London remains the focus of change. In September 2016, the Mayor of London introduced a rating system for construction trucks and HGVs, based on driver visibility, in order to improve safety for cyclists. By January 2020, those vehicles with a zero rating, primarily those with a high cab and large clearance under the wheels, will be banned from London´s roads. From 2024, only trucks rated three stars or above will be allowed into the city.
Packing: Following recent trends, the industry has seen two state-of-the-art installations, each associated with recently upgraded rail-freight facilities. Hope Cement’s new Dagenham Depot opened in September 2016, complete with the facility to produce Hope-branded cement bags in-house. A Roto-Packer Adams 10 from Haver & Boecker was installed, with polyethylene packaging to its own brand design. The accompanying palletiser was supplied by Newtec, operating with an output of 1200bags/hr. HLC will supply around 150,000 two-way construction pallets each year, as part of a three-year contract.
Meanwhile a new packing plant was installed at Tarmac’s Tunstead works, as the site celebrated its 50th year of cement production. The bespoke Haver & Boecker 10-spout Adams 2000 plant is the first of its kind in the UK. It will produce Tarmac’s range of plastic packed and tubbed cement products and store the half-size 12.5kg mixer bags that have recently been introduced by Tarmac. The plant has created 23 new jobs at Tunstead.
Sustainability and industrial strategy: With sustainability an integral concept in the management of the industry, performance reporting is now routine. For example, Hanson’s parent company HeidelbergCement published its 2015 sustainability report in mid 2016, highlighting the company’s strategic aims and challenges in this area. Notable among its successes was a 22% reduction of CO2 emissions, a declining clinker factor (down by 1% to 75%) and improved water management.
Reflecting collective progress, MPA Cement published its 2016 Annual Performance Report in April 2017. However, besides highlighting the industry’s achievements, it contains a warning. In the report, MPA Cement’s Executive Director Pal Chana writes about the ‘cumulative cost burden from the implementation of climate change and energy related policies, which we estimate are going to increase by 40% to 2020 even with the limited discounting provided by government.”
It is the role of the MPA to inform and influence government policy on climate change and other matters that affect the fortunes of its members, the cement makers and related producers of mineral products. The MPA has recently updated its briefing note on ‘Brexit priorities for the Mineral Products industry.’ The briefing outlines six key points that the MPA wishes the government to consider as it begins the process of withdrawing the UK from the EU. It has also just completed a consultation on its Proposed UK Minerals Strategy.
In the past few months the MPA has welcomed the publication of new procurement guidance for construction materials, including cement. The government is planning to use local construction materials in infrastructure projects across 18 projects by 2020. More cautiously, it has welcomed publication of the Government´s Industrial Strategy green paper, arguing that it ‘must not leave behind traditional manufacturing industries ... continuous innovation is a feature of traditional business too.’
To end on a positive note for the environment, it was reported in March 2017 that, according to the agency Carbon Brief, a sharp reduction in the use of coal in 2016 has resulted in CO2 emissions falling to a level not seen since 1898. For good or ill, official carbon policy seems to be making a difference.