Economies may be reopening as the Covid-19 pandemic recedes, but new issues have arisen for the cement sector in 2021, including weakened supply chains and rising inflation. Work towards net-zero targets gives the impression of accelerating, but will it ever be enough for the green lobby? Global trends continue, with China facing a real estate crisis, India booming, the US finally passing that infrastructure bill and much else...
If an event summed up the global economy as it tried to recover from the Covid-19 pandemic, it was the container ship the Ever Given wedged in the Suez Canal in March 2021. It was moved within a week, but the BBC noted that 369 ships, some carrying cement, were waiting on the day it was freed. The Suez Canal Authority (SCA) was losing millions per day, the global economy billions. The view from an analyst from Dewry at the Virtual Global CemTrans Seminar in April 2021 was that the blockage was potentially risky to the cement and clinker export market due to congestion elsewhere at the time, but thankfully it soon dispersed.
It may have been short-lived, but this incident provided a visual metaphor of how snarled up supply chains became in 2021. Lockdowns were lifted, demand revived and suddenly there weren’t enough ships. This became apparent in the cement sector in the form of shortages of building materials and rising prices. Cement may, generally, be a local product, but many of its inputs are not. The biggest manifestation of this in the second half of 2021 has been an energy crunch. Gas prices have risen to record highs and this has prompted electricity producers to switch to coal in the US, Europe and Asia. This in turn has put pressure on industrial users.Both electricity and coal prices have grown and some governments have protected domestic users. In Europe price pressure has led to reductions in ammonia and fertiliser production. Power cuts have been reported in China and India. Demonstrating the interconnected nature of the situation, this has then affected the production of further input materials for cement production, such as refractories.
In China a variety of factors have converged to create a crisis. These include shutting down coal mines on environmental and safety grounds, anti-corruption measures and even mine closures to ensure clear skies for national events such as the Communist Party’s Centenary. Disruption to import sources such as a ban on Australian coal on political grounds, flooding in Indonesia and a renewed Covid-19 outbreak in Mongolia can’t have helped. Thermal coal futures on the Zhengzhou Commodity Exchange hit a high of US$263/t on 15 October 2021 marking a 34% rise through the week and the largest weekly growth since trading started in 2013. The International Energy Agency estimates that coal demand in China grew by over 10% year-on-year in the first half of 2021, but that coal production increased by just over 5%. Industrial users have suffered as energy supplies have been rationed and producers asked to reduce their output. In September 2021 cement output fell by 12% year-on-year to 205Mt compared to 233Mt in September 2020. This is the lowest monthly figure for September since 2011. The China Cement Association attributed this mainly to energy controls, power shortages and high coal prices in Jiangsu, Hunan, Zhejiang, Guangdong, Guangxi, Yunnan, Shandong and elsewhere.
This is not just a Chinese phenomenon. Cement producers from around the world have reported mounting energy costs, now feeding into higher cement prices. India-based UltraTech Cement reported that coal and petcoke prices nearly doubled in the second quarter of its current financial year, leading to a 17% rise year-on-year in energy costs. In Japan, Taiheiyo Cement and Sumitomo Osaka Cement both announced price rises in 2020 due to mounting coal prices. TürkÇimento, the Turkish Cement Manufacturers’ Association, said in June 2021 that the price of petcoke had tripled over the previous year. Finally, Cemex noted ‘severe input cost inflation’ in the US in its third quarter of 2021, forcing it to announce a second round of price increases in the period.
Sustainability
One of the most significant announcements to come out of the COP26 Conference in Glasgow so far for cement producers is India’s commitment to net-zero by 2070 as this has direct implications for any new clinker kiln projects, as well as fuel sources. The run-up to COP26 did include many promises from cement producers and governments to tighten their emission targets, release more low-CO2 products and start tests into CO2 capture storage and utilisation (CCUS) technology. For more on the latter see the November 2021 issue of Global Cement Magazine.
Two further sustainability stories in 2021 deserve a mention. Firstly, the Global Cement and Concrete Association published its roadmap to net-zero by 2050 in October 2021. The document outlines a seven-point plan to increase cement plant efficiency, increase concrete production efficiency, make adjustments to cement and binders, decarbonise raw materials, implement carbon capture and storage, transition to renewable energy and use the natural recarbonation of concrete to meet the target. This is significant because it lays out a schedule to which the association’s 40+ cement and concrete producers, representing 80% of concrete production outside of China, can be held to account. Other regional associations have released their own net-zero roadmaps in recent years. Notably, the Portland Cement Association (PCA) in the US, representing the world’s third biggest cement market, released its own plan, also in October 2021.
The second major sustainability trend of the year surrounds emissions trading schemes (ETS). China launching its national ETS in July 2021 following an interim scheme in February 2021. The new national plan covers over 2000 power companies but it is expected to add cement and other industries at a later stage. Ahead of Glasgow, the Chinese government also launched its action plan to reach peak CO2 emissions by 2030. This included energy efficiency controls for the cement industry requiring clinker lines to use less than 117kg of coal per tonne of clinker by 2025. The China Cement Association estimated in November 2021 that 400Mt/yr of national production capacity (25%) could risk being eliminated if technical changes were not made in time. These measures may be crucial, since China alone produces over half of the world’s cement.
Meanwhile, the European Union ETS CO2 price has nearly doubled since the start of 2021 to over Euro60/t (US$69/t) from August 2021 onwards. This is now in the range given for economically viable CCUS adoption at cement plants. Lobbying is ongoing in the EU as the ‘Fit for 55’ package, as part of the European Green Deal, draws nearer. Of particular consequence to the cement sector is the form that the cross-border adjustment mechanism (CBAM) will take. Cembureau, the European cement association, noted its key concerns on the draft proposals in October 2021, saying that the new system must properly equalise all CO2 related costs between suppliers both within and outside the EU and that the free allocation must remain until the new system has been thoroughly tested. Under the current proposals the CBAM is intended to start in a simplified form in 2023, with full implementation afterwards.
Acquisitions and mergers
The biggest acquisition of 2021 was revealed in April, when Mikhailovsky Building Material Works, part of Smikom Group, won the auction to buy Russia-based Eurocement for US$2.4bn. Eurocement is the largest cement producer in Russia, with plants also located in Ukraine and Uzbekistan. The sale comprised 13 operational plants and three mothballed plants with a joint capacity of ~46Mt/yr. The Federal Antimonopoly Service approved the takeover in June 2021.
The next biggest sale came in September 2021 when Companhia Siderúrgica Nacional (CSN) Cimentos was confirmed as the buyer of Holcim’s Brazilian cement business for US$1.0bn. The deal included five integrated cement plants, four grinding plants and 19 ready-mix concrete facilities. At a stroke, steel producer CSN became the third largest cement production by capacity in the country. It also bought Cimento Elizabeth for US$220m in July 2021.
Africa has had its share of takeovers too, starting with China-based Huaxin Cement, which plans to spend US$160m on cement plants in Zambia and Malawi from Holcim. Once completed this will gain it two integrated cement plants in Zambia with a combined production capacity of 1.5Mt/yr and a 0.25Mt/yr grinding plant in Malawi. This deal is also worth watching as Huaxin is one of the most internationally-minded Chinese producers.
Tanzania was also where HeidelbergCement agreed to buy a controlling stake in Tanga Cement from South Africa-based AfriSam in October 2021. HeidelbergCement already operates one integrated plant in the country, in Dar es Salaam, and will now gain another in the north. This takeover is interesting because it reverses the general trend in acquisitions by western-based multinational cement companies in recent years, of leaving riskier developing markets. However, despite rampant production overcapacity and competition locally, HeidelbergCement’s local subsidiary Tanzania Portland Cement has managed to grow its profits significantly in recent years.
Another African-related transaction of note was Holcim’s agreement in November 2021 to sell Holcim Madagascar, Holcim Reunion, Lafarge Comoros, Lafarge Mauritius and Lafarge Mayotte to Cementis Océan Indien, a newly launched subsidiary of Mauritius-based Taylor Smith Investment.
HeidelbergCement also made a large divestment in the western US to Martin Marietta Materials when it sold Lehigh Hanson’s US West region cement, aggregates, ready-mixed concrete and asphalt businesses in California, Arizona, Oregon and Nevada for US$2.3bn. This included two cement plants, although not the 1.5Mt/yr Permanente cement plant in California, related distribution terminals, 17 active aggregates sites and several downstream operations. The deal closed successfully in October 2021.
Regional highlights
The Chinese market recovered first after its Covid-19 outbreak in early 2020. Cement output continued to pick up in the first half of 2021 but it started to fall behind on a monthly basis from May 2021 onwards. Notably, third quarter output fell by 7% year-on-year to 626Mt from 676Mt. A combination of poor weather, tightening state regulations on real estate and the supply chain/energy issues mentioned above have been blamed for this. The parlous state of the Chinese real estate sector has made international news, as Evergrande has struggled to repay the interest on its debts. Other real estate companies are also facing debt issues and the outcome of the situation has large implications for local cement producers and both the local and global economies.
India’s cement sector recovered well in 2021 after coronavirus-related lockdowns almost totally shut it down in the spring of 2020. Production for the first nine months rose by 24% year-on-year to 260Mt in 2021 from 209Mt in the same period of 2020. Ratings agency ICRA predicts that production to the end of the 2020 financial year will rise by 12%, driven by demand in rural housing and infrastructure. Producers have not been immune to rising energy costs and have switched away from coal to higher ratios of petcoke or alternative fuels where possible.
By contrast the United States has faced supply chain and labour issues as its cement market reopened post-coronavirus and the Biden Administration’s US$1Tn infrastructure bill edged closer to its approval. Shipments rose by 1.9% year-on-year to 59.3Mt in the first eight months of 2021 from 58.2Mt in the same period in 2020. Most producers see the sector as performing well, but Cemex noted it was selling out in most markets in the third quarter of 2021 and Holcim reported supply constraints in some locations. Some of this supply gap may be seen in the country’s 39% rise in cement and clinker imports to 15.2Mt during the first eight months of 2021.
The year was certainly strong for two of the world’s main clinker and cement exporting nations. Vietnam National Cement Association (VNCA) members sold 77.5Mt of cement in the first nine months of 2021, a rise of 3.5% year-on-year. Vietnamese cement exports rose by 19% to 31.9Mt. The bad news came from local securities company SSI Securities in August 2021 when it said that the local cement sector faced a ‘huge’ risk due to its over-dependence on export markets, particularly China. China took in 57% of Vietnam’s combined cement and clinker exports in 2020. This represented 22% of the country’s total sales.
On the other side of Asia, Turkey’s exports hit a high of 16Mt in 2020, 23% of its total sales. In the first half of 2021 total sales grew by 24% year-on-year to 36.3Mt although this seems to have been driven by domestic sales slightly more than exports. Indonesia, an emergent cement exporter, saw its nine months sales increase by 5.5% year-on-year to 47.2Mt. Semen Indonesia attributed this to growth in all regions, except for Bali Nusa Tenggara. Demand for bagged cement from domestic retail consumers continued to drive sales. Production capacity utilisation hit a low of 54% in 2020, although Indocement has forecast a slight uptick to 55% in 2021. Indonesia has also focused on exports in recent years, hitting a high of 9.3Mt in 2020.
In Latin America, Brazil’s sales continued to grow in the first half of 2021 before slowing subsequently. The cement market is still on for considerable growth with a 9.4% increase in despatches to 48.8Mt in the first nine months of the year. Yet, inflation, rising prices and political uncertainty ahead of the general election in late 2022 are dogging the general economy. CSN’s abandoned IPO is one consequence of this. Intercement cancelled its IPO in July 2021 too, citing low valuations amid investor uncertainty.
Elsewhere, Colombia, Argentina and Peru all recovered production levels so far in 2021, although Colombia’s despatches could have been greater in the spring of 2021 if it hadn’t been for social unrest. Argentina implemented price controls in June 2021 to combat mounting inflation. Further north, Mexico reported strong production growth of 15% year-on-year to 30.7Mt in the first eight months of 2021. Cemex attributed this to strong demand and noted high capacity utilisation in the country at the nine month mark. That last point is especially interesting since Cemex decided in February 2021 to recommission a 1Mt/yr cement kiln at its CPN cement plant in Hermosilla, Sonora, to support the US market in the western US.
In Africa some of the biggest stories of 2021 were to do with government controls on either production or imports and exports. The Egyptian government’s decision in June 2021 to finally cap production was mostly welcomed, although some multinationals complained that it penalised older plants. The scheme reportedly introduced a temporary reduction in cement output by 11%, with additional cuts of 3% per kiln line, for one year from mid-July 2021.
In Sub-Saharan Africa both Kenya and South Africa discussed import controls. In the former a government committee found the country has a clinker shortage of up to 3.3Mt/yr when it was prompted by industry lobbying to introduce tariffs on imported clinker. The study found that Egypt and the UAE accounted for 92% of all clinker imports, with a further 7% supplied by Saudi Arabia.
South Africa, meanwhile, has long battled imports, so a decision to ban the use of imported cement on government-funded projects in October 2021 was welcomed. Lastly, Dangote Cement’s export strategy from Nigeria faced a hiccup in April 2021 when a local crisis over cement prices in Nigeria forced it to temporarily suspend clinker exports from its terminals. A previously mothballed integrated plant was restarted and another new plant at Okpella was last reported to be ramping up production at the end of the year. Other companies are also hard at work building new plants to meet demand.
Across the Red Sea, cement output in Saudi Arabia rose by 3.5% year-on-year to 39.7Mt in the first nine months of 2021. This isn’t far off NCB Capital’s forecast back in March 2021 of 4% for the year as a whole. Annual sales jumped considerably in 2020 as government housing programs started and a decent return is expected in the next few years as the Public Investment Fund’s ‘Giga’ projects get underway.
Over the Gulf, Iranian cement producers are having a tougher time of it, with gas and electricity shortages expected in the late winter months of 2021. Following negotiation with the Ministry of Oil, cement companies have been allowed to stock up with 15 days’ worth of heavy fuel oil to keep generators going should domestic energy users be prioritised. This follows cement and steel plants being ordered to stop manufacture for three weeks in July 2021 due to shortages. Unsurprisingly, Iran’s six month cement production figure (mid March 2021 to mid-September 2021) fell by 9% year-on-year to 32.4Mt.
Finally to Europe, where Holcim noted that the region showed an ability to offset cost inflation with good demand generally and strong performances in the UK and Eastern Europe. HeidelbergCement’s experience was broadly comparable, with sales, volumes and operating results all up above 5% in the first nine months of the year. While Cemex concurred, Buzzi Unicem reported a more mixed picture in Europe, with growth in the east but a waning situation in Germany that was worsened by poor weather over the summer. One local story that deserves a mention is the battle that HeidelbergCement subsidiary Cementa has been having in Sweden to keep mining limestone at the quarry that supplies its Slite plant in Gotland. Its renewal was denied in July 2021 and then an appeal was thrown out in August 2021. Cementa threatened to bring in sales quotas from December 2021 in late October 2021 as it waited to see whether the central government intervened.
New name, new company?
The flipside of HeidelbergCement’s expansion in Tanzania was Holcim’s decision to diversify away from cement and concrete in January 2021 when it agreed to buy roofing and building envelope producer Firestone Building Products for US$3.4bn. Holcim remains the largest non-Chinese cement producer, but the move sent a strong message of a traditional heavy building materials manufacturer pivoting away from cement. Its acquisitions in 2021 have consisted of ready-mixed concrete, aggregates and lightweight building materials. Its divestments have been cement subsidiaries.
Of course, 2021 also saw the end of the LafargeHolcim name, when its shareholders voted to change the group name to Holcim in May 2021. The decision marked the end of the famously doomed ‘merger of equals,’ originally proposed in April 2014. In early 2015 Holcim shareholders expressed discontent at the perceived difference in value between their company and Lafarge. The merged entity eventually came together with unequal parties. Now with a change of chief executive, a series of divestments in south-east Asia and a pivot away from heavy building materials, the newly-renamed Holcim is genuinely starting to feel like an entirely different proposition altogether.
Endnote
The aftermath of the emergence of Covid-19 has meant higher costs for the cement sector both for producers and consumers. Supply chains have been disrupted and inflation is mounting. Alongside this, sustainability work by the sector worldwide is growing both in stated intent, in the form of roadmaps and actions, including higher interest in CCUS pilots, and low-CO2 products. However, this carries a cost. In early November 2021 the governor of the Bank of England linked sustainability policies to higher domestic energy costs in the UK. It is likely that the cement industry will face similar issues in 2022 - and beyond - as both inflation and net-zero CO2 costs set in.
