Iraqi cement focus

A turbulent political history has stunted the growth of Iraq, a country with vast natural oil reserves. Now that the US-led occupation has given way to self-governance, the country has turned up the wick on its (re)-development. Recent speculation surrounding the possible doubling of its known oil reserves has put Iraq in a strong position to become an economic and political leader in the Middle East. The cement industry will have an important role to play in this development and is seeing major investment in production capacity.

Formerly part of the Ottoman

Empire, Iraq came under control of the British in the early part of the 20th Century. In 1932 it became a Kingdom and in 1958 it declared itself as a 'Republic,' although in reality a series of six military dictators ruled.

The most infamous of these leaders was Saddam Hussein, who came to power in 1979. He led Iraq into a territorial conflict with neighbouring Iran that lasted from 1980 to 1988 and invaded Kuwait in 1990, triggering the Gulf War of 1991.

Throughout the rest of the 1990s Hussein's regime taunted the established western powers after US-led sanctions against the oil-rich nation. In 2003, amid growing fears over Hussein's access to and willingness to use weapons of mass destruction (WMD), allied forces invaded the country, toppling the Hussein regime in April of that year. No WMD were found.

Economy

The 10 years since the removal of Hussein have been characterised by economic improvement amid continued violence and lawlessness. Foreign firms, especially in the oil sector, are investing heavily in Iraq despite the risks.

Since 2003, Iraq's economy has steadily improved due to the removal of UN sanctions that had been in place since 1990. This has allowed its GDP/capita to return to pre-sanction levels and highlights two decades of lost Iraqi economic development as a result of the Hussein regime's hostile relationship with the west.

Much of Iraq's inherent wealth is tied up in its oil, which provides 90% of all government income.4 This will provide a very strong source of revenue for the country's (re)-development in future years. Speculative results from 2011 have led the government to claim that it has the largest reserves in the world, although with 'just' its existing 171bn barrels, it sits 12th in the list of oil producers and third in the list of oil reserves.¹

Despite this, unemployment and corruption remain major barriers to fair and wide distribution of Iraq's increasing wealth. It remains hard to set up new enterprises due to government regulations and 25% of the population remains in poverty.²

Cement industry - History

Above: Summary statistics for Iraq and its cement industry.

From the start of cement production in Iraq at Badoosh in 1955 until 2003 all cement factories in the country were owned and operated by the government.³ After Badoosh started production, further plants were added over the next three decades by a government keen to develop Iraq's standing as a major regional player across a number of development indicators.

This drive to develop the economy brought 15 cement plants into production in Iraq but, although the country's headline capacity was fairly high, it suffered from severe overcapacity. The country was briefly a cement exporter in the mid 1980s.⁵

Throughout its time as a cement producer, Iraq has benefited from its natural limestone and gypsum as well as its oil. In addition to having a lot of limestone, it is also of unusually high quality, in that it has a high percentage of calcium carbonate (CaCO₃). This means that more cement is produced per tonne of limestone, which theoretically enables a more efficient process. Iraq's limestone is also very close to the surface, allowing low-cost mining.

Since 2003 the Iraqi cement sector has been split into two categories. On one side are the former state-run plants and on the other side are new private operators. Lafarge acquired two plants post-2003 and took over the running of a third in 2008. Other private operators include the Al-Rawi group, which operates three plants and MASS Global, which commissioned its first kiln at Sulaimaniah in 2010 and a second in 2011. Also under private ownership is the Sinjar Cement Plant, owned by a consortium of family members.

Cement industry - Reported production

The United States Geological Survey's (USGS) records of Iraqi cement production in the 1990s confirm that production was fairly low for a country of its size at around 2Mt/yr from 1993 to 2001.³ However, like other outside parties the USGS' access to information about Iraq's internal affairs was largely restricted.

In 2002 the country reported a large increase in its cement production to nearly 7Mt. However, it is now known that Hussein's regime was lying about a lot more than just cement at that time. In 2003 the level, as measured by the USGS returned to ~2Mt/yr.³

Cement industry - Since 2003

Above: List of integrated cement plants that have produced cement in Iraq, drawn from a number of sources. Not all plants are active at present.

Following the US-led invasion in 2003, UN sanctions were lifted and cement capacity began to rise. Production, as reported by the USGS, has risen by a factor of more than three since 2003 to around 6.5Mt/yr in 2011 from a theoretical capacity of around 32.5Mt/yr.³

Throughout 2011 and 2012 a number of new projects were announced that have seen the real potential capacity of Iraq's industry increase. Also detailed are rumours regarding potential future market entrants:

Dangote Cement: Speaking in October 2012, the President and Chairman of Nigeria's Dangote Group, Aliko Dangote, raised the possibility of taking Dangote Cement to Iraq as part of its mission to reach 100Mt/yr of cement capacity.⁷

Fallujah Cement Factory: The Fallujah Cement Factory was previously operated by the Iraqi government between 1978 and 1986, when it ceased operations.⁸

In the new political climate in February 2012, it was agreed by an Iraqi company and the government that the company invest in the plant over a 20 year period to 2032 and bring the plant's capacity to 1.5-2.0Mt/yr from its original 0.6Mt/yr capacity. Global Cement speculates that the new plant is unlikely to be commissioned before the close of 2014.

GRD: Sinoma (Suzhou) Construction Co has placed an order for an MPS 5000 B vertical roller mill for raw material grinding from Germany's Gebr. Pfeiffer.⁹ The grinding plant will be set up in GRD Cement Plant Company's 5000t/day cement plant located near the town of Sulaimaniah in northern Iraq.

Kerbala Cement: Lafarge plans to triple cement production over the next two to three years at its plant in Kerbala. It expects to realise the potential of its Kerbala plant and produce 1.8Mt/yr in 2013 or 2014.¹⁰

In January 2013 it was announced that the International Finance Coporation (IFC), a member of the World Bank Group, would provide a US$70m loan to help renovate the plant.¹¹ "This financing will help address the cement shortage that Iraq is facing and help the country meet supply gaps in its infrastructure," said Guy Ellena, IFC Director for Manufacturing, Agribusiness and Services in Eastern and Southern Europe, Central Asia, the Middle East and North Africa. Kerbala Cement is a joint venture between Lafarge and MerchantBridge, a London-based private equity group. The financing is being supplemented by a US$20m loan from Proparco, a development financial institution funded by the French Development Agency and private shareholders.

Lucky Cement: In April 2012 Pakistan's Lucky Cement Company decided to set up a greenfield cement grinding plant with a 0.87Mt/yr production capacity in Iraq under a joint venture scheme.¹²

MASS Cement: MASS Cement contracted China's Sinoma to build a three line cement plant in Bazian district near Sulaimaniah in 2007, with the first two 2Mt/yr kilns coming online at the end of 2009 and August 2011. The third line, another 2Mt/yr-capacity design, will commence production in March 2013.¹³

The company intends to increase its Iraqi production to 10Mt/yr by constructing another two 2Mt/yr lines, although it is unclear where or when these plants will be constructed.

Nokan Group: In September 2012 Sinoma of China signed a contract for the construction of a 5300t/day (1.6Mt/yr) factory for Nokan Group in the north of Iraq.¹⁴

Samawa Cement: In June 2011 the Iraqi government awarded a US$110m contract to Turkey's Partner Teknik to re-boost the struggling Samawa Cement plant in south Iraq.¹⁵ The plant, which has a design capacity of 2Mt/yr has produced less than a fifth of that amount in recent years following years of neglect.

The project aims to increase the plant's cement production to 1.8Mt/yr, 90% of its original capacity, by mid 2014. A Turkish and Iraqi consortium will own 73% of the plant as part of a joint venture lasting a total of 15 years, with the remaining 27% owned by the Iraqi Ministry of Industry and Minerals.

Sinjar Cement: The Sinjar Cement plant endured a difficult birth between 1981 and 1990. Upon completion it was only in operation for 18 months before production was halted by the first Gulf War.¹

The plant limped through the 1990s producing at a low level and was a victim of sabotage in the 2003 US-led invasion. The plant was radically altered in 2011 via an Iraqi-Turkish investment group, which hired Austroplan Austrian Engineering GmbH and Turkey's Perkam as contractors.

The project's progress means that the plant produced 2000-2500t/day (~0.7Mt/yr) by the start of 2012 with the aim of returning to 1.8Mt/yr in the second quarter of 2013 when further work is finished.

Umm Qasr: In October 2011 the Basra Investment Commission licensed a project to construct a new 3000t/day cement factory in Umm Qasr, near Basra.¹⁶

Cement industry - Future development

At the start of 2012, Global Cement estimated the total combined capacity of the plants that were able to operate in Iraq at around 10-11Mt/yr, giving an adapted approximate capacity utilisation rate in the region of ~45%.¹

In 2013, the pace of redevelopment in Iraq's cement industry continues, with a possible further 11.3Mt/yr of cement capacity to be realised in 2013 or early 2014.

This, combined with the estimated current capacity currently in operation, could give rise to a production capacity of 21-22Mt/yr by the end of 2014. However, even this will not be enough to feed the expected 35Mt/yr of demand from Iraqi development that is expected in 2015.¹⁰

If these much higher production levels are realised, private cement companies will certainly have followed the 'advice' given in our January 20121 report to maximise their production in Iraq by any means possible. The country plans to build 2.5 million homes by 2015 - high cement demand indeed.

However, with constant project updates and a dearth of solid information regarding completion timescales, it remains difficult to get a handle on the actual production rate in Iraq. As suggested by the use of the term 'theoretical capacity' above, there remains a gulf between the capacity 'written on the side' of many Iraqi cement plants and the amount of cement that they can actually produce, the result of decades of poor maintenance.

What is clear is that cement consumption is increasing, with one source estimating an increase in cement demand growth from just 6% in 2008 to over 20% in 2011, when cement consumption was estimated to have hit 20Mt.¹⁰ Demand is centred on Baghdad, Basra and the northern Kurdish regions around Mosul.

Cement industry - Concerns

While the economic and construction factors are in place for a surge in cement use in Iraq, not all signs point to unbridled growth in the Iraqi cement industry. The vast discrepancy between Iraqi production costs and selling prices seen previously, which helped to drive the current construction and renovation trend, may be losing significance in 2013.

In July 2011 Iraqi cement cost US$58/t to produce but was being sold at US$90-120/t.¹ This difference is potentially under threat from two directions. Firstly, as cement supplies increase, prices will likely decrease, making sales less lucrative. Secondly, there is the risk, at least in the south of Iraq, that foreign imports are undercutting Iraqi producers on price. The USGS reports that Iraq was one of the largest importers of cement in 2010, around two thirds of its requirements.³ In December 2012 it was reported that Iranian 42.5N cement was reportedly reaching the Iraqi market in 50kg bags for as little as US$45-55/t.

Undercutting by foreign firms was a concern highlighted by Southern State Cement Co. in September 2012. It threatened to stop production amid a US$50m stockpile of cement that it was unable to sell, blaming importers of cement.¹⁷ It called on those in charge of public projects to seek out Iraqi-made cement.

With this in mind, Iraqi cement producers must take steps to ensure that they do not lose the benefits of their new investments to cement dumping, a situation that is currently underway in Nigeria.¹⁸ With Lafarge estimating 10% year-on-year cement demand growth in Iraq in 2012,19 Iraqi producers need to act so that importers do not take an irrecoverable lead in Iraq.

Conclusion

The Iraqi cement industry is now well into a period of expansion and renovation by a mixture of local, foreign, public and private investors. They have been attracted to the country and the cement industry by the need to update the Iraqi cement infrastructure to sell cement locally and develop the country.

As Iraq's new cement production technology comes online, its strong economic growth and unique set of natural advantages offer the potential for it to gain an advantage in terms of cement production compared to its immediate neighbours.

With sufficient upgrades and a more stable future, Iraq should be able to meet domestic demand and export surplus production either by road, rail or by sea, as it did in the 1980s.

However, for all its natural and strategic advantages, a major disadvantage of Iraq's location are the nearby countries with large cement excesses. In the immediate area, Iran and the United Arab Emirates will have no qualms in supplying 'cheap' cement to Iraq, given their current overcapacities. Also within shouting distance of the lucrative Iraqi market are exporters in Pakistan and India as well as those from further afield like Vietnam.

Other potential stumbling blocks in the future include a potential deterioration in political stability, irregular fuel supplies and a risk of public perception that Iraqi-made cement may be of a lower standard than that which is imported from abroad.

References

1. 'Global Cement Magazine - January 2012', PRo Publications International Ltd., January 2012.

2. World Bank Indicators website, 'GDP per capita (current US$),' http://data.worldbank.org/indicator/NY.GDP.PCAP.CD.

3. United States Geological Survey, Various reports, http://minerals.usgs.gov/minerals/pubs/country/africa.html#iz.

4 - 19. See online article, http://www.globalcement.com/articles.

4. CIA World Factbook website, 'Iraq,' https://www.cia.gov/library/publications/the-world-factbook/geos/iz.html.

5. 'Global Cement Magazine - February 2011,' PRo Publications International Ltd., February 2012.

6. 'Global Cement Directory 2013,' PRo Publications International Ltd., December 2012.

7. Iraq-Business news website, 'Nigerian billionaire sets sights on Iraq,' http://www.iraq-businessnews.com/2012/10/03/nigerian-billionaire-sets-sights-on-iraq, 3 October 2012.

8. Aswat al-Iraq, 'Fallujah Cement Factory to be rehabilitated,' http://en.aswataliraq.info/(S(jzlylkfrmtlldbrbz1ky2ait))/Default1.aspx?page=article_page&id=147040&l=1, 22 February 2012.

9. Global Cement website, 'Gebr. Pfeiffer to supply VRM to Iraq,' http://www.globalcement.com/news/item/1287-gebr-pfeiffer-to-supply-vrm-to-iraq, 30 November 2012.

10. Iraq-Business website, 'Lafarge to triple production in Iraq,' http://www.iraq-businessnews.com/2013/01/01/world-bank-to-finance-lafarge-cement-plant-in-kerbala, 24 November 2012.

11. Iraq-Business website, 'World Bank to Finance Lafarge Cement Plant in Kerbala,' http://www.iraq-businessnews.com/2013/01/01/world-bank-to-finance-lafarge-cement-plant-in-kerbala, 1 January 2013.

12. Global Cement website, 'Lucky Cement to build plant in Iraq,' http://www.globalcement.com/news/item/899-lucky-cement-to-build-plant-in-iraq, 27 April 2012.

13. MASS Group Holding website, 'MASS Cement Factory - Bazyan' http://www.massgroupholding.com/MassPages.aspx?PID=17&lang=en.

14. 'Global Cement Magazine - September 2012,' PRo Publications International Ltd., Epsom, UK, September 2012.

15. Reuters website, 'Iraq awards cement factory contract to Turkish group,' Iraq awards cement factory contract to Turkish group, http://www.reuters.com/article/2011/06/20/iraq-economy-cement-idUSKAM0275520110620, 20 June 2011.

16. Iraq-Business news website, 'BIC licenses cement factory in Umm Qasr,' http://www.iraq-businessnews.com/2012/10/02/bic-licenses-cement-factory-in-umm-qasr, 2 October 2012.

17. Azzaman.com website, 'Cement firm's output surges but there are no buyers,' http://www.azzaman.com/english/?p=338%20-%20Company%20asked%20for%20protection%20in%20Sept%202012, 15 September 2012.

18. Global Cement website, 'Nigerian producers hit back at Ibeto,' http://www.globalcement.com/news/item/1345-nigerian-producers-hit-back-at-ibeto, 3 January 2013.

19. Meed website, 'Lafarge says Iraq cement demand is growing 10 per cent a year,' http://www.meed.com/sectors/industry/lafarge-says-iraq-cement-demand-is-growing-10-per-cent-a-year/3141270.article, 12 June 2012.