At the recent IEEE-IAS/PCA Cement Conference in St Louis I gave a presentation on my best guess for what the cement industry will look like in 2050 (see also www.Cement2050.com). In the presentation, I quoted Mark Carney, Governor of the Bank of England and Francois Villeroy de Galhau, Governor of the Banque de France, who in mid-April 2019 jointly said the following: “A massive reallocation of capital is necessary to prevent global warming above the 2°C maximum target… If some companies and industries fail to adjust to this new world, they will fail to exist.” When they said that, I felt that they could have been speaking directly to the global cement industry.
What would a ‘massive reallocation of capital’ look like? How would it actually affect the cement industry, and could an entire industry ‘fail to exist’? Let’s look at these in turn.
A reallocation of capital1 is nothing new, and happens all the time. I’ve previously mentioned that one Malaysian cement producer sold all of its cement plants, and put the money into telecommunications instead (figuring that it could make more money for its shareholders, which it did). LafargeHolcim is in the process of reallocating its capital, away from a particular area (the ‘hyper-competitive’ southeast Asia region where it likely saw no potential profits coming along for a decade). If the company can make more money by selling its cement production assets at a good price and instead investing in concrete assets in America or Europe (for example), then it makes sense to do so. In fact, Jens Jenich, CEO of LafargeHolcim, says that the money will be used to pay down corporate debt (which has its own cost). As the Scots say, ‘A penny saved [on servicing corporate debt] is a penny earned.’
However, perhaps LafargeHolcim’s move out of southeast Asia is not just a geographical move, but is also a strategic sectoral move as well, in that it might be the first move by a major multinational cement producer to reallocate its own capital away from clinker production as an industrial sector. After all, cement is just an ingredient in the final product made by the cement-concrete industrial complex. Does LafargeHolcim even have to own the means of cement production, or should it, like Australia, divest (or close) clinker factories and just buy clinker on the [over-supplied and therefore relatively cheap] international markets?
Arguably, LafargeHolcim is becoming the leader in ‘optionality’2 in the ‘cement’ industry. Optionality is essentially being in the position to take up options as they come along. A company very heavily invested in clinker production, for example, will not have that many options to take up alternative non-OPC-based ‘building solutions,’ after all.
LH is doing this for itself, but such change can be forced upon a company from outside. Activist investors, special interest groups and politically-motivated research groups are now commonly lobbying company boards to change their capital allocation strategies. Fund managers that are obliged to take environmental, social and governance (ESG)3 risks into their investment strategies may also decide to shift their money away from cement, due to the ‘stranded asset’4 argument, as they have started to do in the oil industry.5 The risk being that the reserves (of oil, or of limestone) that have been laboriously and expensively built-up over years will be stranded in the ground by future environmental legislation - or prohibitive carbon permit prices. If the reserves cannot be economically accessed, then their value must be reassessed. There have been suggestions that on this basis some oil companies are already technically bankrupt. Some have gone bust for a variety of reasons, and the US fracking companies are well-known to be extremely indebted. If bankruptcies could and can happen to the oil industry, then they could happen to the cement industry, in what is known as a ‘gale’ of ‘creative destruction.’
What would this look like in the cement industry? Potentially we could see re-purposed factories (burning ‘bio’-fuels, and using alternative zero-CO2 raw materials to make zero-carbon cement). If the final product is non-competitive on cost grounds, or - like CFCs in refrigeration systems - simply banned, we could see closed and abandoned factories. Reallocation of capital from the cement and/or fossil fuel industries (and a reappraisal of the value of reserves) could indeed lead entire industries to cease to exist.
Time to think and plan ahead?
1 https://www.investopedia.com/articles/basics/07/capitalallocation.asp
2 https://www.ey.com/Publication/vwLUAssets/ey-portfolio-management-in-oil-and-gas/$FILE/ey-portfolio-management-in-oil-and-gas.pdf
3 https://www.investorschronicle.co.uk/comment/2019/04/17/fossil-fuel-divestment-spurs-consolidation/
4 https://www.camecon.com/blog/end-energy-know-stranded-assets-creative-destruction/
5 https://www.bloomberg.com/news/articles/2019-03-08/norway-gives-1-trillion-fund-go-ahead-to-divest-its-oil-stocks
