LafargeHolcim’s investigation into its conduct in Syria claimed its biggest scalp so far this week with the shock resignation of chief executive officer (CEO) Eric Olsen. His decision landed with the publication of the group’s investigation into the conduct of the legacy Lafarge operations in the country in 2013 and 2014. As per the initial findings of the investigation that were released in March 2017, it confirmed that selected personnel had engaged in dealings with terrorists in connection to one of its cement plants in the country during 2013 until the unit closed in September 2014. The board decided that Olsen had no connection or even awareness of the misconduct. However, he decided to quit anyway in order to restore ‘serenity’ to the company.

In its latest public statement on the investigation, LafargeHolcim outlines five weaknesses with its compliance led by improper payments related to Lafarge Syria’s security and supply chain. It then goes on to list a failure of line management, inadequate controls over expenses and a failure to detect improper payments and improperly recorded payments. It’s all presented as ‘chaos reigned’ or wayward staff in tough circumstances trying to do their muddled best for the company. Unfortunately for this narrative, selected members of group management were aware of the situation and appeared to have done nothing about it. This then begs the question: who knew what when?

Olsen may have been exonerated by the board on his departure but he was Lafarge’s Executive Vice-President of Operations for Lafarge in 2014. If he didn’t know what was going on in Syria during his watch then he wasn’t doing his job properly or it was being hidden from him. The head of Lafarge itself at the time, Bruno Lafont, might also have been a viable target for discipline but he decided to stand down from the board of LafargeHolcim in early April 2017. No doubt other former members of the Lafarge management team may bear more responsibility. LafargeHolcim’s implementation of its remedial measures may turn up more culprits, as may the on-going criminal complaints process continues in France.

French newspaper Le Monde, the newspaper that originally broke the story, is probably on the money with its assessment that Olsen’s departure is actually the continuation of the boardroom battle between the board and its shareholders that has raged since before Lafarge and Holcim formally merged. Bruno Lafont was originally lined up to become the CEO of the new company until Lafarge’s worsening financial position compared to Holcim’s prompted a backlash from Holcim shareholders. Le Monde describes how LafargeHolcim’s shareholders include four prominent billionaires: Switzerland’s Thomas Schmidheiny, Belgium’s Albert Frère, Canada’s Paul Desmarais and Egypt’s Nassef Sawiris. Schmidheiny, readers may remember, was one of the principal actors who sunk Lafont’s bid to be CEO back in early 2015.

Placed in this context, Olsen’s departure might seem forced, especially if he had no connection to the debacle in Syria. LafargeHolcim has faced a tough couple of years following its formation with consistently falling sales revenue. Asset divestments and cuts have been the cure as the group struggled to find its new size. Yet, the group saw its adjusted operating earning before interest, taxation, depreciation and amortisation (EBITDA) start to rise in 2016 suggesting that the remedial action was starting to work. LafargeHolcim’s management and shareholders will be acutely aware of its performance so far in 2017 ahead of the public release of its first quarter results in early May 2017. Under these circumstances it seems unlikely that serenity will be restored to the upper echelons of LafargeHolcim any time soon.

Unsurprisingly the European Commission blocked Duna-Dráva Cement’s (DDC) attempted purchase of Cemex Croatia this week. Merging the country’s biggest cement producer with its largest importer was going to be a challenge for the commission. Whereas in previous transactions the various parties offered business disposals to ease the commission’s concerns, here all they were got was access to a cement terminal in Metković in southern Croatia. And this facility on the Neretva river is currently being leased by Cemex! Clearly this didn’t give the impression of being a long term solution.

Compare this with the merger between Lafarge and Holcim in 2015 where multiple sales were proposed to make sure the deal went through. Or look at the acquisition of Italcementi by HeidelbergCement in 2016 where the parties sold Italcementi’s Belgian subsidiary Compagnie des Ciments Belges to Cementir to make the deal happen. In comparison to these deals the attempt by HeidelbergCement and Schwenk, through their subsidiary DDC, comes across as a calculated gamble designed to test the resolve of the commission. If the commission had somehow passed the proposed acquisition then the companies would have cornered the market. If it turned it down, as it has, then nothing would be lost other than putting together the bid. HeidelbergCement had its mind on bigger things as it bought and then integrated Italcementi.

Commissioner Margrethe Vestager summed up the mood of the commission: “For mergers between direct competitors, we generally have a preference for a clean, structural solution, such as selling a production plant. HeidelbergCement and Schwenk decided not to offer that. Instead they proposed to give a competitor access to a cement terminal in southern Croatia. Essentially, this amounted to giving a competitor access to a storage facility – without existing customers or established access to cement, without brands and without sales or managerial staff.”

Elsewhere, the other big story in the industry news this week was Votorantim’s decision to focus on the lime business in Brazil by adding lime units to some of its existing cement plants. Given the dire state of the local cement and construction industry, initiatives to break the deadlock have been expected. The alternative is plant closures and divestures, such as the ongoing talks by Camargo Corrêa to sell the other big local producer, InterCement. Votorantim plans to build lime units attached to the cement plants at Nobres in Mato Grosso, Xambioa in Tocantins, Primavera in Pará and Idealiza in Goiás. Unfortunately the agricultural areas of the country and ones with cement plants don’t overlay neatly. Cement production is mainly focused in the south-eastern states and Votorantim are targeting the Cerrado, in the centre of the country, for the lime business.

The scale of the project, at US$50m, the scale of the lime business generally and the addition of lime units at cement plants suggest that the pivot to lime can only be a sideline to cement and construction. Given the similarity of the cement and lime production processes the announcement would be much more significant were Votorantim set to convert clinker kilns into lime ones. A notable example of this was at Cement Australia’s Gladstone plant in Queensland, Australia. Here a mothballed FCB-Ciment clinker kiln was converted into a lime kiln in the early 2000s. At the time the cost of the conversion project was valued at just under US$20m. If Votorantim was seriously thinking of doing this at a few of their underperforming cement plants then one would expect the bill to be higher than US$50m. However, it’s early days yet.

Data from the Peruvian cement association (ASOCEM) presents a potential bounce in the fortunes of the local industry in March 2017. Cement production rose slightly year-on-year to 0.79Mt. This is the first monthly rise since July 2016. The first quarter of 2017 as a whole is down by 4.5% year-on-year to 2.35Mt but any fillip is surely welcome.

Graph 1: Cement production in Peru, 2012 – 2016. Source: ASOCEM.

Graph 1 shows that production peaked in 2014. Although it has fallen since then it is still above the level in 2012. Cementos Pacasmayo blamed the overall fall in 2016 on a strong end to 2015 associated with El Niño prevention investments although, given that its production volumes also fell in 2015, albeit slightly, it may be being optimistic in its analysis. It also blamed the widening fallout from the Brazilian Petrobras corruption scandal for delaying investment by the Peruvian government on an infrastructure drive.

Graph 2: Cement and clinker imports to Peru, 2014 – 2016. Source: ASOCEM/SUNAT.

Another point to examine in ASOCEM’s latest release is the import figures as can be seen in Graph 2. Overall cement and clinker import volumes have hovered around 10 – 15% of local production but the ratios have changed since 2014, with a focus on ground cement. Cementos Pacasmayo provided one possible reason in its fourth quarter report for 2016 with the news that it had started replacing imported clinker with its own clinker as it increased production at its new Piura plant. Most of this cement has been coming from Vietnam through 2015 and 2016. Coincidentally, Vietnam’s General Department of Vietnam Customs has reported this week that local exports of cement and clinker are up by 11% to 4.82Mt for the first quarter of 2017 and that Peru is one of the top destinations. Also of note in February 2017 was a significant cement import of 30,800t from China following no imports from that country in 2016 and most of 2015.

Recent production and import trends aside, the Peruvian cement industry’s industry base hasn’t changed much since last time this column coved it (GCW183, January 2015). The country has three main producers – UNACEM, Cementos Pacasmayo and Grupo Gloria – who operate 49%, 43% and 8% respectively of the local 11.4Mt/yr production capacity. They each operate production units in north-south geographical bands in the country with Pacasmayo in the north, UNACEM in the central coastal region near to Lima and Gloria’s subsidiaries in the south.

As mentioned above, Cementos Pacasmayo has been increasing production at its newer Piura plant since mid-2015. Gloria Group purchased Cementos Otorongo, a project to build a cement plant in the south, from Votorantim in mid-2016 and Cemex was reported as having gained government approval for a grinding plant project in Lima in early 2016. On the financial side, UNACEM’s income fell by 4% to US$573m in 2016. Cementos Pacasmayo’s sales fell slightly to US$381m and its earnings before interest, taxation, depreciation and amortisation (EBITDA) for its cement operations fell by 4.6% to US$118m.

Like lots of African countries the outlook for the construction industry in Peru is good in the medium term with plenty of scope for development and a growing economy despite a contraction of 6% in the construction industry in 2016. The Gross Domestic Product (GDP) growth rate hit a low of 2.4% in 2014 but it has since started to pick up again. Once or if the Kuczynski administration starts spending on infrastructure then all the signs should point to growth in the cement industry. Given the amount of clinker sloshing around the world if any producers actually start opening terminals or grinding plants this would suggest they are confident of a return on investment.

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.