A couple of news stories from Australia this week give us a reason to look at the country’s cement industry. All the main producers have now released their preliminary reports for the second half of 2016, with the exception of LafargeHolcim, one of the joint owners of Cement Australia. Essentially, the picture is mixed from two of the three main producers - Adelaide Brighton and Boral - with falling sales revenues but growing sales in the east. In mid-2016 the Australian Industry Group Construction Outlook survey predicted that the infrastructure, commercial and residential sectors would start to recover in the second half of 2016 leading to an upturn in 2017, although falling mining and heavy engineering construction was expected to continue to contrast in 2016.

The local market is split in clinker production terms with most of the producers (relatively) concentrated in the south and east of the country. Cement Australia leads in cement production capacity with 2.8Mt/yr or 42% of the country's production base from two integrated plants. Adelaide Brighton then comes next with 2.3Mt/yr or 35% from three plants and Boral follows with 1.5Mt/yr from one plant since the closure of clinker production at its Waum Ponds Plant in Victoria in 2012. The cement grinding plant situation is more varied with Adelaide Brighton's Northern Cement plant in the Northern Territory and BGC Cement plant in Western Australia amongst the country's 12 units, according to Global Cement Directory 2017 data. This total also includes a few slag cement grinding plants such as the Australian Steel Mill Services' plant and the Cement Australia-Ecocem plant that are both in Port Kembla.

Adelaide Brighton reported that its sales volumes of cement were down in 2016 due to major declines in Western Australia and the Northern Territory. Here, volumes had fallen by around 20% year-on-year. Unfortunately, a revival in southern and eastern Australia in the second half of the year wasn’t enough to stem the tide of poor sales. Power supply issues in Southern Australia also caused disruptions at both the company’s own plants and at those of its customers, leading to reduced sales. The cement producer also said that its import volumes had fallen by 2Mt due to lower sales in Western Australia and the Northern Territory and that import costs had increased due to a drop in the value of the Australian Dollar. Adelaide Brighton's reliance on imports is interesting given that this week Semen Padang, a subsidiary of Semen Indonesia, announced that it had started exporting cement to Australia.

Meanwhile, Boral Australia said that its cement revenue had fallen by 3% year-on-year to US$95.3m for its first half to 31 December 2016. However, cement sales volumes grew by 3% driven by higher direct sales. It also noted that competition and energy costs had increased in the period. HeidelbergCement, the other joint owner of Cement Australia, along with LafargeHolcim, said that its operations in Australia had delivered solid development due to strong residential construction demand and strong demand on the East Coast that compensated for a weaker mining sector. LafargeHolcim confirmed this in its half-year report adding that road infrastructure projects had also helped. It also noted that benefits to its adjusted operating earnings before interest, taxation, depreciation and amortisation (EBITDA) had been accrued through energy savings and lower clinker import costs.

LafargeHolcim's financial results for 2016 are due later this week on 2 March 2017. Potentially they have big implications for the Australian cement market given the rumours that were swirling around a year ago about a potential divestment. Although the signs so far suggest that its subsidiary Cement Australia did okay in 2016, pressure elsewhere in the group might prompt a sale of its share. We discussed this issue in December 2015 but since then Adelaide Brighton publicly said it was working on an acquisition plan, including strategy on how to cope with any potential competition issues. All eyes will be on LafargeHolcim later in the week.

The merger between South Africa’s larger cement producers, PPC and AfriSam, is back on this week. PPC issued a statement advising its shareholders that the board of directors of both companies were about to enter formal talks to thrash out a potential deal. Issues such as the merger ratio, black economic empowerment and local competition concerns are all on the agenda.

The resumption of merger talks follows the cancellation of the previous round in mid-2015. No reason for the breakdown was publicly released but possible factors may have included the fallout at PPC from the resignation of its chief executive officer (CEO) Ketso Gordhan and competition concerns. Given the investigations by the South African Competition Commission from around 2008 to 2012 these may have been very real concerns. At this time the two companies held about a 60% share of the country’s cement production capacity.

Events have changed since then with the opening and ramp-up of Sephaku Cement’s cement plant at Aganang and its grinding plant at Delmas since late 2014. Today, PPC and AfriSam control just under 50% of the cement production capacity in South Africa and PPC’s current CEO Daryll Castle remains in post since early 2014. What a difference a year or so can make.

PPC moved its financial year end from September to March in 2016 making it hard to compare like with like. However, its revenue appears to have grown by 10% year-on-year to US$396m for the six months to 30 September 2016. Its earnings before interest, taxation, depreciation and amortisation (EBITDA), a measure of operating performance, fell by 7.5% to US$80m at the same time. Since then PPC notified markets with a trading statement saying that its sales volumes in South Africa had risen by 4% in the nine months to the end of December 2016 but that its prices had fallen by 4%. It also noted that its local cement sales volumes declined marginally when compared to the same quarter in the previous year, with the exception of the Western Cape region.

PPC also has various projects underway in sub-Saharan Africa, including plant builds in Democratic Republic of Congo (DRC) and Ethiopia. Of note to any potential merger with AfriSam are its plans to build a new 3000t/day production line at its Slurry plant in Lichtenburg. The project was reported 54% complete in early February 2017 with first clinker production scheduled for the first half of 2018. CBMI Construction, a subsidiary of China’s Sinoma, is the main contractor for the upgrade project. Once complete the new line will add about 1Mt/yr to the plant’s cement production capacity. One implication of this project is that it will push PPC and AfriSam’s market share over 50% that may have consequences with the local competition body.

For its part AfriSam appears to be suffering financial problems according to local press. The Public Investment Corporation (PIC), a government investment body, revealed in late 2016 that it had invested over US$100m in the cement producer since 2008. The PIC holds a controlling share of AfriSam with a 66% stake in the group. Other than this, solid facts about the state of AfriSam’s business are thin on the ground. However, competition in South Africa’s cement sector has certainly increased in recent years both within and without, from the import market.

As this column has said a few times merger and acquisitions seem to be the way to go for cement producers in weak markets. However, as annual results from Cementir and HeidelbergCement show this week, the initial boost from new asset and business purchases may not be so rosy when viewed in a pro-forma basis or when taking into account new units’ past performance. A lot here rides on these companies being able to take advantage of synergy effects and to make crucial savings. The big example of this in the global cement sector is LafargeHolcim. It will announce its financial results for 2016 on 2 March 2017. It also operates a cement plant in South Africa and the results may have implications for the PPC and AfriSam merger.

In other news, the European Union parliament has voted today, on 15 February 2017, to amend its Emissions Trading Scheme (ETS) in line with a proposal made by the European Commission. This is unlikely to impress the environmental lobby or users of secondary cementitious materials in cement production, amongst other parties. More on this topic next week.

It looks like Cembureau, the European Cement Association, got its own way on the proposal to amend the European Union's (EU) Emissions Trading Scheme (ETS) that the European Parliament voted on last week. The system has been tightened but not enough to make the cement industry suffer, for now. Naturally, the environmentalists are outraged.

The key reform was that the carbon credits reduction rate (the linear reduction rate) will increase and the market stability reserve (MSR) will double its capacity to absorb excess allowances on the market. However, the big battle was fought over whether to include an importer inclusion scheme (or Border Adjustment Measure) or not. Lots of political 'horse-trading' took place right up to the vote on 15 February 2017 to adopt the draft proposal, with particular battles over the importer inclusion scheme. Negotiations will now continue with the Council of the European Union before the proposal returns to the European Parliament for a final vote.

Cembureau seemed pleased with the outcome. It supported the proposal principally for maintaining competitiveness and for not ‘deliberately discriminate between sectors.' It also liked the inclusion of dynamic allocation, a benchmark based on what it said was real data, a flexible reserve in relation to the allowances available for free and those designated for auctioning and an impetus towards funding carbon capture and storage. It also singled out its pleasure that an amendment for an importer inclusion scheme had not been accepted.

This last point caused a spat between Cembureau and Bruno Vanderborght, a former executive at Holcim, at the end of January 2017 in the lobbying frenzy before the vote. In robust language Vanderborght accused the European cement industry of using the ETS for negative leakage. His argument was that the free allocation of carbon credits given to the cement industry had been used to 'maximise gross margin.' Instead of spending the money on upgrading inefficient units, the industry had used its same inefficient units to increase exports of clinker to outside the EU, to places like Africa. Cembureau countered that it had been taken out of context by Vanderborght and that arguments he levelled, such as data from the Cement Sustainability Initiative (CSI) suggesting that the EU has the highest share of clinker production in old, energy-intensive installations worldwide, were misleading since CSI reporting may not be as thorough outside of Europe.

Predictably, the proposal didn't please the environmental lobby, which denounced the deal as toothless. Environmental campaign group Sandbag has been on the case of the cement industry for several years, pointing out that its own research shows that cement producers have 'abused' the free allocation scheme for profit and that emissions have actually increased under the ETS so far. Its headline figure in the wake of the vote was that the cement sector was set to rake in a surplus of allowances worth Euro2.8bn by 2030.

Following the vote Sandbag took no time to point out that the ETS carbon price had sunk below Euro5/t. In its assessment, a carbon price of least Euro50/t is required to stimulate low carbon investment. However, the carbon price soon rose back up. Little impartial analysis is available on whether the amended proposal will actually deliver its aims, although a Thomson Reuters analyst did describe the outcome as one that 'significantly tightens the market balance.'

In a final twist, the lead rapporteur for the reforms to the EU ETS is a UK member of the European Parliament (MEP). Depending on how the Brexit negotiations go, the guy marshalling the amendments to the EU ETS won't be subject to its eventual implementation.

The EU ETS is slowly starting to improve through reforms such as those voted on last week but it remains very much in doubt whether it will be able to deliver solid meaningful reductions in carbon emissions. Cembureau is rightly protecting the industry it represents but at present the price of coal appears to be a better driver of measures such as increased use of alternative fuels than the ETS. The ETS has had the misfortune in operating for the last few years throughout a market depression in Europe where it has been propping up some cement producers and now it’s helping them get back on their feet as they export their products out of the continent. In a world awash with excess clinker the policy makers are eventually going to have to decide how much they want to damage industry in order to meet their environmental aims. We need cement and we need to cut carbon emissions. Someone is always going to be unhappy in this situation.

Last week’s Global CemFuels Conference in Barcelona raised a considerable amount of information about the state of the alternative fuels market for the cement industry and recent technical advances. One particular facet that stuck out were reports from cement and waste producers, from their perspective, about Morocco’s decision to ban imports of waste from Italy in mid-2016. The debacle raises prickly questions about how decisive attempts to reduce carbon emissions can be.

Public outcry broke out in Morocco in July 2016 over imports of refuse derived fuel (RDF) imported from Italy for use at a cement plant in the country. At the time a ship carrying 2500t of RDF was stopped at the Jorf Lasfar port. Local media and activists presented the shipment in terms of a dangerous waste, ‘too toxic’ for a European country, which was being dumped on a developing one. Public outcry followed and despite attempts to calm the situation the government soon banned imports of ‘waste’.

What wasn’t much reported at the time was that RDF usage rates in Europe have been rising in recent years and that the product is viewed as a commodity. As Michele Graffigna from HeidelbergCement explained at the conference in his presentation, its subsidiary Italcementi runs seven cement plants in Italy but only two of them have the permits to use alternative fuels like RDF. Italy also has amongst the lowest rates of alternative fuels usage in Europe, in part due to issues with legislation. This is changing slowly but the company has an export strategy for waste fuels from the country at the moment. Italy’s largest cement producer wants to use waste fuels in Italy but it can’t fully, so it is exporting them so it (and others) is exporting them to countries where it can.

In the Waste Hierarchy, using waste as energy fits in the ‘other recovery’ section near the bottom of the inverted pyramid, but it is still preferable to disposal. Waste fuels may be smelly, unsightly and have other concerns but they are a better environmental option than burning fossil fuels. HeidelbergCement engaged locally with media and local authorities to try and convey this. It also arranged visits to RDF production sites in Italy and German cement plant that use RDF to present its message. Looking to the future, HeidelbergCement now plans to focus on local waste production in Morocco with projects for a tyre shredder at a cement plant and an RDF production site at a Marrakesh landfill site in the pipeline. Graffigna didn’t say so directly, but the decision to focus on local waste supplies clearly dispenses with historical and cultural baggage of moving ‘dirty’ products between countries.

In another talk, at the conference Andy Hill of Suez then mentioned the Morocco situation from his company’s angle. His point was that moving waste fuels around can carry risks and that a waste management company, like Suez, knows how to handle them. It is worth pointing out here that Suez UK has supplied solid recovered fuel (SRF) to the country so it has a commercial interest here. He also suggested that despatching a bulk vessel of waste to a sensitive market did not help the situation and that it heightened negative publicity.

Morocco’s decision to ban the import of waste fuels in mid-2016 is an unfortunate speed bump along the highway to a more sustainable cement industry. It raises all sorts of issues about public perceptions of environmental efforts to clean up the cement industry and where they clash with commercially minded attempts to do so by the cement producers. A similar battle is playing out in Ireland between locals in Limerick and Irish Cement, as it tries to start burning tyres and RDF. These are not new issues. Meanwhile in the background the amendment to the European Union Emissions Trading Scheme draws close with a vote set for mid-February 2017. It could have implications for all of this depending on what happens. More on this later in the month.