There have been two major announcements in the cement sector this week. The first was that Holcim is preparing to divest its business in the US via a spin-off and full capital market separation. The second was that FLSmidth is thinking about selling its cement equipment business. Both stories are huge so we will cover them both. This week we will focus on FLSmidth and Holcim will follow next time.
Both news stories came as something of a shock. Yet FLSmidth’s plans were not surprising given the divestment of MAAG gears and drives business earlier in January 2024 and several years of tough trading conditions in the sector generally. Yet, as one commentator on the Global Cement LinkedIn Group put it, it feels like “the end of an era.”
First a little history. FLSmidth has been in business for over 140 years and has been indelibly linked to the cement market throughout this time. Its first big cement order was in 1887, it built its own plant in Aalborg in 1889 and it started selling rotary kilns in 1899. By 1957, at the time of its 75th anniversary, it was estimated that 40% of the world’s cement was manufactured in equipment supplied by FLSmidth. Many other advancements and milestones followed but signs of the modern business’ focus on mining can be detected in the acquisition of US-based Fuller Company in 1990, the sale of Aalborg Portland in 2002 and the purchase of ThyssenKrupp Industrial Solutions’ mining business in 2021.
FLSmidth described its reasoning for a potential divestment of its cement business and focusing on mining as follows: “our industries, and in turn, the appropriate operating models which best serve them, have diverged. Consequently, combining our two organisations under one ownership is now forcing more operational friction than benefit.” It took pains to state that it hopes to sell its cement business in one piece whereupon it can continue to grow under new ownership and “maximise its full potential.”
FLSmidth’s strategy for selling its cement equipment business appears to have taken the form of separating out the cement business, making it look as strong as possible and then publicly announcing that it is “exploring divestment options.” This is different from many other corporate divestments that only become public once a deal with a prospective buyer has been secured. FLSmidth has been preparing for a potential divestment of the division internally through its ‘pure play’ strategies and focusing more recently on product, services and technology rather than project risks. It said that the MAAG sale had shown it that there was interest in buying the cement business. However, no potential buyers have been disclosed at this time. In a conference call the company said that it was hoping for five to 10 interested parties and it would expect these to be either industrial buyers or financial entities.
One of the callers homed in on the attempts by ThyssenKrupp to sell the cement division of its subsidiary ThyssenKrupp Industrial Solutions (TKIS) in 2020 following a restructuring drive. It changed its mind in 2021 and ended up selling its mining division to FLSmidth instead. In response to any comparison, FLSmidth asserted that it was preparing to sell a significantly different asset to TKIS, not least due to its careful steering away from project-based risk.
The wider business backdrop to this decision has been the rise of the Chinese cement sector since the late 1990s, persistent global production overcapacity, the setting of net zero CO2 emission targets globally and, more recently, logistic and economic shocks arising from the Covid-19 pandemic and geopolitical events. New cement production line projects are now frequently managed by China-based equipment suppliers in many territories, with the exception of North America. It is worth noting here that some of the largest China-based cement equipment suppliers are subsidiaries of the government. The Chinese government has also supported the construction of new plants outside its borders through its Belt and Road initiative. Protectionist investment policies implemented by western governments to support industry transitioning to net zero is in part a response to this in the general economy. Cement equipment suppliers from outside of China can and do build lines on a regular basis but they tend to concentrate on parts of plants, such as mills, or specific technologies and services. FLSmidth is a good example of this transition with its renewed focus on the green transition.
The decision by FLSmidth to consider selling its cement business marks another sign that the cement industry is changing. The transition to net zero puts Europe-based suppliers in a good position given that the region is currently leading with carbon capture projects. A retrofit boom for cement plants (and customers) being made to pay for CO2 emissions could change the dynamic for the cement equipment sector as the focus shifts from building kilns to capturing CO2. And companies like FLSmidth are well placed to benefit from this. Then again it may just end up being business as usual. Either way, any eventual change in the ownership of FLSmidth’s cement division does indeed mark the end of an era.
Next week: Holcim’s plans in the US
