As mentioned last week, there were a number of big news stories, one of which was the planned merger between RHI and Magnesita. On 10 October 2016 both companies announced that they were combing to form a ‘leading’ refractory company with complementary assets and a completion date penned in for 2017. As Informed’s Mike O’Driscoll presents a good overview of the two companies and the general implications of the merger we will focus on the cement industry aspects of the merger here. It is worth noting here that the new company will be established in the Netherlands but its shares will be listed in London. O’Driscoll reckons that had the UK voted to stay in the European Union the new company would have been based in London.
Comparing like-with-like for RHI and Magnesita is difficult because Magnesita doesn’t publish figures on its refractory sales to the cement industry. However, RHI produced 443,000t of refractory materials in 2015 for its Industrial Division, including the cement and lime industries, and Magnesita produced 151,000t for its Industrial Division at the same time. As can be seen in Graph 1 RHI produces nearly three times as much refractory as Magnesita in this area. Sales volumes for RHI have fallen over the last five years and Magnesita’s sales hit a high in 2013. Total revenue for RHI, across all business lines, was US$1.95bn or about double that of Magnesita.
Graph 1: Refractory sales volumes to industrial divisions for RHI and Magnesita, 2011 – 2016. Sources: RHI and Magnesita financial reports. Note: Figures for Magnesita are calculated from percentages.
RHI reported that 12.6% of its revenue in 2015 came from the cement and lime industries. It pointed out that this sector of its business benefited from the growing construction industry in North America. Elsewhere, it had a tough time in most of its territories, with the exception of Indonesia where its revenue grew due to a major contract won in the lime segment. Over the last five years RHI’s revenue from its cement and lime customers dipped to a low in 2013 before recovering year-on-year since then.
However, the situation has deteriorated during the first half of 2016 with revenues from the cement and lime industries falling by 13% year-on-year. China was blamed as the biggest single factor, with business down by roughly a quarter as a result of the downturn in the construction industry, falling property prices and lower investment activities. One interesting point that RHI made at this time was that, “the globally weak economic situation and regional excess capacities are causing a decrease in repair volume.” Another was the importance the refractory producer placed on Africa and on Nigeria and Algeria in particular. This seems to belie the petrodollar woes Nigeria has experienced recently and the scaling back by Dangote Cement of its international expansion plans.
Magnesita reported that sales volumes for its industrial segments sector, including cement, dropped by 11.7% year-on-year to 133,000t in 2016. It blamed the shortfall on the declining cement industry in Brazil with problems in Venezuela also contributing. In contrast to RHI though it reported growing sales in the Middle East and Africa, notably in Saudi Arabia and Egypt. Sales revenue actually rose by 10.2% to US$145m due to favourable exchange rates on sales outside of Brazil.
In the first half of 2016 the negative trend in Brazil continued for Magnesita with sales volumes falling by 22% in its so-called ‘established’ markets. This was compensated for by Bolivia, Mexico, Argentina and the Middle East, Africa and the Commonwealth of Independent States territories. Sales volumes for its industrial segments sector rose slightly by 1.1% to 75,200t in the first half of 2016. Again, sales revenue grew on the back of exchange rates.
As with mergers between large producers in the cement industry, if global growth is stagnating, then mergers offer an alternative way for refractory companies to compensate. However, LafargeHolcim’s promise of savings and synergies has withered to periodic news bulletins of what assets the group is planning to sell next. One question to pose is whether the merger of RHI and Magnesita will herald a similar drip-drip of assets disposals in coming years or whether it will usher in a new era for the refractory industry. A large part of this will depend on the health of the steel industry, as well as minority markets such as cement.