Analysis

Cement producers in the north of Pakistan have started to increase their use of coal from Afghanistan in response to the ongoing volatility in energy markets. Research from a report by Darson Securities found that companies were already using up to 70% Afghan coal in their fuel mix with a further 20% being considered. Most of the northern producers are reported to have secured the cheaper Afghan coal for about two months of inventory, although Maple Leaf Cement was said to have four to five months of inventory. Meanwhile in the south of the country, producers were reported to be facing a tougher situation as Afghan coal costs more for them due to higher logistics charges and export orders were being reduced due to the low cost of clinker internationally. So they are focusing on the domestic market instead.

Graph 1: Cement despatches in Pakistan, 2015 – 2021. Source: All Pakistan Cement Manufacturers Association.

Data from the All Pakistan Cement Manufacturers Association (APCMA) shows that cement despatches have been steadily growing since the mid-2010s with a blip in 2020 caused by the start of the Covid-19 pandemic. The upward trend has been driven by local sales. Exports have generally grown at the same time, with more variance, but they are yet to regain the high of nearly 11Mt reported in 2009. On a rolling annual basis, local sales have remained steady since mid-2021 but exports have been slowly falling. In April 2021 they were 9.17Mt but by February 2022 they were 7.33Mt. For the February 2022 figures APCMA blamed this on the growing cost of production, rising international freight rates, mounting coal prices and a trade ban with India. On that last point for example, Pakistan-based producers exported 1.21Mt of cement to India in the 2017 – 2018 financial year before exports stopped after February 2019. Despite a brief respite in the spring of 2021 talks are still ongoing to resume trade with India.

On the corporate side the country’s largest cement producer by capacity, Lucky Cement, drew the same conclusion as the APCMA with its half-year results to 31 December 2021. Its local sales volumes were down a little but its exports were down a lot. It noted that the reason its local sales were falling but national industry local sales were up slightly was due to some competitor plants being non-operational in the previous year. However, the company managed to keep sales revenue and earnings increasing year-on-year by successfully combating growing input costs with price rises. Bestway Cement, the country’s other large producer, reported a tougher situation in the second half of 2021, with both local sales and export volumes down. This was attributed to a boom in construction activity in the second half of 2020 as Covid-19 lockdowns were eased. Demand for cement since then was said to be ‘sluggish’ due to inflation and high commodity prices. It also pinned its marked fall in exports on political and economic instability in Afghanistan. However, turnover and operating profit were both up due to higher selling prices.

Elsewhere in the sector news since the start of 2021, Pakistan’s exports to South Africa remained stymied in early 2020 due to a review of ongoing tariffs and the government decision to restrict infrastructure projects to only using locally produced cement. On the sustainability front the APCMA started to set out its decarbonisation strategy in November 2021. It may have a long way to go given that a think tank reported earlier in the year that the cement sector was the largest emitter of coal-related CO₂ emissions in the country, even more than power generation. Alongside this plenty of capacity additions have been announced. Lucky Cement started commercial cement production at its 1.2Mt/yr integrated Samawah cement plant in March 2021. Various new cement plants and upgrades to existing plants have been proposed by Bestway Cement, Cherat Cement, Fauji Cement, Kohat Cement Company, Lucky Cement and Maple Leaf Cement. Finally of note to a sector troubled by energy prices, in September 2021 the Pakistan International Bulk Terminal said it was going to upgrade its coal handling capacity to around 17Mt/yr by 2024.

Last week’s Global Cement Weekly covered Turkey. The contrasts are interesting because both of these countries have high cement exports and have raised energy concerns recently. This leads to the question of whether other cement exporters may be vulnerable to the current situation. Pakistan isn’t the only country where the cement industry is facing the negative effects of growing energy costs. This week in the sector news, Spain-based Tudela Veguín has shut down the kiln at its La Robla plant down for 10 days due to high electricity prices, Thailand-based Siam Cement Group (SCG) announced it was reviewing its investment plans and the UK-based Mineral Products Association lobbied the government on the issue.

The shift to Afghan coal by Pakistan’s cement producers is rational given the current situation. No doubt fuel buyers all over the world are doing similar things. In January 2022 the International Monetary Fund (IMF) forecast that Pakistan’s gross domestic product would grow by around 4% for 2021, 2022 and 2023 but current geopolitical events may test these estimates. Over the last year domestic cement demand has remained strong but inflation, growing input costs and the impetus to further rise prices may change this. Meanwhile, lots of new production capacity is in the pipeline and, if or when it is built, it may add additional competition pressure. This may present a problem in Pakistan if capacity utilisation levels drop but input costs keep on going up.

Türkçimento’s Volkan Bozay took to the airwaves last week to raise the issues that the war in Ukraine is causing for Turkey-based cement producers. The head of the Turkish Cement Manufacturers’ Association explained, to the local Bloomberg HT channel, that the dramatic jump in the price of Newcastle Coal posed a serious threat to the sector. The price jumped nearly US$100/t in a single day in early March 2022. Bozay said that the cost of cement from a plant using imported coal would consequently rise by around US$15/t. He added that the association’s members had an average of 15 – 20 days of coal stocks.

Graph 1: Price of coal, March 2020 – March 2021. Source: Trading Economics.

In a separate press release Türkçimento revealed that Turkey, as a whole, imported approximately US$1.5bn of coal from Russia in 2021. The cement industry imported about 5Mt of coal in 2021, from all sources, although the majority of this came from Russia. Coal shipments from Russia since the start of the war were reported as ‘very limited or even not possible.’ It was further explained that each US$10/t increase in the price of coal put up plant production costs by US$1.5/t of cement.

Naturally Bozay’s appearance on a television news show carried a lobbying aspect. He called for government import standards – such as the sulphur ratio, lower heating values and volatile matter limits - to be relaxed to allow coal to be imported more freely from sources such as Colombia, Indonesia and South Africa. There was also a push to let in more alternative fuels such as tyres and waste-derived fuels. The bit that Bozay didn’t mention though was how many of his members had long term coal supply contracts in place to cushion them, from short term price inflation at least. Yet, if coal shipments from Russia have simply stopped, then the price is irrelevant. A cement kiln configured to run on coal stops when it uses up its stocks.

Turkey was the world’s fifth largest cement producer in 2021 according to the United States Geological Survey (USGS). Türkçimento data shows that in 2020 it exported 145,000t of cement to Russia by sea. Overall it exported 16.3Mt of cement and 13.5Mt of clinker. The US, Israel, Syria, Haiti and Libya were the top destinations for cement. Notably, Ukraine was the sixth largest recipients of cement, with 752,000t imported, although anti-dumping legislation introduced in mid-2021 looked set to reduce it until the war started. Ghana, Ivory Coast, Guinea, Cameroon and Belgium were the principal recipients of clinker. Cumulative cement exports for the year to October 2021 were up by 3% year-on-year compared to the first 10 months of 2020. Clinker exports were down by 27% though. Overall domestic production and sales in Turkey rose by 9.5%, suggested an estimated production figure of 79Mt for 2021.

Other fallout in the cement sector from the war in Ukraine this week included Ireland-based CRH’s decision to quit the Russian market. It entered the region in 1998 through a subsidiary based in Finland and was operating seven ready-mixed concrete plants via its LujaBetomix joint venture. CRH says that all operations in Russia have now stopped. In 2021 it sold its lime business in Russia, Fels Izvest, to Russia-based Bonolit. Although selling concrete plants is not trivial, these are far cheaper assets than clinker production lines. Germany-based HeidelbergCement, Italy-based Buzzi Unicem and Switzerland-based Holcim each operate at least one integrated cement plant in Russia. So far these companies have publicly expressed dismay at the humanitarian crisis unfolding in Ukraine and made donations to the Red Cross.

Graph 2: European Union Emission Trading Scheme price, 2020 – March 2022. Source: Sandbag.

Finally, one more surprise this week has been a crash in the European Union (EU) Emission Trading Scheme (ETS) carbon price from a high of Euro96/t in early February 2022 to Euro58/t on 7 March 2022. As other commentators have stated, normally the carbon price would be expected to follow the energy market, but this hasn’t happened. Instead investors have pulled out, possibly to maintain liquidity for other markets.

With the US set to ban Russian oil, gas and coal imports and phase-outs to varying degrees promised by the UK and the EU in 2022, we can expect more turbulence from energy markets in the coming days. As the Turkish example above shows, all of this can... and will... have effects on cement production.

Cement markets have mostly recovered following the shock emergence of coronavirus in 2020. Most of the producers that have released their results so far for 2021 have reported strong boosts to sales revenue and racing earnings as something more like normality resumed. The following roundup covers a selective group of cement companies around the world.

The recovery in 2021 has made the outliers in the companies covered here noteworthy. UltraTech Cement, Semen Indonesia and Dangote Cement are all large regional companies with dominant positions domestically and varying degrees of international spread. As can be seen in Graph 1, UltraTech Cement and Dangote Cement both reported very large increases in sales, over 20% year-on-year. By contrast, Semen Indonesia sales fell very slightly.

Graph 1: Sales revenue from selected cement producers in 2020 and 2021. Source: Company reports. Note: Figures calculated for UltraTech Cement.

One reason for UltraTech Cement and Dangote Cement’s success can be seen in Graph 2 (below). Both companies managed to sell more cement in 2021. Semen Indonesia did not due to Indonesia’s production overcapacity and new competitors. It also blamed a significant rises in coal prices for a 9% drop in its earnings before interest, taxation, depreciation and amortisation (EBITDA).

UltraTech Cement has been wary of successive waves of coronavirus throughout its 2022 financial year, but generally the Indian regional markets have recovered and government-backed rural housing and infrastructure spending have supported growth. It did note rising coal prices earlier in the year, but these were reported to have somewhat softened during the quarter to 31 December 2021. It is worth noting that the ongoing war in Ukraine is affecting energy markets but more on this at the end of this article. Dangote Cement’s performance was slowed somewhat by the start of coronavirus but it has since resumed its turbo-charged trajectory with volumes, revenue and earnings growth all above 10% in 2021. Mostly this performance is supported by the Nigerian market but the company is doing well internationally too.

Graph 2: Cement sales volumes from selected cement producers in 2019 and 2020. Source: Company reports. Note: Figures calculated for UltraTech Cement.

Holcim and HeidelbergCement’s increase in sales revenue in 2021 are actually fairly similar on a like-for-like basis, both with around 10%. The former’s sales volumes were up across cement, ready-mixed concrete and aggregates in each of its regions around the world, as were sales revenue. Holcim’s big move in 2021 has been the expansion of its Solutions & Products segment with the acquisition of Firestone in April 2021. Now this has continued with the completion of the Malarkey Roofing Products purchase on 1 March 2022, a few days after it released its 2021 results. Chief executive officer Jan Jenisch described the move towards lightweight building materials as generating, “further double-digit growth engines for the company.” As an aside, it was fascinating to see CRH leave the building envelope business this week, mostly based in the US, with an agreement to sell up its division for US$3.8bn to private equity. The business CRH is divesting sells architectural glass, storefront systems, architectural glazing systems and related hardware to customers primarily in North America. CRH is clearly pursuing a different business strategy to Holcim.

HeidelbergCement has also reported a strong year in 2021 albeit without the Holcim razzle-dazzle of barging into new market areas. It noted significant increases in energy prices and pandemic‐related lockdowns in some key markets in Asia. It described a very slight cement sales volume decline in Africa and the Middle East and a drop in earnings in Asia. Its trump cards are its carbon capture projects coming down the pipeline. It’s keen to remind investors about this with the unspoken implication that it might save the company money in the future when carbon taxes bite further.

Both Cemex and Buzzi Unicem followed the growth pattern seen in sales and earnings by the other larger multinational producers covered above. Central and South American markets really took off for Cemex in 2021, starting with its home market in Mexico. However, growth was present, although slower, in both its largest markets in the US and its Europe, Middle East, Africa and Asia region. Notably cement volumes in the Philippines grew by 7% and that’s even with the devastation caused by typhoons at the end of the year taken into account. Similarly, Buzzi Unicem performed well in 2021 due to growth in Italy, the US and Eastern Europe compensating for a small sales decline in Germany. As mentioned in Update on Ukraine, February 2022 Buzzi Unicem has particular exposure to the war in Ukraine as it operates two cement plants in Ukraine and two units in Russia but this is a problem for the 2022 financial year.

To finish on Ukraine, first and foremost, a human tragedy is unfolding. Yet the war also presents many economic challenges to financial markets through sanctions and counter-actions. A recession in Russia looks likely as do energy price surges in the US and Europe leading to further inflation and, perhaps, recessions too. All this potentially lies ahead. For now, the dilemma for US and European-based cement companies and suppliers with operations in Russia is reputational. Should they continue to do business in Russia as public opinion hardens and companies like BP, Shell, Equinor, HSBC and AerCap head for the exit? The Russian government has blocked foreign companies and individuals from selling shares locally but pressure looks set to intensify for such companies to do something.

International tensions reached a new high this week with Russia’s formal recognition of the breakaway Donetsk and Lugansk regions in eastern Ukraine and its decision to deploy troops accordingly. However, what of the local cement industry in Ukraine going into the current crisis?

Ukrcement, the Ukrainian Cement Association, says that its members reported a record 11Mt of cement production in 2021. Clinker production totalled 8.11Mt during the same period. The cement figure is close to Ukrcement’s forecast in the autumn of 2021 of 11.5Mt, a rise of 17% year-on-year from 9Mt in 2020. At that time association head Pavlo Kachur added that the local cement industry operated at 66% capacity utilisation in the first nine months of 2021.

The big industry story locally was the start of tariffs on cement imports from Turkey that was announced in September 2021. After much complaining by local producers and an investigation the year before in 2020 the Interdepartmental Commission on International Trade (ICIT) introduced anti-dumping duties of 33 - 51% on cement imports from Turkey for five years. Other than this the usual energy preoccupations have been present in Ukraine. In an interview with Interfax in November 2021, Pavlo Kachur expressed alarm that the price of coal had tripled from the start of 2021 to August 2021. At the same time he explained that the biggest driver of cement consumption was infrastructure projects.

CRH, the largest producer locally, rebranded its subsidiary as Cemark in November 2021 with the intention to start shipping cement bags with the new marking from January 2022. It operates three integrated plants at Mykolaiv, Podilsky and Odessa. It reported that its local operating profit grew year-on-year in 2020, despite a “challenging pricing environment” as cost savings initiatives and lower fuel and logistics costs resulted in improved performance. In September 2021 CRH said that sales were up due to growing cement sales volumes resulting from market demand. Although once again it complained about competitive pricing forcing it to lower its prices. Despite this though lower maintenance costs and cost controls had boosted its operating profit.

Buzzi Unicem runs two integrated cement plants in Ukraine, Volyn and Yugcement, as well as terminals at Kiev and Odessa through its Dyckerhoff Ukraine subsidiary. In 2021 it noted recovery in the construction sector, helped by government stimulus and the introduction of tariffs on imports from Turkey. It said that prices fell in the first half of the year before recovering in the second half. Ready-mixed concrete output showed more growth. Dyckerhoff Ukraine’s net sales rose by 9.4% year-on-year to Euro127m in 2021 even despite negative currency exchange effects.

As for the other producers, NEQSOL Holding Ukraine filed an application to the Antimonopoly Committee of Ukraine (AMCU) in October 2021 to acquire a stake in Ivano-Frankivskcement. Azerbaijan-based NEQSOL Holding also operates the Norm Cement plant near Baku in Azerbaijan. HeidelbergCement used to operate in Ukraine, including the Amvrosiyivka Plant in the contested part of Donetsk region, but it sold up in 2019 to local investors. Its two former integrated plants now operate under the Kryvyi Rig Cement brand. Finally, Russia-based Eurocement runs two plants in Ukraine, at Balakleya in Kharkiv region and Kramatorsk in Donetsk region, under its Balcem subsidiary, which formed in 2019. However the status of the second plant is currently uncertain. Balcem said that the Balakleya plant resumed full cycle production in March 2021 when it restarted kiln two. Kiln one was restarted in June 2021 after a down period since 2008. The plant currently has a production capacity of around 1Mt/yr.

Ukrcement’s Pavlo Kachur said that the cement market in Ukraine was experiencing a positive period in November 2021. Whether this continues is very much in the balance given events in the east of the country. The wider implications for cement producers in the rest of Europe and Russia are the fallout from the economic warfare between both sides. A number of countries have started to react to Russia’s actions with the US, European Union, UK, Japan and Australia announcing economic sanctions and Germany halting approval of the Nord Stream 2 gas pipeline. However, Russia supplies a significant share of Europe’s gas supply. All of this could disrupt energy supplies and force input costs up. This has already been reflected in higher oil prices.

Meanwhile, one aspect of the current situation to watch is how multinational cement producers with a presence in Russia will cope. Moving money in or out of the country is likely to become harder. HeidelbergCement told Reuters this week that it did not expect any major impact on its Russian operations, even if the conflict escalated. Its three cement plants supply local markets and do not export outside of Russia, it added. Other companies straddling the potential sanctions divide include Holcim, Buzzi Unicem and Eurocement.

The crisis continues.

Argos USA announced this week that its integrated Roberta plant in Alabama is set to produce 100% Portland limestone cement (PLC) by June 2022. As part of the transition three of its terminals in North Carolina will also switch over at the same time. The company also expects that all of its plants will convert to PLC in 2023. Cement sites including Newberry in Florida, Harleyville in South Carolina and Martinsburg in West Virginia are already producing PLC.

The change by Argos marks the latest example in an ongoing trend of US-based cement companies moving entire plants to PLC production. In September 2021 LafargeHolcim US said that its integrated Midlothian plant in Texas was preparing to convert to full PLC production and that it would be the first plant in the US to do so. It later confirmed that the plant had done so by the end of 2021. In October 2021 GCC said that its Trident Plant in Montana would fully move to PLC in early 2022. Then in November 2021 Titan America said that its Pennsuco cement plant in Florida would make the change possibly by 2023. Moving into 2022 brought the news that LafargeHolcim US’ Ste. Genevieve plant in Missouri and its Alpena plant in Michigan had each transitioned to PLC production. Lehigh Hanson then rounded up the bunch earlier this month, at the start of February 2022, when it announced that a PLC was the primary product now coming out of its Mason City plant in Iowa. It even invited a US Member of Congress to celebrate!

The current expansionist phase of PLC usage in the US dates back to late 2020 when the Portland Cement Association (PCA) launched a dedicated website to promote the use of the blended cement by discussing its applications and benefits. It then released a new environmental product declaration in March 2021 and PLC received a mention in the PCA’s Roadmap to Carbon Neutrality when it was released a year later in October 2021. Lots of work went into PLC prior to 2020 though, both by the PCA and others. The first commercial production of PLC in the US started in 2005 and PLC gained its own blended cement specification in 2012. Notably, the PCA has been tracking the state acceptance of PLC by the Department of Transportation and it grew markedly during the 2010s.

The US is playing catch-up with PLC. In Europe its usage dates back to the 1960s. Cembureau, the European Cement Association, reported usage of around 30% in 2004. More recently in 2020, the VDZ, the German Cement Association, reported a similar figure domestically with the proportion of blended cement shipments including limestone, shale and multiple additives at 31.6%. In the US it is hard to gauge the scale of the current move towards PLC by producers, due to limited publicly available data. A PCA survey reported PLC production of 0.89Mt in 2016. If all the plants mentioned above convert fully to PLC and maintain their rated production capacity that would be something like 14Mt/yr of PLC in 2023 or 11% of the US’s total cement capacity. For comparison, the United States Geological Survey (USGS) reported total shipments of all blended cements at 3.3Mt in 2020 and a total of 5.4Mt for the first 11 months of 2021. Plus, remember that PLC is just one blended cement among others, like those that use slag or fly ash.

Recent developments show that a large change is coming towards the US cement market in the update of blended cements. It’s been a long time coming but the last six months have seen brisk increases in PLC production at scale. The exact data is not available but one might expect something around triple the current number of production plants making PLC if the US market heads towards European levels. This rough estimate doesn’t take into account existing partial PLC production levels. At the same time the US cement sector should see a fall in its emissions due to PLC’s 10% reduction in CO₂ emissions compared to ordinary Portland cement