Analysis

Microsoft co-founder Bill Gates entered the world of cement this week with a public relations blitz for Heliogen. He’s one of the backers of a new Californian technology startup looking to use concentrated solar power (CSP) to power heavy industrial processes like clinker or steel production. The company says it has concentrated solar energy commercially to levels above 1000°C.

Its process, called HelioMax, uses a closed-loop control system to improve the accuracy of a heliostat system. It says it achieves this by using computer vision software to better align an array of mirrors to reflect sunlight towards a single target. Temperatures of up to 1500°C is one of its targets so that it can apply itself to a variety of processes in the cement, steel, mining, petrochemical and waste treatment industries. It says it can do this for US$4.5/MCF. Another target once it hits 1500°C is to start manufacturing hydrogen or synthetic gas fuels.

Heliogen’s press release was picked up by the international press, including Global Cement, but it didn’t mention the similar work that SOLPART (Solar-Heated Reactors for Industrials Production of Reactive Particulates) project is doing in France. This project, backed by European Union Horizon 2020 funding, is developing a pilot scale high temperature (950°C) 24hr/day solar process for energy intensive non-metallic minerals’ industries like cement and lime. It’s using a 50kW solar reactor to test a fluidised bed system at the PROMES (PROcédés, Materials and Solar Energy) testing site in Odeillo, France.

Heliogen’s claim that it can beat 1000°C is significant here but it doesn’t go far enough. Clinker production requires temperatures of up to around 1450°C in the sintering phase to form the clumps of clinker. SOLPART has been only testing the calcination stage of clinker production that suits the temperature range it can achieve. Unless Heliogen can use its method to beat 1450°C then it looks likely that it will, similarly, only be able to cut fossil fuel usage in the calcination stage. If either Heliogen or SOLPART manage to do even this at the industrial scale and it is cost effective then the gains would be considerable. As well as cutting CO₂ emissions from fossil fuel usage in cement production this would reduce NO_x and SO_x emissions. It would also cut the fuel bill.

As usual this comes with some caveats. Firstly, it doesn’t touch process emissions from cement production. Decomposing limestone to make calcium oxide releases CO₂ all by itself with no fuel. About one third of cement production CO₂ emissions arise from fossil fuel usage but the remaining two thirds comes from the process emissions. However, one gain from cutting the amount of fossil fuels used is a more concentrated stream of CO₂ in the flue gas. This can potentially reduce the cost of CO₂ capture and utilisation. Secondly, concentrated solar power systems are at the mercy of the weather, particularly cloud cover. To cope with this SOLPART has been testing a storage system for hot materials to allow the process to work in a 24-hour industrial production setting.

Looking more broadly, plenty of cement producers have been building and using solar power to supply electricity. Mostly, these are photovoltaic (PV) plants but HeidelbergCement built a CSP plant in Morocco. Notably, PPC Zimbabwe said this week that it was building a solar plant to supply energy to two of its cement plants. It is doing this in order to provide a more reliable source of electricity than the local grid. India’s Birla Corporation has also said that it is buying a solar energy company today. The next step here is to try and run a cement plant kiln using electricity. This is exactly what Cementa, HeidelbergCement’s subsidiary in Sweden, and Vattenfall have been exploring as part of their CemZero project. The pilot study demonstrated that it was technically possible but only competitive compared with ‘other alternatives in order to achieve radical reductions in emissions.’

None of the above presents short or medium-term reasons for the cement industry to switch to solar power in bulk but it clearly deserves more research and, critically, funding. One particular strand to pull out here about using non-fossil fuel powered clinker production systems is that it produces purer process CO₂ emissions. Mounting carbon taxes could gradually force cement plants to capture their CO₂ but once the various technologies above become sufficiently mature they could bring this about sooner and potentially at a lower cost. In the meantime the more billionaires who take an interest in cement production the better.

As most of the larger cement producers have released their financial results for the third quarter of 2019 it’s time to see how they are doing so far this year.

Graph 1: Revenue from major cement producers, Q1 - 3 2019. Source: Company reports.

Graph 2: Cement sales volumes by major cement producers, Q1 - 3 2019. Source: Company reports.

LafargeHolcim is looking good, with rises in both its net sales and earnings on a like-for-like basis. The sale of its assets in South-East Asia earlier in the year and in 2018 may have appeared to reduce its figures, but the like-for-like growth suggests that the strategy its working. This has been driven by markets in Europe and North America as its other big market, Asia, has continued to slide. The latter vindicates the group’s decision to partly leave the region, in the short term at least. It’s also interesting to note that at the macro-scale LafargeHolcim’s ready-mixed concrete (RMX) sales fell by 1.3% on a like-for-like basis to 7.4Mm³ in the first nine months of 2019. What does this mean for a building materials company that has been moving towards the whole supply chain and concrete?

Anhui Conch Cement reported cement and clinker sales volumes of 202Mt in the first half of 2019, a 42% year-on-year growth for the same period in 2018. Its revenue increased by 42% year-on-year to US$15.9bn in the first nine months of 2019 from US$11.1bn in the same period in 2018, putting it ahead of Germany’s HeidelbergCement in sales terms. The group was coy on how it actually managed to boost its sales so fast in a country where cement sales only rose by 5% in the first half of the year. Yet, it did admit to slowing sales growth in West China in the first half. A 5% fall in fuel and power costs no doubt helped its profit margins also. Notably, its overseas sales nearly doubled to US$143m in the first half of 2019 or 2% of its total revenue.

HeidelbergCement’s financials were solid, with growing revenue, earnings and profits. This was balanced by falling cement and clinker sales volumes. Cement sales fell in all group regions with the exception of North America. However, it was able to boast about ‘positive results in all group countries in the third quarter except for Egypt’s. Company head Bernd Scheifele summarised the sitaution by saying that, “price increases and strict cost discipline more than compensated for the slightly weaker demand for our products in the third quarter.”

Of the building materials companies with larger revenues, Cemex has had a tougher time of it so far in 2019 with declining sales, cement volumes and earnings. In part this has been due to a poor market in Mexico, although chief executive officer (CEO) Fernando A Gonzalez said that the group believed that weak demand for their products was ‘bottoming out’ and that a new infrastructure program made them hopeful looking forward. The group’s Middle East and Africa region also caused concern with a 3% drop in sales volumes in the Philippines, one of its key South-East Asian territories.

Things to note from the smaller producers featured here are as follows. India’s UltraTech Cement says it is the world’s third largest cement producer outside of China. With an installed production capacity of over 100Mt/yr in India this may well be the case. The vast majority of this is based at home in India. Alongside this, its financial figures seem buoyant as it continues to integrate new acquisitions such as Century Textiles and Industries into the business. By contrast Africa’s Dangote Cement has endured mixed fortunes so far 2019 with a modest rise in cement sales volumes and small drop in revenue and a larger decline in earnings in both Nigeria and operations elsewhere in Sub-Saharan Africa. At home this has been attributed to a subdued economy and elsewhere it has pointed to poor markets in South Africa, Zambia and Ethiopia. On the positive side though promotional marketing activity at home in Nigeria helped support an improved third quarter.

Summarising all of this is difficult given the very different nature of these large companies. Generally most of these companies are growing. One takeaway to consider is the emergence of two types of cement producer models at the top end: multinationals and large-local players. In recent years the rise of the large-local player has been a story mirroring the economic prominence of China and India. One can also see it in places like Indonesia and Brazil. The worry is that these kinds of companies are more exposed to regional economic risks than multinational ones. Yet in 2019 some multinational cement producers are also having problems. Whatever else happens, if fears of a new global recession come true, then these larger scale producer models will be tested, possibly to breaking point. 

Semen Indonesia’s third quarter results this week give us a reason to look at one of the world’s largest cement producing countries, Indonesia. As the local market leader, Semen Indonesia’s financial results have been positive so far in 2019 following its acquisition of Holcim Indonesia at the start of the year. Analysts at Fitch noted that gross margins for Semen Indonesia and its rival Indocement grew in the first half of 2019 as coal prices fell and cement sales prices rose.

Sales volumes, however tell a story of local production overcapacity and a move to exports. Domestic sales volumes fell by 2.05% year-on-year to 48.8Mt in the first nine months of 2019. Cement and clinker exports nearly compensated for this by rising by 15.4% to 4.8Mt. This is brisk growth but slower than the explosion of exports in 2018. Semen Indonesia’s local sales from its company before the acquisition fell faster than the national rate at 4.9% to 18.7Mt. The new sales from Solusi Bangun, the new name for Holcim Indonesia, partially alleviated this. It’s been a similar story for HeidelbergCement’s Indocement. Its sales revenue and income have risen so far in 2019. At the mid-year mark its sales volumes fell by 2.3% year-on-year to 29.4Mt.

Graph 1: Indonesian cement sales, January – September 2019. Source: Semen Indonesia.

Geographically, Indonesia Cement Association (ASI) data shows that over half of the country’s sales volumes (56%) were in Java in the first half of 2018. This was followed by Sumatra (22%), Sulawesi (8%), Kalimantan (also known as Indonesian Borneo, 6%), Bali-Nusa Tenggara (6%) and Maluku-Papua (2%). By cement type the market is dominated by bagged cement sales. It constituted 74% of sales in September 2019. The main producers have been keen to point out growth in bulk sales as its share has increased over the last decade.

Graph 2: Indonesian cement sales by type, 2010 – 2019. Source: Semen Indonesia/Indonesia Cement Association.

Previously the main story from the Indonesian market has been one of overcapacity and this has continued. It had a utilisation rate of 70% in 2018 from production volumes of 75.1Mt and a capacity of 110Mt, according to ASI data. This was likely to have been a major consideration in LafargeHolcim’s decision to leave the country and South-East Asia (see GCW379) with no end in sight to the situation in the short to medium term. At the end of 2018 it felt like consolidation was in progress following this sale and the reported sale of Semen Panasia. So far though this has been all and perhaps the upturn in the second quarter might buy the producers more time.

As mentioned at the start, another aspect of the Indonesian market deserving comment is that it is one of the first countries with a large cement sector where a Chinese company has made a significant entry. Conch Cement Indonesia, a subsidiary of China’s Anhui Conch, became the third largest producer following the acquisition of Holcim Indonesia. Semen Indonesia and Indocement control 70% of local installed capacity across both integrated and grinding plants with 51Mt/yr and 25.5Mt/yr respectively.

Conch Cement Indonesia is the next biggest with 8.7Mt from three integrated plants and a grinding unit. It’s in a tranche of three smaller producers locally, along with Semen Merah Putih and Semen Bosowa. Fitch also picked up on this in a research report on the cement sector published in August 2019. It pointed out that, although Holcim Indonesia and Indocement had gained pricing power through their leading market share, this is being eroded by local producers owned by Chinese companies.

Depending on how you look at it, Indonesia has the ‘fortune’ to be only the second largest producer in South-East Asia, after Vietnam. China, the world’s largest producer, is not too far away either. As can be seen above this can be a mixed blessing for local producers as the market changes. Overcapacity abounds, a major multinational has moved out, a local firm has consolidated the market as a result and Chinese influence grows steadily. Indonesia could well be an example of things to come for other markets.

The Australian cement supply spat calmed down a little this week with the announcement that Wagners Holdings has agreed to resume the supply of cement products from its Pinkenba grinding plant in Brisbane to Boral. Legal proceedings are still on-going with a trial date set at the Supreme Court of Queensland in late November 2019.

The argument blew up publicly in March 2019, when Wagners said it had suspended its cement supply to Boral for six months. Wagners has a cement supply agreement with Boral whereby it supplies cement on an annual basis for a fixed price. However, Boral informed Wagners that it had found cheaper cement from a ‘long established’ supplier in South East Queensland. Local press speculated that this ‘long established’ supplier was Cement Australia, the joint venture between LafargeHolcim and HeidelbergCement. Wagners then had the choice to either match the lower price or suspend its supply. The disagreement took the legal route as the parties failed to reach an agreement. Wagner says that its cement supply agreement with Boral ‘remains binding on both parties’ until 2031.

Wagners later reported that it expected the suspension to cost it around US$7m in 2019. The deal with Boral constituted about 40% of its cement sales volumes. Its overall revenue grew year-on-year in its 2019 business year to the end of June 2019 but its cement sales volumes fell. Its earnings also fell. This was blamed on higher activity in lower margin areas such as contract haulage and fixed plant concrete, and delays in major infrastructure project work in South-East Queensland.

Boral, meanwhile, suffered from falling revenue and earnings from its Boral Australia subsidiary in its financial year to June 2019 due to a slowing construction market. Notably, its cement sales revenue rose by 7% due to ‘favourable’ pricing, higher volumes and cost-saving programs. It didn’t say whether the cost cutting included sourcing cement from a different supplier! All of this though was counteracted by lower contributions from its Sunstate joint venture (JV) with Adelaide Brighton and higher fuel and clinker costs.

All of this is fascinating because these kinds of disputes usually remain out of the public eye. The large size of Wagners’ cement supply deal with Boral meant that when it was threatened it likely had to tell its shareholders due to the potential financial impact. Whether Boral can wriggle out of the contract is now a matter for the courts.

The broader picture is that even though Boral Australia’s cement division seemed to be growing in its 2019 financial year it was still trying to reduce its costs in the face of a decelerating construction market. Added to this, the companies hold both a supplier and a competitor relationship. On the production side Boral operates an integrated plant at Berrima in New South Wales (NSW), a grinding plant at Maldon, NSW and another grinding plant in its Sunstate JV at Brisbane, Queensland. Wagners runs its own grinding plant at Pinkenba, Queensland. Both companies operate concrete plants. This is not unusual for a concentrated industrial sector like cement but it creates problems for the regulators. Note that, also this week, the Australian Competition and Consumer Commission was reportedly paying attention to the links between Barro Group and Adelaide Brighton. Barro owns a 43% stake in Adelaide Brighton but the authorities are concerned about a possible overlap in the two companies’ roles as suppliers of cement, concrete and aggregates. Any slowdown in construction in Australia seems likely to heighten these kinds of issues.

Interesting news from Holcim Mexico this week with the announcement that it is planning to invest US$40m towards building a 0.7Mt/yr grinding plant in the state of Yucátan. The unit will be supplied with clinker from Holcim Mexico’s Macuspana and Orizaba integrated cement plants. This follows the news in August 2018 that Elementia’s cement company, Cementos Fortaleza, had started to build a new 0.25Mt/yr grinding plant at Merida in Yucatan. That project has a budget of US$30m.

These two projects offer a contrast to comments made by the head of Cemex Mexico, Ricardo Naya Barba, who was lamenting the state of the market to local press at the start of the month. He said that sales volumes of cement, concrete and aggregates had fallen by 12 – 15% in the first seven months of 2019. He blamed the decline partly on falling national infrastructure investment. This marked a slight improvement on Cemex’s Mexican results for the first of 2019 where sales, sales volumes and earnings were all down. At this time as well as slowing infrastructure projects the situation was also attributed to a residential sector hit by the slower-than anticipated start of the new programs.

Elementia’s Mexican cement business, Cementos Fortaleza, reported a similar picture in the second quarter of 2019. Its net sales fell by 6% year-on-year to US65.4m from US$69.7m. This was attributed to a market contraction affecting all of Elementia’s businesses in the country, as well as the redefinition of its core products for the Building Systems business unit. Earnings fell also and this was further attributed to mounting energy and freight costs. Cementos Moctezuma faced many of the same issues. Its cement sales fell by 13% to US$147m in the second quarter of 2019. It is expecting a similar picture for the remainder of the year.

Data from the National Institute of Statistics and Geography (INEGI) shows that the value of cement sales in Mexico fell by 7% year-on-year to US$1.21bn in the first quarter of 2019 from US$1.30bn in the same period in 2018. Cement sales volumes fell by 8.2% to 10.9Mt from 11.9Mt. This was the lowest figure since 2014.

The one larger Mexican cement producer that doesn’t seem to have been overly troubled so far in 2019 is Grupo Cementos de Chihuahua (GCC). Earlier in the year the company was considered to be the Mexican cement producer most at risk from potential US tariffs due to higher reliance on exports than its competitors. Yet Mexico’s National Chamber of Cement (CANACEM) publicly said that that it didn’t consider US tariffs a significant barrier to the local industry. GCC reported growing net sales and cement sales volumes in the second quarter of 2019 due to industrial warehouse construction, mining projects and middle-income housing at the northern cities.

Two new grinding plants in a particular region of Mexico don’t necessarily reflect the state of the country’s industry as a whole. Yucatan may suit the grinding model due to a lack of raw materials or strong shipping links. The region may also be defying the gloomy national state of affairs in the construction sector. Alternatively, producers may be chasing low-cost and low-risk expansion plans in a tough market. The grinding model wins out over the clinker producing one in this scenario. In the wider picture in August 2019 Cemento Cruz Azul ordered two petcoke grinding mills from Germany’s Loesche and Austria’s Unitherm Cemcon said it had been awarded the supply of an MAS DT burner to an unnamed cement plant. These suggest that, although the sector may be having a bad year so far, things are expected to get better.