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Should LafargeHolcim sell in Indonesia?
Written by David Perilli, Global Cement
11 July 2018
Holcim Indonesia was forced to refuse to comment on rumours this week that it might be selling up. Local business press in the country was running stories that parent company LafargeHolcim was in the early stages of a possible divestment. Although the stories seemed pretty spurious, Holcim Indonesia’s share price rose on the news.
The situation is reminiscent of an anecdote attributed to the former US president Lyndon Johnson by Hunter S Thompson about making a political opponent deny a ridiculous rumour. If they don’t respond then it looks like they have something to hide and if they do engage with a denial then they look silly anyway. In Holcim Indonesia’s case, as soon as the cement producer actually refused to comment the story gained more credence.
Part of the reason why the Holcim Indonesia story has legs is because LafargeHolcim has said it plans to make divestments of Euro1.7bn in 2019. There is rampant production overcapacity in Indonesia. The territory is exactly the kind of place you might expect LafargeHolcim to consider leaving. As recently as early in 2017 Semen Indonesia, the main producer, was showing the gaping production capacity – consumption gap in its investor presentations with no catch-up until at least 2020. Romauli Panggabean, an analyst for Bank Mandiri, was even more blunt in a forecast for the Jakarta Post in mid-2016. She ran a model predicting that if production capacity doubled to 150Mt/yr by 2017 then it would take the market until 2032 to catch up with an assumed 7% construction growth rate. Panggabean’s simulation seems to massively overstate capacity growth in the country as Global Cement Directory 2018 data places integrated (clinker) plant capacity at 79.3Mt/yr. By comparison the Indonesia Cement Association (ASI) placed cement production capacity at 108Mt/yr in 2017. Both of these figures are far below 150Mt/yr.
Graph 1: Domestic and export sales in Indonesia, 2013 – 2017. Source: Indonesia Cement Association.
The graph above sets the scene for the capacity wobble worries in 2016 and 2017 as sales growth faltered. It picked up in 2017 with domestic sales rising by 7.6% year-on-year to 66.4Mt. Sales so far in 2018 support this trend, with domestic sales growing by 6.4% to 21.06Mt for January to April 2018. The other trend to note here has been the explosion in exports in recent years with a near doubling to 2.93Mt in 2017 and an accelerated continuation of this trend so far in 2018.
Holcim Indonesia operates four integrated cement plants at Narogong in West Java, Cilacap in Central Java, Tuban in East Java and Lhoknga in Aceh with a production capacity of 15Mt/yr. In addition it runs two cement grinding plants at Ciwandan in West Java and Kuala Indah in North Sumatra respectively, although this last unit is currently mothballed. It also owns cement terminals in Lampung and a new one in Palembang in Sumatra.
LafargeHolcim owns an 80% share of Holcim Indonesia, its main subsidiary in the country. In 2017 Holcim Indonesia described the local situation as one of ‘hyper competition’ due to market overcapacity. Production capacity was over 100Mt/yr but consumption was only 70Mt/yr. Its overall cement sales volumes including exports rose by 7.8% year-on-year to 11.1Mt in 2017 from 9.6Mt in 2016. But despite this its net sales fell slightly to US$953m due to falling prices as new competitors entered the market. Its earnings before interest, tax, depreciation and amortisation (EBITDA) also fell. The positioning of its production units is relevant in Indonesia given the concentration of sales in Java but the faster growth in sales rates and higher competition in other regions.
Both of the other market leaders, Semen Indonesia and Indocement, reported similar problems in 2017 but they don’t appear to be looking to make cuts. Put it all together in LafargeHolcim’s case and you have a group-level desire to sell off parts of the business, overcapacity locally with no end in sight in the short to medium term, falling earnings and profits and some hope that consumption is heading back to its normal brisk rate. All of this seems to suggest that now would be the perfect time for it to exit Indonesia if it decided to. So, if LafargeHolcim isn’t already soliciting offers then maybe it should be. The tough call would be deciding whether to leave the country altogether or to just sell a share of the business. Leaving totally would significantly reduce the group’s presence in South-East Asia and reduce its profile as a truly global player. However pride and money-making are not the same thing. In the meantime though, the only people making a fortune will be the speculators.
Update on Kenya
Written by David Perilli, Global Cement
04 July 2018
Congratulations are due to Bamburi Cement this week after the completion of a new production line at its Nairobi grinding plant. The new US$40m line will add 0.9Mt/yr of cement production capacity to the unit, bringing its total to 2.4Mt/yr when it is commissioned towards the end of 2018. Together with the subsidiary of LafargeHolcim’s integrated plant at Mombasa the company will have a production capacity of 3.2Mt/yr.
Graph 1: Cement production and consumption in Kenya 1999 - 2017. Source: Kenya National Bureau of Statistics.
As Graph 1 shows above it is an interesting time to open new production capacity in the country. Both production and consumption fell for the first time since 2000 in 2017. Production fell by 8.2% year-on-year to 6.2Mt in 2017 from 6.7Mt in 2016 and consumption fell by a similar amount. The change was blamed on reduced demand for building materials in the construction sector occurring at the same time as a fall in the value of building plans approved in 2017. The country also suffered political uncertainty as its general election in August 2017 was subsequently annulled and repeated in October 2017.
With Global Cement Directory 2018 data giving Kenya a cement production capacity of 5.2Mt/yr from five producers and at least four grinding plants with a capacity of 4.6Mt/yr it looks like the country is in an overcapacity phase. The question for producers like Bamburi Cement is whether 2017 is just a temporary blip or not. After all, as per usual for many African countries, the demographic pressure for development to happen and per capita cement consumption to grow seems ineveitable.
Bamburi Cement is not alone in betting on growth. Also this week the Kenya Port Authority recevied four hoppers from the UK’s Samson for the Port of Mombasa. The hoppers will be used to import clinker, coal and gypsum at the site. Earlier in February 2018, National Cement opened a 1.2Mt/yr integrated plant in Kajiado County. On the larger scale Nigeria’s Dangote Cement has been preparing to open two cement plants, near Nairobi and Mombasa respetively. However, these project were reported delayed to 2021 in its annual report for 2016 around the time the company faced problems at home due to a local financial recession.
Meanwhile local producers have faced pressure so far in 2018. Bamburi Cement reported a 6% fall in turnover to US$357m in 2017 that it blamed on the weather, the elections and lower construction activity. Other producers have had a harder time of it with the East African Portland Cement (EAPC) reportedly having to rely on a land sale to remain solvent in April 2018. ARM Cement has also been forced to sell assets to remain operational. Its loss for 2017 more than doubled to US$55m. Amid the problems the UK-government investor CDC Group, which holds a 41% stake in the company, replaced board members of the company in a likely bid to shore up the situation.
It’s into this kind of situation that Bamburi Cement has opened its new plant. On the plus side though it is a grinding plant so it should be able to maximise the company’s use of clinker from either within the country or from imports from other LafargeHolcim operations elsewhere. In its press release for the new unit the company pinned its hopes on anticipated growth in domestic housing and infrastructure projects, backed by government schemes for affordable housing and roads. With the rating agency Moody’s having issued a report this week about the relative reslilence of the Kenyan economy despite recent shocks such as last year’s elections, Bamburi Cement may yet have the last laugh.
Taking the industry pulse at Hillhead 2018
Written by David Perilli, Global Cement
26 June 2018
Hillhead 2018 is on this week and where better to capture a feel of the UK’s quarrying and construction industries? For those that don’t know, Hillhead is a biennial show that takes place in a quarry in Derbyshire. The show bills itself as the largest quarrying, construction and recycling event in the world. A large scale UK show gives us the opportunity to look at the local cement industry and we did exactly that in the June 2018 issue of Global Cement Magazine with Edwin Trout’s feature on the UK cement sector in 2017 and 2018. Following on from that article we’ll pick up a few threads.
Graph 1: Domestic cement production in the UK, 1996 - 2016. Source: Mineral Products Association (MPA).
Cement production in the UK fell by 5Mt/yr during the financial crisis of 2007 - 2008. Since then, as Graph 1 shows, production has been growing almost uniformly. However, it may have reached a plateau in 2017, with the major producers complaining about a weakened market due to Brexit uncertainty.
Main points from a news angle are the rise of the Breedon Group with its acquisition of Ireland’s Lagan Cement in April 2018, investments at Hanson’s Padeswood cement plant and Tarmac’s Dunbar cement plant and a fairly static market reported by the major producers. Alongside this, Ireland’s Ecocem opened a terminal in Sheerness in June 2017 and, more recently, has just inaugurated its slag grinding plant on the other side of the English Channel at Dunkirk.
The decision by Breedon to straddle an impending UK-European Union (EU) border seems wise with Hanson’s parent company HeidelbergCement actively blaming Brexit for market uncertainty in the UK. The rise of Ecocem, a slag cement grinder and distributor, also seems to suit the atmosphere with its smaller, more nimble operation than a clinker producer. It’s into this situation that Hanson is reusing a mill from Spain for its Padeswood project and Tarmac is buying its mill from Cemengal, a manufacturer known for making modular mills that can be moved after installation if so desired.
Banging on about Brexit, and indeed Brexit uncertainty, can’t last forever and once clarity appears then the building industry can focus on various pressing issues. One is the country’s lack of residential housing supply. One possible solution for this is a new national planning policy. The government finished a consultation period in May 2018 for the National Planning Policy Framework (NPPF) and industry bodies like the Mineral Products Association (MPA) have been making their views known. The MPA worries that that the proposed changes will weaken the mineral planning system and threaten the replenishment of aggregate and other mineral reserves. It argues that to secure the essential minerals required to build all those new houses the government needs an, “...efficient and effective mineral planning system with up to date plans, well-resourced planning departments and good data, which are prerequisites, as is appropriate capacity and capability in the ministry to ensure the system is planned, monitored and managed.” Detractors may point out that once the NPPF gets sorted we can all get on with the job of actually, like, building things but, as ever, the MPA has its part to play in the process.
Another indicator for the resumption of ‘business as normal’ might be the number of exhibitors at a trade show like Hillhead. The oranisers say that the exhibitors have grown by 10% in 2018 from 2016. With a heatwave forecast, the group stages of the football World Cup continuing and live demonstrations ongoing there are worse places to be to ponder the state of the industry. Come and find Global Cement at our stand (PC45) in the main pavillion at Hillhead 2018 and tell us what you think.
PPC faces Congolese haircut
Written by David Perilli, Global Cement
20 June 2018
South African cement producer PPC reported this week that its annual profits rose due to ‘strong’ performance in Rwanda and Zimbabwe. Unfortunately it had no such luck in the Democratic Republic of the Congo (DRC) where its new plant near Kimpese in Kongo Central province has suffered from political instability, lower cement demand and subdued selling prices.
As the group went on to describe the local market as ‘challenging’ with production capacity above market demand. Research from the International Finance Corporation (IFC) suggests that the country will only reach a cement supply deficit by 2022. On top of this the country’s elections have been delayed from December 2017 to December 2018, creating uncertainty in the construction market and delaying infrastructure projects. Following an impairment assessment PPC took an impairment cost of US$14m on the unit. Or in other words it concluded that the value it might gain from selling its new 1.2Mt/yr plant was less than the estimated US$280m it cost to build it.
This outcome is depressing given that the plant was only commissioned during the last quarter of 2017 and the fundamental need for development in the DRC. The unit is run by local subsidiary PPC Barnet DRC, a joint venture 69% owned by PPC, 21% owned by Barnet Group, with the remaining 10% owned by the IFC. The plant was 60% debt funded by the IFC and Eastern and Southern African Trade and Development Bank. In January 2018 PPC agreed with its lenders to reschedule debts from the project until 2020. Then in April 2018 it was reported that PPC was in talks with China National Materials (Sinoma) over selling its stake in the plant. PPC chief executive officer (CEO) Johann Claassen said that the deal was dependent on the price and the on going merger between Sinoma and China National Building Material (CNBM).
With the merger between the Chinese cement giants close but yet to be confirmed, PPC remains stuck with a cement plant it’s losing money on. No doubt also the Chinese producers will aim for a bargain on the unit, especially since Sinoma built the plant. This also raises one potential method how the merged Sinoma-CNBM might expand internationally by scooping up plants it builds that have subsequently gotten into financial trouble.
All in all it’s a cautionary tale about how fast cement companies are able to expand in Sub-Saharan Africa. The demographics are enticing to investors but if the market isn’t there or if competitors get there first then building cement plants can go wrong. A 1.8Mt/yr joint-venture plant run by Lucky Cement started up in late 2016 also in the Kongo Central province. On top of this neighbouring countries have targeted DRC for exports. A local ban on imports of cement was implemented in mid-2017 and reportedly renewed in the west of the country for another six months in February 2018. However, Nigeria's Dangote Cement said in its first quarter results for 2018 that its operations in the Republic of Congo were targeting exports at the DRC. As PPC has discovered, investing in Sub-Saharan African has its risks.
Could Knauf corner the market in gypsum for cement plants?
Written by David Perilli, Global Cement
13 June 2018
Germany’s Knauf announced this week that it is set to buy North American wallboard producer USG. The news is relevant for the cement industry because both companies are prominent gypsum producers. They are leading gypsum wallboard producers, with assets around the world, including gypsum mines. Although their focus is on wallboard a significant proportion of raw gypsum ends up being used in cement production. Hence, the takeover of a major North American producer by a European one deserves attention.
First a little background on the deal between Knauf and USG. The takeover has been a particularly acrimonious one at times, with both parties throwing strong language at each other and, although it has avoided being a hostile takeover, at times it seemed close. The deal became public in March 2018 when USG publicly said that it had rejected a bid of US$5.9bn from Knauf. It described the offer at the time as ‘wholly inadequate.’ Knauf then fought back by sending a letter to USG’s shareholders urging them to vote against director nominees at the next annual general meeting. Knauf owns 10.5% of USG’s shares. Then, in April 2018, Warren Buffett, the chief executive officer of Berkshire Hathaway, USG’s largest shareholder with a 31% stake, swung behind Knauf’s scheme. At this point it was revealed that Buffett had facilitated the initial talks between USG and Knauf. He even described the investment in USG as ‘disappointing.’ Buffett’s public move against USG in April 2018 signalled the death knell to USG’s independence. The US$7bn deal between Knauf and USG was agreed and announced on 11 June 2018. The transaction is expected to complete in early 2019.
USG operates 12 mines or quarries in North America. It also has other assets around the world including three gypsum mines in Oman, Thailand and Australia respectively that it runs in conjunction with its USG Boral joint venture in the Middle East and Asia. By contrast Knauf held over 60 quarries in 2014 with a focus on Europe.
The interesting implications from the merger may arise from what Knauf plans to do in certain regions. North America for example saw a reduction in raw mined gypsum production since the financial crash in 2008 as building markets suffered. Rising levels of synthetic gypsum production from coal power plants partly compensated for this. Buying USG gives Knauf a truly global base of natural gypsum production with which it can supply both itself and any cement customers. Knauf has a real shot of cornering the market in raw gypsum production provided it can keep the price low enough to stop enough rival mines being opened. Knauf might decide, as the construction market continues to recover in the US, to bring in the extra gypsum from elsewhere if it proved cost effective. Hooking up USG-Boral gypsum resources in Asia with Knauf’s might have implications for cement producing countries that lack sufficient gypsum supplies such as India. Oman is building itself up as the major gypsum exporter to Asia and USG-Boral is a part of it, with major gypsum resources in the country.
In terms of the cement industry it seems likely that there will be no immediate shakeup of gypsum supply. Long term supply contracts with either USG or Knauf should remain as they were and will stransfer to the new enlarged company. Knauf’s main market for gypsum is to use it to make wallboard but gypsum use for cement is a significant market as well. The ‘fun’ starts when or if Knauf starts to reorganise its supply chains. As its focus is on the wallboard business there may be implications thereafter for cement users. And since Knauf’s only major competitor at scale is Saint-Gobain, the market has just shrunk.