Analysis

With a good number of the financial results published by the non-Chinese multinational cement producers for the first half of 2019, it is now time for a roundup. Graphs 1 and 2 below lay some of the basics with the general sales revenue and cement production volume trends.

Graph 1: Sales revenues from large multinational cement producers in the first half of 2019 and 2018. Source: Company reports.

Graph 2: Cement sales volumes from large multinational cement producers in first half of 2019 and 2018. Source: Company reports.

This is only part of the picture as the larger companies had various complications. For example, LafargeHolcim’s apparent falling revenue and sales volumes is mainly due to its massive divestments in South-East Asia. On a like-for-like basis its sales and sales volumes of cement rose. Its recurring earnings before interest, taxation, depreciation and amortisation (EBITDA) better illustrated this with a rise of 7.2% year-on-year in real-terms to Euro2.41bn in the first half of 2019 from Euro2.25bn from 2018. The company didn’t have it all its own way though with falling cement sales volumes in Asia despite the divestment and poor growth in its Middle East Africa region.

By contrast HeidelbergCement reported growing sales but its earnings and profits were down. Its profit fell by 33% to Euro291m from Euro435m. This was blamed on the group’s sale of its Ukraine subsidiary in April 2019. The operations were sold to Overin Limited, part of Ukrainian investment company Concorde Capital Group, for Euro13m. HeidelbergCement said that the divestment resulted in a loss of Euro143m. Aside from this, as Bernd Scheifele, the chairman of the managing board of HeidelbergCement, explained, positives in markets in Asia, Western and Southern Europe compensated for weaker business in North America and the Africa-Eastern Mediterranean Basin Group area.

Cemex has a tougher time of it than its larger rivals due its greater reliance on American markets. Slow starts to infrastructure projects were blamed in Mexico, poor weather hit earnings in the US and problems occurred further south too. Luckily Europe was strong for the company with lots of good news areas. It wasn’t enough though as Cemex’s sales fell by 4% to US$6.72bn from US$7bn and its operating EBITDA dropped by 11% to US$1.21bn from US$1.36bn.

As for the other companies covered in the graphs, Buzzi Unicem and Titan Group prospered due to the US market. The former described its US activity as ‘lively.’ However, it admitted that its sales growth there was mainly caused by falling imports in the face of weak domestic demand and ‘considerable production and logistical difficulties’ in June 2019 caused by flooding of the Mississippi river. Titan, meanwhile, caught a well-deserved break after recent years with growth also in Greece and Southeastern Europe. Vicat managed to stave off a decline in sales due to poor markets in Turkey, Switzerland, Indian and West Africa through its acquisition of Brazil’s Ciplan in late 2018. Yet, its earnings and cement sales volumes fell anyway.

Dangote Cement once again suffered at home in Nigeria, while its Pan Africa business grew. Trouble at home was pinned on lower volumes, price discounting, higher input and distribution costs and higher fuel and power costs in the first half of 2019. Of more concern, earnings fell in Pan Africa too in the first half due to market conditions in South Africa and Zambia. As ever though Dangote Cement’s diversity in Sub-Saharan Africa should see it through. Finally, Semen Indonesia continued to ride high as its sales increased by 23% to US$1.17bn due to its absorption of LafargeHolcim’s assets. Unsurprisingly, its sales volumes grew at a similar rate, to just below 13Mt in the first five months of 2019. Yet trouble may be store ahead as its local sales fell by 7% in this period.

Other major producers omitted here include Ireland’s CRH and India’s UltraTech Cement. Both are set to release their results later in August 2019 and will make for essential reading as the market conditions so far in 2019 become clearer. The latter in particular will be worth watching if a report by Indian credit agency CARE Ratings out this week is correct. It has forecast production capacity growth of 120Mt by 2030 in India. UltraTech Cement is perfectly poised to benefit from this.

The agreement this week by Ciments du Maroc to buy two production projects from Anouar Invest Group marks a consolidation phase in the local market. The subsidiary of Germany’s HeidelbergCement has struck a deal to acquire Atlantic Cement’s 2.2Mt/yr integrated plant project in Settat province and the Les Cimenteries Marocaines du Sud (CIMSUD) 0.5Mt/yr grinding plant at Laâyoune, which was only recently commissioned.

Graph 1: Cement sales and production capacity in Morocco, 2013 - 2018. Source: L’Association Professionnelle des Cimentiers (APC) & Global Cement Directory 2019.

Graph 1 gives an impression of the market conditions the cement producers have faced over the past five years. Cement sales hit of a high of 16.1Mt in 2011 following increasing growth in the 1980s, 1990s and 2000s. Cement sales have since wilted, while production capacity has increased pushing down the capacity utilisation rate. The capacity utilisation dropped below 55% in 2018, using Global Cement Directory 2019 data, although other sources have placed it at around 60%.

Local production is dominated by two multinational producers, LafargeHolcim (LafargeHolcim Maroc) and HeidelbergCement (Ciments du Maroc), and a local company, Ciments de l’Atlas (CIMAT). CIMAT is owned by Addoha Group and it also operates Ciments de l'Afrique (CIMAF) with plants across West Africa. A fourth player, Asment de Témara, run by Votorantim, also operates an integrated plant.

LafargeHolcim Maroc’s turnover fell by 2% year-on-year to US$837m in 2018 along with a drop in consolidated net income of 18% to US$201m. It attributed this to lower sales and growing petcoke costs. Ciments du Maroc’s turnover fell slightly to US$419m but its net profit rose by 3% to US$108m. This followed a generally positive year in 2017 due to a strong second half of the year. It blamed the instability on a poor real estate market. CIMAT managed to raise its sales in 2018 by 6% to US$300m and its income by 1.4% to US$90.7m.

Anouar Invest Group’s decision to sell up may mean that its attempt to break into the cement market has failed. Who can blame it given the market conditions. Although, who knows, HeidelbergCement may have made it a great offer. HeidelbergCement’s gambit is also interesting because, in February 2019, it reduced its stake in Ciments du Maroc by 7.8% to 54.6% signalling less confidence in the country.

Yet, cement sales started to improve in the first quarter of 2019 with consecutive month-on-month improvements. Neither is Anouar Invest Group the last company to try its luck with cement production in Morocco. In June 2019 FLSmdith announced that TEKCIM had ordered a US$45m cement plant from it and Société Générale des Travaux du Maroc. The grinding unit has a production capacity of 1.2Mt/yr. Clearly, despite a market with production overcapacity, companies are sensing opportunities with the cement grinding model.

Two new stories from Algeria this week highlight a changing industry. Firstly, Groupe Industriel des Ciments d’Algérie (GICA) started marketing cement from its new Sigus integrated plant. The unit was commissioned earlier in the year. Secondly, clinker export figures for the sector show 10-fold growth year-on-year to a value of US$30m for the first five months of 2019.

Graph 1: Cement production and capacity in Algeria, 2012 - 2018. Source: Algerian National Office of Statistics, United States Geological Survey, Global Cement Directory 2013 - 2019. Estimates supplied for 2017 and 2018.

Graph 1 above depicts the moment that lots of new production capacity started to be ordered and then commissioned in 2017. The Global Cement Directory lists new plant projects as they are announced so the trend from 2016 to 2017 may not be as pronounced as it seems but the general destination remains the same. A Ministry of Industry and Mining report estimated that production capacity would reach 40Mt/yr in 2020. Consumption was reported at 26Mt in 2016.

To cope with this the cement industry in Algeria has been moving towards an export model over the last few years. Industry and government figures started to warn of an end to imports in 2016. This quickly flipped to prognostications of production overcapacity in 2017. This then became a stream of news stories about export operations from the local industries to places like West Africa. One consequence of this were problems for foreign exporters in Tunisia and Spain, for example, as the Algerian market was shut off. Indeed, it must have been satisfying for state-producer and market leader GICA to announce that it was exporting cement to Europe in 2018!

Notably the local market has no cement grinding plants, yet this too has started to change. In May 2019 Algematco Steel ordered a modular Ready2Grind MVR vertical roller mill from Germany’s Gebr. Pfeiffer. Target markets for the exports identified by the Ministry of Industry and Mining included neighbouring Mali, Libya, Mauritania and Niger. However, only two of these countries are accessible by sea. Unfortunately, Libya’s resurgence in violence since April 2019 is unlikely to help the export market. The other countries share land borders with Algeria but no rail links. An overland export operation to Niger from a plant near Adrar was reported in early 2019 but feasibility on a large scale seems unlikely given the distances involved.

LafargeHolcim said in its 2018 financial report that its net sales were down in its Middle East and African region due to price pressure and lower volumes in oversupplied markets, particularly in Algeria, Iraq and Jordan. Bloomberg reported in February 2019 that LafargeHolcim was considering divesting assets in the region. However, LafargeHolcim’s exit from Southeast Asia may have since bought it some financial breathing room.

With Algeria facing a production capacity gap of at least 10Mt/yr it seems likely that foreign-backed producers like LafargeHolcim will suffer despite potential in the local economy. Nationally, the race is on to see if the industry can bring its cement to the sea and find new export markets.

The UK waste fuels industry is facing potential challenge from changing Dutch environmental legislation. As part of its new National Climate Agreement the government in the Netherlands is considering imposing a tariff of Euro32/t on imported refuse-derived fuel (RDF) from the start of January 2020. It also wants to add a CO2 tax of Euro30/t on industrial emitters from the start of 2021.

This is bad news for the UK’s waste export market because 1.28Mt or 44% of exported waste fuels from the UK in 2018 went to the Netherlands. The majority of this was RDF. That was more than the next two biggest destinations, Sweden and Germany, combined. Andy Hill of Cynosure Partners summed up the UK situation in the June 2019 issue of Global Cement Magazine when he said, “The UK generates more far more waste than it has landfill, recycling and alternative fuel capacity combined. Quite simply, that’s why the UK exports and has become a leading force in Europe in terms of RDF and solid recovered fuel (SRF) exports.”

Graph 1: International Waste Shipments exported from England, 2011 – 2018. Source: UK Environment Agency.

Graph 2: Destinations of English waste fuels exports in 2018. Source: UK Environment Agency.

Waste management companies and their representative associations on both sides of the North Sea are not taking this terribly well. Robert Corijn, chair of the RDF Industry Group, a European waste organisation, summed up his members response by pointing out both the environmental cost of the new legislation and the risk to jobs in the UK. “RDF export forms a vital and flexible part of the UK’s waste management system, supporting over 6800 additional jobs in the UK, and saving over 0.7Mt/yr CO₂e emissions.” Robert Loos of the Dutch Waste Management Association made a similar response questioning what exactly the Dutch government was attempting to achieve.

Steve Burton, one of the directors of UK-fuels producer Andusia, went further by saying that the Dutch had proposed the move on environmental grounds because it has an incineration capacity of 8Mt/yr but produces only 6Mt/yr of waste. “So they think that by setting a tax it will significantly curtail how much gets incinerated in the Netherlands and thus produce less CO₂. All very sensible if you consider CO₂ in isolation in your own country. However, the Dutch Government aren’t looking at the bigger picture…” He then went on to point out that the RDF would then either get burnt elsewhere or landfilled resulting in no overall CO₂ emissions reduction. His further assessment, which you can read here, goes on to speculate amongst other things that Dutch Energy for Waste (EFW) plants could end up having to cut their gate fees by more than the import tariff in order to keep running. The state-owned EFW plants would then made a loss for the tax payers until the market stabilised. It should be noted that the data from the Environment Agency indicates that Andusia exported just under 38,000t of RDF to the Netherlands in 2018.

The more prickly issues of using waste fuels may prove tricky for Dutch legislators. Corijn’s distinction above of using CO₂e for the savings from RDF usage is important in this argument since burning RDF and alternative fuels, either for generating energy or making cement, still releases CO₂. In the European Union (EU) it’s the biomass fraction of RDF that’s important for the Emissions Trading Scheme (ETS) and the like because biomass emissions are counted as carbon-neutral. Remove this effect and the benefit of waste fuels are more to do with the waste hierarchy and reusing materials rather than leaving them to rot and release methane, a gas with a more potent global warming effect than CO₂. Despite this, at face value, importing rubbish and then burning it to release yet more unwanted CO₂ may seem nonsensical to the parliamentarians. Perhaps the other thing they should consider is that waste-derived fuels are manufactured products to set specifications. On-going arguments around the world about the developed world ‘exporting its rubbish’ frequently ignore this point.

Since the new Dutch National Climate Agreement is currently at the proposal stage it has a long way to go before it becomes law. First it has to be turned into legislation and then this has to be approved by the Dutch Parliament. As indicated so far the waste management industry will continue to fight its corner with vigour.

The big announcement from LafargeHolcim this week was the launch of its Industry 4.0 plan known as ‘Plants of Tomorrow.’ The scheme hopes to use automation technologies and robotics, artificial intelligence, predictive maintenance and digital twin technologies across the company’s entire production process. Operational efficiency gains of 15 - 20% are promised.

There wasn’t much detail beyond the use of the Siggenthal integrated cement plant in Switzerland as the ‘lighthouse’ of the scheme, where around 30 proof-of-concept technology ideas will be tested. One technology it did flesh out a little was its long-running Technical Information System (TIS). This follows the work between Holcim and the power and automation product supplier ABB. LafargeHolcim says that over 80% of its plants around the world use the TIS to provide data transparency at plant, country, regional and global level. It added that some country operations have more than a decade of historic technical data available. This last point is pertinent as the data could potentially be used to support the training of any machine learning algorithms the company might want to invest in. The building materials company also mentioned its LH Maqer subsidiary. This startup incubator was launched at the end of 2018.

LafargeHolcim appears to be playing catch up here with Cemex, which has steadily been promoting its own Industry 4.0 developments in recent years. Emphasis on ‘promotion’ here as only yesterday, the day LafargeHolcim made its big reveal, Cemex happened to release information about a recent roundtable in France that it participated in on digitisation and productivity in the construction sector.

Notably in March 2019, the Mexican multinational struck a deal with Petuum to implement its Industrial AI Autopilot software products for autonomous cement plant operations at its plants around the world in March 2019. Readers can find out more about Petuum’s work with Cemex in the June 2019 issue of Global Cement Magazine. In late 2017 Cemex too set up a division, Cemex Ventures, to engage with startups, universities and other organisations. Cemex has also been building its digital customer integration platform Cemex Go since around the same time.

One interpretation of Industry 4.0 is as a German-industrial approach to the so-called fourth or digital revolution pushed by Anglophone software companies. The idea of taking as much data from a production process, such as making cement, is enticing but the prospect of actually doing something useful with this tsunami of information is daunting. Typically algorithm techniques or predictive maintenance seem so far to focus on discrete parts of a process such as a finish grinding mill or final product logistics networks. Companies like Germany’s Inform focus on the latter for example and, incidentally, it celebrated its 50th anniversary this week.

If automated systems start making apparently nonsensical yet useful decisions across the whole raw materials, production and supply chains, then Industry 4.0 will reach its full potential. This moment, if it comes, will be analogous to the time IBM’s computer Deep Blue managed to beat chess grandmaster Garry Kasparov in the late 1990s. What’s more likely are automated systems that can perform consistently outside the human operator comfort zone edging up against hard physical process constraints.

Meanwhile, what will be interesting to watch here is whether LafargeHolcim will be able to leverage any advantage over Cemex by having more cement plants to pull data from. Before LafargeHolcim started selling off its south-east Asian subsidiaries it had more than three times as many cement plants as Cemex. If data really is more valuable than oil these days then starting late in the industrial digital arms race may not be as deleterious as one might first think.