Analysis

Fascinating information came out of LafargeHolcim last week as part of its Capital Markets Day 2018. The building materials company said it is expecting sales growth to slow in 2019 but earnings to grow. Jan Jenisch, the chief executive officer (CEO), said that the group was ‘aggressively’ moving forward in aggregates and ready-mix concrete. Alongside this, its recent divestment of its Indonesian operations was declared a ‘major’ milestone in focusing its portfolio and cutting down on debt.

Graph 1: LafargeHolcim’s major product lines by sales (%), 2015 – 2017. Source: Company reports.

Graph 1, above, gives a good idea of how LafargeHolcim has been changing its business. Cement sales as a percentage of total sales have been cut to 60% in 2017 from 67% in 2015. Ready-mix concrete and other sales (including asphalt) have risen to 26% from 19%. Aggregate sales have stayed at around 14%. If the world is making too much cement then LafargeHolcim is switching to concrete and balancing out its supply chain. Naturally, this was backed up in one of its investor presentations showing a more even split in the world building materials market between cement, concrete and aggregates. This fits with Jenisch’s background as the former head of Sika. That company manufactures a wide range of specialty chemicals for the construction and automotive industries.

That shift in focus could also be seen at the inaugural Global Cement and Concrete Association (GCCA) event in late November 2018 where concrete was very much the centre of attention from a sustainability angle. The main companies involved with the GCCA are vertically integrated ones and, by switching its product balance, LafargeHolcim seems to be moving in the same direction. In a sense this is a continuation of the synergy-seeking that was promised when Lafarge and Holcim merged in 2015.

Graph 2: Forecast cement demand growth in LafargeHolcim markets. Source: LafargeHolcim investor presentation 2018.

The other interesting question for LafargeHolcim is where next for growth? The graphic above shows a number of promising areas, including India and east Sub-Saharan Africa. Also, note the slowdown forecast for China. That renewed faith in India is timely this week given the expectation by the Indian Cement Manufacturers Association that cement demand growth in the country will rise by at least 10% in the current financial year to March 2019. If the momentum holds up after a strong first half then it will mark the fastest increase for the region since the market slowed down in 2011. LafargeHolcim doesn’t appear to be on course to grow significantly in India anytime soon but it has major ‘skin in the game’ in a promising market.

Another indication of the vibrancy of the Indian market also came this week from the Cement Sustainability Initiative (CSI) with the results of a status review from its low carbon technology roadmap (LCTR). The results were fairly good for such a large industry, with falling CO₂ emissions intensity, growing co-processing rates and a decreasing clinker factor. This report carried a sad note given that the work that the CSI does will be taken over by the GCCA in January 2019. However, if this is the last we’re going to hear from the CSI, then they’ve left on a high note.

Lastly, leafing through old financial reports may not be everybody’s idea of a good time but it does let one see how LafargeHolcim’s product mix has changed. It also gives one time to catch up with old faces. Like Bruno Lafont and Eric Olsen. Once again those two former executives popped up in the latest twist of the on going Lafarge Syria legal case as a group of Yazidi women have applied to become ‘civil parties’ in the case. Whether the war crimes inflicted upon the Yazidis can be pinned on Lafarge Syria remains to be seen. Yet, for all of the LafargeHolcim’s business reorganisation, its predecessor’s conduct in Syria continues to make headlines. However much progress the company makes in turning around its fortunes, if it can be, this will continue to overshadow everything. Once a line is drawn under the affair then LafargeHolcim can move on properly.

Chief executives from over 30 companies attended the Global Cement and Concrete Association (GCCA) inaugural event last week in London. Its first president Albert Manifold, the chief executive officer (CEO) of CRH, laid out the line by saying that, “For the first time we have a global advocacy body.” He followed this up by emphasising that ‘our product’ is the most used man-made product in the world. Just like the Cement Sustainability Initiative (CSI), the body the GCCA is partly-replacing, it is a CEO-led organisation. The target is very much about giving a global voice to the cement and concrete industries and the vertically integrated companies that produce these products.

Along with the head of CRH, the leaders of LafargeHolcim, HeidelbergCement, CNBM, Votorantim, Buzzi Unicem and Eurocement, amongst others, were all on the attendance list too. That kind of representation gave the event a charged air and a real sense of intent. At present the association says it represents 35% of global cement production and its aim is to reach 50%. That compares to the 30% base that the CSI had.

Representatives from some major cement associations were also present, including Europe’s Cembureau, the Federación Interamericana del Cemento (FICEM), the Canadian Cement Association and the VDZ. The only thing stopping the US Portland Cement Association being there was reportedly the Thanksgiving holiday. Although not comprehensive, that kind of representation suggests serious interest from the regional cement associations. The word from the GCCA CEO Benjamin Sporton was that the GCCA is here to provide a global level of coordination to the advocacy and sustainability side of the industry dealing with global organisations like the United Nations (UN), development banks, other associations and non-government organisations (NGOs).

How this will work in practice has yet to be seen, but at the very least, the GCCA can take over the work of the CSI and run with it. The word from the attendees we spoke to was uniformly positive for the association. It was seen as a long-overdue move to finally give the industry some sort of uniform voice at a global scale. In this sense it is catching up with similar bodies in industries like wood and steel. One benefit from moving from the CSI to a full advocacy organisation is that the industry can actually talk about the good things it does rather than being limited to sustainability and environmental data reporting. It seems like a small change in focus but it’s a big shift in mind-set.

A cynic might suggest that the exercise is one of a dirty industry trying to wrest the Overton window, or window of public discourse, back from legislators facing mounting environmental pressure. The latest UN Emissions Gap Report for 2018, for example, reported this week that CO₂ emissions rose in 2017 after four consecutive years of decline. This is the latest environmental report in a long line pointing out bad news. Yet, the GCCA’s unwritten mantra, that concrete improves lives, is sound. Somebody or something needs to link it all up. That somebody might just be the GCCA.

A review of the inaugural annual general meeting and symposium of the GCCA will be published in a forthcoming issue of Global Cement Magazine.

A couple of long-running news stories popped up this week, led by the Portland Cement Association’s (PCA) latest forecast for the US market. Chief economist Ed Sullivan and the Market Intelligence Group predict slowing cement consumption growth to 2020 as the recovery period ends following the financial crash in 2008. The background to this is an expected rise in interest rates dragging on the construction market, a limited boost from the Trump administration’s tax cuts and rising debt levels hitting federal infrastructure spending.

This marks an abrupt turnaround from the PCA’s April 2018 forecast in which potential federal infrastructure spending was anticipated to kick in towards the end of 2019 creating 4% growth in 2020. To give the PCA credit, it did say at the time that this was contingent on a couple of key steps, including passage of an infrastructure bill, federal and state paperwork, bid letting and review and finally, contract awards leading to construction. Following the US mid-term elections in early November 2018 the prospect of an infrastructure bills seems remoter than before given the political differences between the US House of Representatives and the Senate. This may have been the final straw for the PCA and it adapted its forecast accordingly.

Graph 1: Cement shipments in the US, January – August 2013 - January – August 2018. Source: Portland Cement Association (PCA).

It is also worth reflecting on the third quarter financial results of the multinational cement producers over the last few weeks. CRH may have been crowing this week about how its US performance was driving its business in the wake of its acquisition of Ash Grove Cement and other assets, but many of the other multinational cement producers weren’t. HeidelbergCement, Buzzi Unicem and Titan all blamed the weather in the US for dragging on their results. LafargeHolcim said it suffered less with a ‘soft’ first quarter in 2018 followed by recovery.

The other story this week with relevance to the US was the continued speculation in the Canadian press about the future of the McInnis Cement plant in Quebec. The latest update is that the plant’s shareholders have asked the provincial government if they can swap the debt the province holds in the venture for equity. This has been seen as a potential bid to keep the company operational while it continues to hunt for a buyer. Rumours of a sale have swirled around since the start of 2018, with the Global and Mail newspaper naming HeidelbergCement as being potentially interested. Three bids have been reportedly made by unnamed parties but they were rejected for being too low. A slowing US cement market is particularly bad news for McInnis Cement. The plant is situated on the Atlantic Coast of Canada and exports to the US have been seen as a major part of its business. To this end it officially opened its marine terminal in the Bronx, New York in October 2018.

The main US market needs to find an alternative to the ‘fabled’ infrastructure bill if it wants better growth. Yet, reduced US cement consumption growth won’t help McInnis’ shareholders recoup the money they have sunk in the project. Somebody seems certain to lose in this situation and, with a protectionist incumbent in the White House, it seems likely to be somebody north of the border.

LafargeHolcim announced its plans to sell its business in Indonesia to Semen Indonesia this week for US$1.75bn. The deal covers four cement plants, 33 ready-mix plants and two aggregate quarries. It is part of its portfolio assessment scheme with a target to divest assets worth Euro1.7bn in 2019. At the current exchange rate, if the deal completes next year, then that’s most of the target met. Job done.

But wait just a moment. Global Cement Directory 2018 data has Holcim Indonesia’s cement production capacity listed as 11.9Mt/yr. Just taking the integrated cement plants into account and then recognising that the subsidiary has an 80.6% share in the business, puts the cost at a little under US$120/t of production capacity. The other concrete and aggregate assets can only reduce this figure as their value is taken into account. Then, don’t forget that Holcim Indonesia also operates two cement grinding plant: one at Ciwandan in Banten and a mothballed unit at Kuala Indah in North Sumatra. Nor did a cement terminal in Lampung and a cement warehouse in Palembang receive a mention. Holcim Indonesia placed its total cement production capacity at 15Mt/yr in its 2017 annual report. Take that figure into account and one gets a value of below US$100/t for the cement production capacity of Holcim Indonesia. It seems unlikely that LafargeHolcim has undervalued its assets but somebody somewhere must be taking a loss on this deal.

Earlier in the year we looked at LafargeHolcim’s options in Indonesia following speculation in the local press that it was considering selling. Our conclusion was that market overcapacity wasn’t going away anytime soon and LafargeHolcim had a publicly stated desire to sell its assets around the world to cut back its overheads towards profitability. The subsidiary made a loss in 2016 and this tripled to US$58m in 2017. Its earnings before interest, taxation, depreciation and amortisation (EBITDA) have fallen in consecutive years since 2015. LafargeHolcim has opted for the bold option to totally leave the market of one of the world’s top ten national cement producers.

From its perspective, Semen Indonesia said that it was looking forward to taking on-board Holcim Indonesia’s co-processing technology and rolling it to its other plants. Holcim Indonesia’s alternative fuels and recycling subsidiary, Geocycle, processed 0.36Mt of waste fuels in 2017, a 23% year-on-year rise from 0.30Mt in 2016. Semen Indonesia also has plans to submit a mandatory tender offer for the remaining share of Holcim Indonesia. It expressed pride at the transaction making it the biggest cement producer in South-East Asia with a production capacity of 53Mt/yr but it didn’t say exactly where it plans to sell its products.

Graph 1: Domestic cement consumption in Indonesia, 2010 – 2017. Source: Indonesian Cement Association (ASI).

That last bit is important. Since the Holcim Indonesia assets and Semen Indonesia’s plants don’t seem to overlap too much geographically it seems likely that the competition authorities will approve the deal if they can overlook the state-owned company owning over half the country’s production capacity. Indonesian Cement Association (ASI) data put sales at 66.4Mt in 2017, giving a capacity utilisation rate of 84% using the Global Cement Directory’s national capacity of 79.3Mt/yr or 61% using the ASI’s figure of 108Mt/yr for 2017. ASI data shows that local cement consumption grew by 7.6% year-on-year in 2017 following five years of slowing growth. So far, growth for the first half of 2018 seems slower at 3.6% year-on-year to 30.1Mt. These figures may have prompted LafargeHolcim to make its final decision to exit the country suggesting that there is no end in sight to the poor market.

LafargeHolcim’s decision to leave Indonesia seems sound but the selling price seems low and it is walking away from a large market. Either the production assets are old, the market is worse than we think it is or something else is going on. That said though, LafargeHolcim has taken decisive action that should ultimately benefit its bottom line.

HeidelbergCement is set to release its third quarter financial results later this week. In the meantime what can the results from the other major cement producers tell us?

Graph 1: Revenue from major cement producers, Q1 -3 2018. Source: Company reports.

The biggest of the big beasts, China National Building Material (CNBM), released its third quarter update last week. As usual for a major Chinese producer it was the expected story of continuing double-digit growth. Operating income up, profit up and little other information besides.

CNBM’s half-year report back in August 2018 had more information, revealing that cement production volume fell by 5% year-on-year to 143Mt in the first half of 2018 from 150Mt in the same period in 2017. This was pinned on ‘flat’ demand, increased pressure on environmental protection and rising costs of fuel and raw materials. As we mentioned at the time the state-owned company is attempting to cope with the aftermath of China’s great construction boom. National Bureau of Statistics (NBS) data shows that local cement sales dropped by 8% year-on-year to 158Mt in the first nine months of 2018. CNBM’s cement sales are likely to have dropped also so far in 2018 but continuing industry consolidation and/or the merger with Sinoma may save them. With this in mind note the lack of sales volumes figures from CNBM and Anhui Conch in Graph 2 below.

Graph 2: Cement sales volumes by major cement producers, Q1 -3 2018. Source: Company reports.

Of the other larger Chinese producers, Anhui Conch’s third quarter report was similarly sparse, sticking to the facts (revenue and profit up) and discussing in more detail a recent large-scale sale and purchase agreement with Jiangsu Conch Building Materials with a value of up to around US$230m. China Resources Cement is typically more verbose in its results releases. Its turnover and profits are also up so far in 2018 but it actually explained that cement and clinker prices had risen by 32%.

Outside of China, LafargeHolcim’s results were mixed in a direct year-on-year comparison but more favourable on a like-for-like basis. Net sales and cement sales volumes are growing slowly but recurring earnings before interest, taxation, depreciation and amortisation (EBITDA) fell very slightly. Growth in Europe and North America was countered by issues in Asia Pacific, Latin America and Middle East Africa. Chief executive Jan Jenisch was more optimistic than at the same point in 2017 with no talk of ‘lacking potential’ and more emphasis on ‘positive momentum.’

As for the others, both Cemex and UltraTech Cement are looking good so far. Growth in Mexico and the US has bolstered Cemex’s performance giving, it a 7% year-on-year boost to US$10.9bn in the first nine months of 2018. Cement sales volumes grew more slowly at 3%, although operating EBITDA remained flat. Part of this was down to poorer markets south of Mexico, notably in Colombia. UltraTech Cement is still looking good after its acquisition of Jaiprakash Associates’ plants in 2017 but earnings and profits have started to decline. The Indian market leader has blamed this on mounting energy and logistics costs coupled with local currency depreciation effects.

So, in summary, generally good news from the big producers, although issues are present in certain markets, notably South America. HeidelbergCement has already set the scene for its third quarter results with a warning that its earnings are down due to poor weather in the US and rising energy costs. Sales volumes and revenue are said to be ‘within expectations.’ Its Indian subsidiary, HeidelbergCement India, reported storming figures for its half-year to the end of September 2018 with double-digit growth across sales, sales volumes and earnings. Less reassuringly, its larger Indonesian subsidiary reported falling sales for the first nine months of 2018. All eyes will be on HeidelbergCement later in the week to see how this plays out.