Analysis

The long expected move by a Chinese cement producer outside of East Asia took a step closer this week with the news that Taiwan Cement is negotiating with OYAK Cement over a joint venture in Turkey. Taiwan Cement says it is prepared to invest up to US$1.1bn in the subsidiary that will operate OYAK Cement’s business in Turkey. In its press release Taiwan Cement said, bluntly, that government peak production limits and market saturation in China had forced it to expand internationally.

This isn’t Taiwan Cement’s first flirtation with a Turkish cement producer. Back in June 2018 local press reported that it had signed a memorandum of understanding and a confidentiality clause with Sanko Holding about potential investment. However, the timing is curious this time because almost simultaneously Brazil’s InterCement announced that it was selling its operations in Portugal and Cape Verde to OYAK Cement. This sale alone deserves more attention given that it is the third by a Brazilian producer since September 2018 but that’s a discussion for another week. Back on OYAK Cement, whilst nothing is certain at this stage, a pledge of US$1.1bn from a foreign investor would certainly come in handy helping to raise the money at the Turkish company.

Whoever, if anybody, Taiwan Cement ends up pairing up with, the level of the investment suggests a multi-plant move. Indeed, the suggested OYAK Cement deal involves a 40% share in 13 integrated cement plants in Turkey with a production capacity of around 12Mt/yr or a 16% local market share. This isn’t far off the regular international price of US$200/t for integrated production capacity.

For a Chinese company to choose Turkey is resonant historically because it is towards the western end of the Silk Road. Marco Polo, for example, travelled from Venice to China via the territory of modern-day Turkey. The modern day version, the Belt and Road Initiative, seeks to evoke this trade route as China attempts to expand internationally.

Pertinent to the cement industry, both China and Turkey are both major exporters. Turkey is the bigger exporter by proportion of production, at 10% in 2017. Both countries were in the top five exporters to the US in 2017 with 2Mt from China and 1.4Mt from Turkey. The commonly accepted wisdom is that the Chinese industry faces major hurdles to exporting its overcapacity. Yet its production base is so large, 15 times larger than Turkey’s, that the little clinker and cement it has the infrastructure to export is still significant. It’s interesting that a major Chinese producer seeking to overcome structural and market obstacles to its expansion at home is targeting a major exporting nation. Typically, when a foreign cement producer buys local companies, one strategy is to use the new assets to ‘naturalise’ its clinker imports as ‘local’ product. Given Turkey’s already large export market this seems unlikely in this case.

The highly public nature of Taiwan Cement’s latest attempt to strike it lucky in Turkey smacks of bolstering investor confidence as much as closing the deal. Normally, this kind of thing gets announced once everything has been agreed, possibly bar the regulatory approval. Putting some money up front may make Taiwan Cement seem serious but OYAK Cement also stands to benefit from its acquisition of the former-Cimpor assets in Portugal and Cape Verde, since it gives it a toehold within the European Union (EU). This one could go either way.

As ever, there have been plenty of news stories from Pakistan recently covering the on-going fallout of the water shortage at the Katas Raj Temples in Chakwal, Punjab and an update on new production line at Maple Leaf Cement’s Iskanderabad plant. The two stories present two sides to the furious pace of the local industry and the potential price this growth might entail.

Graph 1: Cement despatches in Pakistan, 2012 - 2017. Source: All Pakistan Cement Manufacturers Association.

Graph 1 above sets the scene with an industry that has seen total despatches grow by nearly 30% to 42.8Mt in 2017 from 33.1Mt in 2012. About four-fifths of this is based in the north of the county. The big sub-story alongside this is that exports have fallen by half to 4.2Mt in 2017 from a high of 8.3Mt in 2013. The cause of this appears to be a decline in the Afghan market and a similar drop in waterborne clinker exports. Given the higher proportion of exports to the southern market this change has likely hit the industry in south harder despite overall depatches there rising. So far in 2018 similar trends are holding, except for exports, where the clinker export market has rallied significantly in the south.

The background to all this growth domestically is Chinese investment in the form of the China-Pakistan Economic Corridor (CPEC). CPEC-related project include integrated road infrastructure, the modernisation of railways and the development of the city of Gwadar and its related infrastructure. In addition the local Public Sector Development Programme (PSDP) is also having an effect and demographic pressures, such as a housing shortage, are also expected to support the construction market.

Data from the All Pakistan Cement Manufacturers Association (APCMA) placed cement production capacity at 54Mt/yr in September 2018 compared to 66Mt/yr in the Global Cement Directory 2018, which includes new capacity being built. This compares to around 10Mt/yr in the 1995 local financial year to an estimated 73Mt/yr by the State Bank of Pakistan in its third quarter report for 2017 - 2018. This rapid growth can be seen in recent stories such as the Iskanderabad plant expansion, Flying Cement’s mill order from Loesche, Kohat Cement’s mill order also from Loesche, a new solar plant at Fauji Cement at its Attock plant and the commissioning of DG Khan’s new plant at Hub. These stories are all from the last three months! The State Bank of Pakistan estimated that 11 producers hare now investing US$2.12bn on capacity expansions to add over 23Mt/yr by the end of the 2021 financial year.

One potential price for all of this growth is currently being illustrated in the ongoing legal wrangles about the use of water by cement plants near the Katas Raj Temples. What started as an investigation into why water levels were dropping at a pond at a Hindu heritage site seems to have transformed into a full scale inquiry into alleged corruption by local government around the setting up of cement plants. A report by the Punjab Anti-Corruption Establishment Lahore to the Supreme Court has found irregularities committed by government departments in connection to the setting up of cement plants by DG Khan and Bestway Cement in Chakwal. It seems unlikely at this stage that this inquiry will cause too much trouble for the local cement industry but it will certainly make it more complicated and potentially more expensive to st up new plants in the future.

Read Global Cement’s plant report from the DG Khan’s Khairpur cement plant in Chakwal

Well, it turns out that the European cement industry wasn’t kidding when it raised the risks of the climate mitigation on the sector. This week three (!) integrated plants have been earmarked for closure.

Cementa in Sweden said that it was considering closing its Degerhamn plant due to increased environmental regulations. Today, local press in Spain is reporting that Cemex España is planning to shut down two of its plants. These are plants in different parts of Europe with different local market dynamics but both are within the European Union (EU). That’s three plants closing out of 219 in the EU, or a loss of around 1% of production capacity.

Last week’s column on the United Nations’ (UN) Intergovernmental Panel on Climate Change (IPCC) report on Global Warming raised the way the cement sector is tackling climate change and the existing and impending legislation. President of the German Cement Works Association (VDZ) Christian Knell’s opening words at the VDZ Congress in September 2018 seem prescient. He said, “To be able to realise our efforts in terms of climate protection and at the same time not to lose competitiveness, we need research policy-related support for our investment in breakthrough technologies and the corresponding demonstration projects.” The add-on was that the industry needed to focus on how the development of carbon abatement technologies can meet the 2050 climate goals and, specifically, that suitable boundary conditions would have to be created. The press releases accompanying his speech emphasised that, “on-going trends in European emissions trading and the ‘rapidly increasing’ price of CO₂ were already today leading to considerable costs for cement manufacturers.”

These words are similar to the comments Albert Scheuer, a board member of HeidelbergCement, made at the Innovation in Industrial Carbon Capture Conference early in 2018 about dividing the mounting environmental costs of cement and concrete between producers and society in general. Considering how much cementitious building materials most people use throughout their lives compared to the relative low price of cement, this argument carries some weight. In addition, the sustainability credentials of concrete buildings through longer lifespan and durability through extreme weather events is another argument that industry advocates such as the Portland Cement Association (PCA) in the US have been hawking in recent years.

Cementa, a subsidiary of HeidelbergCement, blamed anticipated tightening of environmental regulations for its decision. Although it said that the plant had made improvements over the years, the expected difficulty (read: cost) to make further improvements was becoming too hard. Shifting production to the company’s other two plants in the region, Slite on Gotland and Brevik in Norway, will reduce CO₂ emissions by 260,000t/yr.

In Spain, the news from Cemex follows a half-year report from Oficemen, the local cement association, that predicted growth for the year but not as fast as previously expected. The problem was that continued declines in the export market, the 13th decline month-by-month in a row, offset the domestic growth. Oficement president Jesús Ortiz also took time to blame rising electricity costs, expected to rise by 20% year-on-year by the end of 2018.

Market issues in Spain aren’t in doubt, but the real question for both Sweden and Spain is whether EU CO₂ legislation right now is causing cement producers to shut plants. The CO₂ emissions allowance price hit a high of Euro22/t in September 2018, the highest price in a decade. Allowances have stayed below Euro10/t since 2011 and the price has more than doubled in 2018. Throw in the mood music of the IPCC and the trend seems irresistible. How many more plants in Europe are at risk to shut next? No doubt the European cement producers have charts marking the viability of their plants against the CO₂ price. This would be a very interesting graph to get our hands on.

The 2nd FutureCem Conference on CO₂ reduction strategies for the cement industry will take place in May 2019 in London, UK

One graph the United Nations’ (UN) Intergovernmental Panel on Climate Change (IPCC) report on Global Warming of 1.5°C didn’t include this week was what happens if the world just doesn’t bother. It’s probably just as well since warming of 1.5°C is likely to happen between 2030 and 2052 at the current rate of climate mitigation efforts. If they had included such as diagram, it likely would have had a ominous red line hurtling skywards like a rollercoaster track just before the screams start.

The giant paper study is really about comparing and contrasting the different impacts and responses to a 1.5°C and a 2°C rise. One taste of what the higher rise threatens is, “limiting global warming to 1.5°C instead of 2°C could result in around 420 million fewer people being frequently exposed to extreme heatwaves, and about 65 million fewer people being exposed to exceptional heatwaves."

The cement industry gets a look-in with an acknowledgment that the sector contributes a ‘small’ amount (5%) of total industrial CO₂ emissions. It then breaks the entire industrial sector’s mitigation strategies down to (a) reductions in the demand, (b) energy efficiency, (c) increased electrification of energy demand, (d) reducing the carbon content of non-electric fuels and (e) deploying innovative processes and application of carbon capture and storage (CCS).

Speaking generally, phasing out coal, electrification and saving energy in mechanisms like waste heat recovery is predicted to get industry only so far. Yet from here even skirting over 1.5°C but below 2°C is ‘difficult to achieve’ without the, “major deployment of new sustainability-oriented low-carbon industrial processes.” Such new process include full oxy-fuelling kilns for clinker production, which have not been tested at the industrial scale yet. Likewise, CCS is seen as a major part of keeping warming below 2°C with a target of 3 Gt CO₂/yr by 2050. Some reality is present though when the report says that the development of such projects has been slow, since only two large-scale industrial CCS projects outside of oil and gas processing are in operation and that cost is high. It even posits a value of up to US$188t/CO₂ (!) for the cost of CO₂ avoided from a Global CCS Institute report.

None of this is new to cement producers. The real debate is how to get there without wiping out the industry. In his address to the recent VDZ conference, Christian Knell, the president of the German Cement Works Association (VDZ), highlighted that meeting climate change goals was leading to ‘considerable’ costs for the cement industry. He then called for policy-related support to on-going research projects into CO₂ mitigation technology.

The bit that the IPCC doesn’t go into is how much those five steps to the industrial sector will cost cement producers and, vitally, who will pay for it. For example, taking a cement plant’s co-processing rate to 70% and building a waste-heat recovery system, might cost around US$30m. The Low Emissions Intensity Lime And Cement (LEILAC) Consortium’s Calix’s direct CO₂ separation process pilot at the Lixhe cement plant in Belgium has funding of about Euro20m. Rolling all three of these measures out to the world’s 2300 cement plants would cost over US$100bn and it would take more than a decade. Beware, the financial figures here are rough estimates and may be way out. The point remains that the implementation costs will not be trivial.

Industry advocates have started in recent years to push back against the climate lobby by highlighting the essential nature of concrete to the modern world. The IPCC barely mentioned this aspect of cement’s contribution to society suggesting recycling, using more renewable materials, like wood, and resorting to the mitigation strategies detailed above. Building new cities out of wood is not inconceivable but CCS seems more likely to solve the climate problem at this stage. Manufacturing the cement that becomes concrete may create CO₂ emissions but it has also built the modern world and raised living standards universally. No cement means no civilisation. There is, at present, no alternative.

Instead of leaving this discussion at an impasse, it is worth reflecting on the last week in the industry’s news. An Indian cement company is importing fly ash, several companies are opening or preparing cement grinding plants, a coal ash extraction pilot project is running, a waste heat recovery unit has opened at a plant in Turkey and a producer is getting ready to co-process tyres as a fuel in Oman. All of these stories are proof that change is happening. The trick for policymakers is to keep prodding the cement sector in this direction without disrupting the good things the industry does for people’s lives through sustainable housing and infrastructure.

The November 2018 issue of Global Cement Magazine will include an exclusive article by Mahendra Singhi, the CEO of Dalmia Cement, about his company’s CO₂ mitigation efforts.

The 2nd FutureCem Conference on CO₂ reduction strategies for the cement industry will take place in May 2019 in London, UK.

Cementos Fortaleza started building its new grinding plant in Merida this week. The 0.25Mt/yr unit is expected to open in July 2019. It marks the first new plant in the country in a while and it will be only the second in the south-eastern state of Yucatan, joining Cemex’s integrated plant. It follows a number of upgrades at existing plants over the last two years, such as various mill orders by Cruz Azul from European suppliers (as part of an upgrade at two of its plants) and Elementia’s upgrade to its Tula plant.

Note that Cementos Fortaleza is a subsidiary of Elementia, the building materials company partly-owned by ‘Mexico’s richest man’ Carlos Slim. The group has steadily been expanding with its purchase of the remaining share in Cementos Fortaleza in 2015, acquiring a controlling stake in Giant Cement in the US in 2016 and a project to build a grinding plant in Costa Rica in early 2018.

The other big news story this week with implications for the cement sector was the arrangement of the US-Mexico-Canada Agreement (USMCA), the successor to the North American Free Trade Agreement (NAFTA). Although the exact details of the deal are still emerging, the consensus is that the cement industry in Mexico is unlikely to be affected much. The two points that might have implications for the cement industry are changes to rules of origin regulations and tariffs on imports made by low-wage workers. Both clauses are targeted at the automotive sector to protect US industry so it is unlikely that cement will be affected. In addition it is worth remembering that Mexico was the fifth largest exporter of cement and clinker to the US in 2017 after Canada, Greece, China and Turkey. And, all the major Mexican cement producers operate plants in the US, further protecting them from any potential negative consequences of the USMCA.

Graph 1: Mexican cement production, 2009 – 2017. Source: Camara Nacional del Cemento (CANCEM).

Back in Mexico, the graph above shows that production has been growing in fits and starts over the last decade. The last growth trend started in 2013 but it stalled in 2017. However, the Camara Nacional del Cemento (CANCEM) was forecasting growth of 2.5% year-on-year for 2018 in April 2018. The last time this column covered Mexico, back in early 2017, we produced a breakdown of the industry by company and production capacity. This is worth looking at for an overview of the production base.

Cemex, the largest local producer, reported Ordinary Portland Cement sales volume growth of 3% year-on-year in the second quarter of 2018 but flat growth for the first half of the year. This growth was supported by good activity in the formal residential sector with support from the industrial and commercial sector. LafargeHolcim released less detailed figures for the first half of 2018 but it attributed its strong performance in Latin America to Mexico. Overall cement sales for the region grew by 12.1% to 12.6Mt, in part due to large infrastructure projects in Mexico, such as the new Mexico City International airport. The third biggest producer, Grupo Cementos de Chihuahua, said that its cement sales volumes rose by 2.5% in the first half of the year, supported by rising prices.

As reported in early 2017, the Mexican cement industry is moving ahead with confidence. A modest amount of production capacity is being built, the steady market growth since 2013 looks set to continue after a minor blip in 2017 and the main producers are all reporting good performance so far in 2018. Finally, the USMCA looks unlikely to trouble Mexican producers much and their diversified holdings will certainly help them if it does. For the moment - bravo!