Analysis

More positive news emerged from the UK cement industry this week with the news that Cemex is planning to restart the second kiln at its South Ferriby plant later in 2018. This marks the full recovery of the plant after a disastrous flood in late 2013 and it is an all round good news story. Around the same time the local government in Scotland approved the planning application for an upgrade to Tarmac’s Dunbar cement plant. That project involves installing a new cement grinding mill, a new cement storage silo and a rail loading facility.

Graph 1: Domestic cement, imported cement and other cementitious sales in the UK, 2001 - 2017. Source: Mineral Products Association.

The timing is interesting given the general uncertainty in the UK economy ahead of the UK exit from the European Union (EU). However, data from the Mineral Products Association (MPA) shows that total cementitious material sales (cement plus products made from fly ash and ground granulated blast furnace slag (GGBS)) reached 15.3Mt in 2017 from a low of 10.3Mt in 2009 following the financial crash. This isn’t as high as the 15.8Mt figures recorded in 2007 but it does mark a recovery. This masks to an extent the change in the market since 2007. Cement sales in 2017 at 10.2Mt were still below a high of 11.9Mt in 2008. The recovery has been driven by higher imports, 1.9Mt in 2017, and higher use of fly ash and GGBS products, which reached 3.2Mt in 2017.

Cemex and Tarmac are not alone in announcing projects. HeidelbergCement’s local subsidiary Hanson is upgrading its Padeswood plant with a new Euro22m mill. Irish slag cement grinding company Ecocem opened its import terminal at Sheerness in mid-2017 and French grinding firm, Cem'In'Eu, has also expressed interest in building a plant, in this case in London.

As discussed earlier in the year, new upgrade projects in the UK appear to carry an element of risk given the unknown status of its departure from the EU. Supply chains may be affected, companies are delaying investment and the value of Pound Sterling is falling. The collapse of construction services company Carillion also had a knock-on effect in the industry and, with major work on the Crossrail infrastructure project finishing, the industry has no major infrastructure projects in support. A quarterly graph of UK construction industry output volume by Arcadis shows almost uniform growth since mid-2012 although this started to flatten in 2017. A badly-handled Brexit (UK exit from the EU) could undo this growth.

All of this presents a picture of risk-adverse capital projects in the UK. The MPA figures help to explain the focus on grinding at Padeswood and Dunbar. The market has changed since 2007, with a growing focus on imports and secondary cementitious materials. Hence spending money on equipment to process these inputs makes sense. The decision to increase production at South Ferriby meanwhile depends on reviving existing equipment. Regional cement sales figures to 2016 from the MPA appear to indicate static demand in counties close to the plant (Yorkshire and Humberside) but sales have increased in the East Midlands and the East of England.

Just compare the current UK approach to the situation in Egypt. This week the head of the cement division of the Chamber of Building Materials described the decision to build the Beni Suef cement plant to local media as “not based on precise information” and that it had harmed local production. In case you had forgotten, that plant is one of the biggest in the world with six lines. The commentator may well have been representing smaller local producers but opening a 12Mt/yr plant in Egypt in these turbulent economic times marks a different approach to risk than the modest plant upgrades in the UK. Let’s wait and see who has the best approach.

Nigerian financial analysts Cordros Securities concluded this week that the merger of some of Lafarge’s Sub-Saharan African businesses had reduced earnings at Lafarge Africa. The report is interesting because it explicitly points out a situation where the consolidation of some of Lafarge’s various companies have failed in the wake of the formation of LafargeHolcim.

Cordros Securities’ criticism is that Nigeria’s Lafarge WAPCO performed better in 2013 alone before it became part of Lafarge Africa, with a higher standalone earnings before interest, taxation, depreciation and amortisation (EBITDA) margin. Lafarge Africa formed in 2014, a year before the LafargeHolcim merger was completed, through the consolidation of Lafarge South Africa, United Cement Company of Nigeria, Ashakacem and Atlas Cement into Lafarge WAPCO. Since the formation of Lafarge Africa, Cordros maintains that its earnings per share have consistently fallen, its share price has dropped, its debt has risen, its margins have decreased and its sales volumes of cement have also withered.

Cordros mainly focuses on the Nigerian parts of Lafarge Africa’s business, given its interest in that market and the fact that about three quarters of the company is based in the country. It blames the current situation on growing operating costs since the merger, skyrocketing financing costs for debts and efficiency issues. In Nigeria, Lafarge Africa has had to cope with disruptions to gas supplies. Nigeria’s Dangote Cement had similar problems domestically in 2017 with falling cement sales volumes in a market reeling from an economic recession but Cordros reckoned that Dangote is picking up market share in the South West due to an ‘aggressive retail penetration’ strategy. Finally, Lafarge Africa faced a US$9m impairment in 2017 due to its abandoned pre-heater upgrade project at AshakaCem. The project has been suspended since 2009 due to security concerns in the North-East region. The plant faced an attack by the Boko Haram militant group in 2014 and the group has seemed reluctant to invest further in the site subsequently.

Cordros’ final word on the matter is that with the Nigerian cement market performing slower than it has previously, the local market has become a battleground between the established players of Dangote Cement, BUA Group and Lafarge Africa. What little the report does have on South Africa covers problems with old and inefficient hardware, labour disputes, low prices due to weak demand, high competition and a negative product mix.

Lafarge Africa itself presents a more mixed picture, with market growth picking up in Nigeria following end of the recession but continued market problems in South Africa. Overall, its reported sales grew by 4.8% to US$448m in the first half of 2018 but its EBITDA fell by 25% to US$76.4m. Overall cement sales volumes were reported as up by 5.4% to 2.6Mt in the first half but volumes were still falling in South Africa in the second quarter.

Part of the backdrop to all of this is the intention of Lafarge Africa to cut its debt. In May 2018 its chairman Mobolaji Balogun said that the company wanted to cut its debts by 2020 before continuing with its expansion programme. Part of this process will include a new rights issue later in 2018 to allow shareholders to buy stock at a discount.

It must have made sense, on paper at least, to merge the Lafarge subsidiaries in the two largest economies in Sub-Saharan Africa. Once the merger had settled in, with synergies generating extra revenue, the group could have considered adding extra territories such as Kenya. However, it’s not turned out like that. Two recessions in Nigeria and South Africa respectively, old equipment, debt and serious competition from locally owned producers have piled on the pressure instead. From a stockholder perspective, Cordros is not impressed by the performance of Lafarge Africa. The wider question is: what else did Lafarge and Holcim get wrong when they joined to form LafargeHolcim?

The Federación Interamericana del Cemento (FICEM) held its 2018 technical congress in Panama City last week and was attended by Global Cement. We’ll run a full write-up of the event in the October 2018 issue of Global Cement Magazine. The short version is that the conference was technically good but, from our perspective, it could have done with more regional analysis. Given that the event is for the local industry this is not a big issue as most of the delegates will know their own markets inside out and many were happy to discuss just this when asked. Likewise, FICEM’s in-house publication also included plenty of local data.

The nearest the presentations came to this was a global overview of the cement industry by Arnaud Pinatel of On Field Investment Research ahead of a market report the analysts are about to release. Although it covered the global cement industry the key local news was that the Latin American sector’s production capacity had grown by 3% from 2010 to 2018 but that prices had fallen in this time. The forecast suggested that cement sales volumes were expected to grow by 3% in 2019 - supported by Brazil, Peru and Bolivia - but that prices were also expected to fall by 1%, mainly due to issues in Argentina.

That last point is especially interesting over the last week because the Argentine cement body, the Asociación de Fabricantes de Cemento Portland (AFCP), released its figures last week to reveal that cement despatches rose by 4.2% year-on-year for the first eight months of 2018. However, at the same time the general news broke that the International Monetary Fund (IMF) was providing an emergency loan to support the country’s economy. The government was keen to shore up confidence in the economy and attributed the growth in the cement sector to the ‘most ambitious infrastructure plan in history.’

Only last year in 2017 the industry was riding a construction boom with cement shortages, new production capacity announced and the initial public offering of Loma Negra. Bailouts from the IMF don’t fit this picture of the poster boy for the South American construction industry. And, if a financial correction is pending, the new capacity that has been ordered may arrive at a bad time. This is a pretty worrying situation.

Meanwhile, across the Uruguay River into Brazil something long expected and hopefully more encouraging has occurred: the acquisition of cement plants. Italy’s Buzzi Unicem revealed that it had struck a deal to buy a 50% stake in the Brazilian company BCPAR from Grupo Ricardo Brennand for Euro150m. The arrangements cover two integrated plants: one 2.4Mt/yr unit at Sete Lagoas in Minas Gerais and a 1.7Mt/yr unit at Pitimbu in Paraíba. Buzzi has also added an option to buy the other half of the business until 2025.

It’s hard to place a value on the sale, but it looks as if Buzzi has picked up the capacity for just under US$100/t, subject to future variation on how well the company does. At that price though this a low figure and a bargain for Buzzi. Given the pain the Brazilian cement industry had been through in recent years some form of traction is welcome. Unfortunately, Grupo Ricardo Brennand has surely lost money on the deal given that the two plants were commissioned in 2011 and 2015 respectively. The complexity of the financial arrangements suggest that Ricardo Brennand is fighting to stay in the game if and when the recovery comes. If Buzzi has moved in then this suggests that it thinks it will make their money back and that it reckons that the bottom of the construction industry trough has been reached. A Brazilian take on this situation would be fascinating.

With these kinds of events happening the same week as the FICEM technical congress it really shows how vibrant and varied the region’s cement industry is. Next year’s conference will surely be even more interesting as market events in Brazil, Argentina and other countries develop.

What’s long, thin and has already exported more than 20Mt of cement in 2018? The answer is Vietnam, which reported this week that it exported 20.1Mt of cement between 1 January 2018 and 31 August 2018. That’s 106 - 112% of its annual ‘target’ in just eight months and around the same amount as it claims to have exported during the whole of 2017. Total cement production in Vietnam was 63.9Mt between January and August 2018, meaning that the country has exported 31.3% of the cement it made over this period. Vietnam itself consumed ‘just’ 43.8Mt. The government target for Vietnamese cement consumption during 2018 is around 65 - 66Mt. That’s basically the amount it has already made.

From a market-led mind-set these targets seem fairly large, huge even, especially the export target. Indeed the concept of such national targets is in itself an alien concept. In most of the world, imports and exports are results of market supply and demand trends, not drivers prescribed by the government.

The reasons behind this apparent desire to export these very large volumes of cement are, therefore, probably best understood from within Vietnam, and we won’t speculate too much on them here. However, Vietnam is clearly determined to continue to produce ever more cement than it can use. In what other country could a major government-owned producer export more than 70% of the cement it makes? In the first half of 2018 Vicem did just that, shipping 11.7Mt of cement overseas from the 14.2Mt that it made.

In 2017 Vietnam’s export target was 15Mt. It ended up smashing this to the tune of 5Mt, 33% more than the target. At the current rate the sector looks like it could overshoot even more spectacularly this year, perhaps hitting as much as 30Mt of cement exports in 2018. This is more than a big European country like Germany can produce! It certainly sounds like a lot but… is it really an exceptional number?

Looking at data from World’s Top Exports (WTEx), which we advise delving into, it seems that this would be a very high number indeed. It reports that a total of 166.6Mt of cement were exported internationally in 2017. It reports that the top exporter was not, as you may by this point have been primed to suggest, Vietnam. It wasn’t even China, as the former number one was bumped into second place (12.91Mt) by Thailand (13.03Mt). Turkey was third (12.79Mt), with Japan fourth (11.93Mt) and Vietnam was listed as fifth (9.53Mt).

All of these biggest exporters except Turkey are in the Far East, an area swamped with cheap cement. China’s average export selling price according to WTEx was US$45/t, against a global average of US$55/t. Thailand undercut it by US$3/t at US$42/t, perhaps explaining its rise to the top spot. Turkey’s average export price was also US$42/t, although it is located in a region that has a lot of saturated markets and others that are growing rapidly. Its average export distance was second only to China’s. Vietnam’s average cement export price was US$51/t, higher than the others. This does not tie in with the apparent rise in exports so far in 2018. This price may have since fallen. Surprisingly, Japan had the lowest export price of the top five exporters by volume at just US$30/t in 2017.

So, to re-answer the question posed two paragraphs above, 30Mt is a very high number indeed. But you’ll have spotted the large discrepancy between WTEx’s 9.53Mt figure for Vietnam, which relies on reciprocal import partner data, and the government’s official line of 21Mt for 2017. One is tempted to ask where the other 50% of the exports reported by the Vietnamese actually ended up, especially given that WTEx reports a US$1.5bn difference in the value of exports and imports across the year. Imports were valued at US$8.8bn but exports were valued at US$10.3bn.

The mystery destination of all that cement, real or imagined, could be the topic of an entire separate column. What appears to be the case at present, is that rampant Vietnamese cement overcapacity is here to stay. The country, as well as Japan, Turkey, Thailand et. al., could stand to benefit in the short term, as China acts ever more aggressively to end its own oversupply situation. However, there could come a time when it has to take its foot off the gas. There are no signs of that yet though.

The world’s largest cement producer China National Building Material (CNBM) released its half-year results this week and the figures were generally good. Despite falling production, the state-owned company has managed to raise its prices year-on-year to generate significant sales revenue and earnings increases. As usual the level of detail was fairly light, although not much lighter than some non-Chinese producers on the international market. The key point was that cement production fell by 5% year-on-year to 143Mt. This was due to poor demand, mounting environmental regulations and rising input costs.

The half-year report was significant because it is the first financial report from the company since its merger with China National Materials (Sinoma) completed in early May 2018. Just like the reports of LafargeHolcim and HeidelbergCement following mergers or acquisitions, CNBM has seen a boost to its performance. Further gains from scale and synergy are expected. The union has indisputably created the world’s biggest cement producer, putting aside any European or American cries of over-calculation of production capacity on the part of their Chinese rivals. However, size comes with particular problems.

Placed in a wider context CNBM and its owners, the Chinese government, are attempting to manage a wind-down from the biggest construction boom in human history. National Bureau of Statistics data show that sales of cement fell by 10% to 984Mt in the first half of 2018 from 1.1Bnt in the same period in 2017. So, falling cement production volumes are not a surprise. What is curious, though, is how cement prices have appeared to rise in a country with massive production overcapacity. Each of CNBM’s cement producing subsidiaries reported that its average selling price of cement grew year-on-year.

Graph 1: Sales of cement in China, 2014 – 2018. Source: National Bureau of Statistics of China.

Regional variation could explain some of this in a country as large as China and similar trends can be observed in India with its own diverse internal markets. The local focus on environmental regulations offers another explanation. In June 2018 the government’s State Council issued regulations to reduce the production capacity of construction materials, set up emission limits for pollution, implement peak shifting of production and to establish a ‘strict’ accountability mechanism for all of this. CNBM has followed these directives with its ‘Price – Cost – Profit’ (PCP) strategy and all of its subsidiaries have conformed to this. What is not covered in the report is whether there is a negative financial effect of peak shifting and other environmental regulations and how bad this is.

It’s easy to dismiss the performance of a state-controlled company but the enlarged CNBM is facing a unique set of challenges. It appears to be off to a great start but both its scale and its challenges are unprecedented. In its outlook for the second half of 2018 it said that the, “contradiction of overcapacity in the industry has not been changed fundamentally.” This suggests that, although cement prices and profits have held up so far, there is no guarantee that this situation will continue.