Displaying items by tag: Consumption

Forget the news stories about poor markets in Colombia and Brazil. Argentina is riding a construction boom right now. Local producer Loma Negra recently ran an initial public offering and it picked a good time to do it. It aimed to generate up to US$800m from the flotation and in the end it raised over US$1bn. Good news for its Brazilian owner InterCement no doubt, which was last reported as aiming to sell a 32% stake in the company in order to cover its debts. More cheer must have followed from Loma Negra’s third quarter results this week. Its cement sales volumes rose by 9% in the latest quarter to 1.72Mt due to expanding local construction activity.

Graph 1: Cement production and consumption in Argentina Q1 – 3, 2008 – 2017. Source: Asociación de Fabricantes de Cemento Portland (AFCP).

As Graph 1 shows its experience mirrors the wider industry. Cement production rose by almost the same rate for the industry as whole, by 10% year-on-year to 3.19Mt for the quarter, according to Asociación de Fabricantes de Cemento Portland (AFCP) data. For the nine months as a whole production has also risen by 9% to 8.7Mt. This figure is the third highest in the last decade since 2008. Production peaked in 2015 before dropping a major 10Mt following a subdued construction industry in the wake of devaluation of the Argentinean Peso in late 2015 and early 2016. At the time LafargeHolcim, the operator of Holcim Argentina, also blamed the negative influence of neighbouring Brazil’s own financial woes. The economy has bounced back giving the country’s its highest nine month cement consumption figure, 8.8Mt, in the last decade.

Earlier in the year LafargeHolcim said it was importing 0.25Mt of cement into Argentina between May 2017 and April 2018 because it couldn’t meet local demand from its own plants. Given the over-abundance of clinker in the world one might be forgiven for being sceptical about this claim. Bolivia’s Itacamba announced it was also exporting cement to Argentina this week. However, the other point to note from the graph is that consumption has been about 90,500t higher than production so far in 2017. This is an envious position for local producers to be in. One more striking feature that sticks out from the graph above is the undulating curve than both production and consumption has. The Argentinean economy has been through the ringer in recent years and this shows in the ups and downs of the figures.

From the perspective of the three major domestic producers, Loma Negra’s sales revenue rose by 53.9% year-on-year to US$620m in the first nine months of 2017. Its adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) rose by a whopping 73% to US$157m. Cementos Avellaneda, owned by Spain Cementos Mollins and Brazil’s Votorantim, reported similar good news with its overall results boosted by the Argentine market. Its sales revenue in the country rose by 28.3% to Euro130m and its EBITDA rose by 59.5% to Euro32.4m. Although Mollins did make the point that inflation had been particular problem in Argentina, although its impact had been ‘greatly’ outweighed by price rises. LafargeHolcim has had its problems globally so far in 2017 but Argentina hasn’t been one of them. Its operations in the country have been propping up the group’s Latin American results each quarter so far in 2017. Despite being one of its smaller regions by sales revenues, its sales and earnings delivered some of the group’s highest growth in the third quarter of 2017.

In this kind of environment new production capacity can’t be far away. Sure enough Cementos Avellaneda plans to increases the capacity of its San Luís cement grinding plant by 0.7Mt to 1Mt/yr by the second quarter of 2019. US$200m has been earmarked for the project.

So, great news for Argentina and proof that poor markets can turn around. The Brazilian cement association SNIC reckoned in October 2017 that the rate decline of cement sales was slowing, suggesting that the bottom of the downturn was in sight. On the evidence of the current situation in Argentina once the market does revive, South America will be the place to watch.

ARM Cement’s declining fortunes this week may signal the end of the current growth cycle in the Kenyan cement industry. The cement producer posted a 20% year-on-year drop in its sales revenue to US$52m for the first half of 2017. Its financial returns have been turbulent since 2015. However, inward investment from the UK’s CDC Group in 2016 had appeared to help the company enabling it to pay of debts and even consider an upgrade project to the grinding capacity at its Athi River plant.

Graph 1: Cement production in Kenya for first half of year, 2013 - 2017. Source: Kenya National Bureau of Statistics.

Graph 2: Cement consumption in Kenya for first five months of year, 2013 - 2017. Source: Kenya National Bureau of Statistics.

Unfortunately it now appears that the Kenyan cement market may have peaked in 2016. As can be seen from Kenya National Bureau of Statistics figures in Graph 1 and 2, production hit a high of 3.31Mt in the first half of 2016 and it has fallen to 3.18Mt for the same period in 2017. Consumption too has fallen, to 2.5Mt for the first five months of 2017. At the same time the value of building plans approved by the Nairobi City Council dropped by 12% to US$1.02bn for the first five months of 2017 with falls in both residential and non-residential applications although the decline in residential was more pronounced. One of the country’s larger infrastructure projects, the Standard Gauge Railway from Mombasa to Nairobi entered its final stage of construction towards the end of 2016 with the completion of track laying.

Bamburi Cement has also reported falling revenue and profit so far in 2017. Its turnover fell by 8% to US$170 and its profit decreased by 36% to US$18m for the half year. Bamburi blamed it on a contracting market, low private sector investment leading to residential sector issues, delays in some infrastructure projects and droughts. The drought also hit the company’s operating profit via higher energy costs. On the plus side though Bamburi’s subsidiary in neighbouring Uganda did record a good performance.

It’s likely that the general election in Kenya in early August 2017 has slowed down the construction industry through uncertainty about infrastructure investment and general fears about political unrest. Thankfully these latter concerns have appeared unfounded so far but the memory of the disorder following the poll in 2007, where over 1000 people died, remains acute. And of course the 2017 election is not over yet following the intervention of the Supreme Court to nullify the result of the first ballot and call for a second. A longer election period with the impending rerun will further add to the pressure on the construction and cement industries.

An industry report on East Africa in February 2017 by the Dyer & Blair Investment Bank fleshes out much of the situation in the region. One particular point it makes though is that, as it stands at present, building materials may be too expensive to grow the market fully. Dyer & Blair suggest that lower construction costs and more affordable home ownership methods might be the key to driving low end housing demands and in turn this might grow cement consumption.

With lots of new production capacity coming online both locally and in neighbouring countries such as Uganda and Ethiopia, the Kenyan cement market faces the dilemma of trying to balance the medium to long-term demographics with the picture on the ground. Low per capita cement consumption suggests growing markets but if the demand isn’t present in the short term then the impetus for cement producers to expand shrivels especially with aggressive imports, rising energy costs and growing local competition. Once the election period finishes the picture will be clearer but the boom times may have abated for now.

Nigeria: This week has seen a major development in the Nigerian cement industry, with a call from domestic manufacturers to ban cement imports, three months ahead of the government's schedule for the ban. The call has been presented in some quarters as proof that the country, long blighted by high cement imports, has achieved President Goodluck Jonathan's bold target of making Nigeria a net exporter of cement before 2013. In the face of steadily diminishing oil revenues the government would like Nigeria to be known as the regional cement exporter, but what else might happen?

According to the Cement Manufacturers' Association of Nigeria (CMAN), the country's total cement capacity now stands at 22.5Mt/yr. Domestic consumption is estimated at 18.5Mt/yr, translating into a required capacity utilisation rate of 82%. It is bizarre, therefore, that cement producers feel the need to call for an import ban. Perhaps:

a) The producers know that they can't compete with the low cost of imports from outside Nigeria,

b) The producers want to recoup their plant investment costs as quickly as possible,

c) The producers know that they can't export if the country continues to import.

With notoriously poor transport links within Nigeria, option c may be a small factor. If road and rail links are poor, transport costs increase and exports become less desirable for both the supplier and the end-user. What is more likely however, is a combination of a and b. Producers need to recoup their investments but can't if China and India can undercut them from thousands of miles away. If the desire to recoup investments goes unchecked when the import ban comes in, there is a high potential for cartel-like behaviour to surface again in the country.

One does not have to look back far to the last major incident of apparent cement market cartelisation in Nigeria. In mid-2011 President Jonathan had to step in and personally call for a 25% price reduction. His target was hit within three months, but since then prices have slowly started to rise again, even with Dangote's Ibese 6Mt/yr plant coming online just three months ago! With four producers committed to setting up a 3Mt/yr plant each by 2015 in exchange for 2011 import licences, the supply of cement in Nigeria will continue to rise, making the temptation to collaborate even stronger.

Indonesia: It seems that not a week goes past without a forecast, announcement or other report about the continued boom in the Indonesian cement industry. Similarly, there is a steady stream of expansion announcements to accommodate the future demand. In light of another round of impressive cement statistics, what's the story for Indonesia in 2012 and beyond?

In the three months to 31 March 2012 Indonesia produced 12.5Mt of cement, an 18% rise on the first quarter of 2011. In the whole of that year, the cement industry turned out a massive 17% more cement than in 2010. These headline increases are certainly impressive and show that if the first quarter of 2012 was repeated three more times throughout the rest of the year, Indonesia would hit its 53Mt production forecast. This is more than double the cement production of 1998 (22Mt/yr in the midst of the Asian banking crisis) and, while from a low base, the values represent incredible sustained year-on-year demand growth.

But what is the potential of the Indonesian cement industry? This can be assessed by looking one of Indonesia's neighbours, namely Malaysia, and doing a quick thought-experiment. What would the Indonesian cement industry look like if the country were to suddenly develop demands and cement consumption patterns like Malaysia does today? Indonesia has a population 8.3 times higher than Malaysia¹ and a cement consumption/capita rate approximately 2.4 times lower.² Assuming current Indonesian cement consumption to be 50Mt, if all of the people in Indonesia were to suddenly start using cement like Malaysia does today, the country's cement industry would have to be nearly 1000Mt/yr to support demand!

While this is clearly not the case today and is unlikely to be fully realised, Indonesia will continue to develop economically. As it does, the world's fourth most populous nation will need more cement. How much is open to debate, but even if a small percentage of that hypothetical 1000Mt can be realised, it will certainly justify the current rush to add extra capacity. This is now especially likely in light of the December 2011 relaxation of land acquisition rules, which will make it easier to build both cement projects and the large construction projects that need cement.

Click here for much more on the cement industries of Indonesia and Malaysia (as well as Vietnam) from the April 2012 issue of Global Cement Magazine.

1. CIA World Factbook website, https://www.cia.gov/library/publications/the-world-factbook.

2. Cement consumption per capita data for Malaysia taken from Lafarge 2010 Annual Report. (http://www.lafarge.com/04112011-customers_activities-cement_market_2010-uk.pdf). Malaysia is a representative comparison for Indonesia based on its GDP to cement consumption ratio.