Displaying items by tag: Infrastructure

The government in Indonesia made building new cement capacity harder this week. The new rules are intended to strengthen the local sector in the face of a utilisation rate of only 53%. A moratorium policy and/or new investment arrangements have been placed on new cement plant projects. Instead, companies have been asked to focus on the regions of Papua, West Papua, Maluku and North Maluku instead, where demand for cement is higher than what the local production base can produce. Ignatius Warsito, the Director General of the Chemical, Pharmaceutical and Textile Industry at the Ministry of Industry, said that the new rules would be reconsidered once the capacity utilisation rate reaches 85%.

Other measures the government is also looking at include increasing exports of cement, changing regulations related to the coal Public Service Agency (BLU) and improving overland transport. On that last point the authorities and the cement producers are looking at how logistics costs can avoid rising in the face of the impending Zero Over Dimension Over Load (ODOL) policy. Proposals the sector has submitted include implementing a multi-axle policy for trucks and improving the quality of certain roads to allow for higher capacity vehicles.

As one of the government’s focus areas - coal - suggests, fuel prices have been a headache for the cement sector in recent years. Warsito noted that international coal prices started to rise in late 2020. This was likely due to the logistical mess that the coronavirus pandemic caused to the global economy. Higher coal prices caused a “significant” effect on the cement industry through both higher production costs and restrictions on supplies. One irony to note here is that Indonesia is one of the world’s leading coal producers. Donny Arsal, the head of Semen Indonesia, told the government in 2022 that the war in Ukraine had enticed local coal companies to export more coal due to the rising international price. At this time he lobbied the administration to use its local domestic market obligation (DMO) subsidy to better serve the cement sector by giving it more coal at a fixed price.

Graph 1: Cement demand and capacity in Indonesia. Source: Semen Indonesia and Indonesia Cement Association.

Overcapacity has been a recurring feature of the Indonesian cement market since at least the 1990s as the demand and capacity have grown sometimes out of step. The capacity utilisation rate reached 90% in the early 1990s only to fall to 50% by the end of that decade due to the Asian financial crisis. More recently Holcim left the market in 2019 when it sold its business to the Semen Indonesia. The state-owned company consolidated more than half of the country’s cement production capacity at the time. According to its data for the first quarter of 2023 it has a 51% market share and a 46% production capacity share. It also said that 92% of local demand was catered for from four of the country’s 14 producers, namely: Semen Indonesia; Indocement; Conch; and Merah Putih.

A recent study by the Jakarta Post newspaper suggested that after a poor first half in 2023, cement demand was expected to rebound and create modest overall annual growth by the end of the year. The key reasons for this outlook are increased government infrastructure spending, ongoing work on the new capital city Nusantara and anticipated price stability. The new city project, for example, is expected to require 1.6Mt of cement in the 2022 - 2024 period. Risk factors, of course, abound such as a global economic slowdown, financial problems at some of the government-owned construction companies like Waskita Karya and new capacity. A new 8Mt/yr (!) plant owned by local company Kobexindo and China-based Honshi Cement, for instance, is scheduled to start operation in the second half of 2023 in East Kalimantan. Even though the government says that the new unit will export 90% of its production, it will place pressure on other existing sites hoping to increase exports.

The country’s largest cement producer being majority owned by the government is a pertinent feature here given that the same government has also effectively banned new capacity. Semen Indonesia’s earnings before interest, taxation, depreciation and amortisation (EBITDA) have fallen each year consecutively since 2020. As mentioned above overcapacity has long been present in the local sector and recent events have made it worse. Yet, the companies that are likely to benefit the most from a block on newer, competitive cement plants are likely to be the established players. That said, though, with the utilisation just above 50% and new projects like the Kobexindo-Honshi plant on the way, the government likely feels it has to take some form of action. Other tools at its disposal include a national carbon exchange set to launch in September 2023. Power companies will participate from the start with cement producers anticipated to follow at a later stage. Despite the uncertain short-to-medium term outlook the cement sector in Indonesia remains one of the largest in the world with plenty of business to be done. Denmark-based FLSmidth was clearly mindful of this when it opened a new office in Jakarta in April 2023.

India: Birla Corporation says that it expects to sell 18.1Mt of cement during the 2024 financial year (1 April 2023 - 31 March 2024), up by 15% year-on-year from 15.7Mt in the 2023 financial year. That financial year, sales grew by 11% year-on-year. Looking ahead, the producer expects its new 3.9Mt/yr Mukutban cement plant in Maharashtra increase its sales. It said that it may also carry out future expansions at its Chanderia cement plant in Rajasthan.

The Hindu BusinessLine newspaper has reported that managing director and CEO Sandip Ghose said "Our strategy is based on prices not going up significantly. Volumes are going to move in a healthy manner unless there are any major dislocations, disruptions or hiccups going forward. I am very bullish on the India growth story." Regarding the company's Gujarat market in Western India, he said "Gujarat had gone through exponential growth in the past year, which boosted certain companies' profitability because of the bullet train, the expressway and other developments." Ghose forecast similar demand growth in Madhya Pradesh and Uttar Pradesh.

Saudi Arabia: Hoffmann Green Cement Technologies (HGCT) and property developer Shurfah Holding have signed a letter of intent to conclude a licensing agreement for use of HGCT’s technology by the state-owned construction firm. BusinessWire News has reported that HGCT plans to build four new units to produce its clinker-free alternative cement in Saudi Arabia. Construction will begin in 2024. Shurfah Holding said that the partnership signals progress towards the development of smart cities under the state’s Vision 2030 economic plan.

HGCT co-founders Julien Blanchard and David Hoffmann thanked Shurfah Holding and said that the partnership represents an acceleration in the producer’s international development.

US: Heidelberg Materials North America inaugurated its 2.4Mt/yr Mitchell cement plant in Indiana on 14 July 2023. The plant is equipped with a 3600 bag/hr rotary packer, and also boasts a 154,000t-capacity clinker storage dome. It will produce Heidelberg Materials North America's EcoCem Portland limestone cement (PLC), alongside other products. The producer said that the new plant will help to address US cement supply chain constraints amid a planned US$110bn infrastructure overhaul.

Heidelberg Materials North America president and chief executive officer Chris Ward said "The plant will reduce CO₂ emissions per tonne of clinker by almost 30%, mainly through operating on natural gas. Our investment in the Mitchell facility helps us lower our carbon footprint, while serving the growing demand for more sustainable products in this key market.”

Türkiye: Marmara Çimento has secured environmental clearance to build a new cement plant at Çiftalan in Istanbul Region. PortsEurope News has reported that the plant is associated with a US$3.08m port construction project called the Çiftalan Marmara Cement Port project. Marmara Çimento submitted plans for the project in December 2021. The planned port will have sufficient berth for two 200m vessels to dock.

Marmara Çimento says that the upcoming Çiftalan plant will supply cement for use in the Kanal Istanbul Black Sea-Marmara shipping canal project.

US: Eagle Materials reported sales of US$2.1bn in 2022, up by 15% year-on-year from 2021 levels. The producer's earnings before interest, taxation, depreciation and amortisation (EBITDA) rose by 19% to US$782m. Its cement sales rose by 7% to US$1.1bn due to increased prices, despite a drop in volumes. Throughout the year, the company increased its production of Portland limestone cement (PLC).

President and CEO Michael Haack said "Looking ahead, we anticipate continued attractive fundamentals in our markets, despite headwinds relating to higher interest rates and affordability constraints in single-family residential construction. Among the favourable demand factors we expect will affect our results in future periods are projected funding increases for infrastructure projects and healthy demand for heavy industrial projects and multi-family residential construction. We remain well-positioned to capitalise on these conditions, given our geographical footprint across the (Central) US Heartland and fast-growing Sun Belt (Southern US) and our financial strength and flexibility."

India: Ramco Cements' sales were US$987m during the 2023 financial year, up by 36% year-on-year from US$726m during the 2022 financial year. The producer sold 15Mt of cement and dry mortar products, up by 36%. The Times of India newspaper has reported that the producer's profit after tax declined by 62% to US$41.5m from US$108m.

The producer expects that anticipated infrastructure investments and a 'normal' monsoon will maintain strong cement demand in India in the full-year 2023 financial year. It forecast growth in its profit margins from the second quarter of the 2024 financial year (July - September 2023) onward.

Nigeria: Dangote Cement recorded sales of US$609m during the first quarter of 2023, down by 13% year-on-year from US$699m during the first quarter of 2022. The producer reported a 25% decline in its cement sales volumes to 3.6Mt from 4.8Mt. Operating costs rose by 6% to US$355m from US$335m. Dangote Cement said that its earnings before interest, taxation, depreciation and amortisation (EBITDA) fell by 14% to US$458m from US$403m.

Dangote Cement chief executive officer Arvind Pathak said “The cash crunch coupled with the uncertainty around the general elections led to a slowdown in key private and public infrastructure investments in Nigeria. Consequently, our domestic operations recorded a drop in volume." Pathak continued “In fulfilling our commitment to creating additional value for our shareholders, we have received regulatory approval for our second buyback programme. We will continue to monitor the evolving business environment and market conditions in making decisions on tranches."

Vietnam: Cash flow issues have been noted as a risk for local cement producers struggling to create enough revenue to continue operations. Revenue is reliant on output, local consumption and exports but these are all falling with raw material costs rising and no improvement forecast for the real estate in the short-term, according to the Việt Nam News newspaper. Examples of cement companies reporting a loss include Quang Ninh Construction and Cement in the fourth quarter of 2022. An estimate by the Quang Ninh Tax Department also showed that the company owed more than US$4.m in July 2021, making it the largest debtor in the province’s building materials industry. Quang Son Cement, based in Thanh Hoa province, also reported an after-tax loss of US$13.5m in 2022.

Data from the Vietnam Association for Building Materials (VABM) shows that the cement industry’s production capacity reached 114Mt/yr in 2022, with an estimated output of 93Mt in 2022, giving it a capacity utilisation rate of 82%. However, domestic consumption accounts for around 60 –65Mt/yr, with exports accounting for the remainder. Information from the General Statistics Office reveal that local cement production fell by just under 10% year-on-year in the first quarter of 2023.

Thai Duy Sam, vice president and general secretary of VABM, told Vietnam Investment Review “In recent years, the cost of input materials, particularly coal, has increased multiple times. It has an effect on both production and output.” He added, “Currently, several significant corporations continue to ensure production. However, small enterprises with production lines that can produce 1 - 2t/day face both manufacturing and consumption challenges.” He continued by saying that the production lines of older plants have high depreciation costs and greater heat and electricity consumption than modern units. In addition, these smaller and older plants often lack a trademark, which can make the sales process harder. Commenting on the real estate market, Sam noted complicated payment processes can cause problems with both construction companies and building material suppliers. He cited examples of how the payment for the building materials used to build the Dong Tru and Vinh Tuy bridges had still not been settled 10 years after completion.

India: India Ratings & Research forecasts that cement demand will grow by up to 9% in the 2024 financial year that started in April 2023, due to continued government infrastructure spending. Despite mounting inflation and a large number of capital expenditure projects in progress, it expects cement company profits to recover due to slowing increases in energy costs, according to the Press Trust of India. The current prediction for the 2024 financial year follows a growth estimate of 9% in the 2023 financial year.

The credit ratings agency warned that sector expansion projects will hold back cement production capacity utilisation rate below 70% in the 2024 financial year compared to 65% in the 2023 financial year. It forecasts that three-quarters of around 150Mt/yr of new production capacity is likely to be commissioned by the end of the 2025 financial year. However, as most of this new capacity will be grinding plants, the clinker utilisation rate is likely to remain high.

It added that it expects to see more industry merger and acquisition activity in the south of the country in the short-to-medium term.