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Displaying items by tag: South Africa
Update on Zimbabwe, January 2023
04 January 2023Lafarge Cement Zimbabwe (LCZ) received an unwelcome present before Christmas when the US Office of Foreign Asset Control (OFAC) placed the company buying it on its economic sanctions list. OFAC made its announcement on 12 December 2022. However, the cement producer said that its parent company, Associated International Cement, had concluded its sale of a 76% stake in LCZ to Fossil Mines on 6 December 2022. Local press reports that the Zimbabwe Stock Exchange halted trading in the cement company on 23 December 2022. Then, LCZ said on 29 December 2022 that the OFAC sanctions had “impacted some processes” within it. It added that it was considering various courses of action to protect the business and the interests of all stakeholders.
OFAC took action against Fossil Agro, Fossil Contracting and the group’s chief executive officer, Obey Chimuka, due to alleged links to a previously sanctioned individual, Kudakwashe Tagwirei, and his company, Sakunda Holdings. OFAC said that Tagwirei had “materially assisted, sponsored, or provided financial, material, logistical, or technical support for, or goods or services in support of, the Government of Zimbabwe.” It accused him of using his relationships with government officials to gain state contracts, to receive access to currencies, including the US Dollar, and of supplying luxury items such as cars to ministers. It added that Chimuka was a “longtime business partner” of Tagwirei. Fossil Agro was also linked to a mismanaged agricultural subsidy scheme.
When a company says it has concluded a divestment or acquisition the expectation is that everything has finished. However, LCZ has admitted that the OFAC action has caused it some problems. We’ll have to wait for more information to be released to appreciate the full extent of these ‘problems.’ However, it is worth noting that government capital controls caused delays for the handover of a new vertical cement mill ordered from China-based CBMI to LCZ in mid-2022. At the time it was reported that the cement producer still owed the supplier around US$5m but was unable to make the payment due to economic measures the government had taken to avoid depreciation of the local currency. Other potential issues could also lie in any continuing services or materials that Associated International Cement and its parent company Holcim might have agreed to supply to Fossil Mines in the future as part of the divestment deal.
Looking at LCZ’s business more generally, in its third quarter trading update it said that revenue was down by 43% year-on-year due to suppressed cement and mortar sales volumes. Yet, this was due, in part, to a roof collapse at the company’s plant in late 2021 and the commissioning and ramp-up of that new mill in the fourth quarter of 2022. So the company expects ‘significant’ recovery in its sales volumes in 2023. In a sobering aside illustrating the realities of doing business in Zimbabwe, it also mentioned that the local interest rate jumped to above 200% in July 2022! Despite all of this though, it noted that both residential and government-based infrastructure markets were driving market demand.
South Africa’s PPC reported a fall in its cement sales volumes from its subsidiary PPC Zimbabwe in the six months to September 2022 with knock-on declines to revenue and earnings. It blamed this on a planned kiln shutdown, noted the negative role of hyperinflation and forecast that volumes would improve subsequently due to ‘robust’ cement demand. It pointed out that its earnings were hit during the maintenance period because it had to import clinker from South Africa and Zambia and that this was more expensive than locally manufactured clinker. The other thing that both LCZ and PPC raised were power cuts, although LCZ reported that unscheduled outages had decreased in the third quarter of 2022.
The growing demand for cement in Zimbabwe as reported by both LCZ and PPC helps to explain how Holcim was able to finalise a deal to sell its local subsidiary in 2022. Operational and financial hurdles such as coping with hyperinflation and power cuts show the problems these companies have also faced running a business in the country. Merger and acquisition deals in the cement sector often face travails as they are proposed, negotiated, made public and then put to the scrutiny of regulators. It seems unusual though for a divestment deal to run into problems after it has seemingly been closed.
PPC’s earnings fall by 12% to US$42m in first half
16 November 2022South Africa: PPC’s earnings fell by 12% year-on-year to US$42m in the six months to September 2022, excluding its subsidiary in Zimbabwe due to hyperinflation. In South Africa and Botswana the group reported higher sales in coastal regions due to less imports but tougher conditions inland that led to a 2.6% fall in cement sales volumes. Despite this, it raised its revenue through price rises. Its earnings before interest, taxation, depreciation and amortisation (EBITDA) fell by 29% to US$29.9m. Performance was better in Rwanda where its Cimerwa subsidiary increased its sales volumes by 11% and its EBITDA by 63% to US$14.5m. PPC Zimbabwe’s sales volumes declined by 13% due to a planned kiln shutdown in the first quarter and margins were negatively affected by the use of imported clinker primarily from PPC South Africa and increased maintenance costs. However, sales volumes improved in the second quarter. EBITDA fell by 48% to US$8.59m.
Roland van Wijnen, the chief executive officer PPC, said, “The PPC group continues to deliver sound cash generation and deleverage the balance sheet despite difficult trading conditions in its core South African and Botswana cement market, offset by positive trading conditions in its Zimbabwe and Rwanda operations. To maintain volumes in the South African and Botswana cement markets, sales price increases were limited to 5% in the period under review. Key input costs, especially those related to fuel and energy, increased at double-digits in percentage terms.”
South Africa: Saudi Arabia-based ACWA Power and Industrial Development Corporation of South Africa (IDC South Africa) have partnered to explore the development of green hydrogen infrastructure opportunities in South Africa. Together, they will aim to accelerate the country's transition into a green hydrogen economy across industries including cement production. ACWA Power projected the potential value of developments at US$10bn.
South Africa is committed to achieving net zero CO2 emissions by 2050.
ACWA Power's vice chair and chief executive officer Paddy Padmanathan said "As a company that is driving the energy transition, ACWA Power is proud to work closely with the IDC, with whom we share a robust working history, and today we are delighted to take our collaboration further. I am confident that our expertise in developing mega-scale green hydrogen projects in other geographies will enable us to successfully create a new avenue of sustainable energy generation - one that will pave the path to further progress.”
Competition body blocks Heidelberg Materials’ acquisition of majority stake in Tanga Cement
12 October 2022Tanzania: The Fair Competition Tribunal (FCT) has blocked an attempt by Heidelberg Materials to buy a 68% stake in Tanga Cement for around US$59m saying it was contrary to the law. The Germany-based building materials producer announced in October 2021 that it had agreed to buy Tanga Cement from South Africa-based AfriSam via various subsidiaries, according to the Citizen newspaper. The Fair Competition Commission (FCC) provisionally approved the transaction but required the buyer to keep the operations of Tanga Cement running, to continue producing and promoting the Simba Cement (Tanga Cement) brand and to keep employing the existing staff at Tanga Cement. However, Chalinze Cement Limited and the Tanzania Consumer Advocacy Society opposed the decision due to a potential reduction in market competition and successfully made an appeal to the FCT.
In a statement Tanga Cement said that Heidelberg Materials and AfriSam were, “considering how to proceed, but the FCT ruling has placed the acquisition at great risk of not being implemented.” It added that the parties were waiting for a formal ruling from the FCT and would then seek further advice on how to proceed.
PPC forecasts ‘subdued’ South African cement demand growth
15 September 2022South Africa: PPC says that the consumption of cement in South Africa will ‘remain subdued’ without new ‘significant’ infrastructure investments. The producer forecast demand growth of 2.5% year-on-year in 2022. It concluded that growth will likely not suffice to offset its cost inflation.
The company said “PPC will continue its efforts to counter input price inflation through price adjustments, operational efficiencies and improved industrial performance.”
South Africa: Bowman International has launched Bowman Split Bearings South Africa to deliver the manufacturer’s high-load capacity split roller bearings to the South African and African markets.
Managing Director Paul Mitchell said “There are several heavy-side industries in South Africa and Africa that struggle with the detrimental effects of bearing failure. Our new associates – directors Gary Mayer and Leon Van den Berg – will support businesses in these areas to reduce downtime by specifying the Bowman Advanced Roller Bearing, which is specifically designed for high-load applications.”
India: UltraTech Cement has imported a 157,000t shipment of coal from Russia for US$25.8m, which it paid in Chinese Yuan. ET NOW News has reported that this is the first instance of an Indian entity using the currency in international trade. The deal has a value of US$164/t, 50% below average South African coal prices and 20% below average Australian cement prices in India. The deal reportedly signals the possible end of Indian coal prince inflation in the medium – long term.
From 2027, the 27 member states of the European Union (EU) will begin to charge third country-based cement exporters for the CO2 emissions of their products sold inside the bloc. The new Carbon Border Adjustment Mechanism (CBAM) is a lynchpin in the strategy to realise a 55% reduction in EU industries' CO2 emissions between 1990 and 2030. Starving foreign cement industries of a source of income may also help to make them change their ways. A regional solution leveraged through an unfair head start, however, might cause progress to falter where it is most needed in the global fight against climate change.
Carbon leakage has hung over the EU’s Emissions Trading Scheme (ETS) since its inception in 2005. Cembureau, the European cement association, has reported a 300% five-year increase in third-country cement imports up to 2021, with spikes matching those in ETS credit prices. Companies from Turkey to Australia have produced and transported their cement into the EU, at great CO2 cost, while benefitting from a competitive edge over domestic producers, it would seem. Lawmakers rectified the situation by maintaining free allocations of ETS credits to EU industries, including cement, which received US$92m-worth in 2021.1 In the wake of the Paris Agreement, an emissions pricing mechanism on cement imports first came before a vote of the member states in February 2017.
In what would become a recurring theme, opposition from all sides of the issue defeated the proposal. Most interesting was the international response: Brazil, China, India and South Africa voiced ‘grave concern’ over the proposed CBAM. A Russian representative at the Department of European Cooperation lamented the possible necessity of ‘response measures,’ while US Climate Envoy John Kerry coolly urged the EU to wait until after the COP26 climate change conference in November 2021. The outbursts were surprising given that the mechanism clearly conformed to World Trade Organisation (WTO) rules: free allocations were always expected to phase out in a mirror image of the CBAM phase-in. The proposal eventually adopted on 22 June 2022 set the end date for both as 2032.
In 2020, the EU imported US$383m-worth of cement and concrete across its external borders, down by 17% year-on-year from US$463m in 2019.2 Imports had previously more than doubled decade-on-decade from US$204min 2009. China accounted for US$167m-worth (43%) of global cement and concrete exports to the EU in 2020, followed by Vietnam with US$34m (9%) and the UK with US$30m (7.9%). Other significant sources include Belarus (US$28m - 7.4%), Russia (US$13.8m - 3.6%), Bosnia and Herzegovina (US$13.5m - 3.5%), Serbia (US$13.1 million - 3.4%), Israel (US$13m - 3.4%), Turkey (US$12.6m - 3.3%) and the US (US$10.3m - 2.7%).
China
China’s first emissions trading scheme will be one year old on 16 July 2021. The scheme, covering more than twice the CO2 emissions accounted for under the EU ETS, may lend an apparent synergy to EU energy policy and that of the bloc’s main trade partner.3 On the contrary, Chinese carbon credits cost 8.5% the price of EU ETS credits on 29 June 2022, with a growth rate of just 10% year-on-year, compared to 53% in EU ETS credit prices. Unlike their European equivalent, they are also restricted to the energy sector. Chinese cement exporters are unready to meet the CBAM on its own terms. The inclusion of indirect emissions further disadvantages plants operating in China’s 57% coal-powered economy. Premier Li Keqiang has warned countries to be on their guard against a ‘new green trade barrier.’
These concerns ought to be considered in light of the scale and diversified nature of the China-EU trade partnership. The eventual inclusion of polymers, hydrogen and ammonia under the CBAM still does not extend its scope beyond 3% of Chinese imports to the EU by value, enabling China to retain the leverage it has previously proved willing to exercise against those who threaten the perceived interests of global trade.
China plans to reach net zero CO2 emissions by 2060 through an energy transition in which it invested US$266m in 2021, more than the next six ranked countries combined.4 In the medium-term future, the CBAM may become a green bridge, connecting with Chinese emissions reduction policies in a single carbon border measure to raise money for developing countries’ sustainable transitions, as suggested by former governor of the People’s Bank of China Zhou Xiaochuan. Until then, China seems well positioned to ensure that a fair share of the costs arising from the CBAM pass to importers and the consumer.
Turkey
Turkey provided 3.3% of the EU’s cement and concrete imports in 2020, but the volume corresponded to 13% of Turkey’s total exports of the same. Thus, the country has a high exposure to any adverse effects of the CBAM – quantified at an estimated US$789m/yr by the European Bank for Reconstruction and Development.5 Turkey’s ratification of the Paris Agreement in late 2021 is among the positive outcomes of the CBAM. The country now plans to align with the CBAM. In this, the Turkish cement industry will rely on a share of a US$3.2bn loan from the World Bank, France and Germany.
The UN has yet to receive an updated climate action plan from the Turkish government in line with its pledges. Should Turkey fail to transition within the short timeframe provided by the CBAM, its cement sector might increase its existing focus on the West African market, where it holds 55% and 46% market shares for cement and clinker imports to Ghana and Ivory Coast respectively. The beleaguered industry has one greater refuge still: the US market, which consumed 18% of Turkish cement exports in 2020.
North America
Discussions of the CBAM’s impacts in Canada and the US are tied to those countries’ on-going deliberations over possible adjustment mechanisms of their own. At present, individual provinces and states are responsible for implementing carbon pricing. An international emissions trading scheme, called the Western Climate Initiative, already exists between the US state of California and the Canadian province of Quebec. The Canadian government is conducting a consultation on federal Border Carbon Adjustment (BCA) credits in the context of economy-wide pricing.6 Carbon border adjustment was previously an item on the US Trade Policy Agenda in 2021, but disappeared in 2022. President Biden pledged to impose 'carbon adjustment fees or quotas on carbon-intensive goods from countries that are failing to meet their climate and environmental obligations' during his candidateship in the 2020 US presidential election. On 7 June 2022, two weeks before the EU adopted CBAM, Senator Sheldon Whitehouse introduced a carbon border adjustment bill to the US Senate, which it referred to its Committee on Finance.7
North American legislators will need to follow the European Parliament in building a broad centrist majority in order to pass their CBAMs. If they succeed, the world will gain a low-carbon axis of cement markets, bringing their trade partners behind them.
Other European countries
The UK cement industry expects to pay an extra US$30.1m/yr on account of the CBAM.9
A November 2021 report by the Ukraine Resource & Analysis Centre (Society and Environment) concluded that Ukraine's 'largest and most technological' cement producers will experience no critical influence from the CBAM when exporting to the EU.8 At that time, the Ukrainian strategy consisted of an alignment with any future CBAM. On 31 May 2022, The European Business Association calculated Ukrainian cement producers' total CBAM tax bill as US$3.36m/yr.10
Montenegro introduced its own emissions trading system, modelled on the EU ETS, in February 2021, a move which Bosnia and Herzegovina and North Macedonia have both announced their intent to follow.11
Norway has called for international acceptance of the CBAM, but questioned the practicality of including indirect carbon pricing.
An example of the possible adverse effects of the CBAM comes from the EU's ban on Russian cement imports in April 2022. The loss of the EU market was one likely contributor to a rollback of climate regulation there.12
Developing countries
Non-governmental organisation (NGO) Oxfam has criticised the CBAM's failure to include an exemption for the least developed countries. The EU's solution is an indirect one: it will put CBAM revenues towards its budget, from which international climate finance funding will be raised to an equivalent level. As Paris Agreement signatories, EU member states already expect to contribute to the achievement of US$100bn/yr in climate finance funds for poorer countries in 2023.
Oxfam has recommended that the EU do more to take account of its disproportionate contribution to cumulative global CO2 emissions. This would include directly paying CBAM revenues into international climate finance and accelerating the phase-out of free ETS allocations.
Conclusion
On 22 June 2022, the most sustainable cement market in the world successfully harnessed market forces to its emissions reduction ambitions. The European cement industry will be able to celebrate the end of carbon leakage. Cement companies outside of the EU, however, now face increased costs and lower prices for their product. The legislation addresses some of the harm that it causes to less developed countries; those – like China, Turkey and Vietnam – in the middle must meet it head-on.
So far, we have cited governments and lobby groups, but the real question of readiness for the CBAM lies with producers. Global cement companies, including those based in the EU, have implemented their sustainable cement technologies across all continents, and are beginning to reap the rewards of a new world where paying for pollution is unavoidable.
Sources
1. Sandbag, E3G and Energy Foundation, A Storm in a Teacup, Impacts and Geopolitical Risks of the European Carbon Border Adjustment Mechanism, August 2021, https://9tj4025ol53byww26jdkao0x-wpengine.netdna-ssl.com/wp-content/uploads/E3G-Sandbag-CBAM-Paper-Eng.pdf
2. Trend Economy, ‘Imports: European Union: 6810,’ 14 November 2021, https://trendeconomy.com/data/h2/EuropeanUnion/6810
3. Energy Monitor, ‘Carbon trading the Chinese way,’ 5 January 2022, https://www.energymonitor.ai/policy/carbon-markets/carbon-trading-the-chinese-way
4. China Power, ‘How Is China’s Energy Footprint Changing?’ https://chinapower.csis.org/energy-footprint/
5. Politico, ‘EU’s looming carbon tax nudged Turkey toward Paris climate accord, envoy says,’ 6 November 2021, https://www.politico.eu/article/eu-carbon-border-adjustment-mechanism-turkey-paris-accord-climate-change/
6. Canadian Climate Institute/L'Instut Climatique du Canada, 'Border Carbon Adjustments,' 27 January 2022, https://climateinstitute.ca/publications/border-carbon-adjustments/
7. Congress, 'S.4355 - Clean Competition Act,' 7 June 2022, https://www.congress.gov/bill/117th-congress/senate-bill/4355?s=1&r=6
8.Ukraine Resource & Analysis Centre (Society and Environment), ' The Impact of Carbon Border Adjustment Mechanism (CBAM) on the EU - Ukraine trade,' November 2021, https://www.rac.org.ua/uploads/content/624/files/impactcarbonmechanismcbamukrainesummaryen.pdf
9. Burke et al, 'What does an EU Carbon Border Adjustment Mechanism mean for the UK?' April 2021, https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2021/04/What-does-an-EU-Carbon-Border-Adjustment-Mechanism-mean-for-the-UK_FULL-REPORT.pdf
10. European Business Association, 'Ukrainian exporters to pay more than € 1 billion in carbon tax to the EU under the CBAM,' 31 May 2022, https://eba.com.ua/en/ponad-1-mlrd-yevro-podatku-na-vuglets-shhoroku-splachuvatymut-ukrayinski-eksportery-v-yes-v-ramkah-svam/
11. Balkan Green Energy News, 'Which Western Balkan countries intend to introduce carbon tax?' 18 May 2022, https://balkangreenenergynews.com/which-western-balkan-countries-intend-to-introduce-carbon-tax/
12. Climate Home News, 'Russian climate action and research is collateral damage in Putin’s war on Ukraine,' 26 May 2022, https://www.climatechangenews.com/2022/05/26/russian-climate-action-and-research-is-collateral-damage-in-putins-war-on-ukraine/
South Africa: PPC’s full-year consolidated sales were US$624m in the 2022 financial year, which ended on 31 March 2022, up by 11% year-on-year from US$561m in the 2021 financial year. Its earnings before interest, taxation, depreciation and amortisation (EBITDA) fell by 6.9% to US$94.5m from US$101m. During the year, the group reduced its debt by 55% to US$63m from US$139m.
The group noted high cement demand across its markets in the 2022 financial year, including a sales volumes increase of 28% year-on-year in Zimbabwe. It also noted a 19% year-on-year increase in South African cement imports, mainly from Vietnam, which constituted 10% of sales in the 2022 financial year. PPC said that it will ‘immediately make additional capacity available’ to capture the increased demand through the rest of 2023 financial year.
Zimbabwe: South Africa-based PPC has held a groundbreaking ceremony for a US$40m project to build solar power plants with a joint output of 30MW to support its integrated Bulawayo and Colleen Bawn cement plants. The Bulawayo plant will set up a 10MW plant, with 5MW earmarked for internal use, while the Colleen Bawn plant will develop a 20MW capacity, 12MW being used internally, according to the Chronicle newspaper. The excess electricity will be fed in the national grid. PPC has chosen ATC Consortium to build and operate the solar plants under a 20-year power purchase agreement.