Global Cement News

Ireland: CRH appointed William J Teuber, Jr as a non-executive Director with effect from 3 March 2016.

Teuber, aged 64 years and a US citizen, is the Vice Chairman at EMC Corporation, a global leader in enabling businesses and service providers to transform their operations and deliver IT as a service. In previous roles he was responsible for EMC’s global sales and distribution organisation (2006 – 2012) and served as Chief Financial Officer leading the company’s worldwide finance operation (1996 - 2006). Prior to joining EMC he was a partner in the audit and financial advisory services practice of Coopers & Lybrand.

Teuber is a member of the Board of Directors of Popular, a diversified financial services company, and Inovalon Holdings, a healthcare technology company. He holds an MBA degree from Babson College, a Master of Science in Taxation from Bentley College, and a Bachelors Degree from Holy Cross.

Cemex has taken action towards its debts over the course of the last week. First, it announced that it had amended its credit agreements in order to delay the looming effects of consolidated financial leverage and coverage ratio limits by one year to March 2017 with other similar deadlines also delayed. Then it announced the pricing of US$1bn of Senior Secured Notes due in 2026, a form of secured borrowing. This was followed by confirmation of asset sales in Bangladesh and Thailand. Finally, it announced that it was seeking regulatory permission to sell a minority stake in its subsidiary in the Philippines.

This column has discussed the on-going financial travails at Cemex a few times, notably recently when the group released its fourth quarter results for 2015 and in the wake of HeidelbergCement’s announcement to buy Italcementi. Basically, it all comes down to debt, as the following graph shows.

Figure 1 - Cemex assets, debt and equity, 2006 - 2015

Cemex took on large amounts of debt following its acquisition of Rinker in 2007. Since then the value of its assets have been falling faster than it has been able to reduce its debts. However, its equity (assets minus debts) is looking like it might dip below its debts in 2016. Hence, action needs to be taken. Cemex appears to have attempted to do this over the last week. Will it be enough?

The credit amendment was probably the most pressing issue for the Cemex management given that the terms have been reliant on maintaining a leverage ratio (debt divided by assets) below a set limit. Cemex has extended the terms of the borrowing in its favour so it can keep the leverage ratio higher for longer without penalty from its creditors. Note that the leverage ratio here means the ratio between debt and operating earnings before interest, taxation, depreciation and amortisation (EBIDTA).

Selling assets and shares in Asia is the next step in cutting debt in the window the group has negotiated for itself. It holds minor cement production assets in Thailand and Bangladesh that it is selling to Siam City Cement for US$53m. These include a 0.8Mt/yr integrated cement plant in Saraburi, Thailand and a 0.52Mt/yr cement grinding plant in Madangonj, Bangladesh. Unfortunately for Cemex it purchased the Saraburi plant for US$77m in 2001 from Saraburi Cement making it a loss of at least US$24m.

A minority sale of shares in its Philippines assets is more promising. The group runs two integrated cement plants in the country, the Solid Cement Plant in Rizal and the APO Cement Plant in Cebu with a combined cement production capacity of 6.23Mt/yr and a new 1.5Mt/yr production line on the way at Solid Cement also. Local media estimate that the sale could earn Cemex as much as US$850m from the booming market. The Cement Manufacturer's Association of the Philippines reported that cement sales volumes grew by 14.3% to 24.4Mt in 2015 with more growth predicted for 2016.

The credit amendment and asset sales of US$0.9bn may give Cemex the breathing room it requires to keep the creditors at bay for a while longer. It originally refinanced its debts in 2009 at the height of the financial crisis to keep the business running until the markets picked up again. They haven’t. A question that might be legitimately asked at Cemex’s analyst day later this week, on 17 March 2016, is this: when is Cemex going to seriously tackle its debts? As the situation continues the group may end up devoting more time to managing its debts than it will to actually making cement and other building products.

India: Burnpur Cement has signed an agreement with Saurabh Ganguly as a brand ambassador for the company for three years from 11 March 2016. Ganguly was the former captain of the Indian cricket team. As the brand ambassador for the company he will endorse the product and brand of the cement producer to help increase of sales.

Germany: Johan Cnossen has resigned as the Chief Executive Officer and a member of the Management Board of KHD with immediate effect from 11 March 2016. He cited personal reasons. Other Management Board members will take over his responsibilities for an interim period.

Dangote Cement released its financial results for 2015 this week and certain numbers are more interesting than others. The headline that the company would probably like us to look at is a 14% rise in profit from significantly higher revenues. However, we would like to look at Dangote’s capacity and production figures. We have spoken about Dangote’s ambitions in this column in recent years and it is very likely that the topic will come up again in the future. But Dangote’s ambitions are increasingly becoming a reality for markets all around Africa. How are its pan-African expansion plans turning out?

Dangote Cement reported that cement production volumes were up by 35% in 2015 compared to 2014. This was due almost entirely to Dangote’s new plants outside of its native Nigeria. While its Nigerian cement production volumes rose from 12.9Mt in 2014 to 13.3Mt in 2015, production elsewhere came in at 5.6Mt, more than five times the amount that Dangote produced outside of Nigeria in 2014. This rapid rise was the result of the first cement being produced at its plants in South Africa, Senegal, Cameroon, Ethiopia and Zambia.

As Dangote has expanded into these new markets, we have heard much about the effects of its new capacity from other producers. In South Africa, long-established players have had to deal with falling cement prices due to the inauguration of Dangote’s Sephaku Cement subsidiary. In Zambia, Zambezi Cement was forced to lay off workers in 2015, citing the opening of Dangote’s new facility as a significant contributing factor. More recently, in February 2016, Ghana announced an investigation into Dangote’s operations in the country following accusations of ‘predatory pricing’ by its competitor Diamond Cement. The investigation is ongoing.

However, the complaints heard to date could really start to ramp up over the course of 2016 as Dangote starts to realise its full potential across Africa. Its cement production volumes may have risen by 35% in 2015 relative to 2014 but its capacity rose by an incredible 87%, with Dangote now claiming a capacity of 44Mt/yr! The capacity utilisation rate is just 43% and the inference is that the ex-Nigerian plants have not yet realised anything like their full potential. Local producers the length and breadth of Africa may well be looking at this situation with dread.

And ramping up its production in 2016 is by no means the end of Dangote’s pan-African vision, with new plants under construction in Nepal, Kenya and Zimbabwe. As well as new plants outside of Nigeria, Dangote cement capacity within Nigeria is also set to rise. It recently announced a further 9Mt/yr of capacity at two new plants. With exports to its smaller neighbours already causing consternation, this will surely add fuel to the fire for local producers like Diamond Cement.

So far in 2016, the news continues to be promising for Dangote. January 2016 sales volumes rose by 77.6% to 2.0Mt, with Nigerian sales up by 46.4% to 1.4Mt. February 2016 sales volumes were 38% better than a year earlier, with Nigerian sales up by more than 60% year-on-year to more than 1.5Mt.

At the end of its report, Dangote says that it expects to have around 77Mt/yr of cement capacity by the end of 2019. If realised, this capacity would be enough to put it up to sixth on the Global Cement Top 100 list by 2016 standards. It would have around 28% of Africa’s entire cement capacity, according to the Global Cement Directory 2016 and would be only 10Mt/yr behind the 87Mt/yr of cement capacity currently held by the established multinational player Cemex. That is truly a number to pay attention to!