Global Cement News

As readers in colder climes will understand: nobody likes a gas bill. Save some pity for LafargeHolcim Bangladesh then this week, as it faces attempts to hike the price it’s paying.

As reported by local press the government-run Jalalabad Gas Transmission and Distribution Systems (JGTDS) is trying to raise the rate for natural gas to the cement producer. Allegedly, LafargeHolcim Bangladesh is paying a lower unit cost for gas supplied to a power plant at its Chhatak cement plant than the fixed amount set by the country’s energy regulator. LafargeHolcim Bangladesh says the rate was set in a gas sales agreement (GSA) signed between JGTDS and its predecessor, Lafarge Surma Cement, in January 2003. The state body meanwhile has referred the issue up the chain of command to the Energy and Mineral Resources Division under the Ministry of Power, Energy and Mineral Resources.

JGTDS says that the plant is consuming around 450,000m3/day of gas. Of this, about a quarter is used to run the power plant and the remainder is used to power the cement plant’s kiln. The plot thickens though as LafargeHolcim Bangladesh is actually paying above the industry tariff for gas of US$0.09/m3. Commentators reckon the price of gas is set to rise in the future. Naturally the cement producer wants to stick to the pre-agreed price for the economic viability of the country’s main integrated cement plant. The Spanish embassy, representing Cementos Molins one of the owners of the company along with LafargeHolcim, has even gone as far as intervening in the argument.

The pressure is on LafargeHolcim Bangladesh because its sales revenue fell slightly year-on-year in 2016 but its fuel costs rose by 12%. As the country’s sole clinker producer it suffered from falling international clinker prices in a nation full of grinding plants. So far in the first nine months of 2017 its sales revenues have risen a little yet its profit has more than halved. Any change to its fuel costs would seem likely to damage the company at a delicate moment.

Energy costs for cement plants are nothing trivial as the graph above shows. It uses data from the German cement industry but the key takeaways are that the calorific ratios of the different types of energy cement production uses don’t directly correlate to the cost. Hence, in Bangladesh and other countries where the electricity grid might be unreliable or expensives, running one’s own captive power plant makes sense both for cost and supply reasons. As an aside that may not be applicable to Bangladesh right now, the stark disparity between the energy produced by alternative fuels and their cost proportion is a great reason to use them if the necessary supply chains can be organised. LafargeHolcim launched local operations for its waste management wing Geocycle in December 2017 so this point has not been lost the company.

The situation in Bangladesh is reminiscent of the bind Dangote Cement found itself in towards the end of 2016 in Tanzania. A dispute over gas prices for its Mtwara plant led to company boss Aliko Dangote negotiating personally with President John Magufuli to protect his investment. Governments want inward spending in the form of new industrial plants and multinationals want assurances on some of their costs, like fuel supplies, before they reach for the chequebook. However, if one side is seen to be getting too good a deal then the relationship can break down. LafargeHolcim Bangladesh may have bagged itself a scandalously low gas deal and the Bangladesh government may also be breaking an agreement. Bear in mind though, that with sales of nearly US$28bn in 2016, LafargeHolcim took in revenue nearly one tenth of Bangladesh’s gross domestic product. If the two parties don’t reach an accord, the consequences for both parties could be negative.

India: Jorge Alejandro Wagner has been appointed as an additional director of Votorantim’s subsidiary Shree Digvijay Cement. Sven Erik Oppelstrupp Madsen has retired as a director following his departure from the role as chief executive officer (CEO) of one of Votorantim’s subsidiaries in Spain

Wagner holds a Master of Sciences in Management (MBA) from Pardue University Indiana in the US and a mechanical engineering degree from the Universidad Nacional de mar del Plata in Argentina. He started working for Votorantim Cimentos in 2002 in Brazil, later becoming the CEO for Spain in 2012. Prior to working for Votorantim he held roles with Esso Sapa, the Argentinean subsidiary of Exxon Mobil, and McKinsey & Company.

Denmark: Virve Elisabeth Meesak has resigned from FLSmidth as its Group Executive Vice President for Human Resources. She had been in post since 2013. She will leave the company by the end of January 2018.

Asia Cement has completed its purchase of Halla Cement this week for US$723m. The deal has created the third largest cement producer in South Korea with a cement production capacity. This includes one integrated plant at Okgye, three slag grinding plants and a distribution network.

Graph 1: Cement producers in South Korea by cement production data from 2016. Chart includes mergers in 2017 and 2018 to represent current market share. Source: Korea Cement Association.

The Halla Cement transaction marks an on-going consolidation process in the local industry. 2017 proved a busy year with the purchase of Daehan Cement by Ssang Yong Cement and Hyundai Cement by Hanil Cement. Assuming the dust has settled this now leaves Ssang Yong Cement and its new subsidiary in the lead by cement production data from 2016 with 12.9Mt or a 23% market share, Hanil Cement next with 12.4Mt or a 22% share and Asia Cement with 10.8Mt or a 19% share. Overall the country produced 56.7Mt of cement in 2016, according to Korea Cement Association data. The remainder of production is shared between six producers.

Fears that the construction industry may have been about to slow down might have prompted Glenwood Private Equity and Baring Private Equity Asia to sell Halla Cement a little earlier than expected. However, they don’t appear to have done too badly out of this. The two private equity firms that bought Halla Cement from LafargeHolcim in 2016 seem to have made a cool US$180m on the deal. At the time it was reported in the local press that they paid US$542m for the cement producer. Glenwood Private Equity was the lead investor followed by Baring Private Equity Asia. They bought Lafarge Halla Cement in May 2016 and then were looking for buyers a year later in August 2017.

Cement consumption in South Korea has followed a rollercoaster path since 1992 hitting a high of 61.7Mt in 1997 and a low of 43.7Mt in 2014. It then rose to 55.8Mt in 2016. The consolidation behaviour by the cement producers suggests either a poor performing market or an uncertain one. Since the gap between the peak and the trough is more than Halla Cement’s production capacity no wonder its private equity owners were keen to get shot of it at the first sign of trouble. So let’s end with the words of Han Chul Kim, Managing Director of Baring Asia, from the time of the purchase from LafargeHolcim in 2016: "We couldn’t imagine a more solid platform from which to access the growth opportunities in the Korean market in the coming years.”

UK: Samson Materials has appointed Dale Lockley as its managing director. He joined the subsidiary of Aumund in 2016 as Senior Project Manager and later worked as Program Delivery Manager. Lockley is a trained mechanical engineer with over 20 years of experience working within and leading international multidisciplinary teams and developing materials handling technologies of worldwide operating companies, including more than seven years as managing director.