Hard-hit by the global economic crisis, Russia may now be re-entering the growth path pursued in the years immediately before the downturn. In its improving economy much of the liquidity generated by commodity earnings is likely to be channeled into the property sector. This is positive news for cement demand, but while the near-term looks relatively bright, the subsequent years may prove more difficult for producers.
Last year cement demand saw its biggest single-year drop (-28%) since the slump witnessed in the 1990s. Import volumes collapsed following a dramatic rise in 2008 while exports surged. However, recent domestic consumption figures appear to be more positive. In August 2010, the country posted a 19% rise in demand – its fourth double-digit increase in five months. Meanwhile, cement production volumes are running above 2008 levels, though still below 2007 figures. Between January-September Russia produced 38.3Mt.
Demonstrating its confidence in the sector’s potential, Lafarge intends to invest EUR1-2bn over the coming years. Prime Minister Vladimir Putin recently confirmed that the French major has started construction of a factory in the Kaluga region, south of Moscow. Plans for this works were announced in 2008 but later put on hold as demand fell. The new facility will add to Lafarge’s Russian cement base, which includes Voskresenskcement, Moscow, and Uralcement near Chelyabinsk. The next step of its investment programme involves the development of projects in the Rostov and Krasnodar regions.
Eurocement has managed to almost regain the market share it lost to imports in 2008. Since 2H09 the Russian market leader has increased its share back close to 40% from 30% in 2008. The company has also recently said it plans to invest US$328m in a plant located in the Voronezh region of Russia.
The Russian government’s step to remove all duties on cement exports from a previous 6.5% base is also set to open wider opportunities. Russia has traditionally been a net exporter of cement, with the exception of the 2007-08 boom years. The easing of trading conditions, which comes into force this November, has therefore come as welcome news.
Looking further ahead, the Russian industry will be tested in its ability to absorb continuing capacity additions. The 25Mta of new plants announced or under construction have the potential to increase installed cement capacity by more than a third. To fulfil the potential of an 80% capacity utilisation rate before 2018, old inefficient plants need to leave the market. At the same time, economic vulnerabilities have not been resolved. Government finances are in a much worse state now than before the crisis and inflationary pressures are building. A positive development could be a robust infrastructure investment programme, which the Russian government has committed to initiate, but is yet to deliver on a large scale.
Over the next five years the industry is expected to see an uptrend of 7-9% annually. Longer-term, the residential sector – the cement industry’s main growth driver – has the potential to drive growth of 80% in the next 15 years. Commercial construction has proved to be a second driver for cement in the past but it may give less support in the near-term due to a high number of vacancies. The long-term potential for the country, however, is considerable given the substantial investments needed in terms of affordable housing, commercial property, as well as infrastructure. Cement consumption is therefore set to expand in Russia over the coming years, even if at a slower pace, and supply and demand volumes are forecast to exceed 100Mt by 2025.