Cemex leads the charge on US pricing

Cemex leads the charge on US pricing
Published: 03 December 2012


Cemex is planning two incremental cement price increases in January and April 2013 in a bid to reverse the "chronic under-pricing of cement in the US", says Karl Watson, president Cemex USA. Speaking at a presentation in Mexico on Tuesday this week, Watson said that the price increases of US$8/t each are integral to the company's goal of achieving an EBITDA of over US$1bn by 2016.
 
"Prices, in real terms, averaged US$154/t in the 1970s. The current industry price of, on average, US$90/t is just not enough to achieve an adequate return on investment," says Watson. "If we are going to recover the cost of capital we need to be pushing prices to in excess of US$120/t and become the lowest-cost producer we can possibly be."
 
Watson believes recovery is well underway and the combination of a growing GDP, falling unemployment rates, record-low interest rates and corrected housing prices makes it the ideal time for the US cement market to bring its prices in line with its neighbours Canada and Mexico.
 
"Structurally I think the US is better positioned today than it has ever been to take advantage of an upturn in cement demand," argues Watson. And demand is on the up with housing starts expected to increase by 16 per cent to around 873,000 in 2013. Cement demand from the industrial and commercial sector is forecast to rise by 8.5 per cent next year. According to Cemex, between 2012 and 2017 total Portland cement consumption in the US will rise from 77Mt to 123Mt. However, last week the Portland Cement Association warned that while it expects cement consumption to rise 7.5 per cent in 2012, these gains could be immediately erased in 2013 if the so-called US 'fiscal cliff' is not resolved. Analysts at BNP Paribas are also cautious on the US construction outlook for 2013 which they note could be negatively affected by budgetary restrictions.

Inflection point

Cemex currently produces around 11Mt of cement, accounting for 29 per cent of global sales. In the first nine months of 2012, cement volumes rose 16 per cent compared to the same period last year. Aggregate and ready-mix volumes in the nine months to September 2012 rose 10 and 16 per cent, respectively. While grey cement shipments rose by only 7.9 per cent in August and 2.2 per cent in September, the 4Q12 has seen a reacceleration of growth with deliveries increasing by 14.1 per cent in October and up by a similar amount so far in November.
 
This year has brought about what Watson describes as a "clear inflection point" for Cemex with EBITDA in the first nine months of the year rising to US$30m, up from -US$74m in the same period last year. Its new pricing strategy, affectionately known as 'Value Before Volume', is designed to boost this to beyond US$1bn in the next five years.
 
But, as Watson points out, actively raising prices is a dangerous journey putting Cemex in potential conflict with its customers. "Someone has got to do it and we're going first," he said. Leading the charge is one thing, getting the rest of the industry on board is quite another. "The industry never takes a collaborative approach to pricing but markets have moved dramatically before, even in the US," he adds.

Alternative fuels development

Tuesday's presentation also outlined Cemex's plans for increasing its use of alternative fuels. Currently burning around 22 per cent alternative fuels, a saving of over US$14m per year, the company aims to increase this to 50 per cent by 2016. Alternative fuels currently in use include peanut shells, tyres, biosolids and wood. Cemex is also investing in wind power reducing electricity costs and preventing over 1500tpa of CO2 emissions.

Commercial strategy

Cemex also recently launched a new procurement initiative, the Cemex Marketplace. Described as their "little Amazon", the marketplace is an online facility enabling customers to compare products, review prices, see deliveries and purchase parts, equipment and services from more than 11,000 suppliers.
 
The development of new products was also discussed, particularly in the pavement applications sector where Cemex hopes to gain market share as future investment is channelled into highways, streets, roads and parking. But, as Watson points out, getting Washington to commit to infrastructure investment is "a struggle that will go on for a while".
 
What is clear is that Cemex is committed to single-handedly raising prices across the industry. It remains to be seen if any of its competitors follow suit.