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The massive bull-run of cement demand in the UAE finally reached its peak in 2008, when demand reached 21.7Mt, up three-fold on the 6.9Mt consumed in 2003. This extraordinary growth is even more startling when one considers per capita consumption reached 4,345kg at this time – over ten times the global average.
Throughout these boom years, supply shortages became common-place, resulting in rapid price inflation as producers sought to capitalise on the scarcity of cement (often funnelling their vast profits into the stock market), while cement and clinker trade increased exponentially. All of this activity was accompanied by a frenzy of new capacity additions as ement capacity reached 32.5Mt, up from just 11Mt in 2003 leaving the UAE littered with grinding plants. Annual clinker production is now in the region of 18.6Mt.
Suddenly, at the end of 2008, amidst the global financial crisis and the bursting of Dubai's self-inflicted real estate bubble, the market turned – sharply. Cement demand fell 16% in 2009 to 18.25Mt as half of all construction projects in the UAE ground to a halt. A further double-digit decline forecast for 2010. Prices have plummeted, from Dhs500/t to just under 200/t in January, while imports, which reached 3.6Mt in 2008, have all but vanished.
Like a supertanker drifting in the sea, capacity in the UAE will continue to rise inexorably, reaching a massive 40.7Mt by 2011, as projects conceived in happier days are completed. This will leave a demand-supply gap of around 25Mt, assuming demand stabilises at around 15.5Mt by 2011. In terms of clinker, the gap could reach 16Mt by 2011.
Who's to blame?
Now saddled with a massive capacity surplus, lowering utilization rates and low prices, one might ask, "who's to blame?". During the boom years, construction companies found themselves facing repeated supply shortage as local cement supply failed to meet demand, while prices swiftly exceeded pricing caps supposedly agreed with the government. For some construction companies, whose operations were continually held back by supply uncertainties, one answer was to build their own grinding plant to ensure guaranteed supply at reasonable prices. Grinding plants are relatively easy to build and require only a limited capital expenditure that could quickly be paid off.
Others speculators from outside the industry saw the potential for windfall profits. To the dismay of many industry observers, new entrants kept coming, even when it was obvious the market was heading for severe overcapacity.
But ultimately, the industry itself must take some responsibility for the pricing environment which attracted speculators with limited understanding of the longer-term cement market cycles, and those simply focused on short-term profiteering and with the support of financiers ill-equipped to carry out proper due diligence.
Perhaps an even deeper problem is the issue of industrial regulation. The absence of any industry co-ordination by the government, including an effective licensing system designed to phase in new capacity at a rational pace in order to protect the long-term viability of the industry.
Even regulation is no protection of overcapacity if the law-makers, financiers and speculators are operating under the collective delusion of a market with infinite growth potential.
The current industry response to this situation of overcapacity over the next year will be crucial. In a rational market, all existing players would reach for their nearest economic textbook, and remind themselves of the damage to profitability that a price war will cause to all involved. Instead the industry must take proactive steps to start a process of restructuring, whereby surplus grinding capacity is whittled out. A degree of price discipline should be adopted, with price levels adjusted to levels at which efficiently run operations can survive, and which correspond to an international price level (and therefore limit unnecessary imports). Finally, production volumes need be adjusted to the demand of the market.
In this way the industry will not be plunged into needless long-term financial distress, while ensuring a sustainable course for the industry in the years ahead. Alternatively, the price war can continue, leaving only the strongest – or those with the deepest pockets – to survive. But at what cost?
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News from the UK Press indicates that ArcelorMittal, Europe’s major
steel producer currently stands to benefit from a €1.15 billion
windfall from European “carbon credits” given to it under the European
emissions trading scheme (ETS). An investigation has
revealed that ArcelorMittal has been given far more carbon permits than
it needs. In fact, it apparently has the largest allocation of any
organisation in Europe. ArcelorMittal is now free to sell its surplus
permits on the market or to hoard them for future
use. Either way, the company will have gained assets worth around €1.15
billion at today’s prices by 2012. The eventual value could be much
greater. Each carbon permit is currently worth about €13.50, but the
European Union has said it wants to drive this price
above €30.00.
Turning our attention to cement, the reduced cement production in the
European Union as, a result of the fall in construction activity, has
also enabled local cement producers to sell significant CO2 emission
allowances. Last year Lafarge made a €85m gain
by selling such allowances to other polluters, such as the power
generating industry. In the first nine months of this year, the company
gained €77m from the sale of emission allowances. This compares with
nothing, or virtually nothing, in 2007. The appearance
of excess allowances last year had much to with the reduced cement
production in Great Britain and Spain.
Holcim, which generated no meaningful profit from the sale of CO2
emission allowances last year, has booked gains of €40m in the first
nine months of 2009, of which €36m came in the third quarter.
HeidelbergCement both bought and sold emission rights last year,
generating a net profit of €50m compared with a €25m net gain in the
previous year. Though HeidelbergCement was a net seller of emission
permits last year, in certain countries it did have to
purchase CO2 emission permits.
Buzzi Unicem provides a good illustration of the unpredictability of
such incomes. The group made €6.4m from the sale of emission allowances
last year, but nothing in the year before, as prices were too low to
make it worthwhile doing such deals. However, in
previous years, the sale of such allowances have been an important
source of profit, providing €24.6m in 2006 and €26.4m, at that stage
all coming from the four countries of Germany, the Czech Republic,
Poland and Luxembourg.
If one adds in all the other European major producers, Italcementi,
Cemex, CRH and the remaining independents, total sales could well have
reached the €200m level to date. Extrapolating this to 2012, assuming
continuing low demand levels for cement throughout
much of Europe, it is not inconceivable that the European cement
industry could also net close to €0.5 billion of unused credits for the
2008-2012 period.
Clearly this cannot be allowed to continue, and it has been suggested
that from 2013 onwards, all emission permits should have to be bought
at auctions. However such a move, industry lobbyists argue, might force
the closure of most of the European cement industry,
especially if cement and clinker imports are allowed to enter the
European Union unchecked, or at least, if not heavily taxed. Instead,
the industry has won its campaign to be recognised as vulnerable to
carbon leakage (the final decision is due to be published
on 23 December 2009).
What happens after that will depend on the European Commission which
must decide on what volume of emission allowances are to be allocated
to the European cement industry for Phase 3 (2013-2020). This depends
on the allocation process and which benchmarks are
used to determine the free allowances. The most likely approach is an
efficiency benchmark multiplied by historical production. Ecofys, the
consultant engaged to advise the Commission, proposed a production
efficiency benchmark, based on clinker, of 0.78t CO2
/ tonne clinker. However, there is disagreement, even within the
industry, as to whether the benchmark should be applied to clinker
(favoured by the majority for its simplicity), or to cement. Secondly,
which historical reference period should be applied in
order to calculate the allocation volumes? Take 2005-07, a period of
relatively high demand growth, and the allocation level could be too
generous. Take 2008-09, and the opposite is true.
Other crucial issues also need to be resolved, such as whether imports
can somehow be incorporated into the ETS without running into conflict
with the WTO. Ideally, the allocation mechanism will succeed in
creating the required level playing field for European
cement producers to remain competitive and not be displaced by low cost
imports (with a higher carbon footprint).
Ultimately, a decision is due in 2010, by which time the European
authorities will have resolved these arguments and incorporated
whatever adjustments are required following the outcome of the climate
negotiations in Copenhagen. In the end, the devil will be
in the detail. Get it wrong and Europe will have to watch its cement
industry steadily relocate to off-shore locations across the
Mediterranean and beyond, or else enjoy unjustified windfall profits
from over-allocation. Get it right and the ETS may have a
chance of doing what it initially set out to do: create a viable market
mechanism to achieve a cost effective reduction of CO2 emissions and
stimulate innovation into low-CO2 technology.
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The prospects for the Turkish cement market are looking increasingly dim, at least over the next 2-3 years. Domestic demand for 2009 is expected to have fallen by around 10 per cent to approximately 38Mt, while capacity on the other hand, shows now sign of easing and is, in fact, likely to increase to 60Mt by 2012. A further four new works had been scheduled for completion in 2010, but most of these projects are now likely to be delayed by a further year. On top of this, there are the two new 2.0Mta works that the Spanish Essentium Group plans to build in Turkey by 2012, the financial logic of which is, under the circumstances, somewhat debatable.
While cement and clinker exports in the first half of this year rose to 7.23Mt, which is just in excess of the 7.20Mt that was exported on the whole year 2006, these higher volumes have only been possible at the expense of lower prices. The important export markets of the recent past in the form of Russia, Italy and Spain have all collapsed. Iraqi cement production has risen strongly as new works in that country have been completed and others have been refurbished, reducing the need for imports. Syria, another important export market has imposed bans on imports from Turkey from time to time, and new capacity is now being built there with largely Arab money.
So even if Turkey succeeds to sell 14Mt of cement and clinker into export markets in 2009, that would still leave some 8Mt of capacity idle. This is likely to leave Turkish cement prices under pressure for some years, and could well force the eventual consolidation of the highly fragmented Turkish cement market and indeed the departure for some of those players whose main business is far removed from cement and other heavy building materials.
While Lafarge has successfully managed to sell all of its wholly-owned capacity in Turkey, it still has to find a buyer for its 23.2 per cent stale in Baltiçim Andalou, and on this topic, Italcementi, having also failed to complete the sale of Set Çimento to Sibirskiy Cement last year, now also needs to sort out what to do with its 34.0 per cent interest in Göltas Göller. All these assets are now worth somewhat less than they were a year or two ago. The eventual sale of the stakes in Baltiçim Andalou and Göltas Göller could well set in train the start of a long overdue consolidation of the Turkish cement market that could restore the industry to an eventual financial stability, provided the government finally tightens up on the criteria for granting planning permission in a country with an abundance of limestone reserves.
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The opening, at the end of last month, of Holcim's new 4.0mt per annum cement works at Ste. Genevieve, Missouri, on the Mississippi river is further increasing the pressure on the remaining wet process plants that are becoming increasingly less competitive. While two wet process Holcim plants in Missouri and Michigan have been permanently closed, these account for only just over half of the capacity now being brought on stream at Ste. Genevieve. With Ste. Genevieve, by far the largest US cement plant, being ideally served by cost-efficient water-borne transport, Holcim can lay claim to being a low delivered cost producer from the Great Lakes to the Gulf of Mexico.
The current recession has slowed down the commissioning of, or extension of, clinker production lines and has led to the postponement, until further notice, of new works such as the Cemex project in Arizona. This can, however, only provide a very temporary lease of life to high energy cost plants. The US cement industry has been very slow to espouse energy efficient production methods. In Mexico, by example, with 33 operational plants, every single grey cement kiln uses the dry process, and has been doing so for years. In fact, because of the earlier reluctance of American domestic companies to invest in modern production methods, undoubtedly led to the North American cement industry now being dominated by European-based companies (accompanied by the odd Mexican and Brazilian group!).
When the US economy recovers, energy costs are clearly set to rise more sharply than that of the overall economy and the remaining wet process cement producers will be put at a further additional competitive disadvantage. In the age of NAFTA, there is no way out, and the Mexicans and the Canadians generally have more fuel-efficient cement plants than the United States has. The alternative to energy efficient production is closure. Can any of the less energy efficient producers afford to invest in new kilns? In the medium term they cannot afford not to, if they wish to stay in the business. It is a question of investing a lot of money, or looking to the right opportunity to sell out but the opportunities are becoming increasingly limited.
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The impending publication of a 300-page report by Mexican competition authorities is expected to shed new light on the saga of a 26,219t shipment of cement aboard the Mary Nour, refused entry into the Mexican cement market back in July 2004. The Mexican Federal Commission of Competencia (CFC) report is expected to be rather critical of Cemex and some specific government administrators over their role in this import shipment of cement, which after lengthy delays and apparently some unwarranted threats, was eventually refused permission to unload its cargo in the port of Tampico, Mexico.
The saga began with the decision of three local entrepreneurs, Ricardo Alessio, Luis Bonales and Ricardo Camacho, who had worked at Cemex between 1993-2002, to form a new import company CDM, in order to import low cost cement and to sell it domestically in Mexico – in effect buying overseas at low cost and selling it in Mexico in line with local high prices. Their difficulties in sourcing the requisite overseas cement is well documented elsewhere, but eventually they obtained some 26,000t of bulk cement from Novorossisk in Russia and sailed for Mexico.
Given some apparent prominence in the report is a letter sent by Rafael Meseguer, a then senior director at the port of Tampico to his superiors in the National Ports Authority expressing concern over “threats” made by Jorge Tello Peon, a Cemex manager, over the cancellation of future investments in the port – although at recent CFC hearings Tello Peon denied that this letter (now missing from the archives) related to the imminent arrival of the Mary Nour. In any case, Jorge Tello Peon acted in a personal capacity, claimed Arthur Ulloa Heron, a Legal Director for Cemex Mexico.
The Commission also puts forward the view that indicates monopolistic influences were at work. For example, it notes that Cemex had effective control of the influential National Cement Association (Canacem) and could influence the national registry of cement importers and thus disallow the CDM operation. CDM however circumvented this action by acquiring an existing import operation for US$90,000 complete with all the necessary licenses.
The formal investigation also notes that the United Union of Alijadores (GUA), the authorised stevedoring group of workers in Tampico port, raised its original quote offered to CDM in February 2004 of just 5 pesos per ton of cement to US$9 in July, when the boat was on the verge of arriving at the port. The commission, however, clears Cemex on any influence on this matter and indeed, potential claims of any payments to the stevedoring union. Meanwhile, CDM, meanwhile, apparently maintains in submissions to the CFC that the union leaders told them to stop their intentions to unload in Tampico in order to avoid the possibility of finding themselves three meters underground!
Cemex argues strongly that it did not do anything illegal to prevent the entrance of the Mary Nour and the over coming weeks it will present their arguments to the Commission. Should they fail to convince, then they then face only minor fines under present rules – up to 12 million Pesos. But as Ricardo Alessio of CDM reportedly told local press recently: “it’s not the level of fine but the chance for companies like ours to play on a level playing field against companies such as Cemex.”
Meanwhile, Lorenzo Zambrano the Cemex CEO, has reportedly expressed some criticism against the President of the Commission, Eduardo Perez Motta, for revealing the content of the on-going investigation to third parties, suggesting that he has not been too professional in his approach to this 28 month investigation.
We watch and wait for the final verdict.
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The recently published Global Cement Report Eighth Edition contains a wealth of very useful cement industry data, with analysis and statistical summaries of over 170 countries. This new publication should form an essential reference source for all those involved in the worldwide cement industry. Of course, I have a vested interest in telling you this, in that I led the editing team who compiled this latest masterpiece and thus stand to gain from its sales. Equally, I am also responsible for the book’s errors and omissions which now leap up from the printed page as I pen this commentary.
In brief, global cement consumption patterns are changing, with strong evidence of a slowdown emerging throughout 2008 with further sizeable declines in 2009, before a forecast rebound occurs in 2010. Looking back over the recent past, 2006 total global cement consumption was measured at 2568Mt, or if you prefer 2.568 billion tonnes – a gain of some 9.6 per cent on 2005 totals. By 2007, total consumption had moved up to 2763Mt, representing a lower annual gain of 7.6 per cent over the previous year. The well documented global financial collapse which reverberated throughout much of the world in 2008 has had an immediate impact on the global cement sector, and although cement consumption growth was to continue, moving higher at 2857Mt for the year, the annual upward change over the previous year is now recorded as slowing to just 3.4 per cent.
The worrying, although hardly surprising, news for 2009 indicates a further slowdown in global demand growth, sliding to +1.7 per cent, brought about by sizeable consumption losses across North America and throughout much of Europe. Even China has not been immune from such trends but with growth recorded at single figures rather than above the 10 per cent level.
Over the period 200-08, compound annual growth in cement consumption is noted at 7.2 per cent, some 3-4 percentage points higher than the long-term global average calculated over the past 20-30 years. As mentioned above, data for 2008 suggests that the global cement industry may now be showing the first signs of a return to such longer-term growth trends. Indeed, if one begins to factor in a higher accountability to global warming and a necessity to limit CO2 emissions over the next decade and beyond, we might one day even come to view this current decade as a high peak in global cement consumption levels.
Clearly, much will depend on what goes on within China, which now makes up almost 50 per cent of global consumption totals. As highlighted in the report, China again continues to dominate world rankings, with consumption levels rising from 1200Mt in 2006 to 1390Mt in 2008. Such gains are, however, slowing and perhaps indicative that longer-term Chinese cement consumption growth could also be much more limited. China’s per capita cement consumption now already stands at over 1000kg, somewhat high by world standards, and especially when compared to the world’s number two most populous country, India which now has a per capita cement consumption of only 150kg. On a positive note, China is now actively scrapping a sizeable percentage of its older polluting production units and beginning to take a more serious stance towards global warming issues.
Global cement trades are also showing signs of slowing. In 2006 total trade levels were measured at 180Mt, but by 2008 such trading volumes in cement and clinker were down to 164Mt. Our forecasts for 2010 show a further decline to 149Mt. Much of this trade is now controlled by the major cement groups, with independents and smaller cement groups probably accounting for 30Mt in 2008 or some 20 per cent maximum.
Reviewing the CD that comes with the book (in essence an Excel spreadsheet spanning the world of cement over the past 18 years) we can see that global cement consumption has risen by over 150 per cent during this 1990-2008 period. Most commentators, including myself, think that such growth is unsustainable. However, it has been pointed out that if sea levels continue to rise at a faster pace, many coastal countries will have to erect extensive concrete barriers to repel the advancing water, which of course means much more cement will be required. But that is getting a bit too cynical – even for me!
The new Global Cement Report Edition VIII can be ordered here.
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The UK papers are full of news and debate about quantitative easing. At first sight one might be forgiven for thinking this was a new type of laxative but the reality is that this is pure financial jargon for printing money – except in todays hi-tech world one doesn’t print money any more, one apparently creates instant money electronically by adding (say) 150 billion to the US Federal Reserve, or the Bank of England’s balance sheet and there you have it – the country is 150 billion richer, which the Central Bank then spends quickly, before it disappears again, buying up financial assets, government bonds, toxic assets, etc. In turn, this same virtual money then filters down through the banking system, individual bank reserves become more secure, these banks then lend out that extra money to businesses and consumers, the money in general circulation goes up. Better still the velocity of money going round the economy increases (for any economists reading!) and we all become better off. So far so good? Like it or not, this is, apparently, the only thing left in our financial armoury to fight a doomsday depression scenario, now we have reached almost zero interest rates.
I much prefer the alternative option where everybody in the western world gets 5000 dollars/UK£/Euros put into their bank accounts which they then spend on more unnecessary consumer items. Businesses prosper and better still, all those millions of workers in China who now make everything we buy, remain in full-time employment. As a further lift to global morale, a much greater humiliation of at least 25 of the world’s leading bankers, or even Chinese public execution displays of those same miscreants, would no doubt encourage people to smile again and who then would probably spend even more money on more things they don't really need. I could be wrong, but I have the distinct feeling that I am just a few short column inches away from a Nobel economics prize!
But I digress. This month’s main talking point in cement is the future for HeidelbergCement, now being run successfully by Bernd Scheifele and his senior management team, but who are collectively hamstrung by the well-publicized misfortunes of HeidelbergCement’s owners, the Merckle family who between them own a 79.1 per cent stake in the group held through the German Spohn Cement and the family's master holding company VEM. The debt of Spohn Cement, to a large extent financed by the Royal Bank of Scotland (that has since has had to be rescued from bankruptcy by the British government) had already been reduced about a year ago by the sale of a stake in HeidelbergCement to VEM for around €600m, leaving Spohn Cement with a holding of 53.6 per cent. In reality, all that move did was to shift the debt within the Merckle empire, but it does show that the pressures on Merckle were there well before things came to a head following the disastrous gamble in VW shares. Before all that of course, HeidelbergCement itself had geared up heavily, notably through the purchase of Hanson at a high price, in spite of divesting the 35 per cent shareholding in Vicat and of Maxit. Hopefully the intended sale of the pharmaceutical group Radiopharm should shortly reduce the financial pressure on VEM somewhat.
HeidelbergCement has strong industrial positions, being the global market leader in aggregates, number three in cement and joint number three, with Lafarge, in ready-mixed concrete. It will not be in the interest of creditors to substantially weaken these positions. A wholesale sale of the individual cement assets to the highest bidder is thus an unlikely scenario as this would be a value-destroying exercise, in particular in the current market conditions. What the banks might choose to do is to bring in some additional equity capital to put the business on a sounder footing. This might come from venture capitalists and possibly also from Schwenk family interests, which used to hold an interest in HeidelbergCement of over 22 per cent, but which it reduced to around seven per cent when Dr. Merckle made its offer for the company. It should also be borne in mind that Dr. Merckle's widow is a member of the Schwenk family.
That HeidelbergCement's equity base needs to be boosted is beyond doubt. What is less clear at this stage, is whether the equity injection will be made entirely into HeidelbergCement directly or also through VEM or its associates. Another possible move in this direction would be for Schwenk to purchase HeidelbergCement's interests in the Hungarian and Bosnian subsidiaries, where it is already a substantial shareholder, but that would not provide much money in relation to what is required. Holcim has also been mooted as a potential purchaser of some HeidelbergCement group assets, possibly a complete clean-out of the group’s UK operations, but this remain somewhat speculative. Some would also suggest a major Chinese cement group could be another potential buyer – a move given some impetus recently by Guo Wensan, the leader of China’s No 1 cement group Anhui Conch, who expressed an interest in buying some overseas cement assets, especially now that prices are tumbling, and while apparently, he has free access to massive state funding for expansion purposes. Perhaps it's only a matter of time, before the Chinese arrive in Europe, giving a whole new slant on the rather presumptive Western views on the benefits of globalisation.
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With eye-catching newspaper headlines indicating that much of the UAE is now facing a boom to bust scenario, a stream of daily news highlighting the wholesale cancellation, or at least a halt to, various major building contracts and, not least, with Dubai’s major road network seemingly a bit less congested, even during rush hour periods, it’s apparent that the global credit crunch is now being felt in the Emirates, despite the region’s massive oil and gas wealth and its resultant spill-over into financial and banking, property and allied service industries. Not surprisingly, such developments are beginning to blow a cold breeze through much of the regional cement sector, which now sees an appreciable downturn in demand, higher production costs and fierce competition from imports as the new operational reality. In total, the complete UAE region has over 11 integrated production facilities. A further eight dedicated local grinding operations using clinker, usually imported from countries such as China, India or Pakistan to grind and then produce cement. Furthermore, there are a further three or four large-scale trading operations which make quite a lucrative living importing either bulk or bagged cement in ships, again from Asia or the Indian-sub-continent for local sale and distribution. In essence, the region is having to come to terms with just too much cement availability and with two new integrated plants coming into service this first quarter of 2009, namely the 3.1Mta Emirates Cement factory in Fujairah and now the new 2.4Mta Star Cement (clinker production only) plant in Ras Al Khaimah things can only get worse for local producers. Ras Al Khaimah cement producers, the main production base for Dubai markets, represent a total of five factories, now with a combined capacity of 11.4Mt feel particularly hard-done by, despite sitting on some of the region’s best limestone reserves. They claim a rapidly rising cost base and at times shortages in gas fuel supplies, plus fierce competition from lower cost imports and the high transport costs involved in delivering cement to their main customers, ie construction companies centred around the hub of Dubai. Add to all this a price cap by the UAE government, with the Ministry of Economy dictating ceiling prices on local cement sales and the picture becomes even clearer – times are certainly changing and not for the better. Cement imports are a particularly contentious issue. According to latest estimates they amounted to almost 700,000t in 2008. Recently freed from import taxes and with the main terminals located in ports such as Jebil Ali which is much closer to the major Dubai consumers, importers are enjoying a resurgence, at a time when their own import costs are falling fast as a result of lower overseas commodity prices and better still, a collapse in ocean freight costs. In effect to discharge cement today in the UAE from China is now about US$15 cheaper than it was 12 months ago. The five clinker import/grinders have also been given a similar boost by such falling international prices, although they too face rising local costs in the final processing operations. With local demand now plummeting, possibly as much as 20 per cent this year, it’s clear that local competition for a slice of this diminishing cement cake is going to take its toll on cement prices. At present bulk cement prices are capped at AED360 per tonne (US$98) while bagged prices are similarly pegged at AED320 per tonne equivalent (US$87.10) or if you prefer AED16 (US$4.35) per 50kg bag. But the new talking point is not the current price ceiling but quite the reverse. Will prices drop in 2009 in the face of slowing consumer demand and a continuing fight for market share and if so by how much. Moreover, cement import costs falling. Current deliveries from India or Pakistan are reportedly being landed in the UAE at about the US$65 per tonne. Add to this a low local transport cost to customers in Dubai of about US$1.5 per tonne and traders are thus able to deliver good quality bulk cement from Pakistan or India at a cost price of well under US$70 or an equivalent AED257 per tonne. With today’s bulk cement market prices in Dubai at around the US$98 ceiling level, importers clearly have some decent room for manoeuvre in their 2009 price negotiations with customers. International market conditions have also given the dedicated cement grinders a boost in recent months. One year ago, Chinese clinker was available in the export market at US$48 per tonne. Today its down at US$32-34. Add in a current much-reduced shipping cost of US$16 and you are able to land a 60,000t shipment of clinker in Jebel Ali for about US$48-50 per tonne. The same calculation using Indian or Pakistani clinker would at today’s prices also see clinker landed at about US$48. Factor in a grinding, storage and distribution cost of US$15 and such cement is on the Dubai market at a cost (not price!) of between US$63-65 per tonne. By comparison, some of the higher cost producers in the Fujairah region claim to have a cement production cost approaching US$60 per tonne. Then add to this an extra road transport cost of about US$4 per tonne to service the main Dubai markets and the market cost is thus again close to the mid-US$60s. Should a price war kick-in later this year its clear that all three types of cement delivery into the local Dubai market have quite a margin with which to negotiate with customers, although the higher fixed costs associated with full integrated factories and the effects of rapidly rising fuel and power prices on such production facilities could give rise to added concerns in some quarters. Local producers are however hopeful that the term price-war remains journalistic hype, preferring to believe that their local cement association, the CPA, will find some common ground between producers to keep prices stable. And while dangers of price under-cutting by importers keen to maintain or improve upon their own market positions in a declining market is clearly a possibility, commonsense should prevail. We shall certainly find out more at the upcoming Cemtech conference to be held at the Grand Hyatt hotel in Dubai on the 14-17th February. For more details please visit the Cemtech Middle East conference section on this website.
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It’s perhaps the sign of a simple mind, but I never fail to smile at the recollection of the Woody Allen quotation that the definition of a financial advisor is someone who you pay to invest your money …until it's all gone. Its resonance in today’s financial meltdown conditions is particularly apt, but the underlying truth of our current malaise also seems to stem from gross under-regulation of the banking and financial sectors, greedy and at times dishonest bankers and, not least, a gullible public, especially those of us in the US and the UK who believed that the housing market was a one way bet to everlasting financial security
Some of our own cement leaders are now having to face up to some stark truths. Adolf Merckle, a seemingly unassuming 74-year old grandfatherly figure, and one of Germany’s richest men, has until quite recently masterminded a seven billion dollar empire based around pharmaceuticals and more recently a massive cement portfolio, following his surprise 2005 takeover of HeidelbergCement. Regretably his secret passions also seem to have included betting the family silver on a string of losing positions on the VW car-making empire. As the German government has since refused to bail him out of his losses, we await the consequences for HeidelbergCement with more than a passing interest.
We will not dwell here of the predicament of Lorenzo Zambrano of Cemex, but it’s perhaps a good time to try to wean him off employing all those bright young Stanford educated MBA graduates with their complex spread sheets and incomprehensible debt derivative formulae. It would also be unfair to quiz him, yet again, on why he bought Rinker at the very top of the market. So we won’t.
Dare to be a Daniel goes the revivalist hymn, an apt phrase for those in cement who are working on new types of ‘green’ cement, nanotechnology advances, lower energy cement mixes, pollution-eating cement etc. Recently a new research document dropped on our desk with the rather unfortunate sub-title of ‘magic cement’ but its content held our attention. Apparently it’s a new cement now under development that is largely formulated from a mix containing 50-85 per cent mineral additives all held together by surface activation technologies.
Moving swiftly on! The consequences of not developing new types of cement, not reducing our carbon footprint and as a result failing to mitigate global warming, should make us all step back and think again. We remain lukewarm on the latest European cement pronouncements feigning shock-horror at the arrival of carbon-tax-free imported cement from outside the EU. But as a briefing document it certainly has had a positive effect for European cement producers, with the EU rule-makers now backtracking on imposing yet more curbs and costs on European cement production. Well done to Cembureau for its success in this respect, but as the children’s game tells us, we will all have to face up to the consequences of our continued inaction on global warming at some point. Well probably not us, but our certainly our children and most certainly theirs.
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The Lafarge ownership saga continues. Last month saw Albert Freres - Group Bruxelles Lambert - seemingly spend close to Euro 100m mopping up Lafarge shares on the French stock exchange, according to official filings, at prices ranging between Euro 70-80 per share, and in consequence now pushing up its stake in Lafarge to almost 25 per cent, while Nassef Sawiris, of Orascom fame, has his own sizeable Lafarge stake at around the 13 per cent level. And if we are to believe reports, both groups have various 'put options' if the share price drops even further. At the same time, another French group now said to be looking at Lafarge in more detail is the private equity arm of LVMH which clearly sees added value in Lafarge stock at today's low prices. Whether there are any on-going linkages between LVMH and Albert Freres remains to be seen. Meanwhile Nassef Sawiris is proving to be a mixed blessing for Texas Industries (TXI) management board. Having quickly built up a 15 per cent stake in this major US cement, aggregates and concrete products group, he has recently sent a letter to the company’s shareholders, petitioning them to oust two influential board directors for their role in a lack-lustre corporate performance over the past 12 months. The same two directors who might, or might not, have been instrumental in blocking any further stake-building by this cash-rich Egyptian entrepreneur. It would be an unacceptable level of speculation to link Lafarge and TXI under some future shared ownership structure, so lets move quickly on... With Cemex ADR's briefly trading at about US$4.50 last Friday (October 10th) before closing the day at US$7.00, and a declining Mexican Peso adding to company woes, continuing speculation as to the overall health of the world's No 3 cement producer continues to worry analysts and speculators alike. Apparently a sizeable slice of Cemex debt is mired in a complex web of derivatives trades and while Cemex leaders are pushing ahead with various asset disposals, the latest in Australia, their actions may not be enough to assuage fears that the company might have insufficient cash to meet all operating and financial requirements. If things worsen we might regretably see Cemex exit from UK markets, a region also likely to see a sizeable downturn in cement and building material sales in 2009. And if.... ...this was to happen what a positive opportunity for someone to come in and pick up the pieces, with Holcim a likely front-runner, consolidating its UK Aggregates Industries business with three cement works, more quarries and ready-mix operations. However Holcim has its own regional problems and could accelerate its US plant closure program, if markets there continue to deteriorate ahead of the planned opening of its massive 4Mta Ste Genevieve works. If it did push ahead with an early plant closure program, Holcim would be able to make up any temporary US supply shortfalls with a resumption of cement exports out of Spain, where its current production surplus levels are now rising as a result of a serious domestic downturn in Spanish cement sales. On the plus side, the recent collapse in dry bulk freight rates might prove a useful cost saving on trans-Atlantic routes. And who said cement was dull!
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The recent brief conflict in Georgia still has some way to run with the Russian’s apparently in no hurry to return to the former status quo. There are two sides to every story, of course, but the Russian view that the Georgian president should be branded as a ‘lunatic’ does carry some weight, despite strong international protestations that the Russian response has, and remains, somewhat exaggerated.
It was however, good to see HeidelbergCement report that its Georgian facilities remained largely unscathed after the Russian territorial incursions. In May 2006, HeidelbergCement purchased a stake of 51% in the Georgian cement grinding plant Kartuli Cementi, close to the Georgian capital of Tbilisi. The plant has since been upgraded to a fully integrated works of 400,000t earlier this year.
At the end of 2006 HeidelbergCement also acquired a stake of 75% in Saqcementi, reportedly the largest cement producer in the Caucasus region. Saqcementi operates two cement plants (Kaspi and Rustavi) near the capital Tbilisi with a total capacity of 1.6Mt, so HeidelbergCement should now be well placed to benefit from a high level of rehabilitation work over coming months throughout Georgia.
The conflict has a long history of course, and the present Russian political leadership still carries the scars of the post-Soviet meltdown when, the now reviled, former Soviet foreign minister, the Georgian-born Eduard Shevardnadze, advocated political and economic liberalisation and the break-up of many of the former Soviet satellite states. Clearly Russia is now intent on redrawing some of its historical boundaries and calling to account some of its more liberal-leaning neighbours.
There are immediate economic consequences of this recent power shift, with the Russian stock markets taking a beating in recent weeks and with many western capital funds now intent on pulling back, and taking a more pragmatic view of their investment positions.
The consequences for foreign groups now in Russia is also worthy of study. The oil giant BP looks to be fighting a lost cause in its attempts to keep its massive oil and gas JV with local Russian oil firm TNK afloat, with the Russian government acting in a rather shadowy, suspect role to break up the partnership. To some, Russia is now becoming something of a no-go area for foreign investors.
At present all foreign cement groups in Russia, essentially, Lafarge, Buzzi Unicem, Holcim and HeidelbergCement have escaped any kind of ‘BP effect’ and while they are clearly not churning out the same massive profit levels for overseas repatriation, they do nevertheless show sizeable returns on relatively low levels of investment spending. All these players are also benefiting from nationwide cement shortages and extremely high domestic prices, with Russia still rather behind on kick-starting its own much-needed expansion programme.
On this basis, foreign cement multi-nationals operating in Russia look safe for some time ahead, although as recent events have shown, no-one can remain too complacent, especially with the Russian bear now re-awakening after an extended 16 year hibernation.
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“That’s where John McCain was shot down in 1967”, my taxi driver said rather nonchalantly as we weaved our way through Hanoi’s heavy traffic back to the airport. I looked over at the city park and the placid lake into which the next presidential hopeful had plunged in his Skyhawk plane during his 23rd bombing mission over Vietnam. “A large crowd pulled him out and attacked him” the driver continued “and he then spent a month in a local hospital recovering from his wounds before we put him in the Hanoi Hilton for the next five years. Not a good Hilton to choose he added with a grin.”
I subsequently learned that my driver, now busy avoiding some of the two million motorbikes that clutter Hanoi’s streets, had been a boy scout in the early stages of the Vietnam war, and had seen his leader Ho Chi Minh in the same city, before being conscripted into the Viet Cong army – the VC as he called it – and heading south to fight. He seemed quite proud of his youthful exploits.
The previous night, I had apparently chosen the same hotel that Jane Fonda, the film actress had used when she came to Hanoi, albeit rather briefly in 1972, to conduct her own personal media campaign to end the Vietnam War. She may well have done some good, although many years later she apologised on national TV for her naivety in having gone there. I doubt also whether John McCain imprisoned nearby would have agreed with her visit. He was tortured repeatedly throughout his captivity, put in solitary confinement for two years and barely survived.
Times change of course, and today Ms Fonda now uses her fame and still attractive features to win consumer hearts and minds, selling beauty products on TV, while the slightly older, perhaps more care-worn McCain aims for higher office.
Back at my chosen hotel, the Metropole, I could, for an extra supplement, have chosen Ms Fonda’s own room, or even John McCain’s suite (he revisited Hanoi as a VIP in the 1990s) but I declined, settling instead for a good meal in the elegant hotel restaurant, surrounded by retired Americans, all elderly prosperous-looking men and their lively talkative wives on a regional Asian tour. Perhaps some of them had also been in Vietnam many years before on military service.
“Not a lot to do with cement” I hear you say. “If I wanted a travel report, I would have bought the ‘Rough Guide to Vietnam’ or something similar.” But, rest assured, dear reader, I was there for cement research purposes, and for those still with me, I did get to meet up with various local industry specialists, to hear that domestic production was still trying to keep pace with what appears to be an insatiable demand for cement. Furthermore, they stressed, new capacity was still being added as quickly as possible. And better still, the government was at long-last facing up to solving the distribution and logistical problems of moving huge quantities of cement, produced in the limestone rich north, to the big demand centres in the south of the country.
Because of this long-standing imbalance, clinker imports into southern markets are still unavoidable and amount to around four million tonnes per year, most of which is sourced from neighbouring Thailand and shipped in by relatively small-sized tonnage into Vietnam’s southern ports.
But with recent inflationary pressures pushing up the imported cost of clinker by over US$10 per tonne over the past twelve months, and with regional prices still moving up quite quickly, plus the fact that the Vietnamese government is clearly becoming paranoid about double figure domestic inflation, there could be trouble ahead for local producers.
Such developments have at last focused government attention on the urgent necessity to build a dedicated deepwater distribution terminal in the north which will be used to ship down cement to the south, and by doing so eliminate the need for any more expensive clinker imports. Improving logistics and keeping costs down as much as possible is becoming the new watchword for the cement sector. But enough, if you want the full story on the Vietnam cement sector, come and join us on the 22-25th June at the Pan Pacific hotel, Singapore, where the first Cemtech Asia conference takes place. Lots of stimulating Asian-focused presentations, good industry debate and even a night out at the legendary Raffles Hotel where the famous writer, Somerset Maugham, stayed and put pen to paper. And finally, for those of you with a more adventurous spirit, why not, when the conference ends, make your own trip to nearby Vietnam, then travel north to Hanoi and sample the McCain-Fonda tour. The country has lots to recommend it. But remember, when booking rooms, the infamous ‘Hanoi Hilton’ is no more, and if you still hanker after Barbarella, I believe Jane’s bed at the Metropole will set you back an extra US$100 per night. The John McCain suite at this same hotel? Well go and find out for yourself. You wont regret it. For Cemtech Asia conference details look for more information on this same website.
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At the end of March 08, Cemex had a net debt US$18,813m disclosed, and a further undisclosed amount of debt in the form of perpetual notes that were lumped together with minorities. Cemex has not yet published its accounts for 2007, but at the end of 2006, perpetual debt amounted to US$1250m. Assuming that in assessing the perpetual debt, this accounted for a similar portion of what is described as 'minorities' at the end of 2006, the actual net debt at the end of March 08 would read US$21,326m, suggesting a gearing level of 124.8%. This is, in fact, now a higher gearing level than the 120.6% seen three years earlier in the wake of the acquisition of RMC. Since then, Cemex has raised the equivalent of some US$257m through its sale of 9.5% financial stake in Axtel a Mexican telecommunications company.
The fall in US interest rates has helpfully reduced the cost of financing the acquisition of Rinker that became effective last July. The failure to conclude the proposed major sale of assets in Catalonia, Austria and Hungary; as well as two US cement plants and a large number of downstream businesses in the United States to CRH, has left Cemex with a stretched balance sheet, with only the sale of the assets that Cemex was under an obligation to sell to satisfy the US anti-trust authorities actually concluded. It could be argued that the assets that Cemex failed to sell are worth less now than they were at the time, at least as far as the US and Spanish operations are concerned.
The net result of buying RMC and now, Rinker, has been to reduce Cemex' dependence on developing markets, which, from an investment point of view at least, had been seen as the Mexican group's main point of attraction. While the other four of the five top global cement producers have been, and are, investing heavily in the two largest cement markets in the world, China and India, Cemex has tended to avoid these. While Russia, another major growing cement market, is now apparently off the radar, which must be disappointing to some Cemex insiders.
On a brighter note, the proposed nationalisation of the Venezuelan cement market, where Cemex is the largest operator, may be helpful to Cemex from a simple cash inflow point of view, but will leave the group increasingly dependent on its three largest markets of Mexico, the United States and Spain for its main cash generation. Returns from Great Britain and Germany still leave much to be desired and this is also not a good time to review Spain’s construction outlook, but the signs from Madrid are not favourable, at least over the short term.
Will Cemex run out of cash? Most certainly not! But if the US recession begins to deepen, with neighbouring Mexico then getting sucked in, plus some heavy clouds becoming more visible in southern Europe, it might need a bit more than the continuing sale of various financial instruments to keep this cement major in tip-top condition.
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I am not a successful investor. I classify myself as one who would, at times, buy high and sell low. One who would finally take the plunge to buy tech stocks the day before the market crashed back in 2000 or whenever, and one, when offered Cemex stock at giveaway prices back in 1996, thought that they were over-valued. (Anyway, my defense at the time - and still today - was that it would have been unethical to purchase).
So when people talk about markets in the light of the recent US and UK banking upsets I tread a cautious path, nodding wisely at some erudite analyst in full flow, tut-tutting at the latest financial shenanigans and hoping that the people who manage my pension pot are not, as I write, hot-footing it to the Cayman Islands with the remnants of my fund in a sack.
Are we heading for melt-down? And what does this mean for our own industry. A slow-down or perhaps even an end to continued pronounced globalisation trends? Global economic growth over the past few years has undoubtedly been strong. More importantly India and China have both contributed significantly to narrowing the divide between the developing and developed world, but today, the underlying global tensions look to be rising. The ill-conceived war in Iraq has helped fuel a quadrupling of fuel prices since 2003, Asia now has a massive stockpile of dollars - and America is now in hock to the world. The myth of a strong dollar has also been put to rest.
As Josef Stiglitz, a Nobel Laurate in Economics wrote recently: The game is up. China is now facing inflationary pressures, and if it revalues its currency as it is being pressed to do by the US, this will translate into much higher costs worldwide. At the same time, the rise of bio-fuels as a means of reducing global warming, has meant that food and energy markets are becoming inter-linked, a lethal threat to many developing countries.
The real threat of runaway inflation is apparently returning to an economy near you, says Stiglitz, and unless we see through the need to raise interest rates relentlessly to meet requisite inflation targets, we should prepare for the worst. Another episode of stagflation - and a reminder to some – me included – of the mid-1970s when stags ruled the world.
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The recent Cemtech Conference in Dubai highlighted some interesting topics, many of which centred upon the current supply patterns for cement in the Middle East and, not least, intense debate over the continuing strength of the UAE market. Many analysts, have for some time been predicting an eventual melt-down in the local UAE construction sector, but this mix of oil, gas and service economies still remains very buoyant, and some local UAE cement producers we talked to were still virtually sold out for several months ahead. Reinforcing this pattern, Dubai city still has very much the feel of a gigantic, ever-expanding, construction site.
On the downside, more new cement capacity is still under construction or in planning throughout the UAE, in effect, pushing up potential local supply to over 25Mt in the near term, possibly even higher and one could be forgiven for thinking that this huge bubble will eventually burst. But quite when, nobody knows. Any views anyone?
A timely report from the World Economic Forum (WEF), the Swiss-based think-tank that attracts a wide variety of celebrity politicians, well-heeled industrialists and pop-stars with attitude, has recently published its outlook for the UAE region in the form of three distinct time-sensitive scenarios stretching to 2025, under the sub-titles: ‘The fertile gulf’, ‘oasis’ and ‘sandstorm’. All scenarios are possible, according to the authors.
Presently, local sentiment in the UAE is generally positive. Enhanced financial liquidity will continue to allow expansion of the private sector, investment in productive assets and upgrading public infrastructure. At the same time, the UAE also faces a range of challenges which could potentially threaten a stable and prosperous future for the country. Even without the threat of external disruption or lower oil prices, the continuing build-up of financial reserves will not last forever.
In fact, says the WEF report, the next five years will be crucial for the UAE and decisions made today could contribute towards building a sustainable and innovation economy, with a more balanced, integrated social structure. Alternatively, a reluctance to engage with controversial issues, coinciding with negative external events could create a future where the UAE enters a negative cycle of conflict and economic decline.
For example, in the WEF ‘sandstorm’ scenario, the current global slowdown causes a fall in oil prices which dramatically reverses when the US bombs Iran in 2009, when oil prices then rocket to US$125 per barrel. The resulting regional instability and oil price shock combined with an economic weakness in the US market then precipitates a further global slow-down, and massive fall in oil revenues …then…well you get the general on-going picture.
Given such a possible outlook, let’s hope the US public votes in the seemingly moderate Barack Obama for president in November . The Republican alternative: John McCain, might well be turn out to be something of an obamanation (ouch!). And before you plunge into UAE markets, download the full UAE scenario report at the WEF website (www. Weforum.org ) it makes for some interesting reading.
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