Cement in 2019

Published 07 January 2019

While global economic growth is expected to continue in 2019, uncertainty will affect the expansion of key cement markets in the year ahead. As a result a mild contraction is forecast although there will be regional differences in cement demand with the developed markets registering limited growth while emerging markets will be more robust. By Arnaud Pinatel and Yassine Touahri, On Field Investment Research, UK.

Figure 1: changes in regional cement demand, 2017 vs 2018. Source: OFIR estimates

Based on its monitoring and forecasts, On Field Investment Research (OFIR) estimates that global cement demand declined by -2.8 per cent in 2018 (and increased by +3.2 per cent outside China). Demand continued to show resilience, supported by a recovery in construction markets in most developed economies and by further infrastructure investment in most emerging economies. However, in certain markets of the Middle East, north Africa and Latin America, lower revenues from oil and commodities impacted cement demand. With an estimated vertiginous and unsustainable 1700kg/capita consumption, China, the world’s largest market (with 60 per cent of global production), is somewhat maturing, and demand is estimated to have been down by -3 to -5 per cent in 2018 (see Figure 1).

Visibility on cement demand trends in 2019 is limited across the different regions of the world as macroeconomic uncertainties exist. In October 2018 the IMF reflected this scenario in its GDP growth forecasts and highlighted the risk of revising its assumptions down further. The IMF is still forecasting growth in 2019 globally but at a lower rate. This is due to the anticipated slowdown in China and the sentiment that certain markets in North America and Europe are close to economic cycle peaks.

These uncertainties are on one side related to challenging political contexts like the trade tension between the USA and China or Brexit in Europe, and on the other side to the impact of currency devaluation and tightening credit conditions on GDP or investment growth in certain emerging economies. Investors’ confidence has been impacted and the recent volatility of the oil price (down by more than 33 per cent in October-November 2018) is adding uncertainty on energy-related economies that were supposed to recover following the initial rebound of oil and commodity prices earlier in the year.

In such an environment, downside risks on cement demand forecasts exist and the probability for upside revision is clearly receding. Limited growth can be seen outside China and cement demand is heavily dependent in OFIR’s scenario on the continuing commitment of governments to spend on infrastructure in a context where visibility on the macroeconomic outlook is low and where deficits are growing in certain markets.

Another important topic is the ability of the industry to recover cost inflation. As the industry failed to fully pass on costs in 2018 through price increases, many observers continue to question the capability of cement producers to pass cost inflation on in 2019. The ability to push prices will also obviously depend on the volume growth that the industry will see in a global context of continuing overcapacity.

Based on its methodology, OFIR has assumed that global cement demand, including China, will decrease by -1.6 per cent in 2019 and that the growth rate will slow down to +2.3 per cent outside China (versus +3.2 per cent in 2018). Regional differences will exist, with OFIR’s scenario anticipating limited growth in the developed markets and continued growth in emerging countries.

OFIR’s forecasting methodology relies mainly on monitoring leading indicators such as construction permits, commodity prices, budget deficits and infrastructure plans disclosed by governments. The research organisation builds a global central scenario for residential, non-residential and public works construction that it then translates into a cement demand trend for each country.

Figure 2: changes in regional cement demand, 2018 vs 2019. Source: OFIR, trade associations

The US cycle – a growing question mark?

Recent leading indicators like housing permits/starts, the Dodge Non-Residential index and Architectural Billing index in the USA are trending down in October 2018. This is creating question marks about the sustainability of the cycle in the USA at a time when The Federal Reserve is increasing interest rates gradually. Construction could slow down because of higher mortgage or borrowing costs for both the residential and non-residential sectors. Bad weather and labour shortages constraining growth are two other aggravating parameters that could limit cement volume growth.

However, anticipating the benefits of the federal fiscal stimulus and relying on infrastructure spending at the state level, most corporates continue to foresee an optimistic outlook for 2019. The Portland Cement Association anticipates +2.6 per cent cement demand growth for 2019 (but has revised down its growth rates for 2020-21), as local state infrastructure spending is supportive. President Trump’s federal infrastructure programme has been clearly delayed and any real impact from it is not expected in 2019. In an environment where utilisation rates are already high, where tariffs exist on Chinese imports and where demand should be mainly supplied by additional imports, OFIR anticipates the industry to push prices in 2019 to recover cost inflation. Several pockets of pricing pressure should remain around Houston, New England, New York and Canada due to specific competitive situations.

Finally, OFIR has also assumed that countries like Canada and Mexico will increase their cross-border cement exports to the USA, partly replacing more expensive overseas flows from China and the European Union (impact of CO2, tariffs or an increase in dry bulk freight rates).

Regional differences within Europe?

Economic growth momentum in Europe is somewhat fading as global trade tensions penalise exports, as political uncertainties (Brexit, Italian deficit, France and Belgium political tensions) are delaying investment and impact investors’ confidence in a context where financial conditions are also tightening.

The construction recovery anticipated in most countries is losing momentum with leading indicators for housing and non-residential weakening. However, clear regional differences exist across the continent. Indeed, construction permits in southern European countries like Spain, Portugal and Greece are still positive and should translate into strong cement demand growth in 2019. On the other hand, permits have turned negative in the Nordics (the cycle has peaked), UK (Brexit) and France (less tax incentives on construction). Cement demand growth is these markets is anticipated to clearly slow and will rely mainly on the support of infrastructure spending, which is still solid in most markets. Growth in Germany is muted but resilient in OFIR’s scenario as Q4 permits are improving sequentially. Overall and as in 2018, OFIR believes that southern Europe will be better oriented than northern Europe in 2019. OFIR expects the western European volume to grow slightly by one per cent in 2019.

Up by three per cent in OFIR’s scenario, central-eastern European markets should continue to grow supported (as in Poland) by infrastructure spending and, to a lesser extent, by decelerating housing trends. Russia and other CIS markets could show different growth patterns. Russia could stabilise as it is penalised by economic sanctions. Ukraine could turn more negative given the renewed political tensions with Russia, but central Asian markets could benefit from the continuing support of Chinese investment linked to the One Belt One Road (OBOR) initiative and could post double-digit growth. Overall, OFIR anticipates an average two per cent growth for CIS in 2019.

Despite softening demand, cement price increases could be significant, especially across western and central Europe, in a context where the industry is focussed on catching up on high cost inflation experienced in 2018. It is, in OFIR’s view, an encouraging indicator to see most companies looking to implement important price increases in 2019 following 10 years of price erosion since 2008. More limited price increases in CIS are noted with further capacity addition and growing regional export flows changing the competitive landscape.

Muted growth in Latin America?

The outlook for Latin America is mixed, with on one side the recovery in Brazil (cement demand could increase by 3-4 per cent with the return of public works, investors’ confidence and politic stability) following four years of recession, and on the other side the collapse of Argentina (cement demand could be down by -5 to -15 per cent in 2019). Argentina is penalised by currency devaluation, hyperinflation, tightening financial conditions and the end of a strong construction cycle that boosted demand until the first semester of 2018. Demand growth is assumed to remain positive but still limited in Colombia, partly helped by the progressive ramp-up of government infrastructure programmes. In Mexico a one per cent decline is expected in demand given the uncertainties on the timing of infrastructure and non-residential projects following the recent presidential elections. Overall, Latin American cement volumes are expected to be broadly stable in 2019. However, in a context of continuing high cost inflation and local currency devaluation the industry is predicted to post significant price increases in most markets.

Africa-Middle East decoupling?

In recent years MENA countries have seen cement demand decrease due to the impact of lower oil prices on domestic economies. It has been particularly true for large markets like Saudi Arabia, Egypt, Algeria and Iran. More recently, the growth prospects of energy exporters have been lifted by higher oil prices but softened for some importers. Indeed, the rebound of commodity prices was creating a better environment for economies heavily dependent on exporting commodities. With the recent significant drop in oil prices in 4Q18, the threat of weaker cement demand is back for the GCC and some north African countries. OFIR’s scenario of stabilisation is potentially at risk if oil prices do not rebound (ie, if OPEC does not tighten supply).

However, the post-war reconstruction of Iraq, Syria and Yemen potentially offers opportunities to GCC producers to export part of their surplus in these markets. US sanctions on Iran are impacting cement demand and exports in this country. Turkey’s domestic cement demand is likely to collapse in 2019 (assumption: -15 per cent), as currency devaluation and tighter financial conditions are weighing on investment and construction. This context should encourage the Turkish industry to export more volumes and reduce export FOB prices. Overall, and due to the impact of Turkey, OFIR assumes a two per cent decline for MENA cement demand.

In sub-Saharan Africa, the continuing flow of Chinese investment into infrastructure along the former Silk Road through the OBOR initiative supports OFIR’s strong growth scenario of an average six per cent. Demand in countries like Nigeria, South Africa and Kenya (impacted in 2018 by public spending delays linked to presidential elections) should improve.

Further decline in China, but “under government control”?

The trade tensions with the USA could impact the Chinese economy. Pending stimulus measures that could be decided by the Chinese government, OFIR expects cement demand to continue to decline, by five per cent, in 2019 as the domestic cement cycle is maturing. Beijing is focussing on controlling debt and is reducing domestic infrastructure spending and investment into real estate. With the government imposing production stoppages and encouraging consolidation, cement prices are expected to continue to increase in 2019 – possibly by double digits.

Oceania growth rate decelerating?

As with Europe and the USA, the scenario of growth for Australia relies more on infrastructure spending than on improved residential or non-residential construction trends. Indeed, leading housing indicators such as building permits have turned negative in recent months. Therefore, OFIR does not expect growth to accelerate in Australia despite better commodity prices and a recovery in the mining capex cycle. For Oceania, it forecasts a two per cent rise of volumes.

Southeast Asia and India supported by strong infrastructure?

In India the growing momentum visible at the end of 2018 is encouraging for 2019 and OFIR’s scenario of a continued strong cement demand growth (6-8 per cent) is again supported by the outlook for infrastructure spending. However, the key question mark remains the capacity of the industry to pass on cost inflation through price increases in a market where overcapacity still exists.

As with Africa and CIS, it expects the benefits of the OBOR Chinese investment to be still visible in Southeast Asia. Even if the region should experience less growth due to the trade tensions between China and USA and weaker credit growth, governments like Indonesia and the Philippines are confirming important infrastructure plans. Malaysia is the exception in the region with volumes trending down. Therefore, a four per cent rise in regional cement demand is forecast. 

The outlook for pricing is also positive with the switch by China from exports to imports. China and Bangladesh are absorbing the bulk of the Vietnamese clinker surplus in the region and FOB export prices are up significantly. Therefore, cement prices in import markets such as Australia, Philippines, Bangladesh and Sri Lanka could improve in 2019. This is also true in Indonesia, where consolidation took place, and in Thailand, where additional exports help utilisation rates, but probably not in Malaysia where competition is still intense in a weak demand environment.

Summary and conclusion

Forecasting is never an exact science, but 2019 provides particular challenges given slowing growth in China, trade tensions between the USA and China, Brexit in the UK, political uncertainties in France and Italy, questions over the duration of the USA cycle, questions over the direction of commodity prices given recent volatility and the impact of currency devaluation and tightening credit conditions in certain emerging markets. The IMF reflects these issues in its October 2018 forecast but still expects global growth in 2019.

For the cement industry, OFIR estimates that global demand declined by 2.8 per cent in 2018 including China, but increased by 3.2 per cent ex-China. For 2019 it forecasts that global demand will decrease by 1.6 per cent including China and increase by 2.3 per cent ex-China. Regional differences will be marked, with OFIR’s scenario anticipating limited growth in developed markets but continued growth in emerging markets.

With volumes likely to move ahead ex-China, the key issue for the industry into 2019 is the level of intent and ability of the industry to raise prices to catch up and make good significant cost price inflation experienced widely in 2018. OFIR believes that CO2 regulations, changing export-import flows occurring in China and Southeast Asia, as well as in Europe in due course, and likely further industry consolidation mean that recent significant posted price increases for 2019 have a strong chance of sticking (or at least a large percentage thereof). This will be the key area that observers will monitor into 2019 and will determine the overall health and perception of the industry. 2019 could well be a very important crossroads for the global cement industry.

Arnaud Pinatel and Yassine Touahri are co-founders of On Field Investment Research.

This article was first published in International Cement Review in January 2019.