Success in adversity

Union Cement Company (UCC), a subsidiary of Shree Cement (India), operates one of the UAE’s largest cement plants. Located in Ras Al Khaimah, adjacent to one of the world’s largest limestone quarries and Mina Saqr port, UCC’s production facility was revamped under Shree Cement’s ownership. ICR speaks with Vijay Somani, CEO and MD of UCC, about the company’s aggressive cost optimisation and export strategy that have enabled UCC to remain a rewarding business in spite of the tough domestic situation.

ICR: What is the situation like in the UAE these days?

Vijay Somani (VS): The COVID-19 pandemic is under control in the UAE. There is almost 100 per cent vaccination. Tourism is as usual and expected during Expo 2020, and we have more visitors here than residents. Yes, there is an impact, but this wave of the pandemic is not as severe as the last one. Therefore, it is not going to inflict as much damage in 2022, in my view. It will be a positive outlook.

UCC and Shree Cement
 

ICR: When Shree Cement acquired Union Cement Co (UCC) in 2018, it was the company’s first overseas venture. What was the rationale for the acquisition, especially given the overcapacity evident in the UAE market?

VS: You are right. UCC is the first operation out of India for Shree Cement. The proposed acquisition helped Shree Cement create its first footprint outside India. The UAE is one of the major economies in the Middle East that has good long-term prospects in the housing, construction and infrastructure segments.

ICR: What attracted the company to UCC?

VS: At that time, when we came to the UAE, quite a few cement plants were available to invest, but we found that UCC was more suitable, not only because it is close to the seaport for export, but also because it is well connected by a conveyor belt with the limestone mine. It also has space – an existing site to expand in case the demand requires.

UCC has a consistent track record of stable performance with oil well cement as a premium product with a specialised application in its product basket.
Unfortunately, those new capacities that were planned in 2006 up to the 2008 crisis came online and those increased capacities created an imbalance between market demand and supply. Everyone wants their piece of the cake.

This has now brought down the cement price and the domestic market was already saturated. Between those minimum cement prices of 2017 and now, prices have fallen to AED155/t [US$42.21/t] delivered and at the same time costs have gone up multifold.

To ensure continuity of plant operations and better realisation, we have shifted our focus and have considerably increased our sales to a very regular export market. Our major export market is clinker, but we are also exporting cement.

Growing export sales
 

ICR: Exports are an important share of your sales. How much of your output is exported and where are you selling?

VS: We are exporting around 65-75 per cent of our output through Mina Saqr port. We deliver to east Africa, Bangladesh and the Gulf states, and these are our target markets for clinker and cement. There is no clinker market for India.

ICR: Is Oman still the leading export destination for UAE producers?

VS: Exports to Oman from the UAE were around 4Mt in 2017 but have come down significantly. Cement is exported to Oman by road, but these days there are some transport and freight barriers that have seriously brought down export volumes. There are also administrative challenges at the border, which are reducing export potential.

ICR: Freight rates are particularly high at present – does this impact your ability to sell overseas?

VS: Of course, but freight and availability of vessels at the right price have definitely not affected only the cement business in my view. All businesses have been affected by that. We are finding it difficult because our import and export shipping costs have gone up and it is difficult to pass on to the customer. That is really a big challenge. We hope that shipping should ease out gradually after the first or second quarter of 2022.

Addressing domestic challenges
 

ICR: How large is the domestic market and how has it performed during the COVID-19 pandemic?

VS: Maybe 10-12Mta, in my view. In the domestic market, yes, we have a lot to refine and upgrade to have a larger share than today.

ICR: What share of your sales is to the domestic market, versus exports?
VS: We sell around 25-35 per cent of our output on the domestic market. Ordinary Portland cement types are the most dominant in the local market, but GGBS-based green cement sales are picking up.

ICR: Apart from shifting to export sales, how has UCC responded to the challenging market situation?

VS: Cost optimisation – Shree Cement in India is well known for mastering costs. Our cost benchmarks are tracked by other manufacturers. We provide you with an example: when we acquired the plant in 2018, the kiln at UCC was producing 10,000tpd. Today it produces over 14,000tpd. That is without any capital expenditure – no major capital expenditure has taken place. So, we probably can say that our technical team has set a new benchmark of higher productivity – 45 per cent by revamping capacity without any additional investment. At the same time, we have more than doubled the waste heat recovery capacity. So, that is driving down our energy costs for manufacturing.

ICR: What fuels are you using to fire the kiln?

VS: We are using imported coal. On that side, before Shree Cement came, the coal was procured locally. Now we are sourcing directly from miners with the benefit of high-volume group consumption and ship it in Capesize vessels to optimise shipping costs. We have significantly brought down our coal procurement costs.

ICR: What about distribution costs in the UAE, how do they impact the market?

VS: The very high transportation cost, including tolls, is discouraging the movement of the goods from one emirate to other emirates. This has brought down overall domestic market presence. So, now we are focussing on optimising transport capacity. We are making the transport fleet more efficient, to bring down costs or at least compensate for increased costs.

ICR: How have energy costs moved in the last year or two, and what do you expect for coal in the year ahead?

VS: Coal has moved up a lot, but by the middle of the year, it should stabilise towards a normal level. Otherwise, if high costs continue in 2022, it will be very difficult to pass them on to the customer.

ICR: What do you expect for the year ahead in terms of UAE cement demand?

VS: 2021 was the year when most of the projects such as the Expo and other infrastructure and residential projects were completed and delivered. Construction activity is currently lower than the pace of the last decade and demand is at about 11Mt, which in my view is the lowest. Therefore, from here it is expected to improve. New projects are currently being announced with more to come, with work on Etihad railways already started. The UAE government is really aggressive in creating world class infrastructure and other icons. So, we are hopeful that from 11Mt it should gradually come back to the old level of at least 15Mt over the next 2-3 years.

ICR: How do you see prices evolving as a result of that increased demand?

VS: Prices will always be challenged here, because of the overcapacity.
Credit terms are another challenge to volumes: people want longer credit, often unsecured, so that is another challenge to mitigate and enhance the volume in the local market.

ICR: Given the level of overcapacity, with around 38Mta of grinding capacity, why has there not been more consolidation in the market?

VS: Consolidation may not have a big impact unless there is a new market and product creation. Consolidation of two times or three times the capacity of demand [is required]. Consolidation works more effectively when there is not a wide gap between demand and supply. However, eventually, consolidation will happen and that will improve the market a little bit, but not significantly unless a new market segment is created.

At the same time, surrounding countries in the GCC also have overcapacity. Saudi Arabia was never previously in the export market, but in the last 2-3 years it has also been exporting. So, consolidation will also happen gradually but will not have much impact on the pricing side [because of global oversupply].

ICR: What is it about Shree Cement that allows it to achieve leadership positions in terms of cost optimisation and technical performance, as in the case of the kiln capacity increase at UCC?

VS: The management always encourages to build the team for growth and innovation. Calculated failures to acquire and adapt new approaches are acceptable to them. That gives us the confidence to try and come up with innovations to enhance efficiency and productivity.

At the time of our acquisition of the plant we knew that there was scope to increase productivity and re-utilisation of waste heat. And the scope identified and visualised at the time of acquisition has been aptly implemented.

Furthermore, in a market with overcapacity, one rule of thumb is that if you can be the lowest-cost producer, then you can definitely survive and operate at full capacity. So you have to have targets on the cost side as well, even if you cannot control things on the demand side.

Decarbonisation

ICR: In many parts of the world decarbonisation has risen to the top of the agenda for the cement industry. Do you think there is the same level of awareness and desire to reduce the carbon footprint in the Gulf and in the UAE?

VS: We do not say that it is a desire, but it is a necessity now. So, we have to tune accordingly. The reduction of carbon is in everybody’s interest, and the UAE has released targets. We will match it, the industry has to match it.

ICR: Do you expect to move into alternative fuels in the future?

VS: Certainly. We have already started on a trial basis for a number of waste streams. Hopefully, by the end of the year, we will see a satisfactory development in terms of alternative fuel.

ICR: Do you plan to invest in solar power, given the plentiful solar resource in the UAE?

VS: Definitely. We are up for investment in solar power, at least in line with our captive use. At the same time, the electricity available from federal sources is very expensive. We are awaiting the right policy announcement for solar power generation in the emirate.

ICR: Do you think there is going to be more demand for low-carbon cements in the market?

VS: We have a capability to produce green cement and we are already supplying it. Since ordinary Portland cement is available at a cheaper rate than green cement, the construction trade has not yet changed significantly. Looking ahead, demand for it may increase. We have capacity to produce it, providing the market commercials work out.

ICR: How should the UAE government support the industry going forward?

VS: The UAE government should address the issue of overcapacity. At the very least, stop approving applications for the building of new capacities and rationalising the existing ones should be looked into.
The government could also look into a minimum pricing cap scenario until overcapacity matches demand. We remind you that in 2007, before the 2008 crisis, the cement sold in the UAE market was priced at AED450-500/t. The government intervened and brought the price to AED350/t and that is the maximum price set. The requirement now is that a minimum price should be set.

In terms of cement imports, we have successfully brought notice to the relevant ministry. As a result, it has successfully imposed anti-dumping measures on those imports.

This interview was first publishing in International Cement Review in March 2022.