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TimePosted 01/04/2019 10:21:50

The new Asian paradigm

This week CemNet news reported on the latest developments in LafargeHolcim's (LH) sale of Holcim Philippines Inc. Shares in the company have risen 50 per cent since January 2019, giving the cement maker a US$1.3bn market value, according to Bloomberg data. A decade ago, every cement major wanted to grab a piece of the Emerging Market pie. What happened?

Holcim Philippines operates five plants with 9.6Mta capacity, following the recent grinding mill expansion at its La Union plant in North Luzon, giving the company a leading market share of around 25 per cent. To maintain its pole position, the company is already working towards a US$300m expansion programme to lift capacity by 30 per cent to 13Mta by 2020.

Like much of southeast Asia, the future demand outlook for The Philippines is promising. Annual YoY consumption, spurred on by President Duterte's 'Build, Build, Build' national development programme, expanded by 13 per cent in 2018 to 35Mta, making it one of the world’s fastest growing markets.

In the medium term, growth is expected to continue at a robust pace: last week Joaquim Estrada, Cemex's regional boss, described the Philippines as one of the most attractive markets, forecasting a demand of 46Mt by 2022, which translates into a CAGR of seven per cent. Capacity, he observed, is also set to expand significantly over the same period, by an additional 10Mta, but this will remain in line with consumption.

Nevertheless, LafargeHolcim has struggled to generate profits in the Philippines in recent years, with input cost pressures and competition from low cost imports eroding margins. So, as with the recently concluded sale of Holcim Indonesia, CEO Jan Jenisch is intent on capitalising on positive market sentiment and continuing the company's exit strategy from southeast Asia.

That leaves the troubled market of Malaysia plus Bangladesh as the only remaining operations for sale in this region, which used to include Sri Lanka and Vietnam. So far, LH remains fully committed to the major markets of India, where the company has a leading position through ACC and Ambuja Cement, and China, through its joint venture with Huaxin Cement.

LH anticipates greater opportunities away from Asian cement
Jan Jenisch is steering the company decisively away from Asian markets, with the conviction that he can generate better profits elsewhere. His ruthless disposal of Indonesia and now Philippines make clear his belief that, whatever the pace of growth, these markets are structurally limited. Availability of cheap capital, combined with low cost technology has encouraged overcapacity by incumbents and ambitious new entrants, and undermined the profitable oligopolistic structures that used to exist.

The assumption appears to be that the situation will only get worse with the emerging threat from newly minted Chinese players backed by state-sponsored international expansion – such as Conch (China) which is bidding for the Philippines assets – further undermining the longer term profitability in the region.

Instead, Jan Jenisch has crafted a new strategy under which LH will shift its focus to higher margin products and building materials solutions, broadening out from cement and concentrated on more mature markets. Given his background as ex-CEO of Sika, this strategy presents a logical step forward and offers LH the chance to capture higher growth business.

The current divestments will certainly give LH greater financial flexibility to pursue this new course, but the real game changer will be the potential divestment of LH's Middle East and Africa operations, which are rumoured to be up for sale for US$8bn. This would provide more than enough fire power to decisively transform the company.

Meanwhile in Asia…
Not all companies are pursuing the same strategy in Asia. HeidelbergCement remains committed to Indonesia via Indocement, and will be hoping that the new industry structure will help restore pricing power to the leading companies. It has also indicated that it may play a role in further consolidation of the market (see Indonesia Country Report 2023 for a full analysis). Cemex remains committed to the Philippines for the time being, although its ongoing US$2.4bn divestment programme could conceivably see the unit up for sale in future.

Meanwhile, it is the regional players that are filling the vacuum. Siam City Cement (Thailand), which ironically includes a number of ex-Holcim staff within its senior management team, has already picked up Sri Lanka and Vietnam from LH and is building momentum in frontier markets such as Cambodia. Semen Indonesia may look to expand its presence further, from its existing operations in Indonesia and Vietnam.

Industry observers, however, have all eyes on China. In 2018 the China cement industry enjoyed the highest profitability of its entire history, reaching a record CNY154.6bn (US$22.9bn), up 110 per cent YoY. Given the funds available, and outward looking expansionist mindset of its government, clearly shown by its belt and road initiative, it would not be a surprise to see more involvement in Southeast Asia from companies such as CNBM or Conch. The latter has built up its position as a low cost challenger in Indonesia, and is now looking at Holcim Philippines, together with China Resource Cement Holdings Ltd and Hongshi Group.

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