What has the monsoon got to do with the cement demand in India, the world’s second largest market for the commodity? In fact a lot, since agriculture and allied sectors have a share of 14.2% of the country’s gross domestic product. And why are the world cement leaders like Lafarge, Holcim, Italcementi and Heidelberg so keen to have a stronghold in the Indian market? The answer is to be found in the forecast of double-digit growth continuing in India in both cement demand and output capacity expansion. One concern, however, is margins in the cement business are coming under increasing pressure because of rises in prices of coal mainly but also of other inputs. Overcapacity in cement is, however, not allowing the producers to pass on the whole of incremental production costs to consumers.
Indian cement manufacturers are celebrating the Meteorological Department’s initial forecast of a normal monsoon this year which should allow the country once again to harvest bumper food and commercial crops. As producers of the bonding material are experiencing improved demand in the countryside in the wake of an all-time foodgrains production of 235.88mt (million tonnes) in the 2010/11 crop year, a follow on good harvest will give a further shot to the building of concrete houses in rural and semi-urban centres.
At the same time, as the United Progressive Alliance government at the centre goes on redeeming its pledge to build 10 million houses under the Rajiv Awas Plan for the slum population, which has grown from 75.26 million in 2001 to over 93 million now, will generate considerable demand for cement. The housing sector accounts for nearly half the cement use here and therefore, producers of the material will want the government to initiate action so that the backlog of a conservatively estimated 25 million houses is cleared within a reasonable time.
At this point, nearly one-third of the country is urbanized. While this is less than the world average of over 40%, urbanization is to spread fast here, thanks to wealth generated in the farm sector and industries being set up in faraway places.
No surprise then that cement companies are engaged in an aggressive competition to push sales in smaller cities and towns. In building construction, particularly residential structures, steel cement use ratio is heavily loaded in favour of bonding material.
As against steel cement use pattern of 1:1 in developed countries it is 1:3 in India. One, therefore, gets to see India’s leading steel men like C.S.Verma, Sajjan Jindal and the Ruias actively campaigning for lifting the share of steel in construction work on grounds of enhanced life of structures, reduced construction time and better aesthetics. They are leading their respective companies SAIL, JSW and Essar to promote use of greater amount of the metal in house construction and other applications beyond urban centres into remote rural areas by making available steel to individuals in asked for small quantities and in required shapes and sizes.
That the cement industry is not overly concerned about any major replacement of bonding material by steel in the foreseeable future is to be seen in the large cement capacity being created, even while a good portion of capacity already installed remains unused. According to the leading Indian producer ACC in which Switzerland-based world leader Holcim owns 48.21%, like in the past five years, the industry’s compound annual growth in the next quinquennium will be 10%. Some research agencies, however, are of the view that while the industry here has the potential to grow at a higher CAGR of 12%, the ground level reality of supply being more than demand putting pressure on realizations may somewhat impact new capacity building. A few cement capacity growth plans are likely to be put on back burner.
The heat of intensifying competition is putting all groups, irrespective of their size under pressure. This will be more acutely felt in the country’s southern states which in spite of being a surplus region will see the creation of bulk of the country’s new cement capacity creation. At the same time,ACC points out, demand supply balance in other regions will either “improve or remain status quo.” In a report Cementing India, rating agency Ernst & Young anticipates capacity addition of 54mt in the two years to fiscal year 2014. The report further says though capacity utilization will stay around 80% this fiscal year, “financial year 2013 onwards, demand will outstrip supply and this higher demand is expected to continue in medium to long term.”
Like many other agencies, Ernst & Young believes that cement demand will rise on the back of the country committing an investment of $1 trillion in infrastructure development during the 12th plan period (2012–17). As India rapidly strengthens its infrastructure, its per capita consumption of cement at 156kg should keep on coming closer to the global average of 396kg. Besides infrastructure and house building, massive investments planned for industries like power and steel will trigger good demand for cement.
The Indian cement industry has seen some major consolidation of capacity heralded by steel, textile and engineering groups wisely exiting their non-core cement business. It was only to be expected that world majors like Lafarge and Holcim will go high octane in increasing their India profile by building new plants as also through the inorganic route. Last year when Lafarge chairman and CEO Bruno Lafont came visiting India, he saw “consolidation happening here in the midterm.” Lafarge, which set its foot in India in 1999 with the purchase of Tata Steel’s cement business followed by acquisition of textile major Raymond’s cement mill, would continue to be open to seizing consolidation and greenfield plant building opportunities. Whether it is Holcim through its ACC and Ambuja Cements or the local Aditya Birla group, growth will continue to happen through a mix of expansion of existing mills, building of new plants and acquisitions.
The way the industry is expected to perform in the near term should create new opportunities for consolidation with groups with capacity of up to 5mt becoming takeover targets. Cement is a capital intensive industry and low return on capital for any length of time makes it difficult to service loans. But why only relatively small groups, as the experience of ACC, Ambuja and L&T Cement shows, big multi-locational units may offer themselves for buy out if right price is to be had. The groups from the West already here have all mammoth capacity under their belt, resulting partly from consolidation. Consolidation is also gaining pace in the Chinese cement industry. The Indian story could not be different.
Cement usage in Brazil continues to accelerateIn 2010, 15% more cement was used in Brazil compared to 2009, and the increase in 2011 will be only slightly less,
writes Patrick Knight.Almost 60mt (million tonnes) of cement was used in Brazil last year, 9mt — or 15% — more than in 2009.
To keep pace with demand,Votorantim, the largest of the 12 companies which produce cement in Brazil, imported ten shiploads of cement from Vietnam last year, bringing in a total of 700,000 tonnes.
Votorantim has a 40% share of the market, and plans to add 17 new factories to the 35 it already owns.
Votorantim had imported about 300,000 tonnes in 2009, but no imports were needed in 2008, because of problems associated with the economic slowdown, although more than a million tonnes had come in 2007.
About half a million tonnes of cement is exported from Brazil each year, most destined for neighbour Paraguay.
Demand is expected to grow by at least 10% a year for the foreseeable future, and to keep pace, the 12 companies between them plan to spend $7 billion to add 40mt of new capacity in the next five years.
The next World Cup will be held in Brazil in 2014 and the Olympic games are to be staged in Rio de Janeiro two years later. To prepare for this, 12 elderly stadiums are being re-built and new ones added. New runways and terminal buildings are to be built at 13 airports, while dozens of new hotels are to be built in cities where matches will be played.
An Olympic village is to be built about 35km from the centre of Rio de Janeiro, complete with several stadiums, swimming pools and accommodation for thousands of athletes
and officials. A new highway linking the centre of Rio and its airports with the village, is to be built.
It had been hoped that a new 400km railway to speed ‘bullet’ railway running between Brazil’s two largest cities, Sao Paulo and Rio de Janeiro, would be built in time if not for the World Cup, at least for the Olympics. But a project expected to cost about $20 billion, with half the track in tunnels or on bridges or viaducts, will probably not be ready until about 2018. Huge amounts of cement will be needed for this.
A major effort is under way to improve Brazil’s creaking infrastructure, which is now prejudicing exports and pushing up costs. Many existing ports are to be expanded and half a dozen new ones built, some just to carry iron ore. New railways are to be built or extended and locks, some up to 400 metres deep, are to be added to waterways.
In a few years’ time, per capita consumption of cement is expected to have risen from the present 280kg a year to close to the world average of 400kg. This would still be far behind the amount consumed by each Chinese or South Korean.
Much of the increase will be in the north of the country, where 60% more cement was used last year as in 2009. Work has already started on building two giant hydroelectric power stations in the area, others will follow. Both the giant Votorantim, as well as the number three Camargo Correa, one of Brazils largest construction companies and a partner in most of the new power plants, will each build two, 1mt-capacity cement plants in this area, where only 5% of the total is now produced.
The second most popular part of the country for new plants is the north east. Many factories are being re-located in a part of the country where labour now costs far less than in the more developed south east, where 75% of Brazil’s industry, and more than half the population is now located. Forty-eight per cent of the current cement producing capacity is there as well..
While the Brazilian economy grew by a record 7.8% last year, the north east grew by close to 10%. New ports, two major new railways, steel mills, oil refineries and pulp plants are being built, or are planned for the region, which is two or three days’ less sailing time from the countries in Asia, Europe and North America where most of Brazils bulk exports go.
With demand for so many of the commodities and foods which Brazil produces extremely high at the moment, the future now seems to have arrived in a country previously referred to as “the country of the future, and always will be”.
Brazil’s exports are now being badly handicapped by its strong currency and the only way to compete when prices eventually weaken, which they always have in the past, is to cut the cost of transport.
As well as very large projects, the left-leaning government wants every Brazilian to have a home of his own, which at the moment, six millions do not.
Under a programme ‘My home, my life’ up to three million new low-cost homes are to be financed on easy terms by the government in the next few years. A total of 600,000 such homes were completed last year and the target of a million a year may soon be reached.
Although huge projects such as new hydroelectric power stations hit the headlines, a high proportion of the cement used in Brazil is sold to millions of small householders, most of whom build, or improve, their homes themselves. Half Brazil’s 57 million homes are now considered inadequate in some way and the owners of many of these plan to make improvements.
If most Brazilian homes are now linked to mains water, and a ‘Light for all’ programme has brought electricity to all but a small number of homes scattered in the Amazon jungle. But less than half all homes are now connected with main drainage, on which about $12 billion a year is now being spent, much of that on cement.
The largest Brazilian companies are not content with expanding in Brazil itself. Votorantim, which already owns, or has a share in plants in Canada, Chile, Bolivia, Paraguay Uruguay and Argentina, has started work on a 400,000-tonne plant in Peru, while the number two Camargo Correa has started work on a 1.5mt plant in Angola. Close to 10mt of cement was imported by Angola, just across the South Atlantic from Brazil, last year.
As well as the three Brazilian-owned giants which head the pack, three leading European cement companies, the Portuguese owned Cimpor, the Swiss Holcim and the French Lafarge, between them have a 25% share of the market. All are planning major expansions, which they will have to do if they are not to lose market share.
Both Votorantim and Camargo Correa now have shareholdings in Cimpor, which plans to increase output by 35% in the next few years.
To be allowed to buy shares in Cimpor, particularly attractive because the company has plants in many fast-growing countries in the developing world,Votorantim was obliged to sell three plants to Lafarge, which in exchange ceded its shareholding in Cimpor to the Brazilian giant.
Lafarge says it wants to become the second-largest producer in Brazil. But if it is to be successful, it will have to overtake four companies and triple output.
Beaten by the two Brazilian giants in its bid to buy shares in Cimpor last year, one of Brazil’s leading steel makers, the National Steel company, CSN plans to build two plants able to make 2.8mt in the next two years in Rio de Janeiro state. These plants would be able to use clinker from the steel plants as a raw material.
EU construction and cement activity yet to catch path of EU economic recovery
After some positive results recorded during several months in 2010, EU construction and cement activities declined on both a quarterly and yearly level, despite signs of an overall EU (European Union) economic recovery.
In 2010 the European economy (GDP) began to recover following vibrant growth in several member states, including Slovakia, Germany, Denmark, Finland and Estonia. The European Union gross domestic product grew by 1.8% on yearly basis reaching €12.1 billion (after a –4% decline in 2009). The volume of EU industrial production showed yearly growth of 4.3% with positive trends in at least nineteen EU Member States. Accordingly, the index of new domestic orders showed positive trends since early 2009. Negative developments in both annual GDP and industrial output were present in Spain and Bulgaria only, while the industry was hit also in Denmark and Portugal.
This positive picture reverses when taking into account both construction and cement activities. According to the latest EUROSTAT data, the EU construction and cement output continued to fall, reaching in December their lowest level since the onset of the crisis. Compared with December 2009, last December’s construction fell by 8% while the average yearly output index dropped by 4.1%. Likewise, there was a further 11.7% decline in monthly index of cement production in December.
The EU construction sector started to improve in March, showing the first signs of recovery after a two-year drop of more than 15%. The production index increased further in June, but fell back to its pre-March levels in September. Finally, some
signs of upturn in October were offset by gloomy performance from the year’s end.
Similarly, according to estimates for 25 European countries, the civil engineering sector, including transport networks, energy, and water supply networks showed some varied, though stable, trend. New building sector, comprising both residential and non- residential buildings, showed a further –8% drop in 2010 that followed the already registered slump in 2009 (-19%).
In 2010 cement consumption in the CEMBUREAU countries is estimated at some 4% below when compared to 2009. When taking into account EU countries only, it further fell by some –6%. Up to year’s end, stable or positive results were registered, in the following Western European countries: Germany, the United Kingdom, Belgium and Luxembourg. Other countries saw a decline in consumption, although at a lower pace than in the previous year.
Siam Cement Group announces investment plans in ASEAN cement markets
Siam Cement Group (SCG),Thailand’s top industrial conglomerate, has announced plans to spend 30 billion baht (US$991 million) over a five-year period, to lift its cement production capacity from the current 1mtpa (million tonnes per annum) to 6mtpa in the ASEAN markets outside of Thailand.
The company’s president Pramote Techasupatkul, recently said the company had researched the possibility of cement production in Vietnam in addition to building a new factory in Indonesia and a second unit of at its Kampot plant in Cambodia. The group has similarly considered opportunities in Burma’s Dawei district and is eager to invest in a cement plant once the military government permits more foreign investors.
“Within five years, we are going to have 6mtpa of production capacity in neighbouring countries. At present, we have only 1mtpa at the Kampot plant,” Techasupatkul noted.
The southern region of Vietnam is the company’s target, as this is where the cement demand is high, while raw materials are plentiful in the northern and central parts of the country. Techasupatkul commented that the company is “also looking at merger and acquisition opportunities in Vietnam, in addition to investing in a Greenfield plant.”
A third of the total planned budget has been set aside to
build a 2mtpa-capacity cement plant on the Indonesian island of Java. “Of course, we have a concern about earthquakes and tsunamis on the Indonesian island so we will cautiously study the potential locations over the next six months in order to avoid any risky areas,” Techasupatkul added.
SCG has an overall cement output of 23mtpa in Thailand, and expects 80–85% to be utilized this year, including 7mt (million tonnes) of exports. The domestic sales are anticipated to rise by 5% from 12mt in 2010, generating nearly 50 billion baht in revenue.
SCG has announced that 30% of the five-year investment plan will be spent to expand the capacity of ready-mixed mortar cement in Thailand by 40% to 3mt.
Additionally, there are plans for Siam Fiber Cement Co, a subsidiary of SCG Building Materials to construct its fifth plant in Nong Khae,Thailand, as the demand for environmentally friendly fibre cement continues to grow. “We are confident that the market will continue to expand significantly and our focus remains on innovative products that are good for preserving the environment,” the managing director, Panthep Supachaiyakit said, adding that sales were expected to expand by 8–10% this year. The new plant is expected to be operational in early 2013.
Vietnam, China businesses strengthen co-operation in cement productionThe Vietnam Chamber of Commerce and Industry (VCCI) in collaboration with ASEAN – China Trade and Investment Promotion Committee, aimed to strengthen and promote the co-operation in developing the cement production technology and equipment, and to create opportunities for Vietnamese and Chinese companies to exchange information and seek business cooperation opportunities.
Pham Quang Thinh, deputy director of International Relations Department,VCCI noted that Vietnam and China have completed a significant year of 2010 in bilateral relations, highlighted by the 60th diplomatic relations establishment anniversary, and the first ‘Vietnam China — Friendship Year’ initiated by leaders of the two nations. Also, in 2010, the ASEAN — China Free Trade Area (ACFTA) was officially enforced with commitments on strong reductions in tariffs by both China and ASEAN countries. Many items will be imposed import duty from 0–5%, including agricultural and industrial products.
According to statistics, the bilateral trade between Vietnam and China has rapidly expanded, with an annual average growth of 32% from 2000 to 2010. In 2009, notwithstanding adverse impacts of global financial crisis and economic downturn, the two-way trade revenue topped US$21.35 billion, up 5.04% compared with 2008. The value was estimated to reach US$25 billion in 2010.
In addition, China invested 749 projects with a total registered investment capital of more than US$3 billion in Vietnam as of 21 December 2010, ranking 14th out of 92 countries and territories investing in the country. According to Thinh, the smooth and successful implementation of most projects benefit investors and both countries. However, this result is incommensurate with nice political relations, friendly cooperation, potentials and advantages as well as desires of the governments and peoples of the two countries.
Thinh said the two companies should take advantage of these opportunities to promote cooperation in trade, investment and production. “Vietnam, which is in the process of integration, has weathered impacts of global economic crisis and is developing dynamically. In 2009,Vietnam was one of few growing economies in the world, with GDP expansion by 5.32%. To maintain the growth momentum and develop,Vietnam needs to focus on investing in industrial modernization and infrastructure construction. At present, the demand for cement, specially advanced cement production machines and equipment, is rising. Thus, the cooperation with Vietnamese companies to this effect will help boost the development of Vietnam,” said Thinh.
For the purpose of establishing relationships, advertising products, transferring technologies and seeking opportunities of investment cooperation with Vietnamese partners, Chinese visiting firms presented advanced technologies and investment opportunities. A representative of the Nanjing Xifu Cement Group, one of largest producer of cement and equipment in China, said his group entered the Vietnamese market in 2004 and helped many Vietnamese partners to build cement production lines. In the coming time, the group will support and co-operate more strongly with Vietnamese enterprises to transfer advanced technologies for production of high-quality cement.
Cement industry facing the pressure of fuel price increase
Along with the pressure of raising electricity prices, fuel prices, adjusting the Vietnamese dollar(VND)/USD exchange rate, the price of coal sold to cement households has risen by 40% since the beginning of April, which has added a greater burden to cement enterprises. According to Nguyen Van Thien, Chairman of Vietnam Cement Association, total energy costs account for 45–50% of cement production costs. An 18% increase in gasoline price, a 15.3% increase in electricity and a 40% increase in coal have made price of cement increase by 10% to 15%.
On the other hand, increasing the VND/USD exchange rate by 9.3% and raising interest rates have caused great difficulties for cement plants, especially for cement projects which have become mature. The increase in the VND/USD exchange rate and interest rate has made the price of cement increase by 12–15%. Thus, electricity, coal, oil, exchange rate and interest rate have made cement price increase by 22–30%.
From late 2010 until now, cement industry has been unable to withstand the pressure of rising prices of coal, electricity, fuel, VND/USD exchange rate, interest rate on bank loans. In 2011, Vietnam Cement Industry Corporation (VICEM) is expected to pay a debt of VND 3,200 billion; Cam Pha cement plant has to pay a debt of VND 800 billion...Therefore, the plants have been forced to adjust prices to offset part of the cost due to increases in prices of inputs mentioned above.
Thien added that this time, the price would increase by VND 120,000 per tonne (about 10% of cost), there has been no salary adjustment for employees despite the rise of inflation and consumption index.
According to Le Van Chung, Chairman of the Board of VICEM, in 10 recent years,Vietnam's cement price has been the lowest in ASEAN, steady at US$50 per tonne or less than US$50 per tonne, while the average cement prices of other ASEAN countries are usually US$65 to US$75 per tonne.
The cement industry is conscious of keeping cement prices and supplies stable to help curb inflation and stabilize the macro- economy. Since 2008, the price of cement has increased by only 13–15% while coal has doubled and electricity and gasoline have also been rising continuously. A more serious problem is that, along with the price increases, electricity and coal industries can ensure the supply of only 70% of electricity and coal demands for cement production. Moreover, power cuts will stop clinker kilns from operating, causing stagnancy for production lines and large losses for cement plants. The most worrying is that if electricity and coal can satisfy only 70% of demands, the source of cement for construction will lack about 30%.
To overcome difficulties in input price increases, Chung said VICEM had directed unit members to actively seek all possible measures to reduce production costs, especially saving energy.
Accordingly, along with the revision of consumption norms of materials, fuels such as electricity, coal, petroleum, cement plants have reschedule the operation of production lines and devices which use much power such as stone crushers, material grinders, cement grinders... so that they operate only in low-load hours.
Besides,VICEM has urgently speeded up the project of utilizing extra heat of the clinker kiln to generate electricity at Hoang Thach and Tam Diep cement factories.
VICEM strives to 2014 so that all the cement factories of the Corporation will install devices that utilize extra heat of the clinker kiln to generate electricity, and can self-supply 18% to 20% of electricity for production.