Every industry goes through a process of churning periodically, writes Kunal Bose. Cement is no exception to this rule. Adjustments required to keep the business rewarding involve replacement of ageing capacity by capacity that incorporates modern cost effective and environment friendly technology.  

This is happening on a fairly large scale in the cement industry everywhere, including China and India, the two countries with the world’s largest and second largest capacities. The point not to be missed here is that as in steel, aluminium and copper, the cement industry in China has capacity in multiples of India’s.

In 2017, China produced 2.4bn tonnes of cement, marginally down from 2.4bn tonnes in the previous year. Compared to the global giant, India made 280mt (million tonnes) last year, down from 290mt in 2016. The Indian setback in production is attributed to demonetization of the two highest value currencies on 8 November 2016 that threw the construction sector out of gear. Cement demand in India started picking up from October 2017. Consultancy and research organization ICRA says:“A demand pick-up in the recent months, October 2017 to January 2018 by 13.4% is backed by low cost housing... along with infrastructure demand from the eastern, southern and western markets” of the country. This apparently remarkable growth happened on a low base and therefore, not much should be read in it.

The US, which hosts the world’s third-largest cement industry, saw production in 2017 rising by 400,000 tonnes to 86.3mt. If that country’s output in 2015 (83.4mt) and 2014 (83.2mt) is taken into account, then there are unmistakable signs that the infrastructure renewal programme will keep the demand for the binding material on an ascending curve. The Portland Cement Association (PCA) has in its spring forecast assumed a 2.8% rise in cement consumption in the US in the current year and also in 2019. Demand will then rise to 4% in 2020 as the impact from potential federal infrastructure spending is likely to take effect.

PCA estimates the US cement consumption at 99.3mt in 2018, 102.1mt next year and 106mt in 2020. According to PCA senior vice president and chief economist Ed Sullivan, the spring forecast has considered factors such as a strong economy supported by tax reforms, likely increases in infrastructure spending and an already low unemployment scene. Only people with jobs and a regular income get accommodation from banks to buy houses.

Analysts think cement imports into the US are set to grow from 9.2mt in 2016 to past 12mt in 2018, due to the fact that new production capacity is difficult to build in that country. The long coast and an extensive waterways system will support growing quantities of imports. Large concrete producers in the US will be inclined to develop their own import operations (or grinding mills). Imports of cement in Western Europe should grow on the back of a healthy growth in construction.

Interestingly even while large pockets in Africa are recording good economic growth and population there is rising, the per capita consumption of cement in the continent has remained low. Expectedly, cement producers in some countries, including China have identified African countries, albeit selectively as their next investment destination. Till such invest- ments in the pipeline and the ones proposed get converted in cement capacity, Africa’s dependence on cement imports will keep on rising. Precise cement import data for Africa are not readily available. It will still be safely assumed that around 50mt of cement and clinker made it to African shores in 2017. Although growing cement capacity is being realized in Africa, part of this is made up of grinding plants that need imported clinker.

Global cement production is expected to advance from 3.27bn tonnes in 2010 to 4.83bn tonnes in 2030. But it will always be the case that only a small percentage of the production will make it to seaborne trade of the commodity. Ad Ligthart of Cement Distribution Consultants writes:“A cement producer’s profitability is determined to a large extent by the utilization factor of its... plants. This is where seaborne cement trade and distribution play a major role. The ability to sell cement (or clinker) in long-distance markets not only brings the profits that go with the trade, but it ensures a substantial reduction in production costs per tonne...

“In 2015 around 4.1bn tonnes of cement were produced by the global cement industry. Of this, 110mt of cement and clinker were traded internationally by water. This is just 2.7% of all cement trade. As marine transport is the most popular form of transport for cement, this can be used as a proxy for international cement trade. A further 93mt of cement and clinker were transported by sea domestically in 2015, with 18.7mt transported domestically on inland waterways, excluding China. This means that a total of 221mt of cement were transported on water... around 5.4% of the amount produced.”

Vietnam, the world’s fourth-largest producer, showed impressive growth in production from 60mt in 2012 to 78mt last year. The country has 82 cement production lines with aggregate capacity of 97.6mt. Since the domestic market is not big enough to consume all the cement that is produced, Vietnamese manufacturers have found outlets in Asian countries such as the Philippines, Taiwan and Bangladesh and also in Africa and Latin America. In the meantime, the Vietnam Cement Association has given warnings that the country will “face a glut of 25 to 36mt a year of the material by 2020 as production completely outstrips national demand.” Vietnam is likely to have cement production of 120 to 130mt by 2020 when the local demand will at the most be 93mt, leaving a big amount for export.

In any case, taking a long-term view, the country has set an annual export target of 20 to 35% of the industry’s cement and clinker capacity by 2030. To ensure that prices in the domestic market do not come under much pressure because of oversupply, the Vietnamese industry has no alternative but to become an aggressive exporter. In confirmation, the general department of Vietnam customs informs that the country exported 2.9mt of cement and clinker worth $101.1m in January 2018, up 32.3% in volume and 30.3% in value over last year’s corresponding month.

Let the significant changes that are now taking place in the industry be considered. According to one consultancy, between now and 2022, globally but excluding China nearly 420 cement capacity expansion projects with an aggregate capacity of 580mt are due to be commissioned. Unless, of course, some of the projects do not suffer time and cost escalation — the major bane in developing and also emerging economies. The capacity in the pipeline comes under the following heads: (i) 150 greenfield projects will deliver new capacity of 250mt; (ii) 114 new production lines at existing operational sites will create fresh capacity of 220mt; (iii) Capacity of close to 100mt will come by way of commissioning of 131 grinding projects; (iv) Finally, in the process of execution of 25 modernization projects not only will there be migration to modern power efficient and environment friendly technology but some additional capacity will be created.

A noticeable feature of new investments in cement worldwide is the shifting of focus from building integrated plants with kiln lines to setting up grinding plants with capacities of up to 2mt. Grinding units offer the advantage of their installation close to the markets. Building a medium- size grinding plant will cost around $60 a tonne. The consultancy says the “trend of ever increasing kiln lines is coming to an end.” Most kilns will be of sizes ranging from 3,000 tonnes a day to 6,000 tonnes a day and “only a few with capacities larger than 8,000 tonnes a day are in the pipeline.”

Large global overcapacity of which the major part is in China and also limited export possibilities are the factors influencing investor decision not to seek bigger and bigger kilns.

The consultancy further says most of the new projects are located in Africa and Oceania followed by south Asia and Latin America. For reasons of cost and sensitivity to the environment, the US and Western Europe, including Turkey, are hosting only a few new cement projects. At the same time, Europe remains the principal centre for further development of cement-related technologies. In the machinery sector, China is offering increasing competition to the likes of FLSmidth of Denmark and Loesche of Germany.

An Indian industry official says: “That China, which produced as much as 2.4bn tonnes of cement in 2017 would have developed formidable capacity in cement plant design and engineering and machinery building was on expected lines. This has been seen in steel and aluminium too supported by the size of Chinese production. China’s rapid emergence in consultancy and machinery building along with improvement in quality of its processes and machinery has put price pressure on the Western companies.”

Observers notice a great degree of discipline among cement companies as they build new capacity. Take the case of China. Beijing has resolved earlier this year of shedding more industrial overcapacity, including cement in a renewed attempt of supply side reform to usher in high quality economic development. China is sitting on cement capacity of up to 3.5bn tonnes and at least 30% of it is surplus. The country’s National Development and Reforms Commission (NDRC) earlier said that cement production was to be cut by 10%, part of permanently shutting of polluting and high cost mills. But buoyed by the success in reducing surplus steel and coal capacity, NDRC said recently the same could well happen in cement, meaning going beyond targeted capacity reduction. Along with capacity shedding, Beijing will encourage merger of cement companies to face the challenges of overproduction, depressed prices and bloated borrowings.

With huge excess capacity obtaining in the country and the banks not inclined to support construction of new mills, some Chinese cement groups and investors are involved in building a good number of new plants elsewhere in the Far East, central Asia and significantly in Africa. Expectedly, the Chinese arrival has made the local groups wary of how the future will unfold for them. But cement has for long been a global business with industry leaders owning plants in several countries. Like LafargeHolcim, created out of the merger of Lafarge of France and Holcim of Switzerland in April 2014, operates in 80 countries. Incidentally, LafargeHolcim owns more than 60mt cement capacity in India and it is to build a 3.1mt greenfield cement factory in Rajasthan. Ahead of the merger Holcim acquired two leading Indian cement groups Ambuja Cements and ACC and Lafarge emerged as a major constituent of the Indian industry by first acquiring the cement unit of Tata Steel followed by the one owned by Raymonds and then expanding their capacity.

An official of Cement Manufacturers Association in India says: “We are the world’s second-largest in terms of capacity and production and the market for the building material is growing as the country’s focus is to strengthen infrastructure from concrete roads to ports and create millions of housing units. Naturally, foreign groups, some of them are already here, will always be contender to buy operating units in competition with local groups.”

ICRA says Indian cement demand will grow 5% this financial year to end in March 2019. It, however, gives the warning that profitability and debt metrics of Indian cement companies may come under pressure in the coming quarters because of higher petcoke, coal and diesel prices. Cement use demands its mixing with sand. But in a number of Indian major states sand shortages are negatively impacting cement sales. But there is hope of rural demand for cement to improve on the back of the government promise that minimum support prices for crops will give farmers at least 50% more than production cost, liberal provision of rural credit and forecast of a normal monsoon three years in a row.

India is an infrastructure deficit country and to sustain economic growth rate at 7.5% to 8%, it is imperative that major infrastructure projects are rolled out at regular short intervals. In fact in anticipation, cement companies with strong balance sheets are going ahead with greenfield and brownfield expansion programmes. Steelmakers, however, want the government to pass an order that like in developed economies, cement and steel use ratio should be 1:1 and not 4:1. That will be a negative for the cement industry.