The cement sector is evolving rapidly. Consumption is increasing, boosted by demand from emerging countries; consolidation is being scaled up almost everywhere. Production continues to be mainly locally-based, except on fragmented markets like those in Sub-Saharan Africa. It is here that development finance institutions must implement operations to boost the sector, promote innovation and international standards – particularly for the environment.
A long with aggregates and water, cement is one of the major ingredients used to make concrete, which is second only to water as the most consumed substance on earth. Cement is an essential building material for the construction sector, one of the world’s largest industries and employers. Vitally important to housing and basic infrastructure, it plays a key role in economic development and poverty reduction in emerging countries. Nevertheless, the cement industry is among the largest contributors to CO2 emissions, and its projects usually have great environmental and social impacts. Because the cement industry is capital intensive, it necessitates large investments that require a long-term perspective on financing and returns. In addition, the industry is energy intensive as well as subject to economic and construction cycles, resulting in volatility of operating costs and revenues. With this background, development financial institutions (DFIs) play a critical role in supporting cement projects in emerging markets. Global cement industry patterns have been changing rapidly over the last two decades, and this article focuses on some of the prominent sector trends, including worldwide consumption, trade flows, industry consolidation, profitability benchmarks, climate change issues, and environmental imperatives.
Emerging markets lead cement consumption
Global cement consumption more than doubled over the last 15 years, reaching 2.96 billion tons (Bt) in 2009 and an estimated 3.2 Bt in 2010. In the same year, China continued to be the world-dominant producer and consumer at about 1.8 Bt, representing about 56% of the world’s cement consumption, followed by India at about 205 Mt.
Emerging markets now account for an estimated 90% of cement consumption worldwide, against 65% twenty years ago. Industry analysts predict that global cement consumption will continue to grow steadily and peak at around 5 Bt by 2030-50 (Betts, 2011; Codling, 2010). During this period, China’s consumption may decrease to below 1.4 Bt, and India’s may be reaching close to 800 Mt. Cement consumption as a function of time follows a bell curve, peaking in its maturity phase – China may be entering this phase, while India is still in its introductory growing phase – and then decreasing towards an asymptotic consumption level.
With the combination of cement’s low value-to-weight ratio and high transportation costs, it remains a predominantly local business, with on average around 95% of global cement consumption consumed in the country where it is produced. Indeed, to be competitive, cement companies as a rule set up their plants next to large limestone and clay reserves with easy access to a reliable energy supply (power and fuels), and usually within 200-300 km of their target market. Nevertheless, in countries at the early stage of their development, especially in small fragmented markets such as sub-Saharan Africa, cement imports may represent around 30 to 40% of domestic consumption.
Cement’s Supply- and Demand-side Leaders
International cement trade flows, traditionally seaborne and representing about 5 to 6% of global cement consumption, have clearly been impacted by the global financial crisis. Following the drastic decline of cement consumption in most developed countries, in some instances, such as in the U.S. and Spain, by over 40%,1 the volume of cement traded in 2009-10 decreased to about 110-115 Mt, or nearly 3.7% of global cement production. Approximately 50% of worldwide trading is carried out by the top five multinational cement groups, with this percentage increasing as the cement industry consolidates. The remainder is done by independent traders, who typically sell below market prices in order to take advantage of periodic regional oversupply or shortages and low freight rates.
In 2009, with 18 Mt of cement and clinker exported, Turkey overtook China as the largest exporter worldwide. The same year, China exported about 16 Mt, followed by Thailand at 14 Mt, Japan at 11 Mt, and Pakistan at 10 Mt. Iraq was the leading cement importer at 8 Mt, followed by Nigeria at 7 Mt, the U.S. at 6 Mt, Bangladesh at 5 Mt, and Angola at 4 Mt (Cembureau, 2010).
Cement consumption is driven by construction activity, which in emerging markets comes mainly from residential building (over 60-70%). Residential demand is further driven by high population growth and increasing urbanisation rates. For example, sub-Saharan Africa, which has a young population growing at a rate of 2.5% per annum and only a 40% urbanization rate, is expected to add 10 cities of more than three million inhabitants, tripling their current population over the next 5 years. In developing countries with a low GDP per capita (below USD 1,500) and a low Per Capita Consumption (below 100 kg), the compound annual growth rate2 for cement consumption is strongly correlated to the country’s GDP growth rate, typically at a beta ratio higher than 1.5. That is, cement consumption in these countries is increasing at an average rate of over 7% per year.
Main Industry Players: Room for Further Consolidation
The cement industry’s consolidation, which began in Europe in the 1970s and then spread to the Americas in the 1980s, is not yet significant in Asia, Russia, and the Middle East. In 1990 the six largest cement companies controlled close to 10% of the world’s cement output. Currently, they control about 25% of world cement capacity, and 45% in countries excluding China. In China, the government is encouraging consolidation of a very fragmented industry,3 and large players are emerging, such as Anhui Conch and CNBM, each having over 120 Mt of cement capacity (Figure 1).
The 2009 financial statistics of the leading global cement companies are indicated in Table 1. They show the stretched finances of the main international groups. Usual industry targets would be EBITDA margin/sales revenues of 25%, net financial debt/EBITDA of 2.5 or below, and net financial debt/equity of 50% or below.
In addition to consolidation, the vertical integration of cement companies towards the ready-mix concrete and aggregates industries will continue. This trend provides more knowledge on clients’ needs and opportunities in designing innovative products and services. It is positive for cement prices, and expands revenues and margins. It also reduces the earnings cyclicality of cement companies. Figure 2 compare typical profitability ratios for different building material segments where large international players have developed activities, with cement remaining the most profitable.
Developmental Impact in Emerging Markets
DFIs invest in the building materials sector in order to increase the availability of competitive local products that are critical to the development of a thriving construction sector. This links directly to the developing country’s ability to add the physical infrastructure and affordable housing it needs for poverty reduction and economic growth. In turn, better infrastructure drives GDP growth, creates jobs and SME linkages,4 and encourages additional foreign investment.
The cement industry is capital-intensive and requires long-term funding, which is not readily available in developing countries. Through their investments, DFIs contribute to the local production of cement, thus reducing the need for costly imports and foreign flows. This also typically enhances competition and helps lower prices for consumers that highly varies across countries (Figure 3).
The International Finance Corporation (IFC) and other DFIs are willing to take considerable risks, including making early investments in the cement sector in post-conflict countries, such as Iraq, Bosnia and Herzegovina, Liberia, Sierra Leone, and Yemen. For example, the IFC and syndication partners financed a Saudi-owned cement firm Arabian Yemen Cement Company as it embarked on an ambitious greenfield project in Yemen, where the business risks are perceived as high.
Reducing cement’s carbon footprint
DFIs’ world-class sustainability standards are also helping client companies reduce their environmental footprints, enhance their social responsibility efforts, and improve governance, all of which contribute to a strong triple bottom line. Indeed, there is a strong business case for sustainability in emerging countries, where politics and authorizations can be volatile, and where manufacturing companies often bear the brunt of harsh criticism from activists concerned about the social and environmental aspects of greenfield or expansion projects.
Cement production is energy intensive and accounts for 5 to 6% of man-made CO2 emissions, about 55% of which are inherent to the limestone calcination process, with the remaining 35% and 10% corresponding to the combustion of fuels in the kiln and to electricity consumption, respectively. Currently, there is no viable alternative to cement, although promising research and development could result in the future commercialization of low-carbon cementitious alternatives (e.g., Novacem, Calera). All DFIs are increasingly cautious and thus selective about climate change mitigation and the energy efficiency of new projects. As such, DFIs systematically analyze the CO2 footprints of their projects and promote best practices and technologies, benchmarking, and mitigating action to reduce CO2 emissions.
The IFC has developed a set of criteria barring inefficient technologies (e.g., wet, vertical shafts and long, dry kilns) and promoting specific actions to limit the carbon emissions of its projects to a maximum of 650-750 kg of CO2 per ton of cement.5
A key one of these actions is to maximize the use of blended cement, thereby lowering the clinker to cement factor, with a target ranging from 0.65 to 0.85, depending on local regulations and specificities. Another set of actions consists of improving the production process to reduce energy consumption via either a minimization of fuel consumption in the clinker production process, targeting a fuel consumption of 2,900 to 3,300 joule per ton of clinker,6 or a minimization of electricity consumption for cement production, with a target of 75 to 105 kWh per ton of cement produced. Finally, the IFC also encourages the use of renewable and alternative fuels wherever they are locally available (e.g. biomass, tyres, municipal waste, solar energy, wind farms).
The strong impact of cement on development, the expected growth of demand for cement in developing countries, and associated long-term capital needs make cement a key industry for DFIs. These should however take into account the significant CO2 emissions associated with cement production in their strategies and include necessary actions to limit such emissions in their investment frameworks.
¹ The U.S. and Spain were the largest importers in 2006-07, with over 45 Mt imported jointly. In 2009-10, their joint imports decreased to about 8 Mt.
² Compound annual growth rate is a business- and investing-specific term for the smoothed annualized gain of an investment over a given time period.
³ Among over 2,000 enterprises, the six largest ones control less than 25% of China’s cement capacity.
4 A minimum economical size cement plant of 1.5 to 2 Mt annual capacity would usually require 250 employees and 150 full-time contractors (quarry raw material transportation, cleaning, maintenance, security, truck loading). Cement transportation and distribution would usually double this number, adding an overall large impact in terms of maintenance, energy supply, transportation, and service linkage activities in surrounding communities.
5 In 2008 the average specific CO2 emission level of companies reporting figures to the World Business Council for Sustainable Development/The Cement Sustainability Initiative (WBCSD/CSI) was 745 kg (including electricity emissions).
6 Target matching 2009 European Integrated Pollution Prevention and Control (IPPC) Bureau’s draft Best Available Techniques (BAT) for the cement sector.
References / Betts, M., 2011, Cement International Industry, Jefferies International Ltd., Note, February. // Codling, A., 2010. European Building Materials Briefing, J.P.Morgan Cazenove, May. // Cembureau, 2010. Activity Report 2009, June. // European Integrated Pollution Prevention and Control (IPPC), 2009. Bureau’s draft Best Available Techniques (BAT) for the cement sector, February. // Exane BNP Paribas, 2010. Industry Outlook and Results, September. // Folliet, M., 2008. IFC’s role in the emerging markets. Emerging Market Report, February. // International Cement Review, 2009. Global Cement Report, February.