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Foundations of Growth

World Cement,


Russia represents one of the world’s largest and fastest growing cement industries. The cement sector has outpaced the growth rates of other prominent industries in the country on the back of various growth enablers, such as increased activity in infrastructure, rising demand from the housing sector and construction recovery. Recent industry developments and the government’s supportive policies are attracting global cement giants and sparking off the construction of new plants across the country.

Despite the economic crisis, which dented the construction industry and disturbed the cement supply-demand matrix, the Russian cement industry has shown excellent recovery over the past few years. In view of stable economic conditions and recuperating housing construction, cement demand grew vigorously in 2010. Producers now seek to increase the capacity of cement demand growth while maintaining positive price trends.

Russia has grown significantly during the last two decades to acquire the position of the eighth largest cement consumer in the world. Although the country’s share in global cement consumption was just 1.5% in 2010, with intensifying cement consumption and fast expanding production capacities, it is all set to occupy the third spot within the next 4 – 5 years.

Market segmentation

On the supply front, cement production in Russia is expected to grow at a CAGR of around 8% from 2011 – 2015 to reach 72.6 million tpa. This is on the back of strong demand from retail, housing and infrastructure sectors. Additionally, many major producers have announced plans to increase their production capacity during the forecasted period, which will further boost the country’s production level.

In terms of consumption, recovery in infrastructure spending and housing construction helped the industry to witness a growth in demand. Housing developments have been the government’s top priority and in order to materialise its ambitious objectives, the Russian government has bought around 2.5 million acres of land. Close to 14 million m2 of land for housing development was expected to be under construction by 2011, a figure that will increase to 20 million m2 this year.

There was a fluctuating trend in cement exports during 2007 – 2010, owing to domestic demand and unstable international cement prices. In order to support the Russian cement exporters, the government slashed export customs duties for cement exports from Russia outside the Customs Union to 0% in the final quarter of 2010. As a result, Russian manufacturers expect export growth of up to 3 million tpa and an additional earning of US$0.2 billion.

Previously, the main cement exporting nations were Azerbaijan, Kazakhstan and Ukraine. But now that export duties have been abolished for other regions, Russian exporters are eying other potential markets, such as Finland, Hungary and Romania.

Cement pricing analysis

Cement prices in Russia reached their post-crisis bottom in 2010 and any further decline is unlikely in the short run. Prices were projected to average US$80/t in 2011 (which implies around 16% y/y increase), while average total operating costs/t were expected to be close to US$55 – US$60/t. This profitability margin is not expected to shrink further without threatening to undermine the sustainability of cement production, which can be seen as a gradual improvement of the market’s fundamentals. Given the probable increase in production costs, including such key inputs as fuel and electricity, it is expected that, in the future, cement producers will be able to shift their increasing costs of production onto consumers.

Competition

The cement industry in Russia by itself is highly competitive. The Russian cement market is dominated by Eurocement, a company fully owned by Filaret Galtchev. Eurocement controls 13 cement plants in Russia. The company is an undisputed leader in the Central and Northwest markets and is among the top three players in the South, Volga, and the Urals. The cement giant has also signed an US$11.5 million contract with Siemens AG to install power equipment, automisation, communication equipment and a new technology line for a cement plant in the Voronezh region.

Furthermore, global cement majors are represented on the Russian market by Lafarge, Holcim, Buzzi Unicem, and HeidelbergCement, although each of these owns just 1 – 2 plants in the country. Initially, these global majors acquired existing facilities; however, it is expected that their future expansion efforts will primarily focus on upgrades and greenfield/brownfield development, rather than new acquisitions, with potential access to relatively cheap and long-term financing being their key advantage.

Industry shortfalls and remedies

Russia has witnessed a massive increase in cement consumption over the past few years. Indeed, the country has come out as one of the rapidly growing cement markets in the Central and Eastern European regions. Due to increased activity in infrastructure and rising demand from the housing sector, the country offers lucrative opportunities to new entrants; however, some roadblocks still exist that may hinder the exponential growth route of this industry in the future.

For instance, around 72% of Russian cement plants currently operate using outdated and energy-intensive technologies.

Additionally, Russian cement production is very seasonal, depending heavily on production technology and buyer demand. Firstly, the outdated technology used in Russia is not capable of processing clinker in winter. Secondly, construction sector activity is historically low in the fall-winter period. The peak for cement production and sales occurs during the second and third quarters of the year, followed by a reduction in supply. Moreover, cement has a limited shelf life. To increase the shelf life, a specially equipped warehouse must be built, the high cost of which cement companies are not willing to bear in the current market environment.

Road ahead

If the challenges are met with serious considerations, then the Russian cement industry is anticipated to witness significant milestones in the coming years. A decisive factor that makes Russia a highly lucrative market for cement manufacturers in the long run is the current low per capita consumption of cement, which, with the developments in residential construction, will be amplified. Considering the increases in demand in the future, local producers are augmenting their cement production capacities.

This article is an abridged version of the full article by Shushmul Maheshwari, RNCOS, which appeared in the January 2012 issue of World Cement.

Read the article online at: https://www.worldcement.com/europe-cis/10012012/russia_foundations_of_growth/


 

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