Healthy Prospects

Cement demand prospects have improved. After four difficult years from 2014 to 2017, global cement consumption excluding China is predicted to increase by 2.5% – 3% in both 2018 and 2019. With the exception of the Middle East, positive growth is expected in all regions. Other industry trends are encouraging: most price wars have come to an end, selling prices are likely to increase to recoup higher energy costs, corporate M&A activity is solid, and trading markets are back in balance.

In 2018, global cement consumption picked up steam. Chinese demand has increased since the summer. There has been notable pre-election spending in several countries, including India, Indonesia, and Nigeria. Growth has accelerated in a number of Asian and African markets. However, European demand has been disappointing, with growing political and trade risks in western Europe. Markets in the Middle East and Latin America have struggled, with the two regions posting weaker demand.

Seaborne trading is back in balance. Chinese production curbs have transformed that market from substantial exports to a position of net imports. These are expected to increase in 2019. As a result, there is a shortage of clinker in Asia, which is allowing exporters from Vietnam, Indonesia, and other countries to raise prices. Higher European carbon prices are likely to result in fewer European exports, with volumes from Turkey and North African countries taking their place.

Western Europe: the carbon question

In 2018, there was a clear loss of momentum in European economic growth. Political uncertainty and trade tensions escalated significantly, most notably in Germany. The European Central Bank is poised to end its quantitative easing programme in December 2018. In 2019, IA Cement anticipates a modest pick-up in cement demand growth to 2.5%, mainly driven by the housing sector. Consumption is predicted to increase in all of the main markets except for the UK.

European carbon prices have shot up from E5/t to almost E20/t at the time of writing. This has caused an immediate surge in electricity prices, squeezing cement industry margins. As a result, cement producers have announced substantial price increases across much of Europe for 2019 to recoup these costs. The UK is the principal weak spot in the region, with demand predicted to decline slightly in 2019 as Brexit uncertainty lingers. At the time of writing, the proposed UK-EU deal faces a considerable challenge to win approval from UK parliament. In Germany, the economy is no longer firing on all cylinders. GDP fell 0.2% in 3Q18, as auto companies struggled to adjust to new pollution standards. Despite this, construction backlogs remain healthy and point towards a modest 2% – 2.5% cement demand growth. The Italian cement market is recovering from a very low base despite wider problems with the budget and banking sectors. Prices are rising sharply from their lows.

Eastern Europe: Russia stabilises

In 2018 the Eastern European cement market barely increased, as strong growth in the central countries was offset by a further decline in the large Russian market. IA Cement anticipates a growth of 2% – 2.5% in 2019 cement demand. Housing demand remains strong in Poland, the Czech Republic, and Hungary due to rising wages driven by labour shortages. Romanian growth is expected to slow as the economy shows signs of overheating. The key Russian market is forecast to experience a modest recovery, with cement demand increasing by 1% – 1.5% as an improvement in housing is offset by headwinds from the recent drop in oil prices and fresh sanctions.

US: a marked slowdown

Cement consumption in the US is locked in a low-growth range of 2% – 3%. Higher interest rates, a stronger dollar, and trade tensions have all led to an economic slowdown. Housing is the main driver of cement demand growth, but has recently slowed sharply in the face of a number of headwinds, including labour shortages, higher mortgage rates, and affordability constraints.

The US$1.4 trillion tax cut has failed to unlock higher commercial construction spending. Businesses are reluctant to invest for a number of reasons, including threats to global supply chains, restrictions on tax-deductibility of debt, potential regulation of the technology sector, and ongoing tax breaks that favour building plants overseas.

Latin America: recovering from a four year decline

The Latin American market outlook is improving after a four-year decline in volumes and IA Cement expects cement demand will increase by 1% – 1.5% in 2019. Argentina is likely to endure a difficult year, as 60% interest rates and IMF-driven austerity measures drive construction demand down. A long-awaited recovery in Brazil is expected to materialise, underpinned by clear signs of improvement in housing. Recent acquisitions by multinationals will help pricing power. In Colombia, predictions are for a slight recovery in demand, with pricing improving further. The new trade agreement with the US has removed a key area of uncertainty for Mexico. This has been offset by the new incoming administration cancelling the half-built Mexico City airport and sending mixed messages over banking charges.

Middle East: struggling badly

The cement market in the Middle East is set to endure another negative year in 2019, marking the fifth consecutive year of falling volumes. The recent drop in oil prices may trigger further austerity measures. Significant declines are expected in the largest cement markets of Iran, Saudi Arabia, and Turkey. These three countries account for 64% of regional demand and are expected to decline by 4% – 6% in 2019. Iran faces the full brunt of sanctions once again; Saudi Arabia is reeling from the Khashoggi affair; and Turkey is struggling to overcome an economic crisis.

Africa: mixed market trends

IA Cement anticipates an increase of 2.5% – 3% in 2019 cement demand. Rapid growth has returned to many smaller construction markets, such as Tanzania, Ethiopia, Rwanda, and Ghana. Many larger markets face an uncertain outlook. Egypt and Algeria face an unappetising mix of higher capacity and sluggish demand. Both are under pressure to increase their exports. Nigerian demand is likely to slow down to a 3% – 4% range after the elections. Market leader Dangote is considering a London IPO. South Africa is struggling to shake off its economic recession and tepid volume growth is likely in cement demand.

China: production curbs change the game

The Chinese authorities have once again demonstrated their ability to completely change the dynamics of the cement sector. Production controls have led to a 30% surge in local cement prices and have brought global trading markets back into balance. Chinese producers are now among the most profitable in the world and have significantly repaired their balance sheets. The country has gone from being a major exporter to a small net importer, creating a much tighter market for clinker in Asia. Imports are expected to rise further in 2019.

Cement demand has improved since the summer of 2018 as infrastructure spending picks up. In 2019, IA Cement predicts a 1% – 1.5% growth in consumption, as higher public works offset a slowing property market. The combination of static supply and moderate increases in demand will make the supply-demand balance tighter. The main headwinds will come from ongoing trade tensions and high corporate debt.

India: strong pre-election spending

The cement market in India is currently enjoying double-digit growth, as the government presses forward with infrastructure spending ahead of elections in 2Q19. Demand growth is forecast to slow to around 6% in 2019 as this effect fades. There is solid growth in rural demand, courtesy of several normal monsoons and an increase in crop support prices. The main headwinds are high inventory levels of housing in urban areas and excess corporate debt. Cement producers also need to increase prices to offset cost increases.

Asia: robust outlook

IA Cement anticipates another strong year for Asian cement markets, with demand growth of almost 4% in 2019. Far Eastern countries will benefit from the shift in global supply chains as a result of the trade conflict between the US and China. The strongest cement markets are expected to be in Vietnam and the Philippines. Vietnamese producers are enjoying a bonanza, with strong local demand driven by record foreign investment and significant high-priced clinker exports to China. Cement consumption in the Philippines is expected to increase to a 7% – 9% growth range, as infrastructure projects ramp up.

Indonesia is likely to experience demand growth in the range of 4% – 5%, reflecting a slowdown after the elections. Selling prices have turned the corner and margins are expected to increase. Malaysia is the main industry laggard, with a further decline in demand as US$25 billion of belt and road initiatives have been cancelled by the new administration. In Japan, solid demand growth is anticipated ahead of the 2020 Olympics.

Conclusion

The global cement industry is poised for a strong 2019. Most industry variables are pointing in an upward direction, despite signs of an economic slowdown due to trade tensions. The Middle East is expected to struggle for the fifth year in succession. Mature markets continue their steady growth, while the supply-demand balance is improving in most emerging markets. Supply-side reforms – in the guise of Chinese production curbs and changes to the European carbon emission scheme – are having a profound impact. Selling prices are increasing in most markets and seaborne trading is back in balance. The market for M&A and IPOs remains very healthy.

Read the article online at: https://www.worldcement.com/special-reports/09012019/healthy-prospects/