Gaining momentum in 2018?

The positive outlook predicted at the start of 2017 has not entirely materialised as emerging markets (EM) have failed to see the widespread recovery that was anticipated a year ago. However, momentum for a recovery is expected to arrive in 2018 as demand in the EM picks up and the USA experiences robust growth. By John Fraser-Andrews, HSBC Global Research, UK.

The synchronised global construction recovery anticipated at the beginning of the year has not come through, with a number of emerging cement markets continuing to splutter, despite a widespread improvement in EM macro-economic data and construction lead indicators. A more widespread recovery is expected to be delayed until 2018-19.

The year 2017 looks set to mark another year of anaemic growth in cement consumption with only a 1.4 per cent forecast global increase, including a similar rise in China (which represents just under 60 per cent of global consumption).

Excluding China, HSBC forecasts a 1.3 per cent rise in global consumption, including a one per cent decline in EM ex-India and eastern Europe, due to soft and even negative volumes in some large emerging countries, notably Brazil, Nigeria, Indonesia, the Philippines and Egypt.

The common thread is the time-lag between economic activity and cement volumes, which has been the case in Nigeria, Brazil, Malaysia and Colombia. Egyptian volumes have been undermined by the impact of the currency devaluation on household finances, while the Philippine market has been undermined by import pressure. The pick-up in volumes in Indonesia did not come through until the 2Q17.

HSBC forecasts that developed markets grew at a blended three per cent rate in 2017 with a broadening of the European recovery and the US to have been held back by soft infrastructure investment and unfavourable weather conditions.

HSBC expects the weak volume growth to cause another reduction of capacity utilisation rates in EM ex-China and eastern Europe, which are estimated to have fallen to 63 per cent in 2017. This is a level where cement prices are unlikely to match cost inflation, reflected in the forecasts for cement prices for this group of countries at 2.7 per cent in 2018, compared to its expectations for cost inflation at 4-5 per cent.

EM pick-up to fuel global volume improvement in 2018

The forecast of a pick-up in global ex-China volume growth to 2.2 per cent in 2018 from 1.4 per cent in 2017 stems from expectations of a continued upturn in the US, broadening recovery in Europe and improved demand in emerging markets as they benefit from a continued rise in capital flows, a strong positive purchasing managers’ index (PMI) across markets and improving commodity prices.

The key highlights of HSBC’s 2018 growth forecasts are:

• The Asia ex-China volume to rise 7.2 per cent, driven by strong growth expectations in India and Indonesia on structural reforms, infrastructure investment and a commodity price recovery helping consumer activity and government balance sheets. A flat outturn is forecast in China (+1 per cent).
• Middle East/Africa volumes to rise 4.1 per cent, led by better volume performance in the oil/commodity export-dependent countries of Nigeria and Algeria, a recovery from post-devaluation lows in Egypt and a continued recovery in Iraq.
• The Latin American volume to rise 2.2 per cent in 2018 from -2.1 per cent in 2017, on the back of predicted continued growth in Mexico and a commodity price recovery-led improvement in other countries. Brazil is expected to bottom out in 2018 after three years of decline wiping out one quarter of industry consumption.
• Robust five per cent volume growth is projected in the USA and a two per cent increase in Canada. HSBC US forecasts assume mid single-digit growth in residential, low single-digit growth in non-residential and civil engineering output, driven by rising state highway spending.
• Expectation of three per cent volume growth in Europe assumes that low mortgage rates continue to stimulate pent-up demand for new homes across the region. In the UK a Brexit-led decline in non-residential spending is forecast to lead to a flat demand outturn, while in Russia and Ukraine a continued recovery in 2018 is anticipated.

Table 1: global cement consumption and price forecasts, 2017E-19E
Region		Change in consumption (%)					Change in price (%)			CAGR 2017E-19E (%)
		2017E		2018E		2019E	2017E	2018E	2019E	Consumption	Price
North America		2.9		4.8		4.8	5.6	5.6	5.6	4.2	5.6
US		3.0		5.0		5.0	6.0	6.0	6.0	4.3	6.0
Canada		2.0		2.0		3.0	1.0	1.0	1.0	2.3	1.0
Europe		3.0		3.0		2.6	2.7	2.1	2.1	2.9	2.3
France		3.0		4.0		3.0	0.0	1.0	1.0	3.3	0.7
Germany		3.0		3.0		1.0	1.5	1.0	1.0	2.3	1.2
UK		2.0		0.0		1.0	2.0	2.0	1.0	1.0	1.7
Russia		3.0		3.0		3.0	5.0	3.0	3.0	3.0	3.7
Ukraine		5.0		4.0		3.0	5.0	3.0	3.0	4.0	3.7
Middle East/Africa		-1.7		4.1		4.3	9.5	3.1	3.2	2.2	5.2
Asia		1.6		2.0		-4.0	20.7	0.6	0.6	-0.2	6.9
China		1.4		1.0		-6.0	24.0	0.0	0.0	-1.2	7.4
India		4.0		8.0		7.0	5.0	4.0	3.0	6.3	4.0
Indonesia		5.3		9.2		8.3	-3.4	9.2	7.5	7.6	4.3
Latin America		-2.1		2.2		3.1	8.5	0.2	1.8	1.1	3.4
Brazil		-8.0		0.0		3.0	4.5	0.0	0.0	-1.8	1.5
Mexico		4.0		4.0		3.0	22.0	-2.0	3.0	3.7	7.2
Global		1.4		2.2		-2.6	18.1	1.0	1.1	0.3	6.4
Global ex-China		1.3		5.0		4.8	4.8	3.2	3.1	3.7	3.7
EM ex-China + Europe		0.7		5.5		5.3	5.3	3.1	3.1	3.8	3.8
EM ex-China, India + Europe		-1.0		4.1		4.4	7.0	2.6	2.9	2.5	4.1
Source: HSBC estimates

Cement prices to remain below cost inflation

HSBC forecasts that EM cement prices in composite will rise by a subdued 2.7 per cent in 2018, below its expectations for cost inflation at 4-5 per cent. This is due to capacity utilisation projections in EM ex-China and eastern Europe falling to 63 per cent in 2017 and remaining below 70 per cent through the forecast horizon, with the decline in 2017 the result of an anticipated contraction of volume growth in this territory and growth by only 0.7 per cent in 2017, versus a near four per cent expansion in new capacity growth.
In this environment, strong competition for volumes is expected to prevail and to limit the extent of price increases despite a cost inflation environment.

The limited pipeline of new capacity additions provides some encouragement for future cement prices in EM as a whole, albeit that even with new capacity additions at 3-4 per cent in 2017-18 and HSBC volume forecasts at 5.5 per cent in 2018, it would take many years to absorb the surplus capacity.

The slowdown in capacity growth should generate a more benign environment as the ramp-up stage of new capacities is often the most disruptive to market price levels. This being the case, Algeria and Egypt are the markets predicted to suffer the greatest real erosion in prices.

Table 2: global capacity growth and utlisation outlook, 2016A-19E
Region	Change in capacity (%)				Capacity utilisation (%)
	2016A	2017E	2018E	2019E	2016A	2017E	2018E	2019E
North America	1.9	2.0	1.5	0.0	75	76	78	82
US	1.0	0.4	1.8	0.0	77	79	81	85
Canada	8.1	12.6	0.0	0.0	65	59	60	61
Europe	1.5	0.0	0.2	0.0	53	54	56	58
Middle East/Africa	9.8	5.6	2.7	2.7	65	61	62	63
Asia	1.2	0.7	-0.2	-3.9	73	74	75	75
China	0.2	0.3	-1.2	-5.0	75	75	77	76
India	3.3	2.3	5.6	0.0	62	64	65	70
Indonesia	17.2	6.2	1.2	0.0	73	69	74	78
Latin America	2.3	3.5	0.6	1.8	62	59	59	60
Global	1.8	1.2	0.1	-2.8	71	71	72	72
Global ex-China	5.2	2.9	2.6	1.2	63	62	63	66
EM ex-China + Europe	6.6	3.8	3.3	1.6	64	63	64	66
EM ex-China, India + Europe	8.4	4.7	2.0	2.5	66	62	63	64
Source: The Global Cement Report (11th edition), International Cement Review, company data, national cement associations and HSBC estimates

Rising energy prices improve government spending power but add to cost pressure

The substantial rise in energy prices, which represent approximately one-third of cement production costs, has created a significant cost headwind for the cement industry in 2017, which is expected to abate in 2018. However, the rise in energy prices is likely to be offset by greater use of alternative fuels, particularly by the multinationals.

On the demand side, the increase in prices is envisaged to help stimulate economic activity and tax revenue in commodity/oil-exporting emerging countries, and hence better spending power on infrastructure.

Imports undermining cement prices in selected ASEAN and African markets

HSBC’s analysis of country cement price vulnerability to imports reveals that the threat to existing cement prices from imports is limited to just a few countries. Global cement imports as a proportion of ex-China consumption (Figure 3) have been on a downward trend since 2014, which is most likely attributable to falling real cement prices in many emerging countries.

This trend is expected to continue as cement export margins have been squeezed by the continued real erosion of cement prices and the increase in shipping costs, with the Baltic Dry Index rising 80 per cent since the July 2017 low.

Improved global returns in store

In summary, global cement industry demand is expected to gain momentum in 2018, with strong growth in the US and improved demand in EM. This acceleration in volume is likely to combine with modestly-higher cement prices and raise returns on capital from the depressed levels that have prevailed for the last four years.  

This article was first published in International Cement Review in January 2018.