Russia gets recovery rolling

As Russia’s economy returns to growth and the domestic construction sector saw a revival in 2021, the country’s cement industry looks set to prosper. Will cement producers be able to capitalise on these positive trends and increase capacity utilisation in the next few years? By Aleksei Semenov, GS-Expert LLC, Russia

Despite the continuing COVID-19 pandemic, Russia’s economy has shown signs of recovery. In the 9M21 GDP grew by 4.6 per cent YoY, industrial production was up 6.3 per cent, fixed asset investment increased by 7.3 per cent (6M21) and real disposable income of the population advanced by 4.1 per cent.

Construction returns to growth

After two years of stagnation Russia’s building and construction industry showed rapid growth in 2021. According to official statistics data, the volume of construction output in Russia increased by six per cent YoY to RUB7151bn (US$96bn). In terms of construction markets, both the residential and non-residential segments performed well in 2021.

Residential construction

After several years of stagnation and a decline in residential construction in 2020 under the restrictive measures imposed in Russia due to the COVID-19 pandemic, 2021 saw a “construction boom”.

In the 9M21 residential construction demonstrated 29.7 per cent growth when compared to the same period of the previous year (see Figure 2), to reach 62.7Mm2. At the same time, the commissioning of multi-apartment residential buildings increased by 19.2 per cent to 27.7Mm2 and the commissioning of individual residential buildings increased by 39.4 per cent to 35Mm2. The share of individual residential buildings in the construction structure was almost 56 per cent (48 per cent in 2020), which is a historical maximum.

Looking forward, the growth in residential construction volumes is expected to continue. As of the beginning of December 2021, 9472 multi-apartment residential buildings with a total area of 98.3Mm2 were under construction. About 14 per cent of this volume is planned to be put into operation by the end of 2021, and about 66 per cent more in 2022-23.

Moreover, in the short-term, it is clear that the growth in the volume of individual housing construction will continue. According to opinion polls conducted in September 2021, 25.6m Russian families want to move from a multi-apartment building to their own house, and 2.3m families plan to build their own house over the next five years. This will ensure the construction of an average of 460,000 individual residential buildings per year, which is 1.5 times higher than the current volume of individual housing construction.

Non-residential construction

The non-residential segment also saw rapid growth in 2021 (see Figure 2). In the 9M21 the total volume of non-residential construction advanced by 18.1 per cent YoY to 22Mm2. The key segments driving this expansion were commercial buildings (+41 per cent) and other non-residential buildings (+43 per cent). On the other hand, the commissioning of industrial buildings fell by seven per cent YoY, and commissioning of medical and healthcare buildings decreased by three per cent.

In Moscow, the country’s largest office market, commissioning of new office buildings in the 9M21 doubled to 498,000m2 YoY, reflecting the booming segment. For the full year 2021, local analysts expect the commissioning of more than 640m2 of new offices – 2.5 times more than in 2020.

Financing of the construction sector

Traditionally, the construction sector in Russia is financed mainly through debt. The growth of bank credits accelerated in 2021 (see Figure 3) and the volume of bank credits increased by 50 per cent YoY in the 9M21. Such high growth rates were largely due to an increase in the volume of lending by banks to residential construction projects.

Meanwhile, the Russian mortgage market continued to exhibit strong growth in 2021. In the first 10 months of the year approximately 1.56m mortgage loans were issued, up 13 per cent YoY with a value of RUB4.54trn (an increase of 34 per cent YoY). In the full year 2021, the total value of mortgages is expected to have reached RUB5.5-5.6trn.

Cement demand picks up and prospers in 2021

As construction activity in Russia increased, a steady expansion of cement demand resumed in 2021. Cement consumption in the country grew by 7.2 per cent to 60.4Mt in 2021.

In terms of cement market segments, the offtake by the ready-mix concrete market grew by 15.5 per cent YoY in 2021, while the ready reinforced concrete products segment stepped up purchases by 8.9 per cent YoY.

On the back of expanding demand, the average producer price of cement (excluding VAT and cost of delivery) increased by 4.8 per cent in the 9M21 compared to the equivalent period of 2020, reaching RUB3927/t (US$54/t).

Shifts in cement production

As in previous years, the Russian cement production base continued to supply 97-98 per cent of domestic demand. In 2021 output rose seven per cent YoY to 59.9Mt.

The low rate of capacity utilisation and the characteristics of the Russian construction market have led to a relatively large share of the market being accounted for by Portland cement without mineral additives (corresponding to ~62.5 per cent of total production). The share of Portland cement with mineral additives was only 32 per cent.

In terms of major shifts in the cement sector, there were three key events in 2021. Firstly, Sberbank sold eurocement Group Holding, the country’s largest cement producer. The company operates 16 plants, of which 13 are currently active with a total capacity of 45.9Mta. The group was sold for RUB161bn (US$2.2bn) to Mikhailovsky Combine of Building Materials, part of the holding smikom (former BaselCement) which, in addition to lime and aggregates, also operates two cement plants.

The second important event in the Russian cement market was the commissioning of a new cement plant by Lasselsberger-owned cemix, which specialises in white cement production. The plant is located on the border of the Republic of Bashkortostan and the Chelyabinsk region (Southern Urals). The facility has a 200,000tpa capacity of high-quality white cement. Prior to this, Holcim’s 80,000tpa works in the Moscow region was Russia’s only white cement production facility. A further 110,000-130,000tpa of white cement was imported through sea ports in the south of the country, where the product mainly arrives from Turkey and Egypt. Therefore, the new white cement plant will significantly reduce dependence on imported white cement. In addition, by reducing the delivery distances, it will lower logistics costs for consumers in the Volga, Ural, Siberian and Far Eastern Federal Districts.

Finally, Holcim decided to resume operations at its 2.2Mta Voskresnsky cement plant in the Moscow region. Mothballed since 2016, the plant is expected to restart production in 2023.

Cement imports edge down

Cement imports in 2021 fell by four per cent YoY to 1.55Mt. Belarus was the largest exporter to Russia, accounting for 71 per cent of cement imports. Kazakhstan followed by some distance with 17 per cent and much smaller shares were accounted for by Turkey (seven per cent) and other countries (five per cent in total).

Cement exports expand

On the other hand, Russian cement exports expanded by five per cent YoY to 1.36Mt.Kazakhstan remains the largest market (representing 66 per cent of exports), followed by Belarus with 23 per cent. In addition, Finland accounts for three per cent, Ukraine two per cent and other countries have an offtake equivalent to five per cent of total Russian cement exports.

Outlook

GS-Expert expects Russia’s cement market to continue its expansion, rising by 5-7 per cent YoY in 2022 to 63.4-64.6Mt. In addition, the average producer price of cement is forecast to grow by 5-8 per cent YoY.
Market expansion is expected to be supported by the active development of housing construction activity and the implementation of large infrastructure projects funded by the government budget. However, the recent increase in mortgage lending rates and an increase in the cost of housing by 25 per cent or more in 2021 is anticipated to lead to a temporary decrease in demand in the primary market. This is not expected to affect the short-term plans of Russian developers, who began the construction of 43.6Mm2 of housing in 2021 – 1.6 times more than in 2020. The volume of new project launches exceeded the volume of housing commissioning by 15 per cent. As a result, the volume of housing under construction at the end of 2021 reached 96.4Mm2 , exceeding the previous year’s figure by 2.5 per cent.

This article was first published in International Cement Review in March 2022.