Cemtech held its second webinar on the impact of COVID-19 on the cement industry this week. The webinar featured several leading industry speakers, including Paul Roger, MD, Building Material Division, Exane BNP Paribas (UK), and Manas Tamotia, partner, LEK Consulting (Singapore). This newsletter summarises the key points from the webinar.
The global cement market outlook
Paul Roger outlined that lockdown meant different things in different countries. In some countries construction is deemed to be an essential service and construction sites continue to function, while in other countries this is not the case. CRH are operating at 80-85 per cent of normal levels in the USA, while states like Washington, New York and Pennyslvania remain in full lockdown. In France, UK, India, Morocco, southern Europe and Ecuador the lockdown is quite strict. After lockdown, private construction is expected to fall by around 20 per cent in countries that have tighter controls.
"The impact of the pandemic has been more immediate and of greater extent than was first expected," explained Paul. Exane BNP Paribas is now forecasting global cement consumption to decline by nine per cent in volume in 2020, although China has the ability to bounce back quickly.
There are also downside risks in sub-Saharan Africa: while the numbers of infections are low, there is a question over the level of reporting in these countries. Meanwhile, North America and Europe are forecast to see a cement demand decline of between -5 to -15 per cent in 2020.
What does this mean for 2021?
Paul said this depends on the shape of the recovery. Exane BNP Paribas believe it will be a 'U-shaped' recovery – a slower recovery than predicted by the IMF. Some scarring of economies or debt overhang is expected, as there are high levels of government debt and confidence could be hit with job prospects in the balance.
The nature of the response is also important. Paul stressed that social security and underpinning of the credit system were governments' main objectives at present, which may not be of great value to the cement sector. There are no infrastructure fiscal stimulus programmes unlike after the 2008 Financial Crisis, although these may come later. "What the COVID-19 outbreak has done is to move the political debate along essentially, it is very unlikely in this scenario to see a return to austerity," added Paul.
Paul also stressed that the gross debt of developed markets is high. Meanwhile, in the emerging markets debt levels may look better, but their ability to service the debt and the fact that much of the debt is in US dollars, means they also have a bit of a debt overhang, which points towards a ‘U-shaped’ recovery. What is also critical is the fall in oil prices. While being helpful for importers, it could be really painful for African countries, the Middle East and Central America.
Outlook for the cement sector
The forecast for 2021 then is a 'U-shaped' recovery overall with a downside risk for African countries such as Nigeria with the oil price decline. Developed markets are expected to remain stagnant and India is expected to bounce back in 2021.
Local currencies in emerging markets will be impacted. Company margins will be under pressure in markets that purchase imports or service debt in US dollars, and any inflationary effect could offset the benefit of lower input costs.
Paul also suggested utilisation rates will remain low in 2020, therefore pricing power will be weak and is unlikely to offset cost inflation in many markets. "We can expect a 2-3 per cent price growth this year and slightly higher in the developing markets, where supply is tighter or the market is an oligopoly," he added.
But the majors are in a better position than when entering the 2008 Financial Crisis as they have been deleveraging and capex is leaner. Any expansion though is likely to be on hold until visibility improves. Cement producers will prioritise cash flow to get through this period.
The long-term issue is sustainability
Cement producers must protect their cash flow during these unprecedented times, but the sustainability agenda cannot be forgotten. In Europe the EU-ETS phase IV is unlikely to be delayed, and while there is currently a surplus of CO2 credits in the system. In the longer term, winners and losers will not only be determined by their success in surviving the pandemic, but also adapting to more environmental approaches to cement production.
The impact of COVID-19 on southeast Asian cement markets
Manas Tamotia of LEK Consulting stated that there was a pre-COVID-19 world and the world of COVID-19 now. Things have changed very quickly from outlooks given as recently as February 2020, such is the rapid impact of this pandemic.
Pre-COVID-19
Even three or four months ago the outlook for the southeast Asian cement sector was not that rosy. Manas highlighted that large economies in the region had been characterised by cement overcapacity and low domestic demand. Moreover, cement prices had been in decline. However, before the pandemic, the optimism for demand growth was bullish at a robust 4.0-8.4 per cent in southeast Asia, and many countries in the region were enjoying success in the export markets.
In terms of cement capacity and demand, the Philippines is the exception with cement capacity and demand almost in balance. As demand is slightly higher, imports are a feature of this market, while pricing is higher than in the rest of southeast Asia.
The COVID-19 world
Southeast Asia has not yet been as impacted by COVID-19 cases as other parts of the world, particularly Europe and north America. However, dependence on trade and tourism means that the region will feel the pain economically. This is already evident in March's Purchase Managers' Index (PMI).
The government response in the region has varied, but generally "governments chose health over their economies." This meant early lockdowns with Vietnam closing schools in early March, when it only had 200 infections. Manila's lockdown started on 12 March and could be kept in place for the rest of the year. Singapore was able to keep its economy running, but when infections increased, it went to lockdown on 4 April, and now this is being extended to June.
"In Indonesia, the situation is different," said Manas. "There are more people on low incomes and the government cannot support them financially with its public debt, and so decided to have a gradual roll-out of a lockdown."
LEK consumer survey
Infrastructure investment only accounts for about a quarter of construction spending. "What is important to realise is that 70 per cent of construction decisions in the region are made not by property developers or infrastructure projects, but by cement demand from the individual home builders," explained Manas.
Therefore, LEK Consulting carried out a consumer survey 3-10 April 2020 to see what the impact was on consumers. The results showed huge job losses and decreases in income. Incomes fell in many cases by 24 per cent with the Philippines the highest in the region at 38 per cent. Many of these workers were on daily contracts. Singapore and Malaysia are richer countries that could offer a social security safety programmes, but money has not reached people’s accounts yet.
The impact of this reduction in household income, amounting to 24 per cent on average, means that cement demand will inevitably fall in proportion to this decline in spending power.
Current supply and demand situation
The Philippines was able to resume cement factory operations on 16 April, but there are still problems in that the dealers and distributors remain closed and raw materials from other parts of the world are hard to get hold of. "Cement factories can produce product, but they cannot get it out the door," said Manas.
Furthermore, the construction sector is still impacted with the lockdown and lack of foreign labour on which it is dependent. There is also little export demand. Small businesses' balance sheets will be hit for a long-time. "Savings are being eliminated and if the lockdowns continue the crisis could see more deaths from hunger than from the pandemic in southeast Asia," said Manas.
SE Asia outlook
2020 is pretty much a write-off. The IMF has been bullish about recovery in Indonesia and Malaysia in 2021, but this is optimistic for a ‘V-shaped’ recovery, Manas believes. It is more likely that some cement producers will fail, and consolidation and structural rationalisation could follow when cement demand returns. A second wave of the coronavirus would probably cause some cement producers to fail. Some excess capacity could be expected to go if consolidation takes hold, enabling long-term sustainability.
Cemtech would also like to thank Jens Peter Koch, Sales Director – Europe, FLSmidth (Denmark), and Frank Brannvoll, MD, Brannvoll ApS, who also contributed to the Cemtech webinar on the Impact of COVID-19 on the cement industry part 2. The webinar was hosted by Thomas Armstrong, who also gave an update on the individual response from countries and the cement sector to COVID-19. You can view the full webinar here.