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Global cement markets – current and future trends: Yuri Serov, Morgan Stanley (UK)

Recorded at Cemtech MEA 2015, 8-11 February 2015, Grand Hyatt Dubai, UAE.

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So morning everyone. Lets just dive straight in, so we're talking about global cement here. To begin with I would like to take a look at just basic economics right? What you have on this page is global GDP history and forecast for the most important countries. The World Economy is continuing to grow, but the growth remains unsatisfactory in many regions.

The Morgan Stanley Economist called this BBB recovery which they call Bumpy Below-par and Brittle. However the growth is gradually becoming better, thus providing an improving back drop for the cement industry. Tom mentioned the US growing strongly with more than 3% growth focus for this year and many of the countries in the world are getting better to say.

Risks however are bound, two of them top my list which are shown here on the chart. One is around interest rates, the US is growing however another spike in US growth may push the interest rate further up and that has the tendency of impacting what's going on in other countries in the world. And the second big risk obviously is China.

China is re-bouncing, its putting quite a lot of impacts on commodities already and have to see whether it will have further, influence on the world. So turning to cement now, there's lots of numbers on this page, I will let you look at them for a bit but not for too long because we need to press on.

So in
Global Cement 2014 was not a good year. The final number may change, as we don't yet have actual data for many countries, but it appears that 2014 showed the lowest growth rate in global cement consumption excluding China for more than 10 years, outside of the great recession. However, supported by improving global economics we see generally brighter prospect ahead for global cement demand.

We forecast particularly notable improvement in Western Europe, where a long correction is coming to an end in India, in South Asia, where Indonesian Thailand stand out and in the Middle East where Saudi Arabia that as Tom has already mentioned is trying better growth now and then we see better prospects for the countries like the countries like Iraq and Iran. Although obviously the oil risk is something that needs to be watched in this region, they will still be trouble spots. Russia is the most obvious example, where we expect double digits demand for in 2015 and Brazil is doing fairly badly as well. And then as I mentioned price of oil is something that needs to be watched carefully, it has increased risk for oil exporting countries, although for the rest of the world it will be a positive influence.

A quick
check verses what we casting before and this chart shows you that we have more or less maintained our forecast for the out years, however 2014 got trimmed because of mostly developing due political events in the world and 2015 got a just a down as well. Lower oil prices in our focus had positive effects in some countries like Thailand, Chile, Turkey but negative in others, obviously Russia, Mexico and some sub Saharan African countries as well starting with Nigeria. In later years there were limited changes to our focus as I mentioned.

This a complex chart and I have shown a version of this before. What the bars on this chart show, is the difference between incremental global cement volumes and new cement capacity in each year. So bars going up is good as that means that there is more demand world than capacity coming in so demand exceeds supply, and bars going down is bad as new capacity overwhelms demand. So the main message here, is that we're going to through a period of eight years when additional capacity, has exceeded global demand putting continues pressure on global capacity utilization.

We don't have enough data, but this well may be truly unprecedented in history, such a long spell. The line going across is the change in real cement prices that is price excluding inflation as you can easily see the correlation here. We all know that capacity utilization influences prices and that to us this is the main explanation as to why global cement prices, have been under performing recently.

This space shows our cement price forecast in more detail, in nominal terms on the left, and in real terms on the right that is excluding inflation. Remember, generally positive real prices mean expansion in margins an obvious fact, and negative prices put pressure on cement margins. So regionally we see India and North America as the most promising market for prices.

In India, a recovery from an effective price war in 2012/2013 it's just start off holding, after a slowdown in capacity additions and faster economic growth. In the U.S prices should continue moving ahead of inflation until we expect the recovery to run out of steam at around 2017, and in the rest of the world, excluding China, we see real cement prices turning positive only in 2017.

Obviously in this calculation we exclude general inflation, as Tom mentioned the better energy prices, which are helping and they help offset the effects of weak pricing in 2015 and with the cost of coal and petcoke still being on the downward path. And then this is an interesting picture. I didn't expect it to look this way frankly, despite all the talk of consolidation and M&A deals, what's interesting is that the fragmentation in the industry is actually growing, and that is not helping with near term price dynamics.

You see it clearly on this chart which shows the global market share, of cement and global majors in the world excluding China. Partially this trajectory is explained by the fact that Western Europe higher waiting in the portfolios of these companies, and that has been an under performing region.

But however undeniably, this is also because substantial influx of new capacity investments from other companies and especially from many new comers into the industry. Okay, at this stage I would like to shift gears and do something unusual. So, I invite you to join me on the journey to business future, 2040 to see what the world of cement may look like that far away.

Given that typical cement plants last for some 50 years, it is important to have an idea of the direction of future long-term development globally and by region to inform today's investment decisions. And now as it shows the original composition of global cement consumption will change significantly over the next 25 years, with widely different potential for growth in different markets.

So how do we do it? So what's the approach that we should take in coming up with such a long-term forecast? So what we did, is we took long-term forecast for population and GDP growth. These are our not own focus, but from other sources but quite reputable. Then we fed that data into two well established relationships for cement consumption shown here, okay you have two charts here which are reasonably well knows.

So the first one the cement bar curve shows the cement consumption per capita tends to rise as GDP per capita rises, but in later stages of the development, it actually holds. Secondly, cement intensity of GDP, cement intensity of the economy, is usually highest in early stages of the country's growth, but it turns to be significantly lower in developed economies which you can see on the lower chart. Obviously that is not a full story, this mechanistic approach gave us the first cut, of country forecast and then we from there manually try to adjust them for other factors one of them is the country terrain, the more mountainous the country is, the more cement is required which this chart here indicates very clearly.

There are some other factors as well obviously the availability of materials, the traditional methods of construction, population dynamics and so on. And here's the result, so quite astonishingly, total global cement consumption in 2040 looks remarkably close to today's levels. Given the very rapid growth over the last decade, one might have expected it to be much much higher.

Now, the explanation to this chart obviously lies primarily in China, where we expect future volumes to fall dramatically. We will look at it in more detail in the following pages. China and India in the future on our numbers would make up just over 20% of global demand each, compared to 60% for China now and only 6% for India.

Sub-Saharan Africa is set for the biggest break through increasing to 10% of the total volume, from almost nothing now. So, here's the more detailed look at the history and future of cement. It is probably most instructive to look at future demand, growth raise by region, which is locked on. Okay. So in Sub Saharan Africa, growth should be rapid, but even after 25 years into the future, at this pace, consumption per capita will still come to below 300 kilos.

So that suggest further substantial potential in the region. In China the re-balancing of an investment heavy economy should result in substantial correction. Although very deep, the fall is not unprecedented. Countries like Japan, South Korea and especially Taiwan have had adjustments of similar, even if some were smaller magnitude.

We expect practically on growth in developed markets beyond the recovery over the next 5 years, and then meaner the region with the second highest cement consumption per capita looks unlikely to grow much as well, over the long term, although the growth may be quite rapid near term depending on the price of oil. Now if you remove China and if you remove developed markets, then the picture for the future looks much more promising.

So over the time that we're looking at, cement consumption is set to about double in emerging markets excluding China. The largest absolute increase already mentioned is estimated, well the absolute increase the largest absolute increase is estimated for India and the largest percentage increase, is reserved for sub-Saharan Africa.

Developed markets. These two charts I have already shown at some tech conferences previously, but I think it is worth repeating them here, as they're very important. The point here is that cement consumption per capita, has been reset in developed markets to a lower level and we believe that this is where it will stay. Without repeating every line here that's written on the chart, as I said, we shall have presented it already.

Basically consumption per capita, in developed markets was maintained at almost 500 kilos in the past, due to credit bubbles in a few regions in the developed world. Now all the parts of developed markets are converging on the level around 350 kilos, and our analysis suggest that this is where it will remain.

And if you look at the to lower lines which show Europe North, as we call it and North America, they stayed at that level forever, for the last whatever 40, 50 years, so there is no reason to suggest that anything is going to change there. And then looking at China, they analysis at the top chart may take a bit of effort to understand what we have there is, cumulative consumption per capital, basically total in consumption per capital across the years.

All the bars on that chart except for China show, there is cumulative consumption per capital to the year in which cement consumption per capital peaked. And you can see that the peak has been ranked 20 tonnes on average. We calculated this from 1950 basically from after the 2nd World War, and you can see it here that China is already above the 20 tonne level, and given that we haven't yet seen the peak, its going to add a bit more on top of that bar.

In that indicates that the consumption per capital, even if you don't know anything about the economy, is about to start turning. The chart below is much easier to understand. It puts China in the context of other Asian regions that went before it and as I mentioned, I already mentioned Japan, South Korea and Taiwan they are shown here.

And you can see how as the economy progressed, as GDP per capita increased, cement consumption per capita first went up and then it went down. And if you take the result that we have for China for 2014 place it onto this chart, it shows you where it sits, so it feels pretty much in line with the contracts that we have here and as I said this sort of correction is not really unprecedented.

Well it may be unprecedented, but the trouble here is that China is just so huge. So the fall is bound to have a massive effect on the cement industry and this chart clearly demonstrates that. Almost 1.7 billion tonnes of cement is estimated reduction in demand in China to 2040. A clear concern obviously for the global cement industry would be, how much of these amount will be exported to other countries.

The answer is probably a small portion, given that most plants are away from the coast, however if you do simple maths, you will see that, even 15% of that amount would cover almost all of the incremental needs in the rest of Asia, excluding India. And in Sub Saharan Africa well turn into India on the positive side, so India is estimated to add more than half a billion tonnes of cement in addition to the growth forecast over the next five years, remember this is from 2019 into 2040.

And in Sub Saharan Africa, the estimated increase in volumes is to three and half times of the 2019 level or almost five times today's levels. And, so the final chart on this topic, this shows you the trend growth rates to 2040 in consumption per capita by well, developed markets, emerging markets and in the world, and as we already said in developed markets, we expect zero per capita growth literally, frankly it was close to zero for almost 30 years before the last decade and in the last decade it actually has been quite a bit below, so that's an improvement for the future.

In emerging markets, excluding China, the trend growth that we calculate comes to about 1.8%, and that's close to the average of the last 40 years, obviously before the financial crisis which was much higher, but it was lower before then.

Okay, now coming back to the present. The next few pages are a quick run through individual country forecasts, for cement demand over the next five years. I have a number of pages here and you know each one has a few countries with bullet points you can read them all, but very quickly commenting on developed markets, so in Europe France, France is still in a very poor state. The sentiment is bad, the government has a lot of debt which does not allow to invest in infrastructure.

We have
better trends in housing but they are still falling, so we expect that cement volumes in 2015 will again be weak, we actually focus the weak is promising Western Europe for France in 2015 but then some recovery afterwards. Germany, Germany is not a growth market, it's a stable country, it's a good market for cement companies but one shouldn't count on any increases there. Spain as Tom already mentioned, is clearly turning around, and in the US the new term outlook is well supported, residential non-residential construction should add to expansion further next year, and lower oil prices I mean people worry about what is going to happen to Texas, but in reality for the country overall it should really be at a positive effect.

In Eastern Europe, the most notable market to mention there is obviously Russia, the country has entered due recession. In 2014 demand didn't fall, although everyone was suspecting that, because there wasn't many housing boom as people given the uncertainty we are putting their money into real estate, that's coming to an end and we expect double digit fall in cement consumption.

Ukraine already experience a double digit fall and we expect another year of poor performance there. And briefly on Turkey, Turkey is one of the markets which will definitely benefit from lower oil prices and we expect much better performance going forward. Latin America, the largest market in Brazil, there are a lot of problems there, the economy has stagnated since 2012.

After the presidential election we have a significant fiscal consolidation which will be a major head win for the country. And there's a recent corruption scandal running, which is affecting all the major construction companies which will be an additional problem for the market and brings in quite a lot of uncertainty.

Mexico, the second largest market in the region. Mexico actually went through cyclical downturn already. It's recovering we were expecting the recovery to be much more buoyant, but the oil price fall is not a positive thing for Mexico given that it is a it's an oil exporter. So we have tempered our expectation for the recovery, but we think it's going to be reasonably good, and we believe that prices in Mexico are going to perform quite well into the future.

Middle Eastern Africa, I'm not going to stay on this region for too long because we have other presenters talking about it. Algeria, that market is needed close watching given the dependency of oil exports. In the ages in Algeria, when oil prices fell, cement demand collapsed by 10% over two years we don't think that the same is going to happen now but clear slow down is likely.

And Nigeria is also another market where the oil price is going to have quite a substantial impact. We're not quite clear what's going to happen in Nigeria actually the risks are, fairly significant to the down side although the growth in 2014 already was quite poor. And then finally in Asia, China we already talked about India, India is recovering very well.

The country went through its own cyclical downturn, the volume didn't turn negative but the growth was very low. After the elections and the huge increase in business confidence the outlook is much, much better and we believe that prices are going to move up nicely as well. And Indonesia, Indonesia went through a down turn in 2014, with only in 1-2% growth in cement demand.

There were some as uncertainty brought in by the presidential election, in our view, the main factor there was the increases in interest rates. The situation should normalize, the investment into infrastructure should begin by the new government, and we expect much better prospects into the future. However, Indonesia is the one market where a huge influx of capacity is about to hit, and we don't believe that despite good growth the prospects for the prices are good.

And that's it. On the last page you can see the monthly trends, in the market that we track across the world and what's been going on recently. Thank you so much.

Global cement markets – current and future trends: Yuri Serov, Morgan Stanley (UK)

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