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Worldwide cement market trends: Thomas Armstrong, Managing Editor, International Cement Review (UK)

Filmed at Cemtech Asia 2015, 21-24 June, Grand Hyatt, Bangkok, Thailand

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Good morning. So, this session we're going to cover some more markets, and I'm going to give a presentation on worldwide cement market trends. We've heard about some of them, so skip over the ones that we've already heard about, but this is a collection of research really from the Global Cement Report, which is actually published today, the 11th Edition. This report, we track around 170 countries worldwide each year, and this information really is the accumulation of this data, it's quite data heavy.

I hope it's not too much, but the slides are there for you to look at later. What we'll do is give an overview of the markets in 2014, looking really at consumption levels on a regional basis, looking at per capita trends, a brief look at capacity developments, prices, trade and then a few words on industry developments of the leading players, and finally the global growth scenario from the research that we've been carrying out. So here's the first slide, and this is the overview of global cement consumption over the last 10 years.

As you can see volumes doubled from 2.2 billion tons in 2004 to about 4.1 billion tons last year, that's a compound annual growth rate of over 6.5%. The high growth rates observed at the start of the decade were interrupted by the global financial crisis, and as we moved towards 2014 annual growth rates have weakened from the very high levels that we saw before. Global consumption increased by just 2.6% year-on-year last year versus 7.7% in 2013. Of course, there is a great deal of variation of the underlying trends at a regional level, and this chart provides some context showing the economic performance of the different regions over the 10 year period. After the 2009 crash GDP growth rebounded somewhat, but at lower rates. The Asian markets continued to outperform global GDP growth, which is now trending at around 3.5%. In the advanced economies growth is more subdued, and this is how these economic trends have translated into cement consumption.

Global demand growth has been driven by the phenomenon of China, shown in red, whose annual year-on-year growth has been in double digits for most of the decade. This has driven up its share of world consumption from 45% in 2004 to 59% last year. Meanwhile steady growth has prevailed in the emerging markets, and the mature markets of Europe and North America have experienced a contraction, especially after 2009 when demand collapsed nearly 20%. Looking in more detail at the regional consumption in 2014 compared to 2004, we see that North Asia expanded its share by 11% over the period, and that's contrasted with Western Europe which fell by 7%, North America by 4%, and South Asia just a smidgen down by 1%.

This is a slide showing regional performance in 2014. North America, that's been leading the gains in the developed world, where demand rose by a vigorous 8.2% in 2014 versus 3.9% the year earlier. The US recovery is now well under way, but is not forecast to return to pre-recession levels till around 2019, it just shows you the strength of the crash, and how it impacted the US market.

In Western Europe, the rate contraction has slowed considerably from -14% in 2012 to -1% last year, reflecting the bottoming of this contraction with markets such as Spain recovering finally, and strong performance in the UK in particular. So we expect modest return to growth in 2015 in Western Europe.

The best performing regions over the period were in Sub-Saharan Africa led by Central Africa with double digit rates each year, as markets such as Angola really boomed. In the Middle East, political unrest and economic headwinds have seen demand falter with consumption done by 1% last year, with volumes sharply down in Iran and Iraq. However, Saudi Arabia continued just to be a star performer fueled by it's massive infrastructure spending. In South America, including the market of Brazil, consumption growth weaken by, it's just 1% with a gradual improvement foreseen going forward.

The Indian sub-continent saw annual growth increase by 4.5% in 2014, and in India, the second largest worldwide, market expansion is expected to pick up pace after a below par performance in recent years. The new government, the BJP government, has stated its intention to invest heavily in infrastructure, and there's a lot of optimism that housing as well will come and start to push through, but these benefits that were anticipated after the election win have been slower to come through, so we're expecting that in the next year or two.

In South Asia, this area grew by 3.2% in 2014. For such a dynamic region, this was a slightly lackluster growth rate partly due to the muted performance in Indonesia, and we'll hear more on that from Randolph later, and flat conditions here in Thailand were disappointing, but the Philippines were very positive at around 9% growth in that market last year. And this is just looking ahead to 2015 when we can see a general improvement in the regional markets with North and Central America set to excel, as will much of Africa.

Overall growth in Asia will be between 5% depending on the market. Reflecting expectations is that China will continue its growth, but at the lower course that its now set. The Middle East and Western Europe are expected to rebound with the obvious downside risks relating to the political and economic uncertainties in these regions.

We've got the Syria-Iraq conflict, implications of a possible Greek exit from the Euro in Europe. Here we have the top 20 consuming nations as they stood in 2014. The table on the right, it shows the ranking of the countries and the change in the ranking over the last 10 years, and it just shows you the BRIC countries and the USA are up in the top five consuming nations. Turkey, Indonesia, Saudi Arabia in number six, seven and eight, so climbing the rankings, you can see in green. North Asian and Western markets continue to slide down the rankings, reflecting their contraction in these more mature economies, and on the other hand, the ASEAN markets, the Philippines entering the top 20 for the first time, and there's 10 Asian countries in the top 20, so a strong performance from Asia. This slide illustrates the range of cement consumption levels on a per capita basis in 2014. That's the world average, it's 573 kilos with a median calculated at 277 kilograms, but a number of countries consume a lot more or a lot less than these averages depending on their wealth, demographics, level of development. The oil rich nations of the Gulf are clustered at the top with very high per capita consumption levels. Qatar, the leader with a per capita consumption level of nearly three tons, and at the other end, poorer African nations of Congo and Niger with a per capita consumption of just 50 kilograms, which is equivalent to a bag of cement.

So, really it's an incredible range, and it shows you the potential really in Africa, once they can generate that economic growth. Another slide just to look at, these are the top 20 consuming nations and this is their per capita consumption, and the range is from nearly 3 tons to around 700 kilos in Iran. Per capita consumption in the regions.

North Asia, by far the highest and that's pulled up by China, which is at around 1,800 kilos per capita, extraordinary given the size and the scale of growth over recent years. An interesting fact which was highlighted by Bill Gates, he tweeted a comment last year about the fact that China consumed more cement in the last three years than the United States over the entire 20th Century, which is amazing.

It just shows you that perhaps the level of growth in China is not sustainable, and it's why we think China has reached an inflection point by many measures, one of them being per capita consumption, and last year growth did cool down to 2.7%, so we expect it to be in the 3-4% range, but China, things can abruptly change, but that's our view at the moment. And at the bottom of the scale are the African nations, which were only now entering the development phase when consumption levels will begin to accelerate.

Nigeria and Angola are great examples of countries that can really take off once investment really begins. So on the supply side, at the end of 2014, global cement capacity amounted to 5.7 billion tons per annum, up 1.3 billion tons per annum from 2010, over half of these additions in China. On a worldwide basis the growth of new capacity was 7%, 5% excluding China.

So as I said, we track around 170 countries. Cement production was recorded in about 154 of these countries, so 10% of countries producing no cement at all. Global cement production climbed to 4.2 billion tons up from 4.1 in 2013, and that gives us a capacity utilization rate of around 73% globally. Here's a slide some of you will have seen on capacity additions outside of China over the last 22 years, and it's really to show the kind of the scale of the surge of capacity before the global financial crisis, and how it's moderated in this chart down to around 40 million tons per annum was been contracted outside of China, and our calculations are that it's now trending at now at around 25 million tons per annum of new capacity being added. The chart on the right just shows you where that capacity is emerging, and North America and Europe have had, in that year in particular, no capacity additions.

Most of it coming on in Africa and India, Asia, Russia. A quick slide on cement and clinker, which Joel is going to talk about in more detail, but our calculations are just under 200 million tons of traded cement and clinker. Top 10 exporters accounted for 60% of exported volumes. Iran, we had a brief comment earlier, was the top exporter, followed by Vietnam. Strong exports from UAE and Spain also, offsetting their surpluses in their respective home markets.

Turkey's exports continued to decline, but this could reverse as there's a lot of new export-oriented capacity coming online. 153 countries engaged in some level of clinker and cement import activity in 2014. The top 10 importers accounted for around 39% of trade, with Bangladesh overtaking Iraq as the main importer, mostly clinker being brought in to serve their mainly grinding base. We were talking about integrated plants,

Bangladesh doesn't have a great deal of limestone, so most of the capacity there is grinding. Egypt, second largest importer in 2014, that was due to fuel shortages curtailing local production. Iraq, still a major importer, but with supply routes cut off due to conflicts the annual volumes have come down, and we also talked a bit earlier about the US recovery.

There are around 900 Million tons last year, building in a nice controlled way, but it will be some years before they return to their historical highs. So here we have a little bit on the leading companies worldwide ranked by capacity, and then in the top 10 of the largest companies, five are from china, but they're nearly entirely based in China, they're domestic players with little or no overseas activity. So of the true global multinational players, Lafarge and Holcim remain the leaders. In recent years the domination of the traditional majors came to an end as the cement markets in Europe and the US collapsed, and this had a profound impact on all the European multinationals, especially Holcim and Lafarge, which were generating half their EBITDA in Europe and the US. That collapsed, and share prices also fell, in the case of Lafarge by 50% between 2009 and 2014. So instead we saw the emergence of a second tier of global players, and you can see here after the Chinese, we've got UltraTech from India, we've got overtaking Italcementi, Votorantim from Brazil overtaking Buzzi Unicem. EuroCement, InterCement, which the also Camargo Corrêa from Brazil, which made the big Cimpor acquisition. Dangote, big player in Africa. Siam Cement coming up fast, as is Argos in Latin America.

This company particularly buying a lot of the capacity of Lafarge. So we have these rapidly expanding emerging majors building on strong domestic bases broadening out into regional markets, and markets where the traditional majors have been unwilling or unable to enter. So that's reflected in the rankings, which is changing year by year, and now is the time to make a quick comment on LafargeHolcim.

What we've just seen goes some way to explaining the rationale for the previously unthinkable merger of Lafarge and Holcim, which is expected to complete later in July this year, according to the current timetable, which will transform the two multinational leaders into a powerful global group with 387 million tons of capacity. Transformed in scale with the restored financial flexibility, an optimized portfolio of assets, which are now better oriented to the emerging markets, higher growth emerging markets. This will give LafargeHolcim a competitive edge, to say the least. They've had to make a lot of disposals in order to carry out the merger, and to placate the competition authorities in several countries, and most of these listed on the slide. CRH is the main buyer of these assets, nearly all of them, for a price of €6.5 billion, and that will see CRH's portfolio expand, it's cement portfolio expand to 42 million tons per annum.

They already exist operationally in China and India, and they will also add Philippines to their Asian portfolio. This slide shows a range of spot prices for cement around the world. They are just there to indicate sort of price levels there, prices changing and they're very territory specific, but in general prices remain highest in Africa and Latin America where there is a high degree of consolidation and price discipline, enabling prices to remain elevated at around $150 a ton. On the other hand, an over supplied and fragmented market such as China or the UAE prices are much lower, they're around the $50 ton region.

And in the US they're currently around $96 per ton. In Europe disciplined markets such as France have been able to maintain price levels in spite of weak demand trends. On the other hand, a dramatic fall in oil, coal and natural gas prices worldwide has offered some margin of relief to those producers operating outside the old dependent economies with the exception of countries such as Indonesia and Egypt where subsides have been removed and created another pressures. Year-to-date volume changes, just a quick snapshot of what we're seeing so far in 2015, quite a range up at the top Vietnam and Philipines seeing double digit growth. Advanced economies, Spain, US, they're performing very well, very strongly.

On the other hand, some important markets have disappointed. We've talked about India, growth failing to materialize as quickly as we expected. Indonesia, way below expectations due to the delay on construction projects and a weaker economic growth. And overall, the summary, global growth decelerated in 2014 to 2.6% as China is and the emerging markets saw their growth rates drop back. We expect world consumption growth to pick in 2015 and 2016 by 3.3% and 4.6% respectively.

Still trending significantly below the historical compound annual growth rate of 6.6% over the last decade. China, as I've mentioned has reached inflection point, and we'll see growth at sub 5% levels going forward against 10% compound annual growth rate over the last decade. In the emerging market countries, growth we see accelerating to around 6% by 2016, and in the mature markets, the continued recovery of Europe combined with the stellar performance of the US should see annual growth trending at around 4%.

So as I said, all this data is produced for the Global Cement Report by International Cement Review, the new publication's out today. It includes a data platform, so you'll be able to carry out more analysis and extract your data in a convenient form. So hopefully those of you who are monitoring world markets will find this product useful and improved, and that's all from me, so thanks for your attention.

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