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Financing cement in emerging markets, Eric Siew, IFC (Hong Kong)

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

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So my presentation would comprise essentially four parts. First I will try to introduce you to IFC, and what is our approach and experience in investing in cement. And then I will briefly share with you our sector view in a couple of slides and then the third part would be, again it's a brief kind of overview of the cement outlook. I think a number of presenters have already shared a number of figures on the cement consumption in 2014 and beyond. So, I will just share with you a few key points. And then finally I will conclude and I think that kind of links very well to where the previous presentations that were made, what is the IFC climate change approach to this sector?

Given as I think we all understand, given the importance of the carbon footprint of this industry. So let me try to quickly introduce you to IFC. IFC is part of the World Bank Group, as probably many of you would know. In the World Bank Group, we have essentially five institutions. The two main institutions, and the first one is the World Bank, which provides advice and financing to governments of emerging markets, and the second one is IFC. IFC stands for International Finance Corporation. It's the private sector almost essentially of the World Bank Group. It was established in 1956, and it provides advice, and also finances to private companies in emerging markets. IFC has quite a global reach today. We've about 108 offices in 98 countries, so we are kind of well we've a strong presence in most markets that we serve.

59 over 60% of our staff now are in the countries where we invest, and Hong Kong where I am based, is the middle hub for Asia not only for East Asia, but also South Asia. In terms of our business essentially we have three business lines - our core business is about investing, investments in companies that are investing in emerging markets. We do provide equity and also debt and different instruments between the two type of products, but increasingly we're also providing advice. Not only to small and medium sized companies but also a new initiative that actually we have been doing that in the past now we launched that a bit is to provide advice to a bit like MNE type of advice - helping our clients to find targets in countries where they want to enter. introduce them to partners evaluate proposals etc. Given the presence that we have in most countries where we invest, we do have a network of relationships in all these markets. And last but not least the third part is this is an increasingly important component in IFC's business is that we mobilize, we leverage also of our own resources. We have been doing that a lot on the debt side and now we're increasingly do that also on the equity side so we manage funds for some investors, sovereigns and pensions funds for example.

In terms of our volume of business we have been investing as I mentioned to you since 1956 in all the emerging countries that we serve. IFC and the World Bank Group, the IMF the same we have like, we have 184 member countries, we have been investing more than 125 billion today in the margin markets over the years. Approximately per year, we would be investing between 20 to 25 billion of which we would mobilize as I mentioned clear this is increasing an important component for us between 15% and 25%. And as you would see in this slide, about 20, I think it's about almost 28% our business, 25% in Asia, including southern East Asia, and just quickly on the slide, what I would like to really emphasize here we take the same risk that the our client, private sector clients will take. We take the same market risk, we're not looking for government guarantees, we promote obviouslt environment and in social and corporate government standard we do have our own standards especially on the environment and social side and you're quite pleased that you know to have heard presenters highlighting the importance of that and that's increasing an important component of the sale [xx] but the business is growing forward.

In terms of the IFC investing Simed we have a long experience of investing in the industry community of Libya have invested more than four billion over a number of years, today we have approximately $1.1 billion of investment in the industry. We're present in 26 countries and most probably going to 35-45 within the next two years, so we have quite a good diversify portfolio which gives us a good understanding of the different situations in different regions, different markets.

And as you would know too also in this slide, in terms of our presence in the industry, in Asia about 30% of our business in cement is in Asia. In terms of the the type of clients that we serve we have a mix of and it's kind of almost equally spread between global and regional players but also local sponsors of obviously.

A few things that we think differentiate us or clients want from us typically, one is that I think we're most probably unique financial institutions that has its own in house industry expertise. We do have people who're working in the industry that are IFC staff and participate in our judiciary process, and I don't think that many institutions, finance institutions would have that.

We do have close relationships in most globals. We've a long experience as I mentioned to you earlier and then the last thing and I think we'll talk a bit more about that is the approach to climate change and we do we're really advocating climate change friendly production processes. Just to quickly share with you a few other transactions we did as you would see in this slide, we've been working with the major but also the local players from Africa, with Lafarge in for example in Bangladesh, and Italcementi also was a client of ours. We do work with the smaller players like Vigat or Titan but also the large Chinese companies like Kon cement or Chanheu and also the smaller players in different markets as well.

In terms of our priorities in the sector, increasingly, the first thing I would like to highlight is that we try to accompany and support players investing in the high risk countries. We talk earlier today about Myanmar for example, this is typically a place where we feel that we will have a strong role to play.

The second thing is that, to illustrate that just to give you a figure of 50% of our business in cement is actually in countries like Myanmar, where the risk of doing business, the risk of developing new cement projects is quiet high. Promoting a high environmental and social standards. I mentioned that earlier this is certainly one of our core expertise and one in the areas where we feel we've a strong value add. In terms of this selection as I mentioned to you, we take the same risks so we do have the full diligence process. We look at cost of production, cost of delivering cement, and also looking at the, we do manage wide sector and region exposure quiet carefully. And finally we've been doing very good business in the industry, so increasingly also we try to do more equity. We're not going to be significant shareholder, but we'll do feel we're taking a minority stake in most of our client companies we can bring a lot of value and our returns have been quite good in that sector.

So just to centralize, I mean in terms experience in the sector, a few key things. I think many presenters have already mentioned that earlier. It's the regional, the local nature of the business. Price differentials are quite significant across regions. I think this morning we were talking about, for example price of cement in Africa ranging between 150-200 dollars per ton compare for example to China, where it's only 50$ per ton.

And when you look at other countries in Asia, you have prices that ride between $80-$100 per ton. So it's quite different. The capital intensity of the industry is understood, transportation costs is also extremely high, because this product it is bulky and it is not easy to transport. So those are factors we look carefully at.

The supply demand balance, those are things that we've discussed. Import price parity, this is going to be an increasingly important factor, especially for Myanmar, which is surrounded by countries which are strong producers of cement so to what extent, it makes sense to and how many plants you would need to have in Myanmar is a big question mark for example?

Location is always important, in term of relation to where the raw materials are, where the infrastructure is available, the energy source etc. This is also we all understood, it's a very energy intensive industry for us. For example, we would look at the production dash course I mean feel, the energy cost should be around or less than 40%. So this is something we look carefully. In terms of green field investments, our benchmark typically is about $175 per ton of install capacity. Obviously the sponsor in management is extremely important and that something that we also look carefully at given the capital intensity again and that amount of financing that we would need. So in terms of financial structure, in terms government principles, results again environmental and social commitment, there are things are extremely important and we're very sensitive. So let me go, this is a project cycle for IFC, I don't think we need to go for this, but you will have the copy of the presentation. In terms of the view of IFC in the sector just a couple of slides I would not spend a lot of time on this I think all the presenters have already highlighted the key elements but two key things - one is the growth of the construction markets when you look at 2010 and 2020, we see a on our side that this market will grow about 67%. It's a big jump but when you look more carefully look at the emerging markets the growth would be about 110%. So it's quite significant and I think all, again a number of people have already underlined this.

China and India remain the key drivers in the markets. And then in terms of the market trends and the business environment, I think, let me spend a little bit more time on this one because I think it's really important. What on our side, on the market side what we see and is that the market and for emerging markets we've continue to grow within 3% to 8% in the next 10 years. Emerging market so we account for 90% of cement consumption. So obviously for us we've be in that business. I think also it's mentioned I think earlier this morning that the consumption is already more than 4 billion.

Our view is that most of it would peak to about 5 billion by 2030 and China may be contrary to what other presenters were saying earlier we feel that China would be contracting actually over the next five years and but at the same time, in terms of the export capacity we feel that would remain limited to about 30-40 million tons per year.

But at the same time, consumption in a number of other market would more than double. Myanmar is is a case in mind, Africa, Indonesia and the Indian subcontinent. And then we talk I think earlier about the cost of transportation by see freight rates these are low given the region oversupply situation that we see, there will be availability of cheap kiln and cement, but at the same time the volume of trade I think that was also underlined is not that significant, but this is something that we follow also quite carefully.

In terms of the business, on the business, the whole Wholecem and Lafarge merger most probably in our view would spend more new way of activities because given the size of that combined entity, but we also seeing a number of large players, and I think this is increasingly important especially for the Chinese companies given that the market is going to contract, the demand is going to contract most probably in our view in China so they have to go outside of China. We've seen that with Kons, I think Gdong we are talking to them, we are talking also with other players like Sonoma and Tratec of India, [xx] of Brazil, so those companies would increasingly try to go outside of the home base.

Energy cost, I mean it's always energy intensive again, extremely important. You have a few inputs for which we see the cost is stabilizing but at the same time the cost of power is rising. So way see for recovery that was highlighted again earlier. This is something which is also important. And then use of alternatives fuels, additives blended cement, I think all this points were mentioned but it's important to highlight and underline them again. Environmental regulation for the industry.

These are going to be increasing, so being proactive and addressing those issues of fraud with the increasingly important and actually competitive factor, and new products. In term of the outlook again a brief overview, again some of the number might be slightly different from that number that we mention earlier but I think the main important point for Asia is that, when you look at 2010-2014, China has been It's a large part of the global growth. I think it's about 60%, although the consumption you combine with India, you already have 2/3 of consumption, global consumption in Asia. But you can see, in our case what we see, in our view is that China will most probably contract by 2019 by about 270 million tons of lower demand. That's something that would decrease in our view the capital consumption from about 1800 kilogram per capita to about 1600 kilogram per capita while India will continue to increase and you do.

A number of other markets in Asia like Pakistan, Indonesia, Myanmar certainly where the market would continue to grow at a fast rate most probably more than 5%. And then, finally, just to conclude on our approach to climate change to the industry given the importance of the emissions that the industry emits in producing cement.

There is, it's clear there's an imperative for the industry to consider reducing the amount or the volume of CO2. We all understand that cement consumption would most probably is going to remain above 4 billion tons by 2050, and I would kind of estimate is that CO2 emissions from cement production are expected to be reduced about 1.6 billion tonnes by that time. So I think a number of things were only mentioned earlier, energy efficiency actions, waste recovery, clean substitution, alternative feul use, carbon captured, is a new thing that may also have some impact and new products as well, new materials.

In terms of our approach to cement given the context and given the fact that as I mentioned to you I think in one of the previous slides when you have a copy of it you will know that cement accounts for about 6% of greenhouse gases, man-made greenhouse gases in the world. It's quite significant and so for us it's extremely important and sensitive how you approach the industry when we specially on our side when we invest.

So for us they are deal breakers and what we feel are our best practices, deal breakers are obviously are vertical shafts kiln, wet kilns. We do finance companies which have those technologies but we expect them to commit to phase out that industry over a period of time, but in terms of best practices, you can see in the slide there are a few things that we've mentioned in terms of the type of pre-heaters, the type of roller mills would have, way seeds recovery again, use of alternative sources, fluidize bad combustion in terms of coal fired power plants.

In terms of the benchmarks that we typically follow when we finance cement companies, one is the use of maximum use of blended cement. I think that was also mentioned earlier, this is something that we look carefully at, the clink to cement ratio is an ratio that we look at carefully and for us it should be a round between 0.65 to 0.85. The fuel use in clink of production is another element, the use of electricity in cement production. We give a few figure here, maybe you would be more expert than me but these are figures that we typically kind of review and ensure that our client company are within that range that I am mentioning depending of the scale of context which country it is.

Renewable and alternative fuels wherever that's possible, that's something that we strongly promote and encourage and we do finance. We take the risk of that as well. Waste recovery, bio-mass, solid waste, those were elements that were mentioned. And again when we capture all of these for us good cement plant should be producing, not more that 750 kilogram per ton of cement.

And that includes the electricity emission. So for us, if our clarity is not there, we will try to see how we can work with the client to see how we can remain in that range. In terms of agenda is the same idea but we do also some clients given that the markets have been more difficult, so how would you finance, for example waste seed recovery system, we've different alternatives and I can share with you, at the end they're two kind of approaches, off balance sheet kind of structures or the balance sheet, that are things that are more technical but we do have a way of funding the these type of investment. Green investments including, waste seed recovery. I think the previous presenter was mentioning here pay back of three years. Indeed and I was saying now we're experience between three and seven year, we do feel that this is a good investment, given that it is an industry which is capital intensive so we don't expect to have a return less than 3 years. o 3-7 years for us is more than reasonable and we are prepared to take the same risk that the client is taking.

In terms of technology, is when solar alternative fuel. Let me just maybe talk a little bit more waste seed recovery and I think that would link very well with the previous presenters' presentations. Waste seed recovery, this is an area where we are increasingly active and we have been financing a few transactions where the clients wanted them to implement those systems.


I think that the figure we're mentioning, I'm pleased to have heard that the numbers that we're mentioning how it's correspond exactly to what the private companies are experiencing. For example, the previous presenter suggested that waste seed recovery energy we can have potential to generate 25% of electricity requirements.

We on our side we look at at 20 to 20% that's our estimate and to help you understand that slide, basically what we're trying to say here is that what you see in green for countries we've a few examples here for countries where we have the green boxes means that they are strong drivers for the development of waste seed recovery.

For countries which are in red or the boxes are in red that means that the incentives or the drivers are much weaker, and obviously yellow is in between. So when you look at the region for example India, Vietnam, and I think those are obvious we see strong potential in doing waste seed recovery systems or financing them obviously. And when you look at the key parameters that typically we would look at, one is the market itself and it's growth to what extent you have a sizable and sizable plants that justify such investment, the reliability of the power supply, the price of electricity is an important element in determining the payback for that type of investment, and the regulatory framework as well.

Yes, I'm almost there. So this slide gives us the the dollar figure that the previous slide gave. This one correspond exactly to the slide that was presented earlier in terms of the number of systems already in place. obviously China is a clear leader. Here it was technology that was the spearheaded by the Japanese supplies earlier, but now the Chinese are the clear leaders.

Finally, in terms of cost, I think the cost also, the figures that I'm proposing here or suggesting here all in line with what was realized. For example the Asia cement investment I think it was 35 million for 21 megawatt which is about 1.6 million megawatt and this is typically what we are suggesting in the second chart that you see in the China it's lower it's abut 1.1 to 1.4 million tons per megawatt of capacity. That assumes 5000 ton per plant and the level of moisture is also mentioned here. And finally a couple of examples. One which is an off balance sheet. This is the project that we did in China where we take the risk from a commercial bank and we take we have every risk sharing facility and in the second case where the client took the risk on the balance sheet and the payback was in that case was 4 years, and here you would see that here the cost was a little bit more about one point almost 2 billion per mega watt of capacity. So that's what I want to present to you, thank you.

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