Industry, manufacturing | Real estate

Cement sector pours $1.5bn into new plants

29 Jun '09
Oleg Kouzbit, Online News Managing Editor

Within a week, three major players announced almost $1.5bn worth of new plants for cement production in Central Russia. Lipetsk Mortgage Corp., Eurocement Group and France’s Lafarge is the trio that are betting big on Russia’s future. With the sector still reeling from the sharp decline in construction projects, why invest now?

Chinese money for Yelets cement

Government-run Lipetsk Mortgage Corp. announced its plans last week for a $415m cement factory in Lipetsk Region’s Yelets district, funded by the China National Machinery Import Corp.

Credit from Chinese private bankers will reportedly be secured on the condition of using Chinese equipment in construction.

Vladimir Tuchkov, a Lipetsk regional official and head of Lipetsk Mortgage Corp.’s board of directors, says a special company, OOO Doncement, has been set up to carry out the project on a 900-ha site, which is ready to go.

The projected capacity is a reported 1 million tons of clinker and 2 million tons of cement a year.

A large federal company may join the project, Mr. Tuchkov said, but gave no name.

He believes the region needs a new facility because currently there is only one operating there. “Construction of the new facility will take a few years, and by then demand will pick up,” the official said.

Yevgeny Botka, the CEO of Construction Information Agency, forecasts fierce competition for the new factory. With the size of Central Russia’s cement market now estimated at 17.9 million tons, the Lipetsk plant will have to hunt for customers all over the Central Federal District, especially in Moscow Region, to be able to sell its production, Mr. Botka believes. But he shares Tuchkov’s opinion about imminent growth in demand by the time the factory is launched.

Government involvement in the project guarantees easy passage through bureaucracy, which is an advantage, Mr. Botka feels. “Before the factory grows and finds its client base, Lipetsk Mortgage Corp.’s own construction needs will ensure at least a fragment of a market for its products,” the expert said.

A Lipetsk derby

Eurocement Group president Mikhail Skorokhod is surprised that these “…new interesting projects are emerging in the midst of a crisis.” In fact, he is concerned about mounting competition in Lipetsk Region. Eurocement Group announced plans on June 23 to build a $460m cement production line on the premises of its local subsidiary, Lipetskcement.

Its new factory will have a capacity of 2.2 million tons a year and once complete, the production equipment in the existing plant will be dismantled. According to the company, construction will begin this fall and be completed in 2013.

RBC reports that the Eurocement Group has 40% of Russia’s cement market; in Central Russia it’s in control of 70%. Last year the firm slashed production and now obviously intends to catch up.

If Lipetsk Mortgage Corp. goes on with its plans, this will shift the region’s balance of forces considerably.

Invest, s’il vous plait!

As the two Russian companies are preparing to test each other’s strength outside Lipetsk, the neighboring Kaluga Region is expecting a powerful international player to come to its construction materials market. Earlier this week France’s Lafarge unveiled its local $580m cement project to kick off within a year.

Lafarge has long been probing into the Russian market. In April 2008 one of the world’s largest construction materials makers announced plans for four cement factories in Kaluga, Rostov, Chelyabinsk and Krasnodar Regions. It already has facilities outside Moscow and Chelyabinsk.

At the end of last year Lafarge posted a cutback of its 2009 investment as demand was dwindling. The firm will reportedly invest $2.6bn in Russia this year and sell $1.3bn worth of assets. But the Kaluga project won’t be sacrificed.

According to Finmarket.Ru, 350-400 new jobs will be created. The projected capacity is 1.8 million tons of cement a year, with the possibility of doubling production in future. Raw material will be reportedly extracted from the local Borshchevkoye field; Lafarge won a license for the field as early as February 2007.

The best and worst of times

The financial crisis hit the construction sector hard. Many development projects were shelved even before they got off the ground. Others were abandoned mid-stage. Cement makers were caught off guard.

The sector was on a roll for years, fueled by tremendous growth in both the commercial and residential sector. Cement shortages were legendary. And the failure of the industry’s domestic players to upgrade their plants left an open door for international behemoths like Eurocement and LaFarge to come in and take over a large chunk of the market.

Following continued growth of prices and investment between 2006 and early 2008 Russia’s cement makers saw the bottom fall out of the market in the second half of last year. According to IRN.Ru real estate analysts, prices dropped more than 40%, imports swelled to 12%, and demand plunged in excess of 20%.

The shortage of production capacity at the beginning of 2008 was followed by the first Russian cement surplus in years by the time 2009 rolled around.

Domestic producers were hit by both shrinking demand and rising low-cost imports; more expensive Russian cement was simply being driven out of the market. As a result, domestic cement production fell more than 10% last year.

With an average $140/ton market price the Russian cement market was worth around $9bn last year. Turkey, China and Egypt did well as cheap cement imports from these countries were gobble up by cash-starved developers.

Can it get any worse?

Negative dynamics persisted in 2009; Russian cement production shriveled by another 38.5% y/y in the first two months alone. In the first quarter the sector reported a decline to an annualized 66.8%.

Cement imports also fell considerably. Market players complained about poor domestic demand and to boost their exports, asked the RF government to cancel the current 6.5% export duty to make Russian cement more competitive in such promising markets as Azerbaijan and Kazakhstan.

Against such a grim background, what is motivating such savvy multinational players to invest billions now?

According to analysts’, Russia’s cement market will see a deficit of up to 10 million tons in 2010. The shortfall is likely to deepen in years to follow as demand for cement is expected to grow faster than Russia’s production capacity. Some feel imports are the only solution. Lipetsk Mortgage Corp., Eurocement Group and Lafarge, undoubtedly, feel differently.

Vast profit potential

Despite the grim current data, making cement in Russia is still very profitable. The cost to produce a ton of cement here is between $38 and $64 per ton, so even if prices drop another 50% cement production will still be a profitable business.

The new factories being built are far more efficient and will take several years to build. When complete, experts believe, they will poised to take advantage of the pent up demand. The only caveats in this rosy scenario is when the market will turn positive and if the demand will be great enough to use up the millions of new tons of cement that will be ready.
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