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The big problem of the global cement industry:overcapacity

  The global cement industry today employs 1.2 million people and has production capacity of around 6.2 billion t. However, it suffers from substantial overcapacity issues: it is estimated that current capacity can already fulfil the world’s needs for the next 20 years at least.

  Since the turn of the century, driven in large part by China’s domestic boom, global cement capacity has increased exponentially, nearly tripling over the last two decades. Meanwhile, the number of producers has grown to more than 5000.

  Although in periods of high demand, this increased capacity could mostly be absorbed, we have seen sluggish demand in recent years, creating global excess capacity,especially in China, Europe, the Eastern Mediterranean, and the Middle East.This is the result of a longer-than-expected global recession following the 2008 Global Financial Crisis, combined with major regional political and economic instability: the 2010/11 Eurozone debt crisis, the Arab spring, a slowdown in the Chinese economy, and collapsing commodity prices.

  This excess capacity and demand shortage have combined to trigger a race to the bottom among cement manufacturers, dragging down prices in domestic and international markets. Low utilisation rates have also pushed up fixed costs per unit, while the hike in coal and petcoke prices towards the end of 2016 put further pressure on margins. As a result, companies have seen a drastic slump in their earnings,with returns just above or even below the cost of capital, with some beginning to burn through cash reserves.

  Current overcapacity continues to increase and is negatively distorting global cement markets,though the impact does vary across regions. Currently China has the greatest excess capacity with 895 million t, representing 45% of global overcapacity, of which only a fraction is earmarked for export due to higher inland logistics costs.

  Meanwhile, Europe has a capacity-to-consumption ratio of 200%, the highest in the world. In addition to low demand in the region, political pressure to reduce CO2 emissions and CO2 emission allowance programmes have helped keep capacity utilisation rates low.

  Developing regions, such as India, Southeast Asia, Sub-Saharan Africa, and Latin America, have seen significant capacity growth over the last decade, representing more than twice the equivalent growth in consumption. Despite a capacity-to-consumption ratio of more than 150% in these regions, further capacity expansion is still anticipated. Southeast Asian (including Indian) manufacturers plan to add more than 100 million t of capacity by 2018, while 50 million t of new capacity is planned for Sub-Sharan Africa, mainly in Tanzania, Kenya, and Nigeria.

  Political turmoil and low oil prices over the past three years have severely reduced domestic cement demand in the Eastern Mediterranean and Middle East, resulting in large excess capacity. The lack of export markets in neighbouring countries across the Eastern Mediterranean region in particular, where Turkey remains a major exporter with 10 million t of export volume, has created a regional exportable surplus.

  Recent project announcements indicate that, in the years ahead, domestic producers in Turkey, Egypt, Iraq, Iran, and Saudi Arabia will expand their operations. This new capacity will be coming online, even as demand remains subdued, contributing to further growth in exportable surplus.

  In the long term, current excess capacity in developing regions is expected to shrink to some extent, as demand for urbanisation increases over time. However, mature markets, such as Europe and North America, will continue to struggle with this surplus for some time, even though new capacity growth will be extremely limited.

  The problem of overcapacity has been experienced by different industries throughout history and still continues to be a crucial threat for many. Notable examples include the UK’s steel industry in the 1980s, the global freight market today, China’s steel industry, the worldwide oil market, airlines, and the fishing industry. In their search for a solution, different industries can learn from one another,though some aspects of the challenge can also be very sector-specific.

  Cement, with its cost efficiency, energy efficiency, and very long durability, is a unique product and has no real substitute. Moreover, the industry is very capital intensive, so has a lower ROCE than other industries. It is also highly regional in nature, due to relatively high land-based transportation and distribution costs. Because of this, strategies for the cement sector can differ from other industries.

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