The Cement Industry: you better start swimmin’ or you’ll sink like a stone!
Having worked for both Holcim and CRH across the globe for most of my career, I still follow the industry with interest and great passion. I am always interested to read suggestions and proposals of consultants how to support the industry to grow margins and be more profitable. Recently I re-read the December 2015 McKinsey article ‘The Cement Industry at a Turning Point: A path toward value creation’ (written by Michael Birshan – who I know from my time in the cement industry – and his colleagues). Two years later now at the start of a new year, I wanted to reflect on the 4 strategic levers McKinsey presented, to see if the industry has passed the turning point. The 4 strategic levers are:
- Strategic lever 1: Active re-balancing to create an attractive portfolio
- Strategic lever 2: Improving the M&A engine
- Strategic lever 3: Choosing a winning business model
- Strategic lever 4: Capturing the benefits of scale
Knowing how much effort LafargeHolcim, CRH and the other global players have put into numerous reorganisations, optimising their portfolios, branding, streamlining and standardising processes and driving workforce efficiency over the last 10-15 years, I can easily conclude that these levers have been well-known for many years. So why is it so hard for the cement industry to be as profitable as it used to be? Why has there still not then been a turn-around, fundamentally or partly changing the entire industry, as it happened for example in the automotive, retail, advertising, and finance industry?
It is not really necessary to dig out the numbers, when common sense and a bit of historical knowledge can explain the barriers to changing the industry. It was around 2009 and when the crisis hit Holcim and the industry very hard, I put my concerns on a single slide and discussed it with my boss, who was one of the ExCo-members of Holcim. The slide was called STUCK and it showed a cement player being stuck, squeezed from 2 forces, above and below. STUCK stood for Stubborn Traditional Unmovable Cement Kings – obviously to trigger the mind.
So why were cement players stuck between these two forces in 2009 and why did it only turn worse since then?
The two forces that I highlighted, were 1) the power of suppliers and 2) a combination of the power of new entrants, substitutes, and buyers. Let’s look at the first force, putting pressure on the shoulders of the cement players. Under supply I understand more than just the raw materials; many other conditions are needed for a cement player to operate. These conditions have become tougher, if not impossible to work with since then:
- Quarry, construction, production, and environmental permits have become difficult to obtain and when obtained, renewal needs to happen more frequently than before, which makes it less certain that the raw material reserves and plant construction and maintenance investments have been worth while for the 20+ years to come
- Environmental laws have become stricter, such as through the introduction of CO2 emission certificates, and tougher NOx/SOx emission standards, which both requires significant investments and expertise
- Anti-competition laws have been introduced and enforced by the authorities. Price and market share fixing has been penalized, non-compliance to other fair competition regulations has been costlier than during the cartel era, which was the foundation for huge profits in the industry
- Monopolies hardly exist anymore, as country borders have opened as part of trade treaties, and standards have been introduced across countries at product level; market protection has become nearly impossible and illegal too
- Whereas the industry used to hunt for acquisitions in underdeveloped markets with short payback windows earning back capex, over-capacity is very present
- Green activists & lobbyists have a larger podium and better access to the media nowadays and they have not made it easier for heavy industries to operate
- Labour rights may have been well-established in mature countries, in emerging countries this became a (cost-)factor to adjust to as well over the past decennia
- The cement industry has difficulties to attract the brightest people. Not only for its reputation, impacted negatively by pollution and non-compliance issues, but also because smart engineers have so many better alternatives in terms of employers and industries
- There is no space for long-term planning and execution as it used to be. On one hand because of the cul-de-sac situation of the industry and on the other hand investors and shareholders demand otherwise
The second force, which shakes the ground under the cement player’s feet, consists of a combination of the power of new entrants, substitutes, and buyers.
- The industrial revolution and the post-WW2 era have both led to an incredible amount of investments in infrastructure and other large construction projects, at a time that there was hardly an alternative for concrete. The bulk of the plans have been carried out, specifically in mature countries: highways, seaports, airports are in abundance. A few infrastructure extensions and a bit of road maintenance in mature countries, is not bringing back the demand of last century
- Thanks to Le Corbusier’s love for concrete, the cementitious products received a boost from modernist architects. Nowadays, architects and occupants have changed their preferences to other construction materials
- Not only from an aesthetic point of view, but also because glass and other materialshave been improved so much that they could outperform concrete in many applications; think of insulation, durability, maintenance, thermal mass, affordability, fire-resistance, and so on. Concrete substitutes have increased their share in the building object in terms of volume, at the expense of the ‘building object share’ of concrete and cement
- Traditionally, most of the budget of constructing a building object was allocated to labour and traditional construction materials. Nowadays, many smart solutions are eating up the construction materials budget, and putting price pressure on traditional materials, which have become even more commoditized
- The global financial crisis has motivated customers to become more creative in sourcing cement and concrete, as margins have been very thin. Many large construction companies have integrated upstream into cement and concrete, cutting out significant transaction costs and securing supply. Downstream integration of cement and concrete companies is insignificant compared to what happened upstream
So now that we have used a bit of common sense in a historical context, what now? Which questions should we answer? I think there are only two questions for cement players to be answered:
1. How to match demand with supply or the other way around and take the pressure of our shoulders?
2. How to stop the ground shaking under our feet?
The McKinsey article and research does not provide answers to these questions, and even ignores the historical context of why cement companies were so profitable. It contains defensive measures and the industry is doing nothing but defending and pretending. To quote a recent Nobel Prize Winner:
Come gather ’round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone
If your time to you
Is worth savin’
Then you better start swimmin’
Or you’ll sink like a stone
For the times they are a-changin’
I think there is a need for a fundamental change, which requires bold moves, rather than putting lots of resources into trying to avoid being drenched to the bone. Because the industry will be. Why don’t you franchise your brand like the hotel industry did and sell your assets. Team up with other building material suppliers and deliver a full functioning building which is only missing the bottle of champagne as a gift to the new owner (please do not recycle your CO2 for a sparkling wine). Utilise the land that you own for other activities which bring in a stable cash stream. Build bridges and tunnels with your own concrete and operate them, or become a landlord of the offices that you build. With all the data you have, become a global cement trader eliminating your fixed costs and bank on your existing relationships with customers. Close a few of your plants… ah but you don’t want to be the first one and solve your competitors’ problems on your own expenses.
It is clear that the competitive arena has changed forever already long before 2015 and profitability of the past will never come back, not even when you excel in implementing the 4 strategic levers. So, If your time to you is worth savin’, then you better start swimmin’. Don’t remain STUCK.