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Russian Cement Market: Figures from 2008 and Outlook for Future Development
Cement Production in Russia
Cement industry is one of the oldest branches in Russia. The 'golden age' of the industry goes back to 60-80-ies: in 1962-1990 Russia was the world leader in terms of cement production. The ultimate production volume of 85.3 tons was achieved in 1989.
During 1989-1998 the status of cement industry in Russia was characterized by negative dynamics, like any other sector of the Russian economy. At the same time the decrease was much more notable against the overall economic background, since the industry is placed among the investment sectors, which are more vulnerable to sharper fluctuations during decays.
The previous economic crisis in Russia (1997) did not impact significantly the industry as at that time it already experienced a deep stagnation. Many cement works were nearly brought to bankruptcy due to the absence of demand and low economic efficiency. Processes at most productions became obsolete, equipment was worn out. As a result, cement production output in 1997-1998 was at the level of 1996 indications. Following the default the cement industry started its recovery. Nevertheless the industry didn't manage to reach the output of late 80-ies. 2007 yielded 60.0 M tons of cement, which was only 70.3% of the all-time high level of 1989.
For the first time in the recent years the production of cement reduced in 2008 by 10.6% as compared to 2007. The economic crisis produced a negative impact on the cement production: before the start of 2008 there was a lack of production facilities, while by the end of 2008 an excess in the Russian cement supply was observed.
Seasonality of Cement Production in Russia
The most problems of cement manufacturers are associated with substantial fluctuations of season cement supplies to the customers. Cement production and marketing in autumn and winter (during a six-month period) are reduced 2-3 times. This factor has remained stable for many years, therefore resolution of the problem requires governmental support.
During autumn and winter the volume of cement consumption comes down. Because long-term storage of cement is impossible many companies become unprofitable due to the uniform character of tax distribution and start losing internal sources of capital and finance, which they need for urgent work, such as equipment repair and preparation for the season of the ultimate demand for cement.
It's not by chance, that cement manufacturers try to gain greater profit during summer months by means of seasonal increase of prices for their product. The manufacturers need to earn to be able to repair or to replace the worn-out equipment, to make investments into cement quality improvement programs etc. during winter time. Therefore in anticipation of the summer season the cement industry enterprises push up their prices practically at one time.
Pattern of Cement Production in Russia
Portland cement is the most popular brand: its share in the production volume in 2008 made up 93.6%. The share of blast-furnace cement was 6.4%. The share of alumina cement in the overall cement production volume is negligible. The most demanded Portland cements are M400 (its share in the overall volume of Portland cement production is 56.6%) and М500 – 40.1%. The shares of other cement brands are negligible.
As compared to 2007, decreased production volumes were observed in 2008 in 29 Russian Federal Entities from the total amount of 34, in which cement production facilities are deployed. At the federal level the cement production volume in 2008 surpassed the last year figure only in two federal districts: e.g., in the Siberian FD the volume of production increased by 4.7%, and in the Far-Eastern FD – by 38.9%. The largest decrease of production volumes was observed in the Central FD (25.8%), Northwest FD (22.9%) and Volga FD (19.2%). The Central and the Volga Federal Districts remain cement production leaders, however, their share in the overall cement production volume has reduced.
The Key Players in the Russian Cement Market
Eurocement Group
The holding owns 13 cement works in Russia. Apart from this there are several enterprises in Ukraine, their total capacity making up 5 M tons per year. In addition, "Eurocement Group" incorporates several dozen concrete facilities and a construction material combine. The company managed to essentially increase its potential production in 2005 after buying cement assets from INTEKO and SU-155.
CC "Siberian Cement" and RATM Holding
"Siberian Cement" is the second cement holding in Russia in terms of production capacities. It operates primarily in West and East Siberian market. At the moment the largest four Siberian companies, such as "Timlyuicement", "Angarskcement", "Krasnoyarsk Cement" and "Topkinsky Cement" are operating under the umbrella of this holding. The two latter companies were acquired by the holding through bankruptcy procedure.
The French Lafarge owns two major plants: "Voskresenskcement" in the Moscow Region and "Uralcement" in the Urals. Their aggregate production capacity makes up 4.8 M tons or 6.5% of the overall Russian level. In Russia Lafarge comes third by production capacities and fourth – by the production output. The share of Lafarge in the market of the Moscow Region makes up about 15%. Its total share in the Central Federal District is about 15%, in the Urals – about 25%.
Holcim (Alpha Cement)
In 2005 Holcim accounted for about 6% of the Russian market in terms of output. In 2003 Holcim built up its share up to 60% in "Alpha-Cement", formerly one of the largest Russian cement holdings.
Park Group
The major cement market operator in the Far East is Park-Group Holding, which controls "Spasskcement" and "Teploozersk Cement Works", their production capacities making up, respectively, 3.4 M tons and 0.8 M tons. These two enterprises account for 80% of the regional market and somewhat over 2% of the overall Russian market.
Dyckerhoff и Heidelberg Cement
Each of these two companies controls one enterprise: Dykerhoff owns Sukholozhskcement, Sverdlovsk Region, with the total capacity of 2.4 M tons and a market share in UFD of about 35%; Heidelberg Cement Group is the owner of 1.4 M ton capacity Tsesla Works (Leningrad region), its market share in the region making up about 20%. In addition to this Dykerhoff and Heidelberg Cement Group possess cement assets in Ukraine.
OJSC Novoroscement
Novoroscement is the largest Russian cement manufacturer and exporter: its rated capacity amounts to 4.6 M tons. This enterprise still remains one of several cement facilities, which are not incorporated into the cement holdings, operating in Russia.
OJSC Mordovcement
The largest cement works in the Volga Federal Region is Mordovcement. The market share of Mordovcement in the Region makes up about 35%. A substantial part of the company's product is supplied to the Moscow region, where Mordovcement holds 8% of the market.
Cement consumption in Russia
The main consumers of cement are ferroconcrete and asbestos cement product plants, which consume about 70% of the cement produced. 24-25% of cement is used during construction and installation work and only about 5-6% of the total cement production volume goes to retail trade to meet the construction and repair demand of the population.
Apart from the construction industry there are other major consumers of cement, such as road facilities, oil and gas sector and other branches of economy.
In spite of reduced production, conditioned by the crisis and expansion of cheaper imported cement, the volume of cement consumption in RF in 2008 surpassed the respective consumption volume of the previous year by 0.6%. Consumption growth rate reduction is estimated as substantial, considering that the annual growth of consumption volume in the recent 10 years was 10-11%.
Traditionally the second half of the year is more productive for the Russian economy, than the first one. Noteworthy is that these tendencies are more evident in the construction and civil engineering. The second half of 2008 was marked by a considerable decrease (by 18.7%) of consumption volume, which was conditioned by the crisis. The most intensive decrease of consumption volume was registered in the 4th quarter of 2008 – by 27.7% as compared to the same period of 2007.
The current cement market is characterized by deficit of a clear regional nature. The Central and the North-Western Federal Districts are the most cement lacking regions. CFD consumes 35.6% of the cement, offered by the RF market, while producing only 25.5%. At the same time, only 24.4% of the production facilities are deployed in CFD, which means that most of them are exceedingly loaded during the consumption peak periods. In addition to this the major part of the cement, consumed in CFD (about 65%), falls to the share of Moscow and the Moscow region.
Shortage of cement in the central areas is explained by construction boom, observed in the recent years, which, on the whole is conditioned by the growth of the people's well-being. The deficit of cement in CFD is compensated by import from the neighboring regions, in the first place from plants, located in the Volga and Southern Federal Districts, which are in the closest vicinity to the Central Region and possess substantial capacity margin.
The most secured Russian Federal District in terms of capacity margin is the Volga FD. Historically a considerable amount of production facilities and a large number of cement works (10 enterprises) were concentrated in the Volga region. Since they are located between the Central and the Ural Regions, the plants of the Volga Region have always supplied cement to the construction sites of Moscow and Urals.
Siberian and Far-Eastern districts have also been cement-sufficient areas so far. Their production capacities will expectedly ensure their own cement production growth at least for the nearest five years at the consumption growth of about 10%.
The Ural Federal District may in the short perspective become an area of shortage. Housing and industrial engineering are rapidly developing industries in the district, so the demand for cement may be very high. In view of this one should not exclude possible cases of local shortage during the highest seasonal demand.
At the same time the basic shortage of cement will be maintained and even increased within the upcoming years mostly in the Central and North-Western regions. Since the major player in the RF cement market – "Eurocement Group" – controls the most part of facilities here, it allows the company to reasonably push up prices. Because the price policy of the company is a reference point for all other Russian manufacturers, actions, taken by Eurocement have resulted in the growth of cement prices throughout Russia.
Since the railway shipment of cement for long distances (beyond 1000 km) increases substantially the price per a ton of cement, its import from distant RF areas will be limited. Because the transportation expenses may be covered only by the customer, he would prefer to purchase cement inside his own region. There is no doubt, that the growth of prices allows more opportunities for players to transport excessive cement to the areas of shortage, however, there still is a number of factors, limiting distant shipments.
First, the problem of railway car availability remains very acute. Surpluses of cement in the region of redundant cement production (Volga FD) cannot be used to fully compensate deficit in the cement-lacking regions.
Second, cement cannot be stored long, as it goes down. Long-term storage of cement requires special storage facilities, therefore one cannot produce a lot of cement during a seasonal reduction of demand to sell it later during the demand growth.
To sum up, the shortage of cement in the Central and North-Western Federal Districts with a potential view to the Ural FD will drive the process of cement price growth.
Outlook for Cement Market Development in Russia
The crisis, which broke out in Russia in 2008, could not avoid the cement industry. Decline in construction volumes, cut-down of customers' solvency affected cement business negatively. Experts note, that the reason was not in the seasonal fluctuations of demand: cement production in the 4th quarter of 2008 decreased by 29.7% in relation to the same period of 2007.
The financial crisis coincided with a decrease of the cement industry profitability, which began in May, 2008 due to a considerable growth of supply of cheap imported cement, which rushed into the Russian market after the cancellation of the customs duties. Cut down of sales volumes due to a high competition on the part of foreign manufacturers forced the domestic plants to start knocking down prices for their own product.
However, many experts believe, that eventually the crisis will produce a positive impact on the industry. Such trends are especially important for the cement holdings, operating in Russia. Under a high investment attractiveness of cement business, competition in the Russian market would become notably strained within the nearest decade. This might happen because of many new cement works with cutting-edge technologies being commissioned. Today, however, individual investors start refusing such plans, therefore it is unlikely that within the upcoming years the structure of market from the viewpoint of market share distribution will significantly change.
One can assume with confidence, that the forecast for the Russian cement market is rather optimistic. In fact crisis threw the Russian cement industry only 1 year back to the figures, which were typical of 2006, both in terms of production volumes and the price level. It is likely, that against the background of price reduction the production decrease will continue, but this will be a return to indications of 2005, which was not that bad for the industry.
If the financial crisis does not continue beyond 1-2 years, the cement industry will live through it easily enough, using earlier reserves, but having 'frozen' the most part of the on-going investment projects for the time being. At the same time, crisis will not practically touch the recently constructed plants. The construction will be mostly completed in the post-crisis period, following which the facilities will start operating to meet the demand for decades ahead.
Experts are unanimous, that the major trends in the present-day construction market may result in its complete or partial stagnation. The paying capacity of construction companies has sharply decreased recently, and the policy of reducing availability of credits and the lack of internal funds have already made current payments more problematic for the companies.
Experts believe, that an active housing will resume within the nearest years. The problem of housing shortage is very acute in Russia. At present this problem has become still worse. At the end of 70-ies – beginning of 80-ies of the last century the birth rate was ultimate. Nowadays people who were borne during that period, constitute a considerable part of the population, which represents an economically active segment, experiencing an acute demand for housing improvement. Active population 25-35 years of age is ready to spend a considerable share of its income to buy accommodations; for most people buying accommodations represents the main medium-term objective. Crisis may only delay the task, but globally it will remain unchanged.
Economically active population will continue to buy accommodations, no matter what its price is: this has been confirmed by the price tendencies in the Russian housing market in the recent several years.
To conclude with, we believe, that despite the crisis, the cement market in Russia has rather good prospects. At the same time, there is no doubt, that in a short term the demand of construction companies for construction materials will decrease. As a result, construction enterprises will be forced to cut down the production volume. In addition to this, requirements to the cost of construction materials will become stricter, and the priority of customers in the selection of suppliers will be given to companies, offering more flexible terms of cooperation.
Source: Abercade Research Company
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