Sustainability at its core in this decade
Tightened regulations by policymakers meant to reduce carbon emissions pose a big challenge over the next few years for cement companies as it puts a lid on the growth opportunities that have come along with various stimuli announced by governments worldwide. The cement industry is expected to be heavily impacted by the increasing carbon certificate prices and reducing carbon allowance in Phase IV (2021-30) of the EU Emission Trading System (ETS) which allows companies to trade excess emission rights freely. These will drastically increase the production cost. The cement industry is a capital-intensive industry with low price elasticity. Hence, cost-cutting and efficiency will be key drivers for profitability, while revolving around sustainability.
Greater the emission = greater the scope of improvement
A few players have already reduced their carbon footprint significantly, leading them to a carbon level of <600kg CO2/t of cementitious material. Holcim currently leads the race with 2020 emissions standing at 555kg/t, while Cementir Holding is the laggard with emissions in 2020 standing at 718kg/t. However, Cementir Holding holds this title not for long because its aims to cut its emission level by 20% and 31% by 2025 and 2030, respectively (from the 2020 emission level). At first glance, one may believe that the emission reduction targets are too aggressive. We thought so too. But in reality, the targets are quite achievable as about 2/3rds of the set targets for 2025 and 2030 will be met in the EU via the existing technologies and the investments that the company has planned for 2021-23. We would like to highlight two key contributors: FUTURECEM™ and kiln upgradation in Belgium.
We appreciate this effort and, hence, in our environment scoring system, we score the companies based on their efforts and progress, rather than just considering sector thematics. Cementir Holding currently has a low score but, given its strong balance sheet (net cash position from 2023 onwards), it is possible for Cementir Holding to boost its capex, accelerate emission reduction and offset its additional carbon-related costs by lower financial expenses, thus improving its score and, consequently, our DCF value which has a sustainability component.
Arbitrage opportunity from Turkey
Beyond the assumptions that we have already made, there is a possibility of imports from Turkey too. In 2021, the European Commission announced the much-anticipated Carbon Border Adjustment Mechanism (CBAM), which is aimed at curtailing carbon leakage. However, CBAM will be in a transitional phase from 2023 to 2025 and will become fully operational only by 2026. So, until then, Cementir Holding will be able to capitalise on its Izmir plant in Turkey, which has a capacity of 2.6mt, with only about 0.7mt exported up to now. So, if we consider that just 1mt of cement per annum will be exported from Turkey to the EU until 2025, and the additional cost of transportation is estimated at €20/t, it will lower our estimated carbon cost by €100m to €360m over 2022-30. This estimated carbon cost is far below the one that we calculated using the group’s guidance of 600,000t worth of carbon rights needed to be bought from 2022 onwards. While the group has a more sophisticated model in place with the active management of the rights integrated in the model, the difference of €100m is too big for us to ignore.
