Outsourcing to strengthen stability

February 14, 2017 Yamato Battirossi

With particular focus on the Middle East and Northern Africa, this article explores how cement producers may consider outsourcing of the operation and maintenance of their plants, in order to achieve greater stability in uncertain times.

As heavily documented in the media over recent years, the Middle East and Northern Africa (MENA) have struggled with political instability coupled with social unrest and high unemployment rates, resulting in a problematic business environment. 

Like many other industries, cement production is highly predisposed to prevailing economic and geo-political forces, which combined with extreme exposition to global economic trends, has presented cement producers with a number of challenges.

Drawback of declining energy prices
While the recent global fall of energy prices should theoretically be a source of cost reduction for many producers, it can also have the adverse effect.

Several governments in the MENA region have taken advantage of the low energy prices by reducing energy subsidies, thus enhancing the financial situation of governments in countries that are import-dependent, whilst negatively effecting revenues of oil exporters. The recent removal of subsidies has made local cement producers less competitive to other regional suppliers where subsidies were phased out several years ago. This means that local suppliers are now forced to become more cost-competitive as cement imports drive pricing pressures.

Short-term growth spurt reversed
There has been a turnaround of flow of investment since the global financial crisis. The credit crisis drove investors to the attraction of gaining stronger yield by investing in emerging markets, such as MENA, and meant that the traditional flow of capital into western economies saw a sharp turn. However, as the US market recovers and strengthens, we are now experiencing an investment reversal, where investors seek to place their capital back to the US as well as other more stable western economies.

Such macro-economic dynamics have a notable impact on the cement market, and several countries are experiencing a decline in their utilisation rate, especially Iran and Saudi Arabia. Additionally, there are factors unique to the cement market highlighting the market’s instability, such as Iraq’s temporary ban on cement imports from Iran, and Saudi Arabia lifting its cement export ban.

Reluctant investors and tourists
Security issues in the area combined with economic inactivity in Europe has resulted in reduced tourism and foreign investment in the MENA region. The reduction of these two significant sources of income and foreign currency means that many countries in the region, particularly Tunisia, Egypt, Lebanon and Jordan, according to a 2016 special report by Rabobank, are experiencing a weakness in their local currency. This can consequently lead to increased costs for local businesses, such as those relying on imported materials and labour from Europe and other trading partners. 

Furthermore, foreign currency becomes less readily available, meaning foreign investors may find it troublesome to revert finances back into their primary currencies, a situation particularly prominent in Egypt, which recently led to a significant devaluation og the currency, when the government moved from its peg to a free float to liquidity back into the market.  

Increased demand ahead
While many positive predictions concerning the MENA region revolve around the resolution of regional conflicts, particularly in Syria, there are several encouraging short-term developments that point to strengthening economic conditions. The 2022 World Cup in Qatar, sanctions being lifted against Iran, and a generally more optimistic outlook in the EU, all contribute to an overall stable seeming economy in the region.

In the longer term, demand increases are expected once political stability returns and the security is improved. Neglected infrastructure maintenance and a lack of development in some areas will result in significant reconstruction. Once stability returns, foreign investor will be tempted back by cheap local currencies and strong demographic fundamentals. 

“Achieving the balance between the short-term competitiveness and long-term readiness for growth is the key business challenge facing today’s cement producers.” - Yamato Battirossi, Market Intelligence & Risk Manager, FLSmidth Operation & Maintenance

A cement surplus?
With the expected demand increase, cement producers are growing their capacities to an even greater extent, thus creating a situation of excess supply across the region. According to data by CW Research, domestic consumption is predicted to increase by nearly 20 percent from 2015 to 2020 whereas capacity is expected to rise by 26 percent, a trend being driven predominantly by Turkey, Iran, Algeria and Saudi Arabia. 

The reason behind this is the hypothetical export opportunities in the future, however as there is currently no market for cement exportation, it is forcing many to limit their output to well below potential capacity in order to avoid the excess build-up of unused product. This means adjusting the approach to everyday operations and maintenance processes and procedures, requiring adept knowledge and expertise.

Outsourcing to reach stability
Outsourcing elements of cement operation and maintenance (O&M) to a trusted, stable partner who can help cement plant owners navigate difficult times and mitigate uncertainty, can help cement producers achieve greater stability in the wide-spread business environment. 

With 135 years of experience, significant industry awareness, and substantial know-how, FLSmidth Operation & Maintenance is the leading partner in this area.

In Libya, we helped a cement plant achieve stability throughout the years of conflict and despite operating in a region embroiled in turmoil. In Egypt, we turned uncertainty into opportunity, where we assisted a cement plant in introducing installations for burning alternative fuels and coal, also allowing the plant to substitute natural gas, which had become scarce and costly. The execution of this pioneer project in Egypt not only allowed the cement plant owner to maintain production when competitors could not, but also increase market share, which has been maintained to this date.

Global know-how used locally
Focusing on employing and continuously upskilling local personnel in all areas of plant operations, from specific equipment operation and repair through process supervision to overall plant management, is not only a great benefit for the local economy but also results in a more sustainable future for the plant through less reliance on imported labour. At FLSmidth Operation & Maintenance, we are able to use our expertise to provide training in the necessary technologies and processes, and thus provide a fully qualified workforce.

Secondly, working with a partner that understands how to navigate local market conditions is vital. This can be exemplified by a plant in Iran that had planned to produce only one type of cement, however the demand for that type of cement dropped drastically. By analysing the market and the plant’s configuration, we were able to use our local market knowledge to suggest diversification as a resolution, and proposed a different, more sought after type of cement.

Why us?
On one hand, each local environment has its own challenges and therefore requires unique solutions. On the other hand, cement producers in the MENA region are increasingly looking for export opportunities, making them increasingly subjected to global forces. It is therefore crucial to work with an O&M partner with global experience, extensive involvement in many different environments, and a long history of successful operations. Not only will this provide cement producers with expert know-how but also give access to state-of-the-art technologies otherwise inaccessible.

Furthermore, with the predicted cement surplus in the MENA region, cement prices are likely to be under pressure for the foreseeable future, forcing cement producers to focus on efficient production processes if they are to maintain resilience to market dynamics. This requires effective cost control and industry-leading plant management, backed up by proven systems and effective proactive maintenance practices. Cement producers would therefore be well advised to acquire the services of a trusted partner with the essential expertise and capabilities to bring greater stability to their business performance.

References 
Global Cement Volume Forecast Report (GCVFR) (March 2016) www.cwgrp.com/research CW Research
Kalf, J (June 2016) North Africa and Levant: calmer waters but external risks remain elevated. Rabo Research, Rabobank

Contact:
Yamato Battirossi
Yamato.Battirossi@FLSmidth.com

Elena Dmitrieva
DEG-RU@FLSMIDTH.COM

 

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