CemWeek 2011 Brazil Americas survey

CW Group CemWee RESEARCH

S: U FOC

GLOBAL CEMENT INDUSTRY. KNOWLEDGE.

L I Z A BR

SEPTEMBER 2011

CemWee CemWee BMWeek

2011

CemWee

CemWeek Americas Cement Business Sentiment Survey

BMWeek

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FOREWORD t is with great pleasure that the CW Group introduces its latest contribution to the regional cement sector surveys – the 2011 CemWeek Brazil and Americas Cement Sector Sentiment Survey. Over 200 organizational units participated in the survey across North and South America. We extend a special thank you to all the participants for their contribution to this highly anticipated survey.

The survey follows similar annual surveys that the CW Group has firmly established as the industry benchmark, including India and the Middle East & Africa. With this initiative, we look forward to leveraging the CW Group’s research platform to continue providing leading industry coverage of the “New World.”

There is no mystery in that the fortunes of the cement sector in the Americas have bifurcated along a North-South divide. As North America continues to struggle in the toughest trading conditions in decades, South America is seeing one of its biggest booms. In particular, Brazil stands out, not only in terms of sustained growth, but also for its ability, as a large market to expand. Given the special dynamics of the Brazilian market, we decided to dedicate a special focus of the survey to this growing force in the global cement sector.

The point of the survey is not to simply point out the obvious, but rather to ask a series of secondorder questions to market participants and professionals to scientifically collect and analyze what the industry in the region is collectively thinking, feeling and putting at the top of its agenda. The survey is intended as a starting point for framing the discussion of the state of the markets from a people-perspective. If you are interested in learning more, please contact us to discuss further: inquiries@cwgrp.com.

We wish to thank the sponsors of this survey for their support. These companies demonstrate a strong commitment to the region and warrant a special mention: KHD Humboldt Wedag, Fives FCB, Gebr. Pfeiffer, Magotteaux and Blancon.

Robert Madeira Managing Director & Head Of Research CW Group inquiries@cwgrp.com

CONTEXT

From Canada to Chile...

his report presents the findings of the first (2011) CemWeek Americas Cement Sector Sentiment Survey carried out in the summer of 2011.

The respondents hail from firms across the Americas, ranging from Canada to Chile. They are grouped into various regions including North America, Central America, the Caribbean, Brazil and the rest of South America. Given the 4

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emergence of Brazil as a major producer and consumer of cement, a special section of this report concentrates on the views of the industry in Brazil.

The survey corroborates and quantifies the considerable differences steadily emerging between North America, Central America and South America. The ongoing slowdown in the CW Group CW Group CW Group

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CONTEXT

...with a big stop in Brazil

wider US economy meant production in 2010 was at its lowest since 1982 and 45% below production in the record year of 2005 in North America. In Central America, firms reported a slowdown in activity rates but generally, production remained stable.

In contrast, there were high expectations of steadily increasing demand in South America

as the regional economies expanded and to cope with planned state expenditures on infrastructure projects. This obviously included Brazil, but production in, for example, Argentina grew by 9.8% in the first quarter of the year with similar year-on-year growth reported elsewhere in the southern regions of the continent.

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INTRODUCTION he survey distilled a series of principal sentiments and trends across the region. These broad trends were confirmed within this survey as: ■■ Consistently across the respondents, there is a clear set of regional differences. Some three quarters of firms based in South America reported that recent performance had been better than expected. For those located in Central America and the Caribbean, 50% indicated that performance had been better than expected and the remainder responded that it had been as expected. On the other hand, 57% of the North American respondents reported performance had been worse than expected.

■■ Despite this, most respondents expect performance to be the same or better in the next twelve months. The bulk of firms located in North America expect little change over this period and 13% expect to have to lay off more staff. In contrast, 67% of the firms located in South America expect performance to improve in the next year.

■■ Across the sector, there is an emphasis on the importance of cost controls and improving domestic sales, though for different underlying reasons. Generally, 28% of North American firms and 30% of those in South America expect their input costs to rise in the next year. The main difference is that those in the South expect to be able to offset this through higher sales and over 50% of those firms expect to see their profits also increase in the coming year. In general, in the southern region, there is less emphasis on a need to control costs and instead the emphasis is on how to meet booming regional demand.

■■ In terms of employment projections, the continental split between North, Central and South America is expected to continue. 36% of firms in the North and 45% in Central America plan to take on more staff. In South America, the percentage of firms expecting to hire climbs to 70%.

■■ In terms of expectations of capital expenditure, 27% of firms in North America, 48% of those in Central America and 54% in South America anticipate seeing an increase. Overall, very few (8% of the entire survey and 13% of those in North America) expect to see this decrease, perhaps reflecting that capital budgets have been cut where needed and that the current view is the minimum already to maintain existing assets.

■■ A strong willingness to meet various environmental and emissions standards on the part of respondents. Overall though, and perhaps reflecting overall economic performance, firms in South America were more likely to be willing to see reduced profits in order to meet higher standards than those in North America (easier to commit profits when they are more abundant).

Firms based in North America were more likely to indicate that environmental issues were the major issue facing their company in the coming year, which reflected the underlying legislative environment.

■■ Finally, this survey asked cement manufacturers for their opinions on the equipment suppliers who supply the industry. On the whole, this continues to be a supportive and symbiotic relationship with some firms active throughout the entire region and others involved with only particular sub-regions or countries. continued on page 8 6

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FIVES FCB, A PARTNER OF CHOICE FOR THE BRAZILIAN

MARKET

Fives FCB has been serving the cement manufacturing industry for over 70 years.

Thanks to its double expertise as Process Mechanical Equipment Supplier and Turnkey General Contractor, Fives FCB provides sustainable and reliable solutions combining technology, safety and cost-optimization in the production of a high quality product in environmentally friendly conditions.

Renowned expertise in project execution, from engineering and supply up to complete turnkey and revamping projects Fives FCB is recognized by both major world cement manufacturers and regional producers as a general contractor and equipment supplier which is able to adapt to and manage a wide range of project types, from engineering & supply projects (excluding construction activities) up to complete turnkey plants anywhere in the world. Fives FCB’s comprehensive organization includes an R&D team, a testing and analysis center, mechanical, electrical and civil engineering departments, project execution and construction & commissioning teams enabling it to offer tailor-made solutions to all its customers, while respecting contractual delivery times, performance specifications and safety requirements.

Recently, Fives FCB has implemented complete cement plants equipped with its latest technologies in Vietnam (Thai Nguyen), Qatar (Umm Bab), Egypt (Beni Suef) and Mexico (Hermosillo) and started work on a major revamping in Saudi Arabia (Saudi White Cement Co.).

A wide range of innovative and sustainable process equipment for the cement and minerals industries Fives FCB offers a range of innovative and sustainable equipment for grinding and pyroprocessing such as: • Horomill®, the sustainable grinding mill allowing energy savings ranging from 35 to 70% compared to traditional ball mills, 15 to 20% compared to vertical mills. It is especially adapted to cements with additives • TSV™ Classifier, the high efficiency dynamic classifier • Zero NOx Precalciner, the high environmental performance precalciner which cuts the stack NOx emissions by half while maintaining high flexibility in terms of fuel type and operation

Fives FCB has reinforced its presence in Brazil Since May 2010, Fives FCB has been developing a dedicated structure in Brazil located in São Paulo within the local Fives group office. Its main objective is to be closer to Brazilian customers and thus better serve their needs.

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Driving progress

Fives FCB – Al. Mamoré, 911 - cj 802 – 06454-040 Alphaville, Barueri – São Paulo – BRAZIL Your contact in Brazil: Yan Huerre – Tel: +55 (11) 4195 3098 – Cell: +55 (11) 8199 1865 – E-mail: yan.huerre@fivesgroup.com

INTRODUCTION Demographics

functional area

he respondents reflect the full range of the types of firms that make up the wider cement industry from cement manufacturers, equipment firms to industry traders and analysts.

Within this spread of firms, the respondents also represent the full range of roles within the industry with 33% involved in sales and marketing, 33% in production and the balance in roles such as research, planning and finance.

Other Consulting and Research Training & Logistics Planning, finance & other administrative Production, operations & Engineering Sales & Marketing

level

The bulk of the respondents were managers or senior managers, but also included a representative group of the professional staff within the industry.

Professional Staff Management (eg Regional manager, Director) Senior management (eg CEO, Head, GM, EVP or SVP)

Almost 50% of the respondents worked in North America, 25% in Brazil and the remainder across the rest of South America and the Caribbean.

location in the americas Brazil South America Central America Caribbean North America

type of company 120

In North America Total

0

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Cement Trader

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Other

SPECIAL FOCUS:

BRAZIL

razil is emerging as a continental powerhouse driving economic development across the globe. The domestic cement market is dominated by four major firms - Votorantim Cimentos, Joao Santos, Cimpor and Holcim – which collectively produce around two-thirds of annual cement production. As with the industry across the globe, there is a steady shift to adopt alternative fuel sources to reduce dependency on coal and reduce carbon and other emissions. Twenty-two percent of the firms in this survey were based in Brazil indicating the importance of this sector in the Americas.

As is clear from this survey, firms in Brazil were optimistic about the current and future state of the industry, buoyed by economic growth in both Brazil and the overall region. For example, almost 40% of North American firms expressed concerns about profitability in the short term. In contrast, this was identified only as a major issue for 25% of those firms located in Brazil.

In terms of recent performance, 85% of firms in Brazil indicated that this was either ‘excellent’ (42%) or ‘good’ (43%) and 33% indicated that this level of performance had been above their original expectations.

In terms of expectations, 18% anticipated the next 12 months to be ‘much better,’ a further 48% that it would be the same and only 2% believed it would

be ‘somewhat worse.’ Thirty-two percent indicated they expected current trends to continue. There was less clarity about how this would affect profitability as 50% expected this to increase and 47% stated it would stay much the same. A number of firms expect to see growth in sales that will not lead to short-term increases in profits.

This may reflect the expectation that employment levels will increase (expected by 75%) although there are concerns about the availability even now of suitably skilled labor. Firms in Brazil are especially focused on ‘operational improvements’ (34%) and boosting domestic sales (22%) with a firm expectation that capital expenditure will increase (65%).

The combination paints a story of the cement companies scrambling to meet demand, but improving what is there and building new when needed.

The sector, however, provides contradictory answers in terms of the impact of climate change and tougher emissions targets. Some 90% would be willing to sacrifice profitability to meet improved emissions targets and 25% indicated that it was a ‘top-priority’ for the company to meet these standards (a further 53% indicate this was ‘important’). However, only 10% indicated that environmental issues were their largest concern in the coming year and 15% that this was the largest issue facing the sector.

PROJECT PROFILE Swing Mill Solution

Cementos San Marcos S.A. Plant/Location: Cobo Lloreda Plant/Cali, Colombia Year: 2009 Industry: Cement Materials: Clinker/Limestone Equipment: MPS 2500 BC Swing Mill Mtph: 63mtph Raw Material/37mtph Clinker Kw: 900

Scope of Services Engineering design and installation of the MPS 2500 BC Vertical Roller Mill with SLS 2250 BC Classifier.

Challenge

Cementos San Marcos S.A. Cobo Lloreda Plant, Colombia

As a newly established company in the cement industry, Cementos San Marcos wanted to keep the initial investment costs at a minimum while allowing the plant to later expand capacity, to meet market demands.

Solution The unique advantage of the MPS Swing Mill is that it can alternately grind both raw material and clinker using the same vertical roller mill. This feature allows Cementos San Marcos to increase plant efficiency while reducing their overall mill investment costs by providing them with the ability to grind different types of raw materials and clinker, interchangeably, depending on their changing needs.

Results

Gebr. Pfeiffer MPS Vertical Roller Mill for Clinker

The plant saved money on their initial investment by utilizing the MPS Swing Mill solution. They can add a second mill when the market demands will support that investment. The plant will also save on transportation costs, giving them a competitive advantage, due to the close proximity of the new plant and the existing limestone and derivatives quarry. The project will generate approximately 210 direct jobs with an estimated production capacity of 200 thousand tons per year.

Gebr. Pfeiffer, Inc. | 18503 Pines Blvd. Suite 306 | Pembroke Pines, FL | 33029 USA | Tel. (954) 668 2008 | www.gebrpfeifferinc.com

SURVEY Recent Performance espondents were asked for their opinions about industry performance in the last six months. In total, some 40% indicated it had performed ‘excellently’ or ‘well.’ However, as predicted, this opinion varies substantially depending on region. Only 9% of North American respondents agreed that performance had been ‘good’ or ‘better’ and 80% indicated that performance was ‘ok’ or ‘poor.’ In contrast, over 85% of Brazilian and 65% from the rest of South America indicated that recent performance was either ‘excellent’ or ‘good.’

How has the cement Industry performed in the past 6 months?

100%

Terrible Poorly Ok Well

FINDINGS

40% of respondents indicated the industry had performed ‘excellently’ or ‘well’ in the past six months

Excellent

0 North America

Caribbean

Central America

South America

Brazil

When broken down by the role of the respondents, staff in a sales and marketing role (regardless of geographical location) were more likely to answer that performance was at least as expected if not better.

How has the cement Industry performed in the past 6 months?

100%

Terrible Poorly Ok Well Excellent

0 Sales & Marketing

Production Planning, Finance Operations & Other Administrative & Engineering

Traning & Logistics

Consulting & Research

Other

Logistics and Distribution In terms of seniority, the main difference among the respondents was that staff in management roles were more likely to describe the previous six months as ‘poor’ or ‘terrible’ than those in professional roles. This may reflect different perspectives on the performance of the firm with those in professional roles reflecting on performance in their own particular department or sector.

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SURVEY FINDINGS

South America and Brazil saw industry performance exceed expectations How has the cement Industry performed in the past 6 months?

100%

Terrible Poorly Ok Well Excellent

0 Senior management (eg CEO, Head, GM, EVP or SVP)

Management (eg Regional manager, Director)

Professional Staff

Most of the respondents indicated that the outcome met or was below their original expectations.

Looking back at the past 6 months, how did it meet your expectations?

100%

Nowhere near my expectations Below my expectations Met my expectations Exceeded Far Exceeded

0 North America

Caribbean

Central America

South America

Brazil

In particular, North American respondents were most likely to indicate that performance had been lower than expected. Those from the Caribbean and Central America indicated that the outcome had been much as expected and those from South America and Brazil suggested performance had exceeded expectations.

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SURVEY FINDINGS

Cement manufacturers are more pessimistic than equipment vendors about the next 12 months

Expectations for the Future When asked about their expectations for the next 12 months, there was a consensus that performance would be about the same or somewhat better. This was a common theme throughout the region, particularly for Brazil and the rest of South America. However, there was also a split between the various sectors of the industry. 90% of the firms anticipating overall performance to be worse were cement manufacturers (who made up 50% of the total survey) while 54% of equipment manufacturers were expecting performance to be either ‘much’ or ‘somewhat’ better in the coming year.

How will the next 12 months perform compared to the last 6 months?

100%

A lot worse Somewhat worse About the same Somewhat better Much better

0 North America

Caribbean

Central America

South America

Brazil

It is perhaps no surprise that respondents were also split along regional lines between those who believed profitability would increase and those who believed it would remain much the same.

Across the whole sample, 50% expected no change in profits over the coming year. Only 30% of the firms in North America predicted an increase compared to 50% in South America. Equally, perhaps reflecting their greater optimism about future performance, equipment manufacturers were slightly (50%) more likely than cement manufacturers (41%) to expect profit growth in the coming year.

How will profitability improve?

100%

Worsen Stay the same Improve

0 North America

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SURVEY FINDINGS Only around 25% of all firms anticipated input prices to increase in the coming year. This rate was relatively stable across the geographical regions. The main exception was Brazil where only 12 - 13% of the sample expected input prices to increase, and over 60% expected input prices to decrease.

How will yout input costs change?

100%

Worsen Stay the same

30% of North American firms expect profits to rise vs. 50% in South America

Improve

0 North America

Caribbean

Central America

South America

Brazil

These trends about the wider industry were reflected in respondents’ views about their own careers.

Around 45% of all respondents (nearly 60% in North America) indicated their jobs would probably be the same, and nearly 40% (30% in North America) indicated they were fairly confident their career would see a boost in the next 12 months.

Are you confident your career will see a boost in the next 12 months?

100%

At risk Probably the same Fairly confident Highly confident

0 North America

Caribbean

Central America

South America

Brazil

The feeling of either cautious optimism or an expectation prospects were relatively neutral was reflected in respondents’ views as to whether their firms were likely to hire more staff in the next 12 months.

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SURVEY FINDINGS

Will your company hire more employees?

Hiring to remain strong in Brazil

100%

Lay off workers Remain the same A bit more A lot more

0 North America

Caribbean

Central America

South America

Brazil

Overall, almost 80% anticipated hiring would ‘remain the same’ or be ‘a bit more.’ The main exception to this was seen in Brazil where an overwhelming majority (65%) expected companies to hire ‘a bit more’ and 13% projected ‘a lot more.’

PERFORMERS START EARLY AND ALWAYS REMAIN ONE GRAIN AHEAD!

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SURVEY FINDINGS

Looking ahead and perhaps reflecting concerns at the need to sustain profits, almost 32% indicated that controlling costs was the most important issue for their company in the next 12 months.

Beyond this 23% believed the priority lay with improving domestic sales, and nearly 15% identified either operational improvements or environmental issues. However, the focus on domestic sales may mask very different issues in North and South America.

In the North, given the state of the market, sales have become essential to company survival.

Furthermore, recent EPA rulings are putting a focus on environmental issues, and cement manufacturers, not surprisingly, are anticipating a significant impact on their operations. In the South, and linked to other concerns about operational processes, the challenge appears to be in meeting the domestic demand.

Controlling costs is top priority; improving domestic sales second

What wil be your company's most important theme for the next 12 months?

100%

Other Operational improvement Environmental issues Safety and occupation Finding new export opportunities Improving domestic sales

0

North America

Caribbean

Central America

South America

Controlling costs

Brazil

Again, Brazilian respondents differed (especially in comparison to those in North America) in being less likely to see a focus on cost control. This is illustrated in Table 12 above, where they expected input prices to fall and were more likely to identify ‘operational improvements’ as the key theme. Across South America as a whole (including Brazil), the main themes were to improve domestic sales (30%) and operational improvements (27%).

There were also sectoral differences in terms of the key issues facing firms. Forty-two percent of cement firms compared to 25% of equipment vendors saw cost control as the key issue. However, in terms of the relative importance of improving domestic sales, 25% of cement manufacturers, as opposed to 33% of equipment vendors, saw this as the critical issue.

Respondents were also asked what they saw as the wider industry issues in the next few years. In North America, there was a particular focus on environmental and regulatory issues driven by the new EPA rules, as well as underlying profitability and excess capacity. Firms in South America stressed plant efficiency, and especially in Brazil, a shortage of skilled labor due to problems with meeting existing high demand.

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SURVEY FINDINGS

Brazil and South America expects increases in capital budgets

What is te biggest challenge facing the cement sector in your country in the next few years?

Other

100%

Safety & health Energy prices Shortage of skilled labor Regulatory Environment/ emissions Plant efficiency Excess capacity

0 North America

Caribbean

Central America

South America

Brazil

Profitability

In terms of capital budgets, there is a clear distinction between North and South America. Only 26% of the former compared to 50% of the latter expected to see an increase in their company's capital budget in the coming year. Brazilian firms were particularly optimistic in this respect with 67% forecasting an increase.

How will your company's capital budget change?

100%

Decrease Stay the same Increase

0 North America

Caribbean

Central America

South America

Brazil

When asked directly, the impact of climate change and related environmental concerns is widely acknowledged across the industry. Overall 64% indicated the industry should sacrifice profits in the search for lower emissions. However, while this is by far the dominant view in South America (including Brazil) where over 80% agree, the opinion in North America was evenly split with 48% agreeing and 52% disagreeing.

In contrast, North American companies were far more likely to have identified environmental issues (16% as opposed to 8% of the rest of the sample) as the major concern of their firm in the coming twelve months. It may be that this difference reflects concerns that operating costs may increase at a time when profit margins are already under pressure, or that North American firms are already taking steps to adapt to stricter regulations.

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SURVEY FINDINGS Do you think the cement industry should sacrifice profitability in the next few years to improve emissions and reduce CO2?

North and South America diverges in prioritizing sacrificing profits for lower emissions

100%

No Yes

0

North America

Caribbean

Central America

South America

Brazil

The latter interpretation may be correct given the importance ascribed to adapting production techniques to meet changing environmental regulations. Overall 50% of all firms indicated it was ‘important’ that they meet the latest emissions standards.

How important is it for your company to meet the latest emissions standards (eg CO2, mercury etc?)

100%

Top priority Important Neutral Not too important Not at all

0 North America

Caribbean

Central America

South America

Brazil

Relations with Equipment Suppliers The cement-manufacturing firms in the sample were asked to give their opinions of the various equipment manufacturers serving the industry. FLSmidth and Polysius were particularly highly rated with two-thirds of respondents rating them as either ‘best in class’ or ‘good to work with.’ This increased to 75% for respondents located in South America.

Some firms maintain a regional presence with companies such as Siemens and ABB being highly rated by 65% of the respondents in North America. Others such as Claudius Peters were valued by respondents in South America where 72% rated the company as either ‘best in class’ or ‘good to work with.’ 1 The is an extract of the responses. Respondents were asked to provide their views on the following companies: FLSmidth, KHD, Polysius, Sinoma, Fives FCB, Siemens, ABB, Loesche, Gebr Pfeiffer, Claudius Peters, IKN, Aumund, and Atec Greco.

1

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SUMMARY verall, the 2011 CemWeek Brazil and Americas Cement Sector Sentiment Survey confirms the view that the cement industry across the Americas has split into three broad regions. Firms located in North America have seen profits and sales dip in the last six months and most see little indication of a rebound in the next year. Those in Central America and the Caribbean reported profits and sales have been relatively static and were only slightly optimistic about prospects for the coming year. In contrast, those in South America have seen sales increasing over the last six months and either were expecting this to continue or accelerate in the coming year.

Please contact the CW Group to arrange for a discussion of this survey and its findings in more detail: inquiries@cwgrp.com.

St Marys Cement Plant Charlevoix, Canada cwgrp.com

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We know the cement industry well. Let us guide you. For more information please contact us at inquiries@cwgrp.com or on +1-702-430-17 48 848 N. Rainbow Blvd., Box #1658, Las Vegas NV, 89107, USA

CW Group Research provides highquality and data-centric custom and published market research. Our research and report services help companies conduct and leverage research to provide clear direction for business decision-making. ӹӹ Market and country research ӹӹ Forecast services ӹӹ Due diligence research ӹӹ Competitive benchmarking ӹӹ Opportunity assessments ӹӹ Customized surveys ӹӹ Business intelligence

CemWeek CemWeek CemWeek Contact us at inquiries@cwgrp.com to discuss further how we can support your market intelligence needs. www.cwgrp.com/research T: +1-702-430-1748 F: +1-928-832-4762

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