Sunday 2 February 2020

LafargeHolcim ‘will struggle – faced with seismic costs to decarbonise’


Could LafargeHolcim sell its cement 'assets' one day, and move into say timber, even telecoms? It’s not as far fetched as you think. Pressures are mounting on the cement sector and LafargeHolcim – the world's biggest cement producer and parent of Aggregate Industries – reports the Financial Times:
Redburn, the equity research house, has downgraded two major European cement producers, arguing that the industry will face huge costs to decarbonise from the middle of the decade. A "dramatic" escalation in the price of cement is forecast, as costs to produce the construction material will rise by some 61 per cent when the industry invests in technology to capture and store carbon, according to a new report.
Redburn downgraded LafargeHolcim from "neutral" to "sell", pointing out that cement represents almost four-fifths of the company’s income.
"That is a seismic level of extra pricing that the industry is going to have to unlock over time to make returns," said John Messenger, one of the authors of the report.
Large-scale investment will be needed from the middle of this decade in expensive carbon capture technology.... [This] will prevent the European construction material companies from paying out dividends to shareholders and they will struggle to compete with local competitors in developing markets, the report said.
LafargeHolcim claims it is "proactively addressing the challenge of its carbon footprint" blah blah blah. Last year, LafargeHolcim was named second worst company for increasing CO2 emissions.


This is not the first time these issues have been aired. In 2019, the governors of the Bank of England and Banque de France made a joint statement:
Carbon emissions have to decline by 45% from 2010 levels over the next decade in order to reach net zero by 2050. This requires a massive reallocation of capital. If some companies and industries fail to adjust to this new world, they will fail to exist.
A reallocation of capital is nothing new... one Malaysian cement producer sold all of its cement plants, and put the money into telecommunications instead (figuring that it could make more money for its shareholders, which it did).
Fund managers that are obliged to take environmental, social and governance (ESG) risks into their investment strategies may also decide to shift their money away from cement, due to the ‘stranded asset’ argument, as they have started to do in the oil industry. The risk being that the reserves (of oil, or of limestone) that have been laboriously and expensively built-up over years will be stranded in the ground by future environmental legislation - or prohibitive carbon permit prices. If the reserves cannot be economically accessed, then their value must be reassessed. There have been suggestions that on this basis some oil companies are already technically bankrupt. Some have gone bust for a variety of reasons, and the US fracking companies are well-known to be extremely indebted. If bankruptcies could and can happen to the oil industry, then they could happen to the cement industry, in what is known as a ‘gale’ of ‘creative destruction.’
Lower carbon footprint building materials will need to be increasingly used – adding to LafargeHolcim's woes. The Committee on Climate Change says "increasing the quantity of wood used in construction presents a significant opportunity to reduce GHG emissions." A recent study from MIT found:
Comparing the economic and emissions impacts of replacing CO2-intensive building materials (e.g. steel and concrete) with lumber products in the U.S. under an economy-wide cap-and-trade policy consistent with the nation’s Paris Agreement GHG emissions reduction pledge, the study found that the CO2-intensity (tons of CO2 emissions per dollar of output) of lumber production is about 20 percent less than that of fabricated metal products, under 50 percent that of iron and steel, and under 25 percent that of cement.
However, as the CCC point out, regardless of the amount of future timber-based construction, there needs to be "significant decarbonisation efforts in the sectors that produce key construction materials". For LafargeHolcim and Aggregate Industries, climate pressures mean the outlook is bleak.

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