It seems this year will be a hard one for cement producers... 

Among the subdivisions of construction industry, one of the vital parts of economy, cement industry is the single one that has no relation to informal economy. And fluctuations in the sector are one of the important indicators of the course of overall economy. Receiving its share in the fluctuations of real-estate, although the sector entered a slowdown period in developed countries it is still in a growth trend. While 26 countries that are members of The European Cement Industry Association (CEMBUREAU) saw a 2% increase in production, this figure stands for approximately 12% of world production. Spain, Germany and Turkey have the fastest growing cement industries with over 7% increase in production. Cement consumption of other member countries showed an 8% increase as compared to the last year. 

The leading countries of the cement sector are Asian countries. These developing countries not only provide a large part of world production but also continue their fast rise. For example, while China increased its production by 19% as compared to that of the last year, this rate was 11% in India. Asia’s share in world total is 70%. Mexico’s largest cement producer Cemex is another cement giant originating again from developing countries. Being unrivalled at the local level, the company is currently the third largest cement producer of the world. When we look at Turkey, however, it is seen that while the amount of production has increased in time, cement has been imported for years since demand could not be sufficiently met. The fluctuation in the world economy that started in 1997 in the Far East and continued with the Russian crisis had also effects on our country in 1998. Not having been affected much by that fluctuation at the beginning, the construction sector was crippled first by the 7.4 magnitude earthquake in August 17th, 1999 and then the 7.2 magnitude one in November 12th of the same year. Following upon that blow, the uncontrolled entry of cement from Iran that brought the cement plants in the eastern parts to a halt has gravely affected cement industry and also lengthened the recovery period of the sector. 

Privatization Process in the Sector

The sector’s passage to buoyancy was achieved through its being able to renew itself and entry into global markets after securing competitive advantage. After the privatization of the public company ÇİTOSAN, which held half of the market with respect to both capacity and production with its 21 cement plants, the state totally left cement industry. The sector has attained a significant position in the world particularly with cost-cutting modernization investments made after the privatization making the competitive advantage permanent. So much so that having become the largest cement exporter of Europe, today Turkey ranks third in production and fourth in sales among European countries. As can be seen from this ranking; Turkish cement industry has no specific disadvantage when compared to EU’s cement industry in terms of capacity, production technology and productivity. Attaining a level totally different from the initial stage particularly in terms of production capacity, the sector produced by the end of November 2007 a total of 46 million 548 thousand 203 tonnes of cement in plants completely belonging to private sector. While this figure meant an increase of 2.9 million tonnes as compared with that in the similar period of the previous year, it is expected that total sales exceeded 50 million tonnes in 2007. Just like in previous years the largest production took place in Marmara Region with 13 million 979 thousand 494 tonnes, while this region was followed by Central Anatolia Region with 7 million 937 thousand 400 tonnes and by Mediterranean Region with 6 million 499 thousand 661 tonnes.  

Foreign Interest in Turkish Cement Market

As the current situation is looked at; there are 60 cement plants operating in Turkey with 41 of them integrated facilities and 19 of them grinding-bagging plants. Among these plants and facilities 16 are owned by foreign capital. At the global level, large cement companies expand into the world with the help of funds and experience they acquire in their home countries. Turkish cement market, which has not reached saturation yet regarding consumption per capita thus having the characteristics of a growing market, attracts the attention especially of European investors. Among the foreign investors that came to Turkey are; France’s Lafarge, Italia’s Set Italcementi and Cementir, France’s Vicat, Portugal’s Cimpor, Egypt’s Orascom and Germany’s Heidelberg. SET, having 4 companies within its structure, and Lafarge with 2 companies are among the active players in the market. Heidelberg has a capital at Akçansa of Sabancı Group. Çimentaş and Konya Çimento are also companies with foreign capital. Set Group Holding carries out in Turkey the activities of Italcementi which is the fifth largest cement producer in the world. Becoming the first ever foreign cement group to enter Turkish market in 1989 with 5 cement plants it bought at privatizations, Italcementi’s total amount of investments in Turkey in the last 10 years is 400 million dollars.

The Swiss-based Holcim, Mexican-based Cemex, Greek-based Titan and Irish-based CRH were the other foreign cement companies that bid for Turkish cement companies. The entry of these large global companies into the market has laid the ground in the sector for such improvements as; technological development, increase in product range and environmental protection. Having led Turkish cement producers in such areas as strategy, customer services and quality improvement foreign investors have helped those local managers they saw as incompetent when assuming responsibility, to leave cultural and traditional habits behind and attain decision making positions. With that process, quality awareness has reached a higher level at every stage in the Turkish cement sector in which domestic and foreign capital were blended. 

Active Struggle with Formidable Rivals

Foreign companies’ being active in the Turkish cement sector may be attributed to country’s characteristic of a growing market, geographical position and existing high potential for production. Moreover, foreign investors’ interest does not seem to be limited to its current level; because there are quite a lot of rising Turkish cement companies in the market which have not set up partnerships yet. These companies completely deserve to be coveted by foreign companies with their financial structures, locations or product range. By opening up to external markets in global competition Turkish companies also resort to growth. One of the best examples for these companies is Çimsa from Sabancı Group. The company has grabbed 20% of the Spanish market, the world’s largest white cement market, despite formidable rivals like Cemex. The initial reaction of Cemex to that defeat was to establish a filling facility in Mersin where Çimsa has its plant and to carry the war over white cement into Turkey. 

In parallel with large scale mass housing constructions by public companies, housing loans extended by banks at favorable rates and the decrease in interest rates applied on these credits and the resulting buoyancy in construction sector create a ground for capacity enlargements by positively affecting also the cement industry. But investments that are made without carrying out feasibility works seem to make consolidation in the sector inevitable in the coming periods. Because developments show that acquisitions will be the preferred investment method instead of building new plants. It is expected that the investment appetite of cement producers, that have no difficulty with meeting internal demand and even export considerable amounts, will create a huge excess supply in the sector. Companies deciding to increase capacity one after another face the danger of getting negatively affected by the slump in real-estate sector that has not been fully recognized and confessed yet. 2008, in which the demand is to possibly recede, seems to be a difficult one for cement producers. When the slump also in the Iraqi market is taken into consideration, it is not hard to predict a fierce competition.

 Falling a Prey to Unfair Competition

Price instability in the internal market forces many producers to export. Cement prices, which have remained below the inflation between 2003 and 2007 contrary to what many people suppose, are at the same levels despite energy costs that have risen by 35% in the meantime. The only possible way of maintaining and improving profitability for the sector which is equally pressed by rising production costs and low prices at the domestic market at the same time seems to be focusing on external markets. Russia is an opportunity that should not be missed at that point. Going to import 4.5 million tonnes of cement this year and 7 million tonnes in 2009, Russia has a considerable potential in the short run. If Turkey can solve problems related with exports and direct the excess supply to Russia, it will export approximately 3 million tonnes of cement. Sector’s problems are not limited to excess supply. Although world-grade cement that has the quality to compete with the global companies is produced, complications arising from the country’s general economic conditions like infrastructure (ports, railway), electric and fuel costs have a great effect on the sector. Completely self-dependent with respect to raw materials, the sector is dependent on external resources in terms of mostly energy and operating supplies.

Having reached a high production capacity by processing its own resources that are again at a more advanced level when compared to many other industries, the sector can not effectively use this advantage due to the insufficiency of export ports. Although it is located to European markets closer than its rivals, particularly the remoteness of South East Anatolia from ports and consequent high freight costs create a great problem for the industry in general. Although their products are compatible with the U.S. and European standards and have the CE brand thus giving them a competitive advantage at global markets, Turkish producers have to incur higher input costs for this high-quality production but they can not convey these costs to prices. As a result, it can be said that they fall prey to unfair competition in a sense.