Cement is not an industry usually at the forefront of investors’ minds when it comes to climate issues, however due to its carbon intensity and cement’s everyday necessity, companies face a challenge in becoming compatible with the future transition following COP21 in Paris. The changing landscape of policy and regulation for an industry which accounts for 5% of global emissions will have implications for investors and the value of their holdings. We have explored this further in our latest sector research piece on cement companies.
The industry, which is mature and some would argue at overcapacity globally, is in need of reinventing itself such as allocating capital to climate R&D, piloting CCS at scale and developing products with low embedded carbon.
We see signs that some companies are starting to take these steps, however the current pace of change is not sufficient considering the impending action required. The quarter century post-2025 will be vital for the industry to cement its future as part of a low-carbon economy and some are already leaving others behind; the carbon intensity of the industry needs to be reduced by 40% from levels which some companies are currently not attaining.
Our report shows that there is significant disparity in what companies have done to date and how they are placing themselves for the future.
We look at how aligned companies are with science-based pathways – i.e. what is needed by the industry to decarbonize in line with a 2-degree transition. Whilst a handful of companies currently appear to be taking the required measures, the majority are not. We view ambitious, yet attainable, long-term reduction targets as a crucial tool with which company management can inform investors of their intention to manage their emissions going forward.
Cement is not only very emissions and energy intensive but it is particularly so relative to its price and our analysis shows that even a modest carbon price applied to all company emissions could have significant implications for underlying earnings (up to 114% of EBIT using a US$10 carbon price with no cost pass through).
Cement producers in Europe are currently sheltered from carbon pricing due to generous emission permit allowances, however reform of the EU ETS (emissions trading system) post 2020 may change this. The reverse of what is commonly referred to as “carbon leakage” fears has occurred in Europe in recent years with the ETS encouraging (sometimes inefficient) cement plants to maintain a certain level of output in order to retain their free emissions allowance allocations. The resulting excess production is shipped outside of the EU, whilst the associated emissions remain in Europe, which has its own ambitious reduction targets out to 2030.
We highlight ways companies can decarbonize and protect their bottom line – reducing their energy expenditure through thermal efficiency measures and burning more waste materials that they are often paid to dispose of. Companies who are already taking such action will continue to reap the cost benefits, while it poses an opportunity for others playing catch up.
Read the full report, Visible cracks: Which cement makers are failing to address structural issues?
