Is cement a building block or roadblock to sustainability?

Is cement a building block or roadblock to sustainability?

Cement Industry
Cement companies who do not improve their climate changes dramatically possibly face strong financial impacts.

It is six months since the Paris Agreement was adopted by 195 countries and set a new compass for business on climate.

The sectors at the forefront of investors' minds in the wake of the deal have tended to be obvious climate culprits such as oil & gas, extractives or transport, but another industry that will be dramatically affected by the agreement is cement.

The cement industry is responsible for more global emissions than Japan or Canada, and it faces a fast approaching structural change in wake of Paris. Yet it is rarely put under as much scrutiny as other high-emitting industries.

A pivotal moment

New analysis, released today by CDP, seeks to change that. It shows that only three of the 12 largest cement companies have plans for reducing their emissions in line with global carbon budgets i.e. the science-based targets that will allow us to avoid a temperature rise of more than two degrees.

Even a modest carbon price applied to all company emissions could have significant implications for underlying earnings - up to 114 per cent of Earnings Before Interest and Tax (EBIT) could be wiped out for the worst performers using a US$10 carbon price.

Better performers face a lower but nonetheless materially significant hit of 10 per cent of their earnings.

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.

Significant innovation and aggressive action will be required, going well beyond the industry's efficiency improvements to date, if these companies are to survive. This could also have an impact on sectors such as construction and housing.

What can be done?

There are a number of actions that cement companies can take including allocating capital to climate R&D, piloting Carbon Capture and Storage (CCS) and developing products with low embedded carbon.

The cement report shows that leading companies are already reducing their energy expenditure through thermal efficiency measures and burning more waste materials they are often paid to dispose of in their kilns. We found that four companies currently source 20 per cent or more of their thermal energy requirements from alternative fuels such as industrial waste, tires and biomass, with CEMEX utilizing the highest proportion (28 per cent).

For some companies, there is a need to dramatically change climate practices. The worst performers in our analysis tend to be those most resistant to climate legislation. For example, a strengthening of the EU emissions trading system (EU ETS), a cornerstone of the European Union's policy to combat climate change, is currently being negotiated which affects at least eight of the cement companies in the report.

Even if free allowances remain and continue to benefit companies in the short-term, a stronger price signal is likely in the mid-term which will put inefficient assets under strain and drive deeper emissions reductions in the industry. Those who remain behind the curve will face significant financial impacts.

Liquidity issues

Emissions are not the only climate issue facing the industry. More than 50 per cent of cement facilities are currently located in areas of water stress and the report finds water scarcity to be a potential issue for the sector.

In particular, it poses a significant risk to two Indian cement companies Ultratech and Shree Cement, as well as other companies operating in the country where water shortages exacerbated by climate change may restrict growth. Water may also be an Achilles heel for two of the industry's future option to reduce emissions - CCS and biomass fuel - both of which have large water requirements.

The cement industry can be either a building block or a roadblock to the Paris Agreement. If it is to be the former then its leading companies need to set challenging climate targets and back them up with sustained action.