Cement’s high emissions lay the foundation for green investment

Joe Mares

Joe Mares

Portfolio Manager

Joe Mares

Joe Mares

Portfolio Manager
Joe Mares has worked in investment banking, equity research, and portfolio management in high carbon-emitting sectors (energy/utilities/materials) for over 27 years. Joe began his career at Morgan Stanley in 1997 in investment banking and equity research in Energy & Shipping. In 2007, Joe moved to the buy side, as lead Equity & Commodities Analyst for Greg Coffey, at GLG and then Moore Capital, from 2009. Prior to joining Trium, Joe was a Portfolio Manager at Société Générale from 2011-2016, responsible for a global long/short equity book focused on Energy, Resources, Shipping, and Utilities. Joe holds a Bachelor’s degree from the School of Public and International Affairs, Princeton University.
Trium Climate Impact
Trium ESG Emissions Improvers
Trium Climate Impact
Trium ESG Emissions Improvers

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Trium ESG Emissions Improvers

Cement is one of the highest GHG emitting industrial sectors. As European environmental regulation tightens, sector dynamics and innovation in green technologies are unearthing promising investment opportunities. Joe Mares explores how cement’s emissions challenges are laying the groundwork for returns.  

The cement sector is the largest industrial emitter, generating ~8% of global emissions, with cement companies averaging 4 tonnes of CO2 per $1,000 of sales, compared with a global stock market average of 0.3 tonnes per $1,000 of sales. Any credible net zero plan must have an agenda for cement, as replacing it is almost impossible due to its widespread use and low cost. From an investing perspective, we believe cement companies can offer attractive returns, partially driven by environmental regulations restricting supply and creating product differentiation.

High temperatures and process emissions associated with cement manufacturing create multiple challenges for decarbonisation. The European cement industry has decreased cement/clinker1 intensity using alternative fuels and lower-clinker binders (e.g., fly ash, slag), resulting in a 15% reduction in emissions intensity since 1990. But further progress will be more difficult due to the limited supply of alternative materials and the difficulty in producing the highest-grade structural cement (CEM 1) without calcium carbonate, which is the largest source of process emissions.

The investment opportunities in cement are rooted in this environmental challenge. After the 2008 financial crisis, the European cement industry had significant overcapacity, and since then has been consolidating and shutting down inefficient capacity (Exhibit 1). As an energy- and carbon-intensive process, cement manufacturing was doubly impacted by the rise in carbon prices from 2016-2022, and the subsequent rise in energy prices after the Ukraine invasion. In recent years, scarcity of environmental permits and carbon allocations has resulted in very limited new capacity added. Cement is also a local industry, as transporting the product more than 120 miles is uneconomic due to its weight. The absence of new investment, combined with reduced capacity and lack of imported product, has created a series of tight local markets where prices are rising and profitability is increasing (Exhibits 2 & 3).

Exhibit 1: EU 27 cement consumption dropped 35% from 2007 to 2014, but has slowly increased in the last decade

Source: European Cement Association (CEMBUREAU)

Exhibit 2: Prices have risen to all-time highs in the last two years

Source: Trium Capital & Bloomberg

Exhibit 3: Limited new capacity and high prices lead to EU cement margins returning to pre-2007 highs

Source: Trium Capital & Bloomberg. Margins of Heidelberg Materials, Buzzi Unicem, CRH, Holcim, Vicat, Cementir, and Titan Cement.

This increasing profitability, along with customers’ efforts to reduce emissions, gives rise to a new opportunity in cement decarbonisation – “green” cement – which will be priced even more attractively than the undersupplied conventional cement market. The rising profitability of cement has allowed companies to develop new products and fund innovation, a shift from the focus on cost-cutting that dominated the previous decade. We believe that European cement investments in carbon capture, electrification, and calcinated clay can generate economic returns and provide a pathway for cement decarbonisation. These investments also benefit from regulatory support through the declining free carbon allocations to the cement industry in the EU ETS, along with the inclusion of cement in the Carbon Border Adjustment Mechanism (CBAM).

It should be noted that we are not suggesting there is an easy solution to reducing the cement sector’s global emissions. At this stage, Europe is the only region providing the combination of high carbon prices, government support, and environmentally focused customers needed for large-scale investment in cement decarbonisation. We would suggest that the European cement industry is exhibiting the right mix of environmental improvement and attractive economics to provide investment opportunities and outperformance. 

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1Clinker is an intermediate product in the cement manufacturing process. A partially fused material typically made of calcium silicates, clinker is ground down and mixed with gypsum to make ordinary Portland cement. 

 

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