Cement is the most common building material in Ukraine. In addition to direct use in construction, it is the main component of concrete. The cement takes about 14% in the mass of a concrete mixture, but its cost is much higher than the cost of other fillers, so a share of cement in the cost of raw materials for concrete can reach 50% and more.
Mineral reserves for centuries, but we still produce less than consume
A piece of good news is that the resources are more than enough for the growth of the industry. According to today’s production rates, our country is provided with cement raw materials for 320 years. Even if the Ukrainian cement industry reaches the record production in the amount of almost 20 million tons in 2017, our construction industry will receive domestic cement for at least the next 100 years.
The state balance of mineral reserves contained records of 47 deposits and 6 metering stations of cement raw materials, which in total have reserves of 3.2 to 4.0 billion tons. The production is already underway on 32 deposits and 5 metering stations, and three other deposits are being explored.
According to the Ukrcement association, which brings together more than 95% of cement producers in Ukraine, our country produced 9.1 million tons of cement in 2016 and consumed 9.45 million tons. The difference is offset by import. At the same time, according to the UN Economic Commission for Europe, Ukraine still ranks the second worst in Europe with the index of 206 kg in terms of the annual cement production per capita. For comparison: in Poland, it is 489 kg, in Germany – 342 kg.
Forced deficit in the cement market and surplus in the concrete market
What limits the growth of cement and concrete production volumes? A specific feature of these markets is the presence of significant barriers to enter them. The main reason is the cost of production equipment. That is why these markets are very concentrated – a limited number of mostly large players are operating there.
A factor of production expenses is also a common feature of these markets. Both cement and concrete markets are energy-consuming. The issue of old production facilities and energy efficiency in production is a limiting factor for both markets.
Speaking figures: in 2016, there were only 9 out of 27 rotary furnaces for producing a cement clinker, which is the first step in the cement production, operating in Ukraine. The market forcibly creates a shortage of products. With a constant increase in demand for cement, the level of use of even the operating facilities for the cement clinker production amounted to 88.5% in 2016.
Today, the Ukrainian cement industry mainly uses an outdated “wet” method of clinker production while being very dependent on energy prices. On the other hand, market prices for construction products significantly affect the level of prices for building materials, including cement. The industry needs the energy efficient modernization to grow.
There is another situation in the concrete market. In Ukraine – it is a surplus of concrete production. But this market is divided into segments in terms of location. Each segment represents a territory with a point in the form of a concrete mixing station (CMS) inside and a radius of up to 100 km. It is impossible to carry the concrete at large distances – it simply hardens. Consequently, the competitiveness of the market for concrete mixtures operates solely in local geographic segments, and not in the whole country. Concrete producers are very dependent on the building activity in those local regions where they are located.
Both markets are logically linked to the production chain having similar regulatory problems. At the same time, the possible solutions for the problems can be different. And not all problems can be solved by regulatory instruments.
Concrete: state programs of road construction and social housing
According to experts, it is important to promote the construction industry in order to ensure the concrete market development. A state strategy, which provides for introducing new technologies in the construction of infrastructure facilities (first of all, concrete roads required in the southern regions of Ukraine) and by creating programs for industrial construction of social housing can be a real solution. Both problems – roads and affordable housing – are already determined state priorities. It is only necessary to establish cooperation between market representatives and the government.
It is logical that with the growing concrete market, the industry will require new cement volumes. And a shortage of raw materials will be an obstacle.
Cement: stimulating new technologies and developing mini-factories
In order to increase cement production, it is necessary to provide the state support for “cement” producers, but – the market support, which will be based on mutually beneficial cooperation. And this should be the result of a dialogue and a compromise between business, the state and consumers.
The declared state priority towards increasing the energy efficiency allows us to talk about the possibility of stimulating programs to modernize cement enterprises operating in Ukraine. A goal of such programs should be the transition from energy-consuming technological processes and technologies to new, modern and efficient ones. There can be different ways of cooperation between business and the government – from favorable taxes for reconstruction to preferential projects and grants. At the same time, producers receiving the state support should guarantee the jobs growth and preventing unjustified increasing in cement prices.
The development of local cement mini-factories, the stimulating mechanisms of which should be at both central and local levels, is of current interest. This is completely in line with the SME support strategy in Ukraine. The state should establish new rules for access to raw materials that will provide small enterprises with the access to deposits and prepare programs to support small enterprises in this segment (grant programs, privileged loan programs, leasing schemes, etc.). And local authorities, which should be interested in developing entrepreneurship and creating jobs in the regions, can offer easier access to orders and tenders for such mini-factories.
Public-private partnership can overcome counterfeit
At the same time, with the development of competition, the issue, which both the Ukrainian cement industry and the world’s one is concerned about, may arise again. I am talking about a systemic issue of falsification and counterfeit production. This is the chronic issue. Both the construction, food, consumer goods industries and many others require to resolve this issue. This is a huge challenge for our government bodies requiring systematic inter-industry cooperation.
In my opinion, the first steps should be coordinated actions regarding:
Of course, introducing a counterfeit control system will require additional costs. Experts estimated that the state spent 21 million hryvnas a year to keep just the register. However, under the conditions when almost 50% of cement in the retail market is counterfeit products, the business loses huge amounts of money. This is an excellent ground for public-private partnership to overcome these problems.
The industry requires new standards for development
All mentioned current pressing issues – starting from re-equipment of production facilities to fight against the counterfeit – can not be solved effectively without solving the problem of technical regulation and standardization.
The obligations undertaken by Ukraine within the framework of the Association with the EU in terms of harmonization of technical regulation should be fulfilled. Both producers, state standardization agencies, experts, legislative and executive branches of the government should work together in solving this issue. First of all, it is necessary to implement the provisions of the EU Regulation 305/2011 On establishing harmonized conditions for the marketing of construction products to the fullest. At the same time, it is necessary to intensify the development of national standards harmonized with the European regulatory framework in order to ensure the implementation of European standards for the design of building structures (Eurocodes).
So, as a result, I think that it is important for cement and concrete markets to:
I can not claim that I provide you with a guaranteed effective formula in this short article. I share my thoughts after a systematic analysis of the regulatory environment of two markets. My goal is to initiate a dialogue between all interested groups and take the first steps towards the effective regulation of this sector and the development of modern construction in Ukraine. I appeal to everyone – let’s work and make our state stronger!