Redburn, the equity research house, has downgraded two major European cement producers, arguing that the industry will face huge costs to decarbonise from the middle of the decade.
A “dramatic” escalation in the price of cement is forecast, as costs to produce the construction material will rise by some 61 per cent when the industry invests in technology to capture and store carbon, according to a new report.
Redburn removed the “buy” rating from HeidelbergCement, the German building material company, and downgraded LafargeHolcim, the Swiss construction material company, from “neutral” to “sell”. Heidelberg derives over 60 per cent of its earnings from cement, while the sector represents almost four-fifths of LafargeHolcim’s income.
“That is a seismic level of extra pricing that the industry is going to have to unlock over time to make returns,” said John Messenger, one of the authors of the report.
Cement is a major contributor to global carbon dioxide emissions. The sector produced 7 per cent of carbon emissions in 2018, a percentage point lower than the emissions from cars.
But it is one of the most difficult sectors to decarbonise. The industry can reduce carbon emissions in the short-term by about 30 per cent by replacing fossil fuels with renewable energy sources, improving energy efficiency and reducing clinker content, an intermediate product ground and blended to manufacture cement, Redburn said.
Large-scale investment will be needed from the middle of this decade in expensive carbon capture technology, which extracts the CO2 emissions produced during construction and buries it, in order to reach carbon neutrality by 2050, it said.
The investment in carbon capture will prevent the European construction material companies from paying out dividends to shareholders and they will struggle to compete with local competitors in developing markets, the report said.
The European Union’s Emissions Trading Scheme — a 14-year-old project to cut greenhouse gas emissions — is predicted by Redburn to initially benefit European cement manufacturers by encouraging production discipline and industry consolidation in the region.
As ETS becomes stricter and a border tax on carbon is introduced for products entering the EU, carbon capture technology will become necessary for cement manufacturers to reduce emissions, the report said.
Mr Messenger said that no construction material company has tried to quantify the potential costs of funding carbon capture.
“The companies should be helping investors understand the spending that is in front of the industry,” he said.
The sector has largely avoided shareholder pressure, but it has been growing. A group of investors, which includes Standard Life Aberdeen and BNP Paribas Asset Management, sent letters in July last year to four construction groups urging them to ramp up their preparations for a low-carbon economy, including cutting carbon emissions to net zero by 2050.
Shares in Heidelberg and LafargeHolcim fell by 2.83 per cent and 3.66 per cent respectively on Monday, although stocks in most companies fell due to fears over the economic impact of the coronavirus in China.
Heidelberg and LafargeHolcim did not respond to requests for comment.
