The FINANCIAL — In his interview with The FINANCIAL Michael Hampel, General Director of Heidelberg Cement, said that the Group will invest EUR 1,000 million in its factory by 2015.
“We sell about 1 million tons of cement in Georgia alone. This represents approximately 80 percent of the market here. I think that Georgia will go up from today’s consumption of 1.2 million tons to 1.8 million tons. I am certain that we will double cement consumption here in Georgia within the next ten years,” said Hampel.
On the whole Heidelberg Cement has increased incoming orders by around 16 percent to EUR 2,757 billion; sales are up around 14 percent at EUR 2,629 billion. The sales volumes for Heidelberg Cement in 2011 were above the figures for the previous year, according to the annual report of Heidelberg Cement Group.
Q. Please could you summarize the year 2011 for Heidelberg Cement Georgia?
A. First of all I did not see any big impact of the financial crisis here in Georgia, because most of the projects going on here are infrastructural things that are financed by the international community. I am absolutely sure that these things will continue to go ahead, because stopping the development of bridges, highways and a hydropower station would be very bad for Georgia and I think that for that reason everybody will ensure the continued development of these projects. We have a lot of ideas for the next 5-6 years. Georgia is currently at a stage that other countries like the Czech Republic, Poland and Hungary were at 10-15 years ago. Before cement consumption doubles here in Georgia, it will naturally dip after 15-20 years but the best part of that development story is before that happens. That is why we are here.
Q. You mentioned that Georgia has already overcome the effects of the August War and financial crisis. Today the world is facing a new crisis. What are your plans to avoid its effects?
A. I think that this crisis will not reach us in Georgia. The projects in the country will go on. Of course if the international financing stops that will be a problem. But I do not think it will stop because Georgia is important for investors. It is not a country with 100 million people where financing would be a big problem. I have full hope that the volumes of money that go to Georgia will not stop and that they will continue at the same rate as at present.
Q. What about the prices of cement? How do you see the prices moving from here, or will they remain stable?
A. Cement prices here are on a very low level compared to in Russia and Azerbaijan for instance. We are only now back to more or less the price level that we had in the pre war period. It took us three years to return to this stage. If we look at the increase of price, the cost increases that we faced in the last few years have been enormous. Today we pay 15 percent more for a ton of coal. Fuel prices have gone up, energy prices have dramatically risen and the fact that we have a positive result is only thanks to the volume of our reserves. I would say that the results are thanks to the best outcomes of our plans. Every year we renew some of the technology in the old plants and that helps us maintain a reasonable result. The result was very negative in 2009. In 2010 it was level, and in 2011 we had slight success. But if we compare this to the results of our neighboring countries, all of the Heidelberg Cement countries have had better results than we because the prices there are much higher. We have heavy competition here. If the prices are a little bit higher in Georgia than our Armenian and Turkish competitors, then they will just come over the border and deliver their cement. It looks like we are monopolists here because we are the only producer, but the reality is far from that. If we look at the market, we have to add Armenia and Turkey and we have to be very, very careful not to exaggerate our prices as a result. What we have now is a price increase that just covers the coal price increase that we had at the beginning of the year. We hope that maybe this summer we will have another possibility to have slightly better prices. But we need to be careful as the competition never sleeps.
Q. To maintain your position on the Georgian cement market, how much new capacity do you aim to add each year?
A. At the moment only about 70% of our production capacity is used. So that means that if the market grows we can easily add 300 thousand tons to the current production. We would reach our limit in 4-5 years I would say. Then our expected market growth in Georgia would have to be so big that we would have to do something else, and that next step is already planned. We want to get a new kiln line in Kaspi. If we get a new kiln line there, which means an investment of about EUR 100 million, then we can even produce 500 thousand tons more. This means we will have no limits. We can produce the cement that every Georgian needs and we can export it to Azerbaijan, which is very important for us at the moment. So with the new kiln line we can deliver the same volume to Azerbaijan plus deliver 3-4 hundred thousand tons more in Georgia. Georgia will never have a problem with deliveries, because we are an international company. The next cement plan we have is for Turkey, then Romania, Ukraine, Russia and Kazakhstan. Georgia will always be provided with good quality cement at a reasonable price.
Q. During the time of your existence in Georgia, how much have you invested here? What was the total investment of the company in 2011?
A. Now I would say that we have invested around EUR 200 million in Georgia during our whole time here. Every year we add EUR 5 to 10 million and the next big step is planned for 2015. I mean the Kaspi plant where we want to invest EUR 100 million. We have the newest technology and the entire amount of investment in it will be EUR 350 million.
There are two possibilities for producing cement: there is a wet production process and there is a dry process, which is the modern process and which has much lower production costs. We can say that the difference per ton between wet and dry cement production is USD 20. That is a lot of money and running costs are so much lower for dry process cement because you do not need so much energy. If you get energy costs down to half with that new process you are saving 50% of costs. That’s what we are aiming for.
Q. Why did you not implement this project before then?
A. Because this is a really big investment. EUR 100 million is not just poker money. That is a lot of money. Heidelberg Cement has 100 cement plants worldwide and a lot of different places to invest in. Of course the financial crisis had an impact on Heidelberg Cement as well. We are still getting really good results thankfully. But our board does try to slightly limit the amount of money being invested. We are currently concentrating on the most promising projects that we have. The renovation and improvement of our old plant is very necessary. At the moment we are having a small break in investments but we will continue investing here soon.
2009 really was a year of heavy losses. It was the post war period. Nobody was investing here. Everybody wanted to leave the country rather than wait for the situation to improve. Because of that the volumes in Georgia decreased by 40-50% and the prices fell by 30-40%. It is clear that when you have half of the volume and let’s say a 30% lower price you cannot get your fixed costs in one month. So you have high costs and low turnover which leads to heavy losses. I was not responsible here at that time and people and the newspapers were speculating that Heidelberg Cement would leave the country. This was never discussed, not even for one second. Cement is an investment, a big investment and you have to stay on the market not just for five or ten years. This is an investment for 15, 18, 100 years. We would never have stopped the business simply because of the losses we had in 2009. That was not an option. We can even stay in a country for ten years as long as we have the feeling that the country will develop in the next few years. We know that Georgia will be a prosperous country in the next ten years.
Q. Why do you have such positive expectations for Georgia’s development?
A. Because Georgia is at the beginning of a period of seeing lots of investment, lots of industry. Infrastructure is developing here. By infrastructure we mean for example the highway to Poti Port. If that is finished a lot of companies will come here, invest and use Tbilisi as a hub. The hydropower stations and big building projects are all linked to our product, cement. This is really the right thing that the Government is doing, to use those natural resources of water power to develop the country. We have no oil here, we have no gas here. But we have high mountains with water. So we can produce electricity and sell it.
Q. You said that Azerbaijan is an importer of Heidelberg Cement. But in 2010 it was said that Azerbaijan refused to import your company’s cement. Could you please tell us about the Georgian-Azeri relationship in terms of exporting cement?
A. It happened in 2010. For six months the border was closed for cement produced in Georgia. When I came here it was July 2010 and this issue was the company’s main problem. When I asked what had caused the problem, no one knew the reason. There was no official statement from Azerbaijan for why the border was closed. When we went to Azerbaijan with the Asian authorities, the Azeris said that we could export the cement there and that there was no problem. This remains a miracle to us. At that time Michael Saakashvili and Nika Gilauri really helped us. They held some meetings with the Government of Azerbaijan, with Mr. Aliev and the Prime Minister of Azerbaijan. The meeting was held in Baku where the Georgian side discussed the problem. After several weeks the border was opened. To this day we do not know what the reason was.
Q. What responsibilities do you feel in regards to your product and the way you make it having an impact on the environment?
A. Cement production is a heavy industry which means that we have problems with pollution of the air and so on. The filter technologies that we have here in the cement plants are the same high quality that we have all over the world. We do not have German, Georgian or Chinese standard anything, we have a consistent, global standard. We invested EUR 10 million in filters alone to keep the environment in good condition. We did that without being told to by anyone. We have a big responsibility not just for our production but for the environment as well.
Q. How do you understand the impact your business has on the Georgian market and how will you use this impact in a positive way?
A. My feeling is that we have a very big responsibility for Georgia. Most importantly for any development in Georgia are two factors: infrastructure and hydropower stations. For both you need cement. Georgia is in a really good situation, the fact that Georgia is not dependent on cement imports in order to develop the country. We have other countries like Azerbaijan for example. They are dependent on Iranian, Russian, and Georgian imported cement because they have a small cement industry. This is dangerous. If you depend on others to deliver cement to develop infrastructure this is no easy thing. We feel the responsibility to deliver high quality cement; to deliver the volumes that the state needs. I am very happy that we are so important and valued by Georgia and we respect that responsibility.
Q. How will your company need to change in the next ten years in order to make your vision a reality?
A. I think that the only thing we have to do, the major thing, is to invest EUR 100 million. What we do every day is to develop Georgian employees in the direction of having really high work performance. The cement factories that we took over were really old ones in bad conditions and the people working there did not know how to use the new technology. We are going to help our people perform better. The management is on a better level. After four years the people working in the management sector are on the same level as in every other country. The problem is the people in the plants. They are intelligent, they have the will to learn and it is a good precondition for having good staff. This is what we will be trying to do in the next ten years.