The FINANCIAL — Can lies tell a deeper truth? Owing to political correctness, one might claim thus regarding the cement industry, but instead of giving you a ready-made answer on a silver platter this feature shall dive deeper and take a versatile approach in unveiling the hardships its stakeholders are facing at its core leaving the reader free to draw their own conclusions.
Today, the challenge for the cement industry globally is to balance growing demand for cement with the need to forge a more sustainable cement industry, which by the way, has not seen much innovation for the past decades. Cement production is still energy-intensive, accounting for approximately 5% of global emissions of carbon dioxide, and affecting climate change, emissions to air and water, natural resource depletion and worker health and safety issues.
The Cement Sustainability Initiative, a global effort led by twenty-four major cement producers with operations in more than hundred countries, aims to reduce the footprint of the industry and promotes sustainable development. Collectively, these companies account for around 30% of the world’s cement production. HeidelbergCement, one of the core members of this initiative has been active in Georgia since 2006, being the only cement producer in Georgia that moved up the value chain by producing clinker in the country. To date, HeidelbergCement Georgia has made close to EUR 400 million investments that were mainly oriented on existing cement plants modernization and expansion in the concrete business line.
The problem with the Georgian cement industry is that there isn’t a problem. The market is operating normally at a quick first glance. Except, it isn’t on so many levels.
Looking at the overall Georgian import statistics for cement and clinker in US Dollars from 2013 to 2017 does not seem alarming at all. At a closer examination, it stood out that cement imports from Iran increased from 696 tons in 2017 to 1,755 tons in first six months of 2018; and Clinker imports have increased from zero in 2015 and 2016, to 273 tons in 2017 and to overwhelming 11,953 tons in only the first six months of 2018, with the anticipated further growth trend by the end of the year. But even that does not constitute a problem in itself. Iran is one of the most significant producers of clinker and cement in the world. Their ability to manufacture quality cement is unquestioned. Before unveiling the essence of the problem, I deem necessary to give some color to the background story.
HeidelbergCement currently employs more than 1,300 people in Georgia. But due to recent developments, the management was forced to lay off close to 200 workers and run the company at about 50% capacity because they can no longer compete with underpriced cement being sold on the Georgian market. Mr. Michael Hampel, General Director of HeidelbergCement Georgia has expressed remorse to Versatile KS that “it is very unfortunate we are forced to cut down our operations by half because of the unfair game players we have had to navigate through for the past couple of years. It breaks my heart that by August 1st four out of seven kilns we own shall be shut down; and out of our total production capacity of 154,000 tons per month, the company will be running at only 78,000 tons per month instead”. He further repented that the impact quickly spirals up if we consider the aligning industries as well: “our operation gives work to more than 10,000 families all over Georgia if you look at cement, coal, carriers, and suppliers altogether”.
To visualize the impact better, Versatile KS has construed the given snapshot of the situation HeidelbergCement Georgia currently faces.
General Director of HeidelbergCement Georgia already knows that even their brand new, efficient Kaspi production line worth USD 100 million that will be operational by the end of this year, will not be able to compete against the dumped prices: “even the best cost performance production facility in the world will not be able to fairly compete against such a scenario where some players, in this case from Iran, just want to capitalize on and generate cash in USD, i.e. a tradeable currency outside their country, disregarding basic economic principles of business and not caring about actually generating profits”, further elaborating that if this dumping practice is not stopped right away, the existence of the cement industry in Georgia will start counting down days to its extinction.
An inevitable side-damage is that local coal will no longer be needed in this setup. The cement production of HeidelbergCement in Georgia is buying more than 90% of the Tkibuli coal and given the circumstances, the company will be needing less and less coal with the closure of each kiln: “we all hope that the Tkibuli coal mine will soon recuperate from the tragic incident of this month and manage to ensure maximum safety operation for its workers. But they will have one additional problem to solve. That is to find new buyers for their coal as our demand on coal will inevitably decrease”, concluded Mr. Hampel apologetically.
Reading in between the lines of what Mr. Hampel said, any country neighboring Georgia can, theoretically, at any time, engage in the practice of dumping either to increase market share in any product or merely to earn more hard currency. To protect against such unfriendly economic distortions from anywhere, it is necessary for Georgia to face up this threat and enact general antidumping legislation to ensure fair competition.
Let us take a step back and look at a bigger picture. Presently, Iran has about 40 million tons of excess capacity which it subsidizes by transportation grants, thus making it possible for their products to compete – notwithstanding the great distances – at prices as low as 30% below market in western Georgia and as low as 40% below market in some parts of Africa. Reasonably, a fair form of anticompetitive dumping regulation to prevent vivid and unfair economic distortion that players from other countries might engage in should be in Georgia’s best interest. After all, once the local production is ruined, Iran may no longer subsidize their exports of clinker and cement and the market prices will shoot up with Georgia having little to no alternative to combat this threat.
Zooming further in on Georgia, the country’s cement market is a little over 2 million tons annually. Mr. Paul Rodzianko, Chairman & CEO of Kavkaz Cement candidly spoke with Versatile KS about the industry issues: “it is rather important to have thriving Georgian quality cement producers at price levels that are sustainable for the long-term along with strong antidumping protection”, so that any imports will compete fairly and openly for market share in Georgia, price-wise, as well as quality-wise.
Those in favor of ‘invisible hand’ in Georgia shall raise a clamor against any taxation or antidumping law propositions. Many believe that winning doesn’t mean anything unless someone else loses; they say, it is the utmost essence of the ‘survival of the fittest’. And if some companies in Georgia can’t be efficient enough to keep up with the fittest players, they should stop operating.
But what happens when the national security threats arise because some actors take cunning advantage of Georgia’s open arms? The dreadful truth is that without quality checks, Georgian citizens shall end up being the ultimate losers when the buildings and infrastructure constructed with low quality cement start crumbling down at the first blow of a tad of time. A glimpse of what Georgia’s infrastructure could be in a decade from now is terrifying. And the emphasis here is not about aesthetics but rather durability, endurance and sturdiness of structures.
Mr. Rodzianko also wears the hat of the President of the Georgian Cement Association: “our objectives include maximizing our Georgia supply chain to minimize cross-border risks such as currency fluctuation and ensuring that all participants in the Georgian cement market – both domestic and international – abide by the rules of fair trade consistent with WTO/European standards and do not cheat consumers as to quality” he emphasized to Versatile KS.
To ensure this, the Georgian Cement Association has been conducting regular blind testing in Georgia since 2017. Sampling process for blind tests are performed by Geoexpertize, the daughter company of Georgian Chamber of Commerce and Industry done at the laboratory of the Georgian Technical University. The counterfeit cement results were truly disheartening with 12 out of 21 of the cement samples being tested in June 2018 as significantly below specification, ranging from minus 4% to minus 90% deviation from the norm. Last year alone, approximately 300,000 tons, 13% of the total cement market, of poor quality products were sold to consumers in Georgia. The quest for opportunistic profit is bound to have a bloody end unless the stakeholders learn how to combat the quality control issues.
Versatile KS also spoke with Mr. George Nonikashvili, Director of Tbilcement: “Our company was founded back in 2001. We manufacture cement, construction blocks, and inert materials, among other products. Our cement production capacity is around 5,000 – 6,000 tons a month and we use most of it for our construction projects within the group. We are not looking to export the products because we primarily focus on satisfying our internal demand. We do sell small quantities of bags of cement straight out of the factory, though”. They have recently started selling bulk cement as well. While Tbilcement hasn’t felt the pressures of the dumped prices yet, Mr. Nonikashvili welcomes all legal activities that will regulate and ensure the selling of only quality cement on the Georgian market.
Chairman of Georgian Competition Agency, Mr. Nodar Khaduri explained to Versatile KS that GCA exercises its authority based on the Georgian Law on Competition which does not entail any special provisions with respect to the antidumping issues, moreover, “the regulation of particular areas through the special laws is a matter of state policy and it is beyond our area of responsibility to decide, whether it is necessary or not to adopt antidumping legislation”. Mr. Khaduri further elaborated that as they investigated, there are very few countries worldwide where the competition authorities handle the dumping issues. “We would like to further point out that the Georgian Law on Competition does not make any difference between local and foreign undertakings. Our main objective is to protect the competition and to preserve fair competitive environment on the Georgian relevant markets”. GCA can launch investigation proceedings on the alleged infringements of the Competition Law based on complaints, applications, or on its own initiative, is empowered to impose fines on the perpetrators of Competition Law, as well as studies merger notifications.
Sometimes you find yourself in a situation where the decision is very difficult, but you must make the correct choice, or rather the most efficient tradeoff among the given variables. The big question remains where the priority of the Georgian Government rests regarding the issue. Versatile KS got in touch with the Business Ombudsman of Georgia, Mr. Irakli Lekvinadze to enquire about the actions his agency has taken to study the matter after they became aware of the threats producers in Georgia faced due to some importers dumping the cement prices below production cost and below standard quality goods available on the market. The office of the Business Ombudsman is finalizing cramming the facts and should be ready to make a statement in the coming days.
In the meantime, remember, as Georgian Cement Association blind tests have shown, the difference in quality is generally far worse than the difference in price. While stakeholders figure out how to resolve the issue legally, all construction companies and individuals are urged to think twice before falling for the cheaper price. The unsuspecting purchasers of counterfeit cement expose gullible inhabitants to physical harm by the inevitable collapse of structures built with sub-standard cement. So, can lies tell a deeper truth? You tell me.
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