Why Brazil's cement industry will face major uncertainty next year

Brazil’s cement industry will likely contract 2% this year, although cement sales were expected to increase 0.5%.

And the 2023 scenario will be marked by domestic and international uncertainty.

The president of the cement producers association SNIC, Paulo Camillo Penna, talks with BNamericas about the reasons and what should be done.

BNamericas: What is the expectation for cement sales this year?

Penna: For several months after the beginning of the pandemic, we saw cement sales in Brazil being supported by so-called DIY construction, which are those small renovations people do in their homes and businesses, without the help of a specialized company, buying cement in small quantities. However, at the end of 2021, we started to see a slowdown of these effects in the sector.

At the beginning of 2022, we started to see some economic indicators being compromised because of the increase in interest rates.

With the Selic rate at 13.75%, as it is now, this impacts the entire business environment and hurts the real estate market, which is the most important segment for the cement industry.

When the interest rate in Brazil goes above 12%, we usually see a migration of investments previously directed to the real estate market to the financial segment, investments in fixed income.

Given this scenario, if we evaluate the situation now, we have a drop in cement sales in annual terms of 3% and we should end this year with a contraction of 2%. This small improvement in the last months of the year is because we see some improvement in inflation and employment levels.

BNamericas: Do you have a 2023 forecast?

Penna: We still don't have an estimate for 2023 because we still don't have a result of the presidential elections. Only after the elections will we have a better perception of the scenario. Perhaps by the end of November we will unveil a forecast for 2023 about the performance of the cement sector.

In addition to the election factor, we are experiencing low growth of the global economy. We do not export cement at relevant levels, but the performance of the global economy always affects Brazil's economy in some way.

Another important aspect to be considered in our projections is the current clash in Brazil between monetary policy, which translates into an increase in central bank interest rates, and fiscal policy, which has been pressured in the face of increased government spending with social programs. Only when we have greater visibility of how this dispute takes place and we better understand at what moment the interest rate will start to fall will we have a clearer signal about the activity next year.

BNamericas: Many specialists advocate for more public infrastructure investment. What is your view and how important is infrastructure for the cement industry?

Penna: We need to have another political orientation regarding infrastructure investments.

In 2011, infrastructure was responsible for 25% of cement demand and today this figure is no more than 13%. Most cement demand comes from the real estate sector.

There is a pipeline of infrastructure and sanitation concessions, but the projects that are auctioned now will only materialize in the purchase of cement in three or four years, that is, many of these infrastructure auctions have not yet generated positive impacts for the industry.

We have to evaluate measures to incorporate investments in infrastructure in public accounts. We have serious fiscal problems to be solved, but we have to find a method to increase public infrastructure investments.

BNamericas: How do inflation and rising costs of living affect the cement industry?

Penna: The biggest cost pressure for us comes from the price of petroleum coke, which is used to generate thermal energy for the cement industry. In addition, we also suffer greatly from rising electricity costs.

The coke effect is the highest currently, because coke prices follow international market conditions that were affected by Russia's war in Ukraine.

The cement industry has also suffered a severe cost increase, like many other sectors.

BNamericas: What is the sector doing to mitigate cost increases?

Penna: The sector has been looking for alternative fuels, even using more clean energy.

We have already achieved a replacement rate of coke, which is a fossil energy, of 28%, using alternative fuels, biomass and even landfill energy.

This level of 28% was within our goals for 2025 and we have already reached it.