Cement's dominance no longer set in stone
Buildings account for 30% of the world’s energy consumption and greenhouse gas emissions. Without significant changes, this could increase by 50% through 20501. Measures put in place to reduce emissions once buildings are in use – such as insulation, heating, ventilation and air conditioning (HVAC) technologies – have already received a lot of attention.
However, 50% of a typical building’s lifecycle emissions are in its construction2 - mostly in the production of cement and steel - but also transport, interior fitting or on-site construction waste (15% of the embodied carbon in a building). The cement and steel industries account for 4%, and 7%, of global greenhouse gas emissions respectively. This is more than five times the aviation industry3 and these industries have made little progress in reducing emissions. The carbon intensity of producing steel has barely changed over the last decade, and cement emissions have also been relatively flat, as shown in figure 1. Both will have to make significant changes to meet the Paris agreement objectives. The steel industry would need to cut emissions by 70% by 2050 to meet the 2oC scenario4.
Figure 1: Cement emissions <1% reduction/year since 1990
Source: Schroders; Sustainable Concrete: (http://www.sustainableconcrete.org.uk/co2_emissions.aspx)
Ripe For regulation
Regulation is playing an increasing role in limiting greenhouse gas emissions, creating an economic imperative to rethink value chains. By the end of 2017 around 70% of the world’s steel and cement production will be subject to a carbon price (see figure 2). Whilst the current price is small at under $10 per tonne in most regions, once pricing mechanisms are in place we expect prices to ramp up quickly. For low margin industries like cement, even low carbon prices have a significant impact on earnings. Carbon Disclosure Project (CDP) research shows a $10 carbon price results in $4.5 billion of lost earnings for the twelve largest cement companies, and a loss of 114% of earnings for the worst performers5.
Figure 2: World cement production (%)
Search for solutions
Established technologies could allow the cement industry to cut emissions by up to 70%. Foremost amongst the options, carbon capture and curing replaces the heat and steam normally used to create concrete with the carbon dioxide (CO2) that is produced in cement formation. CO2 is stored in the concrete rather than released to the atmosphere, significantly reducing the industry’s emissions footprint6, although the approach is rarely used. Production costs are four times higher than conventional methods, but a hurdle that could be overcome when carbon emissions attract a meaningful price. Another method is blending cement with other materials, such as fly ash or blast furnace slag, allowing less limestone to be used. This can lower CO2 emissions by up to 20%7. Large players such as Heidelberg and LafargeHolcim are ahead of peers in their application of these processes8
While cement producers could make major strides to future-proof their industry, less carbon intensive materials are likely to become increasingly attractive over time. One example is cross-laminated timber (CLT), which is already gaining a foothold in the construction markets. CLT involves compressing layers of dried wood, structuring the layers, and then laminating. This achieves strength parity with steel but is lighter and requires less foundation. It is already cost competitive with many forms of concrete. CLT also currently emits 33% less carbon than concrete, with most of the CO2 associated with its transportation.
In short, there is growing impetus to make buildings more efficient. Higher and more widespread carbon prices will impact carbon-intensive sectors, such as cement and steel, forcing change and raising the prospect of substitution from other materials. Identifying those companies before their profile rises too far presents opportunities for investors to get in on the ground floor.
Source: Schroders; Research Gate, 2014; E-tool Global, 2015
1. http://www.iea.org/Textbase/npsum/building2013SUM.pdf ↩
2. http://www.wrap.org.uk/sites/files/wrap/FINAL[(20PRO095-009) was not found]20Embodied[(20Carbon) was not found]20Annex.pdf↩
3. CDP: Visible cracks, 2016↩
4. https://www.cdp.net/en/articles/media/steel-companies-need-tech-transformation ↩
5. https://www.cdp.net/en/articles/media/cement-companies-entire-earnings-at-risk ↩
7. http://blogs.ei.columbia.edu/2012/05/09/emissions-from-the-cement-industry/ ↩
8. https://www.cbi.eu/sites/default/files/market_information/researches/product-factsheet-western-europe-cross-laminated-timber-2016.pdf ↩
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.