6 minute read 10 Feb 2020
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Four challenges to achieving sustainability in the cement industry

By Andreas von Buchwaldt

EMEIA EY-Parthenon Strategy Leader

A strategy consultant. Experienced in private equity and technology, media and telecommunications.

6 minute read 10 Feb 2020

All players in the cement industry must decide how to adapt products, supply chains and business models. Doing nothing is not an option.

Cement plays one of the most fundamental roles in construction, but it is also among the key drivers of climate change, responsible for 6 to 9% of global CO2 emissions. In the 2016 Paris agreement, it was agreed to keep the global temperature increase below 2°C. To achieve this, CO2 emissions will have to be reduced by 80 to 90% by 2050. As a result, the cement industry faces increasing pressure,  but they have already started to address this challenge.

The cement industry is conducting significant research to reduce CO2 emissions. Conventional technical progress, such as thermal efficiency, fuel switching and the reduction of the clinker-to-cement ratio, will not suffice. The key technology required is carbon capture and storage (CCS); more recently, first steps in carbon capture and usage (CCU) have complemented CCS.

The conventional measures to reduce CO2 emissions from cement manufacturing are further improvements in thermal energy efficiency and fuel switching, a reduction of the clinker-to-cement ratio, and innovative technologies. All of this means significant transformation for the cement industry. Although these measures aim only to reduce the CO2 emissions per ton of cement and do not imply an overall reduction of cement volumes, this reduction potential is significant.

This reduction of cement output will change the value creation along the value chain of cement and concrete. Therefore, players along the cement and concrete value chain need to assess whether the adoption of new business models that are less volume-based and more value-based is an attractive strategic direction.

Transition to new business models in the cement industry

From the stakeholder environment, we expect a strong move from the current cement industry model to a lower-carbon cement industry, pulling all levers of investment within the value chain as well as additional measures, whether for an intermediate time in additional off-setting or for the longer-term using CCS.

This move will burden the cement industry, and the key question will be how it can recover its investments and, more importantly, how first movers can turn their new low-carbon offerings into a profit. In the short- to medium-term, as CO2 reduction becomes increasingly crucial, the era of differentiated, carbon conscious value business models begins.

The change in the overall construction value chain toward stronger industrialization and module prefabrication (modular construction’) is a second, overlying trend. It has more drivers than environmental sustainability, (e.g., higher labor productivity, more standardization, digital approaches). We expect that the cement carbon intensity will accelerate this trend.

In the longer term, this more carbon-conscious and more industrialized environment will spark the era of integrated and new business models. Cement suppliers, but also all other players along the value chain, will have to rethink and evolve their business models to remain profitable and attractive to customers, shareholders and employees.

In the short- and mid-term, successfully evolving toward a more carbon-conscious business model will be mission-critical.

A first step: offer CO2-reduced cement

Cement producers will have to move from a commodity focused, volume production strategy to a more differentiated and diverse production approach, which changes the investment economics for production plants. They will also need to switch from a commodity go-to-market approach to a differentiated offering that leverages and monetizes carbon-consciousness optimally:

  • A pull from owners and builders for carbon reduced cements needs to be created
  • Cost-plus pricing must evolve into value- and usage-based pricing, which implies a major shift in thinking
  • R&D, product management and sales must master the increasing complexity of a broader offering, both technically and commercially

Cement producers will have to transition from a manufacturing-centric perspective to a customer- and market-centric perspective.

  • Active and customer-group specific marketing will become crucial
  • An active and professional addressing of legislative bodies and political decision-makers will become an important key element
  • Producers’ footprint strategies must begin to consider access to carbon capture infrastructure (e.g., pipelines)

A next step: more pre‑fabrication

The industrialization of the cement industry will essentially be driven by two factors:

First, the move of the overall construction industry toward industrialization: modular building. An increasing need for speed, a shortage of skilled labor, the growing relevance of digital tools and increasingly demanding customers, as well as efficiency potential, are driving this development.

Second, industrialized (i.e. prefabricated (pre-cast) cement/concrete modules have significant potential to contribute to decreasing CO2 emissions: Industry experts estimate that pre-casting can reduce the amount of required cement by approximately 10% or more.

  • Pre-cast modules require less concrete, and therefore less cement
  • High-tech, low-CO2 cements can be used more often and more effectively
  • The manufacturing process is more efficient and scrap rates are minimized

With cement compositions and production capabilities improving constantly, these savings potentials are expected to increase further.

All players along the cement value chain should adapt to essentially two new key challenges:

  • Overall reduced demand
  • The need to reconsider the value chain coverage cement players are aiming to achieve (e.g., should they restructure to become the perfect supplier for existing or new precasting business models? Should they integrate forward, occupying the value chain control point that will have shifted to prefabrication? etc.)

A broader value chain coverage implies a major business model leap with four key challenges:

  1. Make the product and service needs of architects, planners and investors the starting point of all strategic and go-to-market decisions
  2. Add a second, more end-to-end business model that is able to master such as product development, product consulting, facility management, etc.
  3. Manage the complexity of entering competition with own customers
  4. Restructure their own footprint and operations to retain profitability at reduced cement demand

To achieve this, cement suppliers should consider both the make and buy approaches, but also entering into partnerships to integrate crucial capabilities. This would enable an integrated solution that covers the value chain from cement production to recycling and re-usage. Such a broad value proposition would not only contribute to further decreasing cement production but enable cost savings.

Other players should consider their strategic options:

  • Today’s cement and concrete users (e.g., construction companies) should consider integrating backward and precast concrete modules, thereby gaining control over the value chain control point
  • Existing players and investors should consider the potential for new business models/startups that focus on the precasting of concrete

Established players will face increasingly strong competition from players who will optimize their business model to succeed in these changing times. Also, new players are likely to enter the industry with innovative business models. Ultimately, this will lead to market share losses for established players.

There are many ‘right’ decisions

In this evolving and challenging environment, it is apparent that there is no single right direction.

The key question becomes what value chain coverage to aim for? Bottom line: doing nothing is not an option.

Special thanks to Björn Reineke and Otto Schulz for co-authoring this work.

Summary

Cement is among the key drivers of climate change, responsible for 6 to 9% of global CO2 emissions. To reduce this dramatically, the cement industry must not only develop new production technologies but will eventually experience a reduction in cement volumes including a move toward pre-fabrication. This in turn changes the value creation along the entire value chain of cement and concrete. All players must decide how to adapt their products, supply chains and business models if they are to survive.

About this article

By Andreas von Buchwaldt

EMEIA EY-Parthenon Strategy Leader

A strategy consultant. Experienced in private equity and technology, media and telecommunications.