THE EFFECTS OF NEW CLIMATE CHANGE COMMITMENTS THE CEMENT INDUSTRY PREPARED BY MICHAEL NISBET JAN CONSULTANTS July 1996 Acknowledgement The author would like to thank the Portland Cement Association and the American Portland Cement Alliance for providing extensive statistical and technical information. CONCLUSIONS The purpose of this paper is to estimate the effects of two imposed levels of energy price increases on the U.S. cement manufacturing industry. The proposed price increases would be introduced in two steps: half in 2005 and the remainder in 2010. The analysis is made by developing a base case projection to 2015 for industry performance under "business as usual "conditions and comparing this with projected performance in the two price increase scenarios. The initial impact of higher energy prices would be to increase cement industry energy costs by as much as 150% by 2010 in scenario 1. The rise in manufacturing costs will result in sharply increased prices for domestic cement. This creates the potential for a large gap between the price of U.S. produced cement and that manufactured in non-OECD countries where no energy price increases are imposed. The availability of lower priced imports from non-OECD producers would not serve to raise cement consumption because cement demand is relatively price inelastic. The imports will displace domestic production. Based on the price differentials calculated in the report, and assuming an elasticity of substitution of 7.5, imports under scenario 1 conditions are estimated to capture 45.9% of the U.S. cement market in 2010 compared to 19.8% in the base case. In scenario 2 import share would be 36.6% in 2010. The result of lost market share will be closure of cement plants and foregone capital investment in new capacity which would have been made to take advantage of growth in demand. Investment in new capacity would have resulted in improved energy efficiency. Approximately 26 million metric tons of clinker capacity would be shut down by 2010 in scenario 1 and 17 million metric tons in scenario 2. The plant closures will cause job losses: 5,800 and 3,700 in scenarios I and 2 respectively by 2010. These losses are significant because cement plants are often located in small communities where the plant is one of the major employers. As far as fuel switching is concerned, there is no incentive to alter the fuel mix in scenario 2. In scenario 1. switching from coal to natural gas could reduce energy cost by an average of $3.54 per metric ton in 2010. This would reduce the price gap between imports and domestic product and potentially reduce import penetration to 40% from 46%. The cost reduction gained by switching to gas would not change the import trend but it would dampen the degree of penetration. The table summarizing changes in indicators shows the increases in energy cost, cement price and import market share, and the consequent decline in production, capacity and employment. The most likely outcome of the proposed energy price increases would be the development of new cement production capacity in countries not subject to the price increases. The purpose of these plants would be to supply the U.S. market. The plants would use the same technology and emit the same amount of carbon dioxide as new capacity installed in the U.S. The purpose of this paper is to estimate the effects of two imposed levels of energy price increases on the U.S. cement manufacturing industry. The proposed price increases would be introduced in two steps: half in 2005 and the remainder in 2010. The analysis is made by developing a base case projection to 2015 for industry performance under "business as usual " conditions and comparing this with projected performance in the two price increase scenarios. Information used in this study is from published reports supplemented by personal experience in the cement industry. Assumptions used in making projections are listed. The report consists of three sections. The first provides an overview of the industry, its trading patterns and the base case projection. The second consists of a description of the cement manufacturing process including its use of energy, and the third deals with the effects of increased energy prices on the industry. Working papers containing the data used to quantify the impacts are attached as an appendix. SECTIONI INDUSTRY OVERVIEW Background Portland cement is a finely-ground, manufactured, mineral product that, when mixed with water, sand, gravel and other materials, forms concrete the most widely used construction material in the world. The raw materials are primarily limestone, shale, clay, and silica sand which are usually quarried within 1 to 3 miles of the cement plant. They are crushed, proportioned to give the required chemical composition and ground. Small quantities of iron oxide and alumina are sometimes added to the raw mix. The mixture is heated to about 2700 °F (1500 °C) in large rotary kilns. The clinker. a hard granular intermediate product, is discharged from the kiln and finely-ground with the addition of about 5% gypsum as a setting time regulator to give cement. U.S. cement plants are large scale. Average annual capacity in 1993 was about 640,000 metric tons of cement, the largest has a grinding capacity of 2.1 million metric tons per year of cement. The manufacturing process is continuous with the kilns operating 24 hours per day for approximately 330 days per year. Except for occasional process upsets or equipment failure, the downtime is scheduled and is used for major maintenance. U.S. annual production capacity is close to 75 million metric tons, making it the third largest cement manufacturer with 5.8% of the total world production of 1.3 billion metric tons. China is the major producer with 356 million metric tons capacity or 27.3% of world production. As a point of comparison, about 80% of Chinese production is from mini-plants of less than 100,000 metric tons per year capacity. Cement manufacturing is capital intensive. Constructing a greenfield modern plant of 1 million metric ton capacity would cost between $180 and $200 million. |