Cement. The stuff of dreary, dystopian cityscapes as well as the key ingredient in any self-respecting gangland thriller. “Will that be white Portland or a nice Pozzolana mix in your boots, sir?”
It’s also been the stuff of futures markets, being long on promise and hype but short on action.
On paper it’s a no-brainer. With annual production of over 2bn tonnes, cement is one of the world’s most significant commodities, and its price is volatile, buffeted by production capacity and the strength of demand from the building industry. Although you can stockpile against price hikes, you nevertheless have the makings of an accompanying derivatives market.
Radio silence
That appeared to be the thinking when the Moscow Stock Exchange in November 2007 announced that the following spring it would launch cement futures. The reason? A building boom and the Winter Olympics of 2014, in Russia, were stoking demand for cement. Russian cement prices more than doubled in 2007, compared with a 16% rise the year before.
But then not a word more from the exchange.
The Dubai Gold & Commodities Exchange also had plans around the same time. But now there is a vagueness to even recall the scheme.
It certainly seemed to make sense. Or then it did.
Five years ago, Dubai used to boast that it had up to some 25% of the world’s cranes at work in its territory — a figure that was disputed by global crane suppliers — but the number is said now to be roughly half of its then peak. And just as the hulks across the skyline are vastly diminished in the debt-beleaguered emirate, so too is its demand for cement.
India’s Binani Cement said earlier in February that it was putting expansion plans in Dubai on hold, as it was getting only 100 dirham a tonne in January from its cement, down from 350 dirham a tonne in November.
Perhaps Binani Group might have chosen to lock in profit had Indian authorities allowed the National Commodity and Derivatives Exchange in Mumbai to start futures trading in cement as it had hoped to before the global slump arrived in 2008.
India’s Forward Markets Commission, the commodities markets regulator, did not give the go-ahead, however, putting forward a number of reasons for the decision.
It argued that, as a processed and branded commodity, cement was not appropriate for a futures market. (Note, of course, that a great many products with forward contracts are also processed, however, whether aluminium ingots or refined oils.) Implicit to this is the suggestion, though, that cement isn’t really a commodity at all.
Grades no obstacle
True, if you fall in with the marketing puff of cement giant Lafarge you may believe that “cement is not a commodity but the exciting bond that enables the creation of luxury apartment blocks reaching a mile into the sky”. But, glossy talk aside, cement is cement — and its various grades and types should pose no genuine difficulty in putting indexes together.
Oil futures have not been impeded by the differences between standard markers such as, say, Brent and West Texas Intermediate.
Those of a cynical bent might suggest that one reason a government might not want futures trading in cement could be that it would insulate the industry from state interference — in the past the Indian government has sought to control the price of cement by tinkering with tiered excise regimes.
Another reason given was the lack of any clear precedents. China — which accounts for half of global cement demand — toyed with cement futures in the early 1990s, well before its massive construction boom began. But that experiment did not keep pace and simply choked in the smog of later, full-scale expansion.
And yet the advantages of a futures market in cement are clear.
Prices are volatile and in just the 12 months to India’s quashing hopes of contracts in the commodity they rose by about a third. Proponents argue that, with agricultural commodities, volatility in the spot price is reduced by some 50%, and say that cement contracts would bring a similar degree of stability.
However, while demand for cement shifts dramatically — in Europe this year it is expected to be around a third less than in 2007, and US trade association the Portland Cement Association expects American demand to be 44% down on 2006 consumption — the price movements are not the sort of overnight spikes and plummets that other commodities can experience.
There are no equivalents to the geopolitical hair-triggers that can catapult the spot price of oil or sudden weather events that might affect certain agricultural commodity prices.
Plenty to play for
But the opportunities for the business are enormous.
The Freedonia Group, a US business research company, has just released a forecast that global demand for cement will rise by 4.1% a year to 3.5bn tonnes in 2013, valued at $246bn, driven in large part by rising investments in developing countries as well as recovery among developed nations.
Although previous hopes for futures whereby cement producers can insure against a drop in demand and builders safeguard against rising prices have proved premature, surely someone will soon make the market an offer it can’t refuse?