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Decarbonizing cement: How EU cement-makers are reducing … – S&P Global

European cement manufacturers have committed to reducing carbon emissions by 30% by 2030, which we view as achievable. However, if more stringent regulations are enacted to mandate emissions reduction, we believe that it will be challenging for the industry to achieve net-zero by 2050 without putting profitability under pressure.
Published: October 27, 2022

This report does not constitute a rating action.

The EU’s largest cement manufacturers have committed to reducing their Scope 1 CO2 emissions per ton of cement by about 30% by 2030, from 1990, mostly via enhanced thermal-energy efficiency and fuel switching. We view this target as achievable and at reasonable cost.
Beyond 2030, a significant drop in direct emissions can only be achieved via reduced demand (greater product efficiency) and accelerated carbon capture and storage. The required technologies are still in prototype or development, awaiting significant infrastructure investments to scale up. As such, it remains uncertain whether the sector can achieve carbon neutrality by 2050.
The proposed EU regulation “Fit for 55,” targeting a 55% carbon emissions reduction by 2030, could lead to a much lower supply of free carbon allowances for cement companies, significantly increasing their carbon-related costs if they cannot cut emissions.
While sector decarbonization presents many challenges, we also consider a number of mitigating factors that may shield the most efficient players. Cement substitution alternatives are currently limited, meaning demand should remain structurally steady. These factors together could allow entities to pass higher costs on to customers, but pressure on profitability still looms, in our view.

Authors: Renato Panichi, Senior Director, S&P Global Ratings | Pierre Georges, Analytical Team Manager, S&P Global Ratings | Pascal Seguier, Analyst, S&P Global Ratings

Research Contributors: Terry Ellis, Global Climate Transition Specialist, S&P Global Ratings | Arianna Valezano, Associate, S&P Global Ratings

Editor: Julie Dillon

Designer: Tom Lowenstein

The EU is leading the way on decarbonizing the cement industry, with larger players taking steps to reduce emissions by 2030. In this research, we analyze the steps some European players are taking to decarbonize their operations and update their strategies to meet changing customer demands. We also look at the financial and operational implications for companies in light of the EU’s goal to hasten emissions reduction and the challenges the industry faces, given the current nascent stage of decarbonizing technology. We also set out some mitigating factors, which largely reflect cement’s limited substitution risk and still-high demand. In the second part of our research, “Companies could see pressure on ratings as the EU firms up carbon rules,” published Oct. 27, 2022, we explore how producers are preparing for tighter European carbon regulation and how this might influence our credit rating analysis. 

Cement production is responsible for about 7% of the world’s direct CO2 emissions, according to the Global Cement and Concrete Association. China and India are the largest producers at about 55% and 8% of global production, respectively, according to the International Energy Agency (IEA). Cement, chemicals and steel account for nearly 60% of all industrial energy consumption and about 70% of direct CO2 emissions from the industrial sector. Cement production is highly concentrated in emerging markets and developing economies: about 70% of combined output. Concrete is the second-most consumed substance on earth after water, with half a ton of cement being used each year for every person on the planet (IEA, Energy Technology Perspectives 2020).
Cement manufacturers’ carbon intensity ratios are about 6x larger than the average for the materials sector and well above most other business sectors (see chart 2). Producing a ton of grey cement today generates about 0.6 metric tons of CO2 on average but can vary widely from 0.5 to 0.8 metric tons (EIA data). Two-thirds of emissions are generated in the chemical process, or calcination, from carbon released from the raw materials used, particularly limestone, and are difficult to decarbonize. The other third stems from energy consumed as process heat. Fossil fuels, mostly coal plus some petroleum coke, account for 90% of thermal energy needs in cement production. White cement, which is higher quality but more energy intensive, emits more than grey cement, which is more common and cheaper to produce, at an industry average of 0.9 metric tons of CO2 per ton of cement, reflecting both higher clinker ratios and lower use of alternative fuels to preserve its quality (IEA).

Chart 1

Carbon intensity ratios differ among large European cement manufacturers. Companies with lower emissions or greater diversification into other building products typically have lower carbon intensity. For example, CRH displays the lowest intensity ratio among European rated companies (see chart 3) because cement comprises only 15% of its total revenues, which compares with an average of 60% for the other cement manufacturers. Ready-mix concrete, aggregates and other building products, such as architectural and infrastructural, typically make up the balance of cement manufacturers’ revenues.

Chart 2

Chart 3

Europe’s large cement companies have reduced CO2 emissions substantially in the past few years.
This is as a result of investments to improve plants’ thermal efficiency and increase the use of alternative fuels, such as biomass. For example, according to its company reports, HeidelbergCement has cut carbon emissions per ton of cement by 23% since 1990 and Buzzi Unicem by 17% in the same period. Most of their investments have been driven by cost considerations, but more recently, the increase of carbon costs in the EU and their anticipation of more stringent EU environmental policies have become key drivers. European players represent a significant portion of the market in EMEA and North America; among manufacturers outside the EU, however, decarbonizing regulations for the industry remain nascent at best, and carbon pricing is either nonexistent or not constraining.

For EU companies, energy efficiency remains the most relevant factor for meeting 2030 emissions reductions targets.
2030 is the year most large companies have set as a target to cut Scope 1 carbon emissions to below 500 kilograms per ton (kg/t) of (grey) cement, compared with an average of 600 kg/t today. Holcim, for example, has set a target of 475 kg/t of cement for Scope 1 net carbon emissions by 2030, 14% lower than its 2020 emissions. Some companies have more work to do than others to reach their 2030 targets (charts 4 and 5). Cementir’s emissions are currently well above those of Holcim or HeidelbergCement, largely reflecting its lower use of alternative fuels in Europe and higher share of white cement as a portion of total revenues. In May 2022, HeidelbergCement provided new decarbonization targets and now aims to cut Scope 1 net carbon emissions to 400 kg/t of cement by 2030, which is close to a 50% reduction compared to 1990 and compares with a former commitment to reduce emissions to 525 kg/t of cement by 2025. The new target is 15%-20% lower than the typical target of the largest European players. HeidelbergCement plans to reach this target by reducing the clinker content in its cement to below 68%, from 73% currently, and by increasing its use of alternative fuels to 45% from 26%. It is also aiming to capture a cumulative 10 million tons of CO2 using carbon capture, utilization and storage (CCUS) technologies to reach its 2030 target, and it is the first company in the sector to include CCUS in its 2030 emissions strategy.

Chart 4

Chart 5

The cement industry as a whole, and some large European players in particular, could update their 2030 emissions targets over next few years. HeidelbergCement already has. This is because the proposed EU regulation “Fit for 55,” which targets a 55% carbon emissions reduction by 2030 compared with 1990, will likely result in a much lower supply of free carbon allowances to companies. This will significantly increase the costs associated with carbon if companies cannot cut emissions. The investments needed to reach current 2030 reduction targets are not prohibitive, in our view; most companies have already woven such costs into their annual capital expenditure (capex) targets, and we, in turn, have factored them into our credit quality assessments. Investments relate to increasing the use of alternative fuels or biomass, decreasing clinker content and accelerating process innovation. HeidelbergCement has stated that its annual capex for conventional CO2 reduction initiatives is about €100 million-€150 million, which it is already included in its total capex guidance. On average, we estimate that investments associated with reaching 2030 targets represent about 20% of large European cement companies’ yearly maintenance capex. 

Whether cement companies can achieve carbon neutrality by 2050 is a more difficult call to make.
Given current production technologies, a significant drop in emissions beyond 2030 can only be achieved by accelerating new technologies. CCUS  as described below by S&P Global Commodity Insights, an S&P Global Ratings affiliated entity, potentially offers the most promising decarbonization solution for the sector but requires technologies that are still prototypes or under development and will need significant infrastructure investments to scale up as well as policy support to reduce the associated production costs. Currently, only the leading cement manufacturers are at the forefront of carbon capture and storage projects.   
There are multiple ways to lower the carbon footprint of cement at different stages of development. CCUS is the only option to eliminate process CO2 without changing cement’s chemistry.
The integration of carbon capture in cement production could reduce emissions by up to 36%, according to the Global Cement and Concrete Association. This technology could capture the emissions generated during the calcination process and does not require fundamental modifications to the cement production process.
Cement currently accounts for 6% of global CCUS capture capacity in the pipeline. This is mainly from European manufacturer-led projects in Europe and the U.S. Most of the CCUS project additions capturing CO2 from the cement industry are expected to be operational beyond 2025; currently, 5% of the pipeline of projects for the cement sector is under construction, while the rest is still in early development.
Five main technologies are being tested to capture CO2: oxy-fuel, cryogenic, solid sorbent, membranes and amine scrubbing. Other technologies are also being tested on a smaller scale. 
Multiple CCUS decarbonization options, pre- and post-combustion, exist at different stages of development with a variety of additional energy inputs.

Amine scrubbing
This leverages amine-based solutions to absorb CO2 from the tail-end flue gas, usually coupled with steam generated from natural gas boilers or combined heat and power.
Calcium looping
Capture units apply reversible carbonation reaction (CaO + CO2 ↔ CaCO3) burning additional coal as the thermal input. A steam cycle recovers electricity, reducing the overall electricity reliance on grid.
Gas separation membranes are used in physical and/or chemical interactions with end-of-pipe flue gas from cement, usually requiring pressure powered by electricity.
Oxy-fuel combustion
CO2-rich flue gas produced from combustion performed with oxidizer consists mainly of oxygen and can be easily captured using a simple carbon purification unit powered by electricity.
Solid sorbents
CO2 from the flue gas can be adsorbed with sorbents and later released in a pressure swing adsorption process, which requires electricity and steam usually generated from natural gas boilers.
Post-combustion CCUS (solid sorbent, membrane, calcium looping and amine scrubbing) provides opportunities to decarbonize without compromising existing production but requires additional thermal input that is expensive and creates emissions.
Oxy-fuel could be a solution to decarbonize the industry; however, it is a less mature technology compared to CCUS and would require the modification of existing production processes. Its effects on product quality are also uncertain.
All technologies require sufficient infrastructure to transport and store or utilize the captured carbon, which could prove very expensive. 
Adding CCUS to cement production currently more than doubles the cost of cement; as a result, manufacturers globally are testing a wide range of capture technologies with the aim to reduce capture costs. Despite the cost reductions these new technologies could deliver, policy support will still be required.
In Europe, adding CCUS currently increases the cost of cement by 125%–200% because of high fuel costs and offshore CO2 infrastructure requirements.

We observe that rated EU cement companies are updating their commercial strategies, given increasing customer demand for recycled and low-carbon cement products. HeidelbergCement has committed to doubling its revenue from low-carbon and circular products and solutions to 50% of group revenue by 2030. This would largely come from increased use of recycled aggregates and of supplementary cementitious material with a lower clinker ratio. Cementir in 2021 rolled out its FUTURECEM™ technology, in which about 40% of the energy-intensive clinker in cement can be replaced by limestone and calcined clay, leading to a 30% CO2 emissions reduction. Cementir targets FUTURECEM volumes to reach 50% of total volumes sold by 2030. We believe that demand for low-carbon products in the building materials industry will surge in the next decade, boosted by intensifying regulatory and public pressure on builders to transition to green buildings and use materials with reduced negative impacts on human health and the environment. This could prove a game changer for the cement industry’s competitive position over the medium term, which should support the larger and more sophisticated European players that can leverage on more advanced product offerings. Because of the trend toward low-carbon products, we could see the industry gradually diversifying away from standard cement only, with pricing premiums helping more advanced companies to protect their margins ahead of much higher carbon costs. Still, the much wider use of recycled materials or low-clinker products will require reshaping the construction value chain and greater end-user acceptance, which could prove a challenge in some countries. Therefore, we do not currently reflect this trend in our assessment of companies’ business risk profiles. Furthermore, the potential for recycled and low-carbon products to decarbonize the cement industry is lower than that offered by CCUS technologies. 

Some companies are repositioning away from cement by switching to other building products, which is helping reduce their consolidated carbon intensity.
The most tangible example is Holcim, whose growth strategy is focused on increasing its share of value-added products and strengthening its environmental credentials by refocusing away from the core cement business. As part of this portfolio transformation, in 2021 Holcim acquired Firestone Building Products for $3.40 billion and more recently Malarkey Roofing Products for $1.35 billion, both to strengthen Holcim’s presence in the U.S. residential roofing market. Holcim also executed on its strategy to reduce exposure to cement in emerging markets, signing an agreement in September 2021 to divest its operations in Brazil for an enterprise value of $1.025 billion. In December 2021, it closed the sale of its 75% stake in its business in Zambia for $150 million. In May 2022, Holcim announced the divestment of its India businesses, Ambuja Cement and ACC, to Adani Group for net cash proceeds of CHF 6.4 billion. We believe that Holcim will reinvest these funds to accelerate the transformation of its portfolio to grow its solutions and products segment to the targeted 30% of group sales by 2025. We view the disposal and reinvestment plan for the proceeds as aligned with Holcim’s strategy of increasing its presence in less asset-intensive building solutions and in mature markets, where cement and building materials products require more diversification and innovation.

Limited substitutions for cement should enable companies to increase prices if CO2 costs rise.
Grey cement is used as a binder in concrete and is therefore an essential raw material for buildings, roads and infrastructure. Currently, few materials can replicate cement’s characteristics, robustness and affordability, though increased design and construction efficiency could translate into reduced use of concrete. For now, however, all subsegments globally that rely on cement are showing good medium- and long-term growth potential.
In our view, grey cement’s low substitution risk may lead cement manufacturers to increase prices ahead of rising carbon costs in the EU. Rising grey cement prices in most European countries in 2022, ahead of higher energy costs, indicate that for as long as demand stays resilient, companies can pass on higher costs to clients (see chart 6). If current growth potential persists, we believe that this is what cement companies will continue to do, and as such, we anticipate significant cement price increases in those regions with carbon taxes. Most companies have already started to show CO2 cost components in their client invoices to improve transparency. This commercial strategy aims at shortening the time lag for pass through, ahead of the expectation that carbon costs will become a key driver of price increases in the next few years.

Chart 6
Note: The Cement Price Index is calculated as the average of the following European countries: Poland, Italy, Czech Republic, Germany and Luxembourg. Regions included in the average for the United States are the Northeast, the Midwest and the Southern states along the Mississippi River, Georgia, Alabama and Texas. Source: Buzzi Unicem SpA.  
We believe that substitution risk can be higher for white cement, which is used for decorative purposes and represents a niche market. At the same time, white cement benefits from much higher margins and has different demand dynamics, which could support its market position. 
Still, we see a risk that much higher cement prices may lead to structurally reduced demand in the construction industry, for example through the more efficient use of concrete in building construction. This could happen if most regions introduce or tighten carbon regulations, thereby increasing carbon costs.

Decarbonization challenges are significant for the sector, given the still-early stage and high costs of technological solutions and potentially much more stringent regulations coming particularly in Europe. Apart from cost pass-through capacity, the most efficient and proactive companies could also benefit from more rapidly adopting, and developing, new technologies to improve their competitive positions. This can come from high upfront investments. Gradually bringing new products into the business mix, such as recycled or low-carbon building solutions, may further mitigate risks, but we recognize that this is still a nascent trend. In the second part of our research, “Companies could see pressure on ratings as the EU firms up carbon rules,” published Oct. 27, 2022, our scenario analysis shows annual carbon costs could reach 75% of EU cement companies’ EBITDA on average, assuming a complete phase-out of allowances. We also find that companies with high emissions and with a high portion of business in the EU could see significant profitability pressures post-2027, particularly if weaker economic conditions challenge pass-through strategies, potentially weighing on our credit ratings on issuers. More supportive financial policies or other adaptive measures could mitigate such pressures.

This second part of our research into decarbonizing cement explores the regulatory environment that the European sector could be facing in light of the EU’s envisaged more stringent regionwide carbon legislation and how we can analyze this from a credit perspective. We leverage S&P Global Ratings’ data on the industry to perform a scenario analysis of the potential implications of the regulations for our ratings on cement companies. This research complements the first part of our research, “Decarbonizing cement part one: EU makers are reducing emissions while building business resilience,” published Oct. 27, 2022, in which we present our views on trends in the European cement industry’s carbon footprint and manufacturers’ decarbonization strategies.

The current regulation, phase four of the EU’s Emissions Trading System, has only slightly increased carbon costs for cement companies, but the proposed ramp-up of emissions reductions to 55% by 2030 will likely increase pressure on credit ratios.

The EU Emissions Trading System (ETS) dates from the 2000s and covers the power and heavy industrial sectors, including cement, and more recently aviation. Under current regulations, cement manufacturers receive slightly fewer free emissions allowances from EU member states. These allowances, until now, have materially alleviated companies’ carbon-price cost pressures. Annual allowance reductions have gathered pace, by 2.20%, under the current phase four, from 1.74% under phase three (2013-2020). The aim is to encourage faster decarbonization efforts.  
Beyond 2024, if phase four continues, carbon costs will not likely top 10% of cement companies’ EBITDA on average by 2030. This is why we have not yet taken any rating actions on entities in the European sector related to carbon-price risk. EU ETS reform will continue to evolve, and the implications for cement producers remain uncertain.
In 2019-2021, carbon costs represented 0%-3% of cement companies’ EBITDA. Under phase four, we think that carbon costs will increase slightly but still comprise a modest share of total costs. More notably, we have not highlighted any material differences in competitive positions among European players based on their carbon intensity. This reflects that differing levels of carbon intensity have had little financial or business impact on the sector so far. The sector’s ability to pass through these marginal cost increases is an important credit support and reflects sustained demand ahead of construction backlogs (see chart 1). Low carbon costs until recently mean most companies still benefit from a surplus of received allowances carried over from past years (see chart 2). This means companies’ exposure to carbon costs is still broadly contained, even in today’s higher carbon price environment.
Climate transition risk and the rating implications for cement-makers
Cement companies are high emitters of CO2. They have among the highest carbon intensity of all sectors and, as such, are exposed to climate transition risk (see “Environmental, social, and governance principles in credit ratings,” published Oct. 10, 2021). Carbon regulation and raising carbon costs is a key risk for cement manufacturers as their profitability can be undermined in the medium term. Production or product innovation could potentially reduce carbon emissions. But decarbonization can be very expensive, and some technologies to capture carbon are still in prototype. 
Climate transition risk has so far had limited influence on our ratings on cement manufacturers. This is because the costs linked with high carbon emissions have been contained, reflecting limited (EU) or no carbon regulation (elsewhere). The EU ETS dates from the 2000s, but cement companies have received free allowances covering a large share of their carbon emissions. We also note that there are few cement alternatives at present, which should preserve steady volumes in the medium to long term and enable cement producers to pass through higher costs. 
We factor climate transition risks into our ratings on cement companies when we assess a company’s business risk and financial risk profiles. More specifically, we incorporate climate transition risks into our assessment of a company’s competitive position and cash flow/leverage analysis. Among the key factors we consider for our competitive position assessment are:
Effective local carbon regulation, which typically translates into monetary costs associated with carbon emissions, for instance, free allowances and/or carbon price/tax.
How high an issuer’s carbon emissions are, and its carbon intensity relative to the sector average.
The issuer’s commitment to cut emissions, how far advanced it is, and whether it has a track record of emissions reductions.
Technologies adopted to reduce emissions and associated capital investments.
Investments in research and development to develop innovative technologies to capture emissions.
Risk of cement substitution with other products, and cement demand trends.
Innovative product offerings such as low-carbon cement or concrete, or the use of recycled or new binder materials; significant price premium gained by using such products compared with standard cement products; share of innovative products in total revenues.

In our cash flow/leverage analysis, we incorporate the monetary costs associated with carbon emissions if present.
We also reflect the capital spending linked to carbon reduction initiatives and greener production processes. Both can reduce a company’s free operating cash flow.

The EU is furthest along globally in cement industry regulation. Its emissions trading scheme currently covers about 4% of the world’s cement production. In the U.S., only 13 states currently have a carbon pricing mechanism for power generation, and California is the only one that applies a carbon price to cement production. China’s ETS only covers coal and gas power generation emissions at the moment, but the government has signaled its intent to include emissions from industries such as cement production. The EU-only scope of this research reflects that the other regulations are still evolving, which does not allow us to determine easily the assumptions for this research.
Still pending EU members’ approval is a proposal to increase the 2030 target to a 55% reduction in carbon emissions, up from 40% currently. It would tighten annual caps and therefore reduce the supply of free carbon allowances, much more so than the current phase four. The linear reduction factor (LRF; the annual decrease of allowances) would almost double to 4.2% from 2.2% and be accompanied by a small one-off reduction. 
Furthermore, the EU is proposing to gradually introduce a Carbon Border Adjustment Mechanism (CBAM) to impose fees on imports from neighboring countries based on emissions incurred in their production, and cement is included. We understand the policy intent is to both protect European manufacturers from unfair competition as well as to avoid a flight to production sites outside the EU (“carbon leakage”). However, the CBAM would be accompanied by a complete phase-out of free allowances in 10 years, from 2026 to 2035.
In June 2022, the European Parliament voted on ETS reform and the CBAM, agreeing that the latter would not start until 2027. The European Commission had initially posited 2025. The later starting date, however, comes with a much faster phase-out of free allowances, down to five years from 10 initially, between 2027 and 2032. This would accelerate carbon deficits for cement companies.
Reflecting the market’s perception that regulatory pressure is increasing in Europe, the EU ETS price has soared since 2020, with a monthly average approaching €90 per metric tonne in January 2022 from below €10/tonne on average over the past decade. The gas crisis in Europe amid the Russia-Ukraine conflict and the resulting increased use of high-carbon-emitting coal sources has somewhat reduced ETS prices in 2022.
Chart 1

The European Parliament’s step forward is not the final one for EU ETS reform. Details are lacking, but we understand the EU Parliament, the Council and the Commission are in negotiations. The reform has complex implications, which makes it difficult to fully grasp what it means for the European cement sector. We also recognize that under the current implementation timeline of 2027, sector players would still have time to adjust their operations and capital structures in the face of potential regulatory changes. Given the uncertainties, our ratings do not currently incorporate these potential evolutions; the direction and visibility of those climate-related factors could change rapidly. Therefore, our research focuses on assessing, with scenario analysis, how companies’ profitability could be affected by new regulations (see section below: How companies’ profitability could actually be impacted: Findings of our scenario analysis).
The so far limited effect of carbon costs on cement companies’ profits and financial risk profiles could change under the proposed EU ETS reform. This is because most manufacturers would likely rapidly consume any stockpiled carbon allowances and start paying much higher carbon costs. Their ability to sustainably pass-through much higher costs to customers would be tested. We note that so far, amid rising energy prices in Europe, cement manufacturers have been able to increase cement prices, albeit with some time lag, largely preserving their EBITDA and sales volumes. 
Under the proposed EU ETS reform, companies that are further along the decarbonization path, with lower carbon intensity, would be better off. Larger companies that have invested more to cut emissions or diversified in favor of circularity and low carbon products are in a comparatively stronger position. Smaller producers could risk a slump in profitability and cash flows, potentially leading to market exits. That said, most of our rated EU producers are regional or global, with lower-than-market-average carbon intensity. This means their competitive positions could even benefit from such market disruption. Larger issuers also generally benefit from geographic diversification outside the EU, with a meaningful share of revenues not subject to EU ETS rules.
Chart 2
Note: Average calculated on the following companies: Cementir, Titan Cement, Buzzi Unicem, Holcim, CRH and Heidelberg Cement. Sources: Companies’ reported data; S&P Global Ratings calculations.
If higher carbon costs lead an EU cement manufacturer to post a below-average S&P Global Ratings-adjusted EBITDA margin — that is, sustainably below 15% — we would revise down our business risk assessment. For context, the EU cement sector’s EBITDA margin currently averages 19%-21% (see chart 2). Our business risk assessment also factors in an entity’s ability to increase (pass through) prices when costs rise and its productive efficiency relative to peers. If lacking, we could revise down our assessment. This could lead to us taking negative rating actions, absent any remedial measures. We could consider downgrading companies that do not adjust their financial policies or cannot rapidly adapt their assets to mitigate rising carbon costs. Other considerations would be whether carbon capture technology became widely available and affordable; or if the lack of cement substitutions continued to allow cost pass-throughs; or if low-carbon cement products become widely available. 
If future developments in technology, regulation, carbon pricing, demand or cost pass-through become more visible and influential to our analysis of creditworthiness, we will reflect them in our ratings. This could, for example, see us update the headroom for credit metrics currently available in our ratings, potentially leading to ratings actions (see chart 3).  
Chart 3

We conducted two simulation exercises under our hypothetical scenario analysis to compare the two EU proposals and their potential implications for our ratings on cement companies. One scenario is under the July 2021 European Commission proposal. The second assumes EU members will pass the June 2022 EU parliamentary vote on ETS reform and the CBAM, with the later starting date of 2027 accompanying a much faster phase-out of free allowances, between 2027 and 2032. In both simulations, we assumed a more favorable and less favorable scenario, which reflects different business conditions and companies’ ability to pass through carbon costs.

*See below on main assumptions underlying our scenario analysis for more details on more favorable and less favorable scenarios.
Click here and here to view full size table.
Our scenario analysis concludes that more geographically diverse cement companies and those with lower carbon costs would see a much smaller EBITDA decline.
We also anticipate that leaders in carbon emissions reductions would be better off than less-efficient companies because their marginal cost of cement production would be lower. This would increase their competitive edge in the sector. This is why we anticipate market consolidation with several small players being acquired by larger players or exiting the market. Most of the companies we rate in the EU are regional or global producers with lower-than-market-average carbon intensity and with geographic diversification outside the EU. Still, decarbonization paths differ within the EU; large companies such as HeidelbergCement are better positioned than purely regional players, reflecting their lower CO2 emissions and their higher investments in projects to capture carbon. We would consider negative rating actions if we observed structurally weaker profitability due to higher carbon costs, leading to weaker credit metrics. We believe that financial policy — and the ability of a company to balance shareholder remuneration with managing credit metrics — will be a key rating driver.
Chart 4
Chart 5
There are some factors not included in our scenario analysis, which may change the outcome.
Our scenario analysis does not incorporate the potential benefits arising from the widespread adoption of CCUS technology at the end of this decade. For example, if HeidelbergCement’s new 2030 carbon reduction target were to become the industry standard, carbon costs could be lower than we have assumed. Our scenarios also do not consider the effects of a widespread adoption of carbon regulations outside the EU, which would likely translate into higher carbon costs as well as accelerated investments to reduce emissions. We also do not factor in risks of structural decline in demand due to increased efficiencies and more readily available alternatives in the construction process.
The main assumptions underlying our scenario analysis:
Constant cement volumes in both the EU and the outside EU.
Revenue and EBITDA growth of 1% per year from 2022 (sector average).
Our estimation of chargeable CO2 emissions in the EU based on our discussions with rated companies.
Reduction of CO2 emissions in the EU, through to 2030, as per companies’ public commitments or based on more detailed assumptions that companies have shared with us.
Our estimation of carbon-free allowances received in 2021 and stocks of carbon credits carried over from previous years based on our discussions with rated companies.  
Free allowances will reduce, as per the European Commission’s “Fit for 55” proposal of July 2021 (4.2% load factor and progressive phase-out of free allowances in 2026-2035) and as per the EU’s June 2022 parliamentary vote on “Fit for 55” :that is, a higher load factor and progressive phase-out of free allowances in 2027-2032.
Companies would first utilize their available stocks of carried-over free allowances, when available, to cover their CO2 deficits.
Progressive increase in CO2 prices from €100 in 2025 to €125 in 2030 and €150 in 2035, as per S&P Global Commodities Insights’ published forecasts.
No carbon leakage in the EU, prevented by the CBAM.
In our more favorable scenario associated with stable operating conditions, we assume that cement companies with lower-than-average emissions would be able to largely pass higher carbon costs through to clients, albeit with a lag of six to nine months following the introduction of the CBAM. Higher-emitting companies would experience a longer lag before being able to pass on costs, which would weigh on their profitability. We assume a longer lag for cost pass-through if the EU phases out free allowances in five years, as per the parliamentary vote, given the significant drop in carbon allowances and the sudden increase in carbon deficits that would follow. 
In our less-favorable scenario, we assume that cement companies’ pass-through strategies are less effective. This would largely reflect weaker operating conditions, for example due to prolonged business contraction, reduced demand or a decline in pricing discipline. In this scenario, the cost pass-through lag would widen compared with the more favorable scenario.

Industry Top Trends Update: Building Materials EMEA, July 14, 2022
Industry Top Trends 2022 Building Materials, Jan. 25, 2022
ESG Credit Indicator Report Card: Building Materials, Nov. 19, 2021
Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
ESG Materiality Map: Building Materials, May 18, 2022
Key trends that will drive the ESG agenda in 2022, Jan, 31, 2022
GCCA 2050 Net Zero Roadmap Accelerator Program, Global Cement and Concrete Association 
Cement report, International Energy Agency, September 2022 


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