Construction materials are set to benefit from infrastructure and housing projects

With road and residential construction thriving, Colombia’s construction materials industries appeared poised for steady growth in the medium term. Materials produced domestically include cement, steel, PVC, brick and several raw resources including gravel, sand and metallurgical coal. All of these sectors stand to benefit from large-scale government infrastructure projects and subsidy programmes. The initiatives, which include low-cost housing developments, mortgage subsidies and highway projects, aim to address, above all, the housing deficit and inadequate road networks.

Construction Projects

The governments of Presidents Álvaro Uribe and Juan Manuel Santos, as well as recent mayors of Bogotá, have made public housing projects a priority. The Santos government set a goal of building 1m homes for economically vulnerable citizens by 2014, and although the target will not be reached on time, the programme set in motion a spate of residential development across the country. In Bogotá, the municipal government has overseen the construction of hundreds of thousands of homes, some of which have been given to poor families for free. The national and local governments have become focused on home construction in the past decade as the population has grown significantly. Between 2000 and 2012 Colombia’s population increased by almost 20% compared to growth in regional peers Mexico and Argentina of 16% and 11%, respectively. As a result of this, the housing deficit has widened to concerning levels, reaching around 1.5m homes in 2014. Furthermore, the rate of construction has been unable to keep pace with demographics, and thus the deficit is expected to continue growing in the coming years. As the government continues to combat the housing shortage, producers of cement, PVC and other construction materials expect to see increased demand from the public sector.

Additional opportunities will also come from the ongoing 4G infrastructure project, which includes 40 concessions for building major highways. These concessions, for which bidding is taking place throughout 2014, will create significant demand for steel and concrete in the medium term.

Steel Production

Two companies, Acerías Paz del Río and Diaco, are the dominant players in the steel industry, and they produce 1.2m tonnes per year in total. However, these companies have struggled recently. In 2013 Paz del Río lost $127m. In October 2013 both firms asked the Ministry of Trade, Industry and Tourism (Ministerio de Comercio, Industria y Turismo, MCIT) to implement safeguards protecting domestic steel production from imports. The MCIT acquiesced and put in place tariffs on six types of steel products for a trial period of 200 days, during which the ministry would evaluate the effects on the market. Steel producers praised the decision, citing the global surplus of steel production capacity, which creates a risk of dumping.

Consumer groups, construction companies and steel merchants, on the other hand, opposed the safeguard. Some of these stakeholders – including steel importers and distributors, construction companies and firms that create products from steel inputs – formed the Colombian Steel Chamber (Cámara Colombiana del Acero, Camacero) specifically to oppose the safeguard. The chamber has argued that the factors threatening the domestic steel industry are not imports but internal inefficiencies. Supporting this claim is the fact that Colombian demand for steel exceeds domestic production by almost a factor of three. As a result, some have viewed the safeguard as a backwards measure. “If there is a steel deficit in the country, the answer should not be restrictions on imports, but incentives for national production, benefitting the value chain as a whole,” Edgar Plazas, Camacero’s president, told OBG.

International opposition to the safeguard came from Turkey, the EU and Brazil, all exporters of steel to Colombia, who threatened to file a complaint with the World Trade Organisation (WTO) over the tariffs.

After the trial period, the government agreed with the safeguard’s opponents. In March 2014 the tariffs were lifted on five of the six steel products to which they had been applied. Tariffs on non-corrugated wire rod were left in place. “There was no causal relationship between imports and damage to the companies. A relationship was only found in the case of smooth wire rod,” Santiago Rojas, the former minister of commerce, industry and tourism, said. In the case of noncorrugated wire rod, a tariff of 21.29% will remain in place on all imports from Mexico and Trinidad and Tobago beyond the first 174,452 tonnes per year until April 2015. The tariff may be extended for an additional year at that time. In response to the suspension of the safeguard, Turkey, the EU and Brazil said they would not move forward with their WTO complaint.

Cement

Cement industries tend to be regional and oligopolistic. Production is usually located close to consumers because of the high cost of transport relative to the low price of the product and markets are generally dominated by a small number of players due to the business’s high capital requirements and low margins. Colombia’s cement industry adheres to both of these general tendencies: the country’s exceptionally high transportation costs have led factories to locate as close as possible to customers, and the industry has consolidated to the point that three players control Cementos Argos, CEMEX Colombia and Holcim have 49%, 34% and 15% market share, respectively. Along with several small companies, they produced 10.9m tonnes of cement in 2013, making Colombia the third-biggest producer in Latin America (Mexico and Brazil each produce more than 30m tonnes). Each company is strong in specific domestic markets near their plants. Argos is the dominant player in Antioquia, Valle del Cauca and the Atlantic coast. CEMEX is the leader in Bogotá, Santander and the south-west. Holcim has one large plant, with production capacity of 2.1m tonnes, in Boyacá.

Traditionally, these companies have sold more than three-quarters of their cement in packaged form to consumers (rather than in bulk to professional clients). As a 2013 report by a CEMEX research team pointed out, this breakdown of cement sales is typical in developing countries where much construction is done by private individuals who are working without professional assistance. In the developed world, where a greater share of construction is carried out professionally, the proportion of packaged to bulk cement sales tends to be inverted. In the past few years formalisation of the construction sector, stimulated by the government’s housing projects, have nudged cement sales toward a distribution more like that of developed countries. From 2000 to 2013 bulk sales of cement more than tripled, while packaged sales increased by 1.7 times, resulting in bulk sales reaching 33% of the market.

Despite the increase in demand for cement since 2003, prices have declined slightly in real terms. Between 2001 and 2004 the price of cement hovered below COP15,000 ($7.50) in terms of year 2000 Colombian pesos. The price crashed in 2004 and 2005, bottoming out around COP6000 ($3) before bouncing back and stabilising for several years around COP10,000 ($5). Since 2010, the price has moderately but consistently increased, which has led to allegations of price fixing. In August 2013 the Superintendency of Industry and Commerce opened an investigation regarding claims that Argos had conspired with CEMEX, Holcim and two other companies to increase prices. The companies have denied any wrongdoing. As of mid-2014 the investigation had not reached a conclusion. Still, if evidence of price-fixing is ultimately discovered, the government could place caps on cement prices as it did recently at the conclusion of a separate probe regarding prescription drug price-fixing.

The most significant obstacle faced by the cement industry, and the area that provides the greatest opportunity for savings, is the cost of transportation. The high costs are the result of slow-moving roads and expensive fuel, compounded by the inherent costliness of transporting cement. “Moving a tonne of cement from Bogotá to Cartagena is more expensive than bringing it from Asia,” Edgar Ramírez Martínez, vice president for planning at CEMEX Latin America in Bogotá, told OBG. Despite the fact that Colombian cement producers have built their plants close to the markets they serve, according to Ramírez, transport still accounts for 30-40% of total costs. As a result, the ongoing highway projects may prove to be doubly beneficial to the industry, creating demand in the medium term and likely decreasing costs in the long term.

PVC

Colombia consumes around 200,000 tonnes per year of polyvinyl chloride (PVC), much of which is used for tubing in construction. Mexichem Resinas Colombia, a subsidiary of the Mexican chemicals giant, meets between 85% and 90% of this demand and also exports PVC worth $200m per year. Production of PVC and other plastics in Colombia could grow in the coming years as Ecopetrol and other companies have invested heavily in expanding refining capacity (see Energy chapter).

Brick

Colombia produces about 4.5m tonnes of brick per year and exports $65m worth of the material. Like the country’s mining sector, brick making is carried out by a wide range of actors from professional, modern companies to rural dwellers. The majority of brick making operations – more than 70% according to a 2013 report by Mexico’s National Environmental Institute – are small-scale, artisanal projects. These operations produce income and cheap construction materials for rural communities, which the government is striving to develop. But, as is the case with informal mining, this economic output comes with an environmental cost. The informal brick makers are unregulated and adhere to no emissions standards. They release large volumes of particulate matter, which compromise air quality and can cause illness in children and premature death. So far, the government has done little to directly tackle informal brick making, as other informal sectors, such as mining, are higher priorities.

Coking Coal

Metallurgical coal, also known as coking coal or coke, a raw material for steel production, became a growth industry in Colombia in 2010 and 2011. As steel production rose in Asia, global supply of coke was squeezed, leading to skyrocketing prices and a scramble to discover new coke resources. In the first three quarters of 2011, the price of coking coal shot up from about $200 per tonne to more than $330.

Colombia benefitted from the new market dynamics. The country has long been a major thermal coal producer and exporter (see Mining chapter), but coke reserves were paid less attention. As coke prices rose, a number of North American and Australian exploration and production companies, many of them newly formed for the purpose, rushed to exploit Colombian coke resources, including Colombia Energy Resources, Tigers Realm Coal and New Age Exploration. However, since the price jump and the concurrent spate of exploration investment, the coke price has crashed – the price cracked the $100 barrier in 2014 – pushing many new projects below the threshold of economic viability. As of mid-2014 analysts do not expect prices to rebound to their previous levels. Goldman Sachs projects premium hard coking coal prices of $145 in 2017.

New Revenue

Some relief has come from other construction materials. Many coal mining concessions also include reserves of raw building materials such as sand, gravel and other aggregates. As Colombia’s road building projects continue, demand for such materials will grow. As a result, miners, including Colombia Energy Resources, are tapping these resources to develop new revenue streams from existing coke concessions.

Demand for construction materials can be expected to continue growing, as high levels of public spending on infrastructure are planned for the next decade. Specific sectors’ ability to profit from this demand may vary, depending on internal efficiency and the extent to which they rely on domestic public sector demand versus international commodity prices. Steel, for example, has shown itself to be somewhat less than competitive in comparison with foreign companies, while domestic cement producers occupy the enviable position of selling a product that is too expensive to import due to high shipping costs. In a country that has seen numerous manufacturing sectors damaged by international trade, this may be the greatest safeguard of all.

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The Report: Colombia 2014

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