Holcim Ltd. (HOLN) Chief Executive Officer Bernard Fontana is turning waste into profit at the world’s largest maker of cement by burning toxic baby dolls, contraband cigarettes and old sunglasses.
Fontana, who last year became the first outsider to run Jona, Switzerland-based Holcim in its 101-year history, is ramping up the use of waste materials, instead of coal, to heat cement kilns from India to Vietnam and cut costs. The expansion into waste management is generating revenues as companies such as cigarette makers pay to burn copycat and expired goods, said Aidan Lynam, an area manager for Holcim in South Asia.
“They watch to make sure every last cigarette goes into our kiln,” he said, referring to manufacturers in Vietnam that pay to cremate contraband at Holcim plants. “It disappears like a grain of sand in the Sahara,” he said, adding that at extreme temperatures, cigarettes become part of the cement.
Following more than $10 billion of acquisitions in the decade through 2011, Fontana began a cost-cutting program last year to boost operating profit by 1.5 billion Swiss francs ($1.6 billion) and adjust for declining demand amid the European debt crisis. Burning waste may make some cement plants in Asia as energy efficient as in Europe, helping Holcim to free up cash and compete with rivals Lafarge SA (LG) and Cemex SAB.
“Short term, it’s a massive saving; over time it will slow down,” said Ian Osburn, an analyst at Cantor Fitzgerald in London, adding that energy is about one third of the cost of making cement. “Holcim clearly have been leaders for this and early thinkers, but all the cement manufacturers move quickly to copy each other.”
Alternative fuels contribute about 20 percent of energy used at European cements plants, said Philippe Fonta of the WBCSD cement sustainability initiative, consisting of manufacturers representing about 30 percent of world production. Alternative fuels represent less than 1 percent in markets such as India, he said.
“There’s huge potential, particularly with the use of municipal solid waste in fast-growing emerging countries,” he said. Countries such as India could boost the use of alternative fuels to 25 percent over the next decades, he said.
Cement makers worldwide are seeking to reduce energy costs as they’re cutting expenditures after a slump in demand following the debt crisis and expensive acquisitions.
Cemex (CX:US), the biggest cement maker in the Americas, has posted net losses for 15 consecutive quarters as the U.S. construction market slumped after its $14.2 billion acquisition in 2007 of Rinker Group Ltd. In September 2012, Cemex agreed a debt restructuring with creditors to extend the maturity of bank loans by three years.
France’s Lafarge, which acquired Orascom Cement for 10.2 billion euros ($13.6 billion) in 2008, is seeking to reduce borrowings to below 10 billion euros this year to regain an investment grade rating. It has announced 1.7 billion euros of asset sales since the start of 2012.
Holcim, which paid $4.1 billion for Aggregate Industries in 2005, avoided a drop to junk status. Before today, Holcim has dropped 38 percent in the last six years in Zurich, valuing the company at 22 billion francs, while Lafarge declined 45 percent in Paris and Cemex slumped 48 percent in Mexico City. Today, Holcim gained 0.4 percent.
Holcim’s Untervaz plant in a Swiss valley above the river Rhine is an model for what the cement maker wants to achieve at its emerging market operations. The plant, founded in 1957 by Max Schmidheiny, whose descendant Thomas Schmidheiny is Holcim’s largest shareholder, already uses up to 40 percent alternative fuels to fire up the kilns.
At one point fuel included diseased cattle during the height of the European bovine spongiform encephalopathy (BSE) crisis. Now the plant burns mainly tyre chips and plastics as substitutes for coal or petcoke, said site manager Markus Hepberger, while proudly displaying his latest-model caterpillar truck for transporting rock and a 15 million-franc waste heat recovery system installed by ABB Ltd. (ABBN)
Holcim’s Wadi plant in India can produce six times as much cement as the average Swiss plant in a year, and has a correspondingly large energy bill, Lynam said. Holcim wants to bring Asian plants, especially in India, up to the same level of efficiency as those in Europe, as many factories, acquired through acquisitions, still have uneven levels of knowledge, he said.
Fontana “laid down the gauntlet” to plant managers, adding urgency to cost-saving efforts in energy, the biggest cost in cement operations, Lynam said. Asian energy savings, which contribute “extremely strongly” to the expected 300 million franc total energy savings from the so-called Leadership Journey program, may exceed targets, he said.
Holcim’s thermal substitution rate, or the percentage of alternative fuels used instead of traditional fuels like coal and petcoke, increased to 12.8 percent last year, up from 12.5 percent in 2011. The substitution rate increased by 2 percentage points in the six months through June compared with a year ealier, Fontana said on a call Aug. 15.
Plants make cement by feeding a mix of limestone and clay into a kiln where temperatures can reach as high as 2,000-degrees (3,600 Fahrenheit), turning it into clinker. Clinker is then cooled, ground and mixed with gypsum to yield cement.
Burning conditions inside the kiln will break down waste like expired drugs and pesticides without leaving residues, unlike incinerators which burn at lower temperatures. That makes Holcim’s furnaces perfect for the so-called co-processing of unwanted stock such as defect baby dolls, which were burned because of lead contamination, Lynam said.
To be sure, there are some things Lynam won’t burn, such as Agent Orange, a herbicide used by the U.S. army as a chemical weapon in Vietnam.
“We just don’t want to go there,” he said.
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