Vassiliko Cement to invest EUR 125 mln

To reduce CO₂ emissions by 15-17%

Slash energy consumption by 30%

 

New plant to absorb waste and strengthen competitive position

 

Vassiliko Cement Works Pcl (VCW) is waiting for the green light from the Commission for Protection of Competition on its planned merger with Cyprus Cement in order to commit a record EUR 125 mln for a modern cement production line. 

The new production unit will utilise the best available technology, with significant benefits in environmental performance and production efficiency. Total capacity will increase significantly to cover the increasing demand for cement in the local market and strengthen its exporting activity. 

One important issue is the reduction of the CO₂ emissions that has been dominating the headlines in Cyprus, the EU and other developed countries. CO₂ is largely responsible for global warming and unusual extreme weather phenomena that have been witnessed world-wide.

The replacement of the five old-technology production lines with a state-of-the-art unit will help to reduce total CO₂ emissions at country level and enable Cyprus to meet its commitments without facing any penalties from the European Commission. Furthermore, the new production line will be able to utilise alternative renewable sources of energy to replace traditional fuels. These can be produced from various streams of waste, which also count as a reduction of CO₂ emissions. In this way Cyprus will avoid potentially damaging sanctions and fines for not meeting its environmental obligations, which at the moment are not being met.

Dr. Andreas Panayiotou, Chairman of the board of Vassiliko told the Financial Mirror in an exclusive interview that the cement merger plan may easily be seen as make-or-break for Cyprus to meet its obligations to produce energy from alternative sources, cut down on CO₂  and other emissions, absorb waste and comply with the increasing environmental constraints.

“The planned merger is also crucial for the survival of cement production in Cyprus and will have a major impact on the future prospects of Vassiliko Cement,” said Panayiotou.

He pointed out that “the increasing environmental constraints imposed on the industry will significantly raise the production cost of the current old-technology production lines, becoming uncompetitive at the end of the day”.

“The deal between Vassiliko and Cyprus Cement is a win-win situation for everybody, the shareholders, the stakeholders and the consumer. The increase of total capacity will ensure that the fast-growing demand for cement on the island will be met at all times, at competitive prices and of the high quality at which the Cypriot consumer has enjoyed so far”.

 

The deal

Vassiliko Cement Works and Cyprus Cement (CCC) have signed a preliminary agreement according to which VCW will acquire the cement related operations of CCC as well as CCC’s investments of 50% each in Latouros Quarries, CCC Aggregates Ltd, Athinodorou Beton-Transport Ltd, Athinodorou Beton-Estates Ltd, Athinodorou Beton Ltd and ELMENI (Quarries) Ltd.

The company will issue, subject to EGM approval, a total of 18.199.794 shares to CCC at the weighted average of VCW’s closing price during the three months that preceded the date of the agreement on March 9 (EUR2,89/share). This will represent 25.3% of the issued share capital of VCW.

The deal is subject to the approval by the Commission for Protection of Competition (CPC) as the Cyprus cement industry is a duopoly with VCW holding around 70% market share and CCC the rest.

Once the cement production unit at Moni near Limassol is disbanded, CCC will develop the extensive land area that now is occupied by the plant in new ventures creating new opportunities for growth and development.

 

Best-available-technology production line

Currently VCW operates three production lines with total capacity of 1,35 – 1,4 mln tonnes cement and CCC has two production lines with total capacity of 0,43-0,45 mln tonnes cement.

The new unit planned to be built at Vassiliko at a cost of EUR 125 mln, will eventually replace the five production lines with a total capacity of 2,4 mln tonnes of cement compared to the combined total production of 1,8 mln of the two companies.

The new unit will be one of the biggest installations in the region and will be able to cover the projected increasing cement consumption on the island. It will further strengthen the exporting activity of Vassiliko to the Mediterranean Rim. Exports currently range between 200.000 to 300.000 tonnes per annum depending on local demand. The new capacity increase will enable VCW to export up to 600.000 tones a year mostly to European destinations in the Mediterranean Sea turning Cyprus into one of the leading cement exporters in the region.

Customer relations

Panayiotou said that VCW had a very close, valued relationship with its customers based on the high quality of its products, the high level of service offered at competitive prices. VCW will always be vulnerable to competition from imports from neighbouring low-cost producers (Egypt and other Middle East countries with the advantage of low/subsidised energy and labour cost).

During the last few years, the increase in cement prices was the lowest amongst the building materials range. Cement represents only 4% of the construction cost of a house, and the impact to the final consumer is very low. Fears expressed for unjustified increases in prices are therefore not valid, Panayiotou said. In any case, the framework established for the protection of the consumer in Cyprus and at European Union level is so strong that an attempt by the company to unfairly exploit its strength could risk very high sanctions from competent authorities.

More importantly, Panayiotou said that cement production using the latest technology and constantly modernising production techniques requires huge capital investment, which would have not been economically feasible in small scale operations. This is the reason why in many other EU member states cement is produced by a single operator. In particular, in eight EU countries with very high sensitivity towards consumer protection, there is only one cement producer. These are Holland, Sweden, Denmark, Luxembourg, Finland, Estonia, Latvia and Lithuania.

“The single producer practise is allowed and even encouraged because otherwise the production units would not be able to meet the EU rules on reduction of CO₂ emissions, waste management  and other environmental issues,” said Panayiotou.

 

Environmental issues

The planned new production line will cut fuel consumption by 30%, reduce CO₂ emissions by 15-17% from 2006 levels and replace about 40% of the main fuel with alternative or biological fuels to further cut CO₂ emissions and energy from conventional fuels. Furthermore, the new line will reduce all other solid and gas emissions.

The European Commission has already warned Cyprus that it risks heavy fines for failure to meet the targeted reductions in CO₂ emissions and other waste.

The biggest CO₂ emissions currently released in Cyprus and which are monitored by the EU are caused by the Electricity Authority of Cyprus, the cement sector and the brick factories.

“We either reduce emissions or Cyprus will be obliged to buy emissions rights from other countries that do reduce their emissions at the current rate around EUR 20 per ton CO₂ (for the second trading period of 2008 – 2012), in order to avoid fines. In any case the cost for compliance, if a solution is not found, will be transferred to the final consumer from any of the above involved sectors. Financially, it would not make any sense for Cyprus to spend cash on something that it could just avoid by allowing its biggest emission producers to become more modern, environmentally friendly and competitive,” said Panayiotou.

The new plant will also absorb most types of industrial waste and use them as fuel in the kilns in controlled processes, without any negative impact on the atmosphere, which will earn Cyprus more credits in CO₂ emissions.

Vassiliko will also be in a position to absorb chemically stabilised biofuel (green coals) from the processing of selected waste streams, which will count as renewable energy source for the company but also for Cyprus.

“Not only will we be in a position to reduce our fuel costs, save on imports, but we shall solve many of the country’s environmental issues, which is why it is so crucial for the Commission for Protection of Competition to view the deal for the benefit of the whole country,” adds Panayiotou.

Vassiliko submitted its documents to the Commission on March 16 and hopes for a positive reply by the end of July in order to proceed with its new production unit which will be fully funded from borrowings. The project will take 2-3 years to complete.

 

Exit CSE Main Market

The only downside is that VCW will probably be forced out of the CSE’s Main Market since it will not be able to satisfy the minimum public dispersion rules. If the deal is allowed to proceed, CCC will hold 25.3% of the share capital of the enlarged company with Italcementi Group, now with a 33% stake dropping to 25.3% and Hellenic Mining Company also seeing its stake falling to 25.3%.

Holcim Group, the giant Swiss cement conglomerate which has 19% in CCC will participate in the new Vassiliko through CCC’s 25.3% stake. The other principal shareholder of VCW is the AG Leventis Foundation, which will be left with a 5.5% stake after the merger.

“This means 82% of the capital will be shared among the major shareholders, leaving only 18% among the public and since none of the major shareholders wishes to reduce its stake, there is a good possibility that VCW will be forced out of the Main Market but will certainly remain a CSE-listed stock,” said Panayiotou.

 

Italcementi welcome

Panayiotou says Cypriot investors should be proud at the fact that Italcementi, the Italian cement giant has agreed to remain as a principal shareholder of Vassiliko and plans to help in the construction and future production of the new unit.

“Italcementi has contributed significantly to the development and progress of Vassiliko by sharing its know-how in cement production and advising on new technologies and we are so happy and relieved that they intend to stand by us in this important milestone for our company,” concluded Panayiotou.