Saving a packet

Holcim chief executive 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 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 was generating revenues as companies such as cigarette makers paid 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 US$10 billion of acquisitions in the decade to 2011, Fontana began a cost-cutting programme last year to boost operating profit by 1.5 billion Swiss francs (HK$12.8 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 and Cemex.

"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 a 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 contributed about 20 per cent of energy used at European cements plants, said Philippe Fonta of the WBCSD cement sustainability initiative, consisting of manufacturers representing about 30 per cent of world production. Alternative fuels represented less than 1 per cent 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 per cent over the next decades, he said.

Cement makers worldwide are seeking to reduce energy costs as they cut expenditures after a slump in demand following the debt crisis and expensive acquisitions.

Cemex, the biggest cement maker in the Americas, has posted net losses for 15 consecutive quarters as the US construction market slumped after its US$14.2 billion acquisition in 2007 of Rinker Group. In September last year, 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 (HK$104 billion) in 2008, is seeking to reduce borrowings to below €10 billion this year to regain an investment grade rating. It has announced €1.7 billion of asset sales since the start of last year.

Holcim, which paid US$4.1 billion for Aggregate Industries in 2005, avoided a drop to junk status. Holcim has dropped 38 per cent over the past six years in Zurich, valuing the company at 22 billion francs, while Lafarge declined 45 per cent in Paris and Cemex slumped 48 per cent in Mexico City.

Holcim's Untervaz plant in a Swiss valley above the river Rhine is a 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, uses up to 40 per cent 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 burned mainly tyre chips and plastics as substitutes for coal or petcoke, said site manager Markus Hepberger.

Holcim's Wadi plant in India could produce six times as much cement as the average Swiss plant in a year, and had a correspondingly large energy bill, Lynam said.

Holcim wanted 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 had uneven levels of knowledge, he said.

Fontana "laid down the gauntlet" to plant managers, adding urgency to cost-saving efforts in energy, Lynam said. Asian energy savings, which contribute "extremely strongly" to the expected 300 million franc total energy savings from the so-called Leadership Journey programme, might 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 per cent last year, up from 12.5 per cent in 2011. The substitution rate increased by 2 percentage points in the six months to June compared with a year earlier, Fontana said.