Cement Plant Project Financing

Cement plant project financing empowers the industry, allowing companies to implement capital-intensive projects without burdening their balance sheets with multimillion-dollar debts.

Meanwhile, the history of PF goes back more than a hundred years. This method of financing originated in England at the turn of the 19th and 20th centuries.

During 1970s and 1980s, a considerable part of projects implemented under this scheme were in the oil and gas sector. The impetus for the rapid development of project finance was the oil crisis of 1973, when many governments and private companies were actively searching for oil in different parts of the world (North Sea, South America), faced with rising prices. Subsequently, this financial concept spread to such areas as the construction of cement plants, power plants, water supply systems, desalination plants, toll roads, airports, and so on.

The idea of co-financing the construction of capital-intensive facilities against future financial flows has accelerated the development of strategic industries worldwide, from China to the United States. Today, project finance is actively adopted by leading engineering companies, equipment and construction materials manufacturers, international financial institutions and the world’s largest banks, such as Spain’s BBVA or Santander.

All these players are involved in the construction of large enterprises, the expansion of infrastructure and the emergence of new industries, such as the renewable energy sector.

The role of project finance in cement plant construction

Project finance means allocation of financial resources for investment projects without recourse to the borrower. It is a method of financing based solely on the cash flows generated by the project itself. In other words, the cash flows and assets of the future plant are used as a guarantee of repayment of the loan. This serves as a guarantee to compensate for losses in adverse technical or economic scenarios that may occur throughout the life cycle of the project. In contrast to traditional lending, in this case the lenders assume most of the risk, being fully responsible for the success or failure of a particular project. PF can be used when a group of related assets is able to function effectively as an independent economic unit.

Only a viable and potentially profitable project with promising market opportunities can be realized through project finance. Since the cement industry is highly dependent on the state of the global economy and is subject to severe fluctuations, the demand for cement, reinforced concrete products and other construction materials is also volatile. The recent economic turmoil has had a negative impact on the global cement market and has led to a situation where many cement plants in Europe and beyond have been forced to operate below full capacity.

Meanwhile, the cement industry is considered one of the most capital-intensive industries. The cost of building a cement plant with a capacity of 500,000 tons per year is about €70–80 million, which is equivalent to the cost of cement produced in 2–3 years of operation at full capacity. When developing the project, it is important to plan access to seaports and take into account that transportation of products by land is considered profitable only if the distance to the consumer is up to 300–400 km. Providing the plant with fuel and electricity also requires the attention of investors.

Main expenses for construction of a cement plant include purchase of land, obtaining of official permits, civil construction and installation of equipment, testing and commissioning of the facility, construction of electrical substations and power lines, new roads and access roads, implementation of environmental protection measures around the construction site, etc.

Advantages and Disadvantages of project finance in the cement industry:

As mentioned above, PF is quite expensive due to the high risk for investors and the need for numerous studies, expertise and consultations. Although not all projects can be financed through this mechanism, a number of advantages make project finance a very attractive option for the construction of large cement plants. First, project finance makes it possible to distribute risks among several participants. It is not one company that takes the risk of the project and is responsible to the lenders with all its assets.

SPV brings together all the stakeholders, including the project initiator, financial and strategic investors, investment funds, venture capital, banks, and construction companies. Without this distribution of risk, it is unlikely that a single company would have been able to implement such a project quickly, given the scale of the investment to be made. Indeed, few companies would be able to build a large cement plant worth 200 million euros using only internal financial resources.

The creation of an SPV means that the financing is removed from the project initiator’s balance sheet. The SPV as the “owner” of the project is a debtor, so the initiator does not worsen his balance sheet and can continue borrowing. Secondly, long-term financing is impossible or difficult in many countries because of the immaturity of the local market. For this reason, large investment projects with a long payback period can be implemented only in the case of project finance. Where one company or country gets credit only for 5–10 years, some projects, if properly organized, can attract financing for 13–15 years under more favorable conditions. Viable projects in many sectors, well structured within the PF and accompanied by an information memorandum, attract respected institutions (World Bank, OCD, IFC) that serve as a catalyst for full financing from the rest of the market. These players would never have been attracted to the project otherwise. For example, your company is planning to build a cement plant in a poor and unstable developing country. In this case, the economic, political and social situation in the country will be seen as a source of risk and uncertainty, and international financial institutions can greatly improve the overall picture and convince investors to participate in the project. At the same time, most transactions are insured by specialized insurance companies, sometimes even with the support of national governments. It can be said that the opinion of these transnational organizations can stimulate and encourage potential investors to enter the project, although the opposite can also happen.

The results of debt ratings (e.g. Moody’s) are now published almost daily. If a country’s rating is downgraded, it becomes harder and more expensive to finance projects. The same is true for large companies. All of these factors can affect the viability of a project on a speculative level. There is a boom in project finance around the world, as many governments seek to reduce public spending and shift the implementation of major infrastructure, environmental, energy and many other projects onto the shoulders of private capital. Accordingly, foreign investors are becoming very sensitive to rating changes, reacting quickly to the situation of the host country.

Advantages

If you are interested in long-term project financing of a cement plant on flexible terms, make Havelet Finance Limited your best bet. Our finance team is ready to offer unique options for large business financing anywhere in the world.

Disadvantages

Unfortunately, there is no one right way to finance projects that works for all industries and companies. Project finance also has a number of drawbacks that limit its use. In particular, it is far from being the best option for small businesses.

Disadvantages of project finance for cement plants include the following:

1} High fixed costs. This makes it advisable to use PF only for large projects. However, it is a growing practice and more and more projects are being financed with PF, with the average investment amount becoming smaller. As financial institutions feel more comfortable with project finance, this trend will continue.

2} High risk for investors. While project sponsors today bear high risk in arranging PF, growing experience in the field will help reduce risks and uncertainties as financial teams are trained and requirements for participants and the investment projects themselves are standardized. In the past, the list of these requirements was short and rather vague. Strictly speaking, project finance begins the moment a bank provides funds for the construction of a facility. This stage in itself can be a risk for the project.

Financing the construction of cement plants:

Havelet Finance Limited develops a worldwide network of business contacts, involving engineering companies, equipment manufacturers, financial institutions, scientific institutes and governmental agencies.

We provide a full range of project finance, engineering and construction services. Our services in financing investment projects include:

Project finance against future cash flows.
Long-term lending, including 100% credit for the full amount of expenses incurred.
Professional financial modeling and financial consulting.
Providing credit guarantees and more.

Financing of investment projects is at the heart of any business, that is why our team pays special attention to this stage.

We provide large funds (from 50 million euros and more) to implement your ideas, while continuing to advise and support your specialists throughout the life cycle of the project.

Havelet Finance Limited can also negotiates with governmental bodies and other stakeholders, agreeing all aspects of the project.

Our company provides large business with the necessary financial, legal, engineering and construction solutions for the realization of the most ambitious investment ideas in the cement industry and other sectors. Our scope of responsibility includes contractor sourcing and supervision, concession agreements, environmental permits, engineering design, long-term power purchase agreements, tax optimization and much more needed for your future enterprise.

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