MBA 510 Financial Accounting Financial Analysis Project Harvard Case Solution & Analysis

1.1. Industry Overview

The aim of this report is to take a closer look at the building materials industry as a whole and the publicly traded Swiss company Holcim in specific. This report contains an overlook of the cement industry, its characteristics and logistics in addition to an evaluation and analysis of the company’s financial position, liquidity and more to clarify the company’s performance based on 3 years’ worth of annual reports and comparing ratios.

 The report will include the following:

  • An industry analysis of the cement industry through a macro and micro scale processed
  • Annual reports of Holcim and two of its competitors in the market Cemex and Heldberg including income statements, balance sheets and cash flow statements
  • A description of the operations and strategies of an individual company

“The cost of cement plants is usually above € 150M per million tons of annual capacity, with correspondingly high costs for modifications. The cost of a new cement plant is equivalent to around 3 years of turnover, which ranks the cement industry among the most capital-intensive industries. Long time periods are therefore needed before investments can be recovered and plant modifications have to be carefully planned and must take account of the long-term nature of the industry.

Each tone of cement produced requires 60 to 130 kilograms of fuel oil or its equivalent, depending on the cement variety and the process used, and about 110 KWh of electricity.

With the development of modern automated machinery and continuous material handling devices, the cement industry has become a process industry using a limited amount of skilled labor. A modern plant is usually manned by less than 150 people.  In the EU the cement industry represents 45 000 direct jobs. In CEMBUREAU countries, it represents approximately 56 000 direct jobs.

Although produced from natural raw materials, which vary from plant to plant, cement can be considered a standard product - there are only a few classes of cement and in each class, products from different producers can generally be interchanged. Therefore, price is the most important sales parameter next to customer service; quality premiums exist but are rather limited.”(The European Cement Association , 2014)

A heavy product

Land transportation costs are significant and it used to be said that cement could not be economically hauled beyond 200 or at most 300 km. The price of long road transportation may even be higher than the cost price. Bulk shipping has changed that, however, and it is now cheaper to cross the Atlantic Ocean with 35 000 tons of cargo than to truck it 300 km. However, in large countries transportation costs normally cluster the markets into regional areas, with the exception of a few long-distance transfers (where, for example, sea terminal facilities exist).

Demand for cement (which was first produced in the early 1800s) increased considerably in the 20th century, reflecting the development of industry and growing urbanization. Consumption in the industrialized countries multiplied 6 to 8 times following World War II. Other than a few ups and downs in both the United States and Europe in the intervening years, growth continued until the 1975 oil crisis - with a subsequent decline of 20 to 40 percent in mature markets.

However, over the last 25 years, some European countries have doubled or even tripled their consumption (Greece, Portugal, Spain and Turkey), since these countries have experienced significant growth over the last 10 years.  (The European Cement Association , 2014)

Market parameters

Consumption of cement is closely linked to both the state of economic development in any given country or region and to the economic cycle.  In mature markets, such as in Europe, where cement consumption per capita still varies considerably from one country to another, cement sales are dependent on evolution and habits in the construction sector a sector that is itself following very closely (usually after a brief delay) the evolution of the economy in general.”(The European Cement Association , 2014)

 

Production process

Cement is produced by mixing iron, aluminum, silicon, and calcium burnt together and are thinly ground to create the powder used as component of mortar and concrete which we name cement. Cement hardens when it is mixed with water. The most common type of cement is Portland cement, which divided generally into gray and white. Gray cement is the most known, as people refer to it when they name cement. Gray cement is made from clinker and calcium sulfate while white cement contains limestone, kaolin and gypsum.(Abdullazade, 2014)....................

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