In this exclusive interview with Cement Americas, the new chairman of the Portland Cemenst Association discusses the dire state of the industry, whether a stimulus package is enough to end the freefall, plant closings, and how the latest sustainability and green building efforts tie it all together

Cement Americas: You have become chairman of PCA at an interesting time — one of the most challenging times the industry has ever seen. Can you talk about the current state of the industry as you see it, and where you see it going in the next year or two?

Enrique Escalante: Sure. That's a funny question because many people asked me when I became chairman, ‘How did you pick this time to be chairman?’ Obviously, I've been in the line for this job and on several subcommittees for many year, so when the nominating committee asked me if I'd serve as chairman, I said ‘Yes.” I'll work for the industry in any way I can. That was a couple of years ago, so nobody thought that the downturn cycle was going to be as deep as it is this time.

The cement industry, as you know, is a cyclical industry, as it's tied to the construction industry. Nobody predicted how difficult this time was going to be. We expected a downturn, but it's going to be a lot more challenging this time. 2009, as you may know from our economist Ed Sullivan, we're projecting a 15 percent further decline, but things are changing so rapidly that it could be less, it could be more. The industry is very regional, so some areas may experience even higher decline than others. 2010, we were originally expecting an upward trend — or at least less of a drop off — but that has been pushed back to 2011. My personal view is that 2009 and 2010 are still going to be very difficult years for the industry, especially 2009. Of course, there's a caveat, and we don't know exactly yet what's going to happen with the second economic stimulus package. Depending on how fast that can be deployed and implement, our industry is going to be one of more favored ones in terms of recovering from the downturn. President Obama has announced that the reconstruction of infrastructure is a major objective, so that will benefit us and accelerate the recovery, so the forecast for 2010 could improve a little bit.

Cement Americas: Does that seem to be on track to help out in 2010?

Enrique Escalante: I wouldn't expect too much in the way of positive effect in 2009. We should see the increases begin in 2010. All of this infrastructure planning has to take place on the local level too, so state and local governments have to run them. And it's always a question of how fast the projects can be planned, approved, and funded. I guess I hear what everybody else hears in terms of the priorities of the new government in terms of expediting. There are certainly projects that are ready and in line to go, in order to stimulate the economy, but I don't have any specific information yet as to how they're going to do that. Let's hope the political aspect of it is reduced in lieu of pushing hard for making the money flow to the states and their different projects as fast as possible.

Cement Americas: And obviously we're not just talking about highway projects, as far as projects that might stimulate the economy. Public works is often a component as well.

Enrique Escalante: Absolutely. We're also looking at schools, which is one of the big priorities of the new administration, hospitals, water infrastructure, dams. You're right, it's an array of infrastructure project that, according to President Obama, will have both a short-term effect and a long-term affect on what he intends to do in other sectors of the economy.

Cement Americas: With cement demands so low right now, is PCA looking at new markets to tap into to combat this freefall?

Enrique Escalante: Yes. In the PCA's new strategic plan, we're focusing on markets where we see large potential in the short and long term, with a lot of it dealing with paving. There is an effect that you are aware of the high asphalt prices and the availability of oil for asphalt. With more and more oil refineries installing coker upgrading their operations and plants to better refine gasoline and diesel from their oil they will have less asphalt. So we understand that supply will be lower than in past years. The combination of the high price and lower supply brings an additional opportunity for the cement industry to advance its programs as an industry for pavements, and not just highways, but streets, local roads, parking lots, all types of structures that are being built with asphalt.

It's a huge opportunity for the cement industry, so the PCA is making an effort to focus on those sectors and making an effort to also work together with allied industries to find the niches that each one of the different allied associations need to pursue. We compliment each other and leverage the synergies of the industry and increase the market share of concrete material over materials such as asphalt. That's part of the new PCA strategic plan.

The PCA is trying to maintain the unity of its members during these hard times by trying to offer them precisely the help that they are expecting from their association. A lot of that is related to developing markets at the local level. We're trying to work more and more at the local level with state governments, local association. We're looking for ways to respond to local situations of our members with more intensity, instead of remaining an association that is more focused on the national level. That's a change we're trying to bring through the new strategic plan. We do this through the RPGs [regional promotional groups], so more and more of the influence of the association will be done at the local level.

Cement Americas: You mentioned that the downturn is a regional phenomenon. Is GCC seeing regional differences as well?

Enrique Escalante: Fortunately for GCC, we're established in markets, although they don't typically experience huge growth increases, we also are more stable during the downturns. We've been favored with a stable demand, and, of course, we have felt the decrease, but we're not like other areas that experienced high increases and are now experiencing huge decreases. We're pleased, and we think that we're going to continue to be a little bit shielded in the coming years too.

There is constant modest growth in a lot of the markets where we are, and we prefer that because you can do better planning under those conditions as opposed to areas where the markets swing drastically.

Cement Americas: We've been hearing a lot more these days about plant closing, many of which are older plants perhaps on the verge of closing to begin with, but not all of them. That's something we're not used to seeing in such great numbers all at once. How is the industry reacting to that, and can we expect to see more in the coming months?

Enrique Escalante: I'll start by answering the last part of your question. I think we're still going to see more closings, both temporary and permanent. As the industry has consolidated, it has a better understanding of how capital-intensive an industry we are. When demand comes down, we look at where we can produce more efficiently or in an optimized way. That means bringing inventory down — shutting down or closing kilns that are not as cost effective as new plants. We try to bring up production to capacity on the efficient plant. In the end, for a company, it seems better to temporarily shut down some of its capacity at some plants while increasing production in others. I think the industry has come to understand that as it consolidates more and more.

In terms of the old plants and some of the wet-process plants, I expect some of those plants not to restart again, and the reason is two-fold. There is new capacity coming on line that will be more cost effective. The industry is modernizing, and to do that it has to replace part of the old technology. On the other hand, I think that we're more aware of our responsibility and how we as an industry need to contribute to the environmental aspect of the industry. Those old plants are also less energy efficient and have higher emissions than the new plants. The trend is clear, and we know where we need to go in this regard, so it's also an opportunity to contribute in that sense.

Cement Americas: You also mentioned earlier the changes in the strategic plans. Are there specific marketing tactics that PCA is changing as a result of the drop in demand?

Enrique Escalante: Yes, on the market promotion/development side, we're concentrating on those markets where we see more growth potential, like the paving market I was explaining earlier. Obviously, there are other markets where we are temporarily decreasing the intensity of the programs in order to put the funds in the markets that have the greatest potential. It's no surprise to anyone that the residential markets are going to take more time to produce the benefits that other markets are going to produce.

But also, aside from the market development plans, we have some other marketing strategies and communication strategies that are very specific about educating the regulators, architects, and owners of projects about the benefits of concrete from the environmental standpoint. We're thoroughly convinced that when you look at the product's life cycle compared to other competitive materials, concrete brings many advantages from the economic side, from the environmental side that have not been completely understood by our customers — the end users of our product. And it's our responsibility to tell our story and to educate all of these interest groups. So there's a very specific strategy that we are developing about communication in order to advance the properties and advantages of concrete compared to other materials.

Cement Americas: Leading up to this downturn, there was continuing consolidation in the industry and a drop in the number of players who control production. Has that contributed — helped or hurt — the current situation?

Enrique Escalante: I think it has contributed to helping the situation, because as the industry consolidates, it's easier for the companies to understand about shutting down capacity to optimize a system. When you have a system of plants, it's a lot easier to cope with the downturn. So by optimizing production on the plant level, the whole is greater the sum of its parts, rather than having each plant operating independently and having each one optimizing their own plants. When you have a system of plants, it's easier to optimize them so the companies can endure low demand and stay in better shape. That's also enhanced by the ability of the companies to produce in one region or another without having to ship the product across long distances. When you have a system of plants, you can also optimize the transportation of product.

Lastly, a lot of these companies have had the ability to bring product into the country. So as demand goes down, the imports have been used as a buffer to regulate the domestic supply. These companies have the ability to reduce imports and stabilize the downturn in the domestic supply. That's an effect of consolidation. Before consolidation, it was difficult to use imports as a regulator.

Cement Americas: Speaking of consolidation, one of the largest buyers of other businesses, Cemex, was profiled in The Wall Street Journal in December. Did you think that was a fair profile of a competitor?

Enrique Escalante: That's a hard question. I think many companies in the industry have taken great efforts to grow and take advantage of this industry consolidation. I don't think this is going to stop in the future; I think the trend will continue. Obviously, we have to absorb and go through these couple of years of decline, but in these times there are going to be opportunities for companies that have a solid balance sheet to continue down that consolidation path. I'm hoping and expecting that the industry as a whole continues to be a strong industry and will continue down the path of growth and consolidation for years to come.

Cement Americas: One of the newer areas that PCA is getting involved with more these days is sustainable building and green building efforts. Is there a place for that emphasis when times are in crisis mode? Will that continue and grow in coming years?

Enrique Escalante: Absolutely. We're thoroughly convinced about the sustainable properties of concrete compared to steel and wood, and we're increasing our efforts to education designers and architects on those aspect. When we're talking about building structures, a lot of the decisions are made by the architecture firms and owners before we have a chance as an industry to show them how things can be done better in terms of sustainability with concrete. So our efforts are going to be precisely that. And we are shifting money for programs that address and promote the sustainability aspects of concrete. This is going to be a permanent effort, and we're trying to do it both internally at PCA and also by reaching out to our sister organizations like, for example, masonry producers or block producers or even the concrete housing branch of the Home Builders Association. So we're trying to advance our position with the help of our sister industries and not just an individual, isolated effort by PCA.

Cement Americas: One thing that is a constant concern for the industry is at the recruitment level. Have their been any changes on that front in recent months?

Enrique Escalante: I think there is a lot of interesting and definitely some changes in that regard. People in the cement industry have found it hard to compete with those in other industries in the search of talent and recruiting into the industry. We have this program in which we're trying to sponsor a student who will study and do research in cement and concrete, and will eventually comes to work in the industry. That's one specific effort.

I think that at the individual member-company level, there are also efforts to bring new talent into the industry from outside the traditional cement and concrete companies. Ideally, we'll be looking at a combination of experience and talent, new faces that will bring different ways to see things and approach our industry. That's part of the effort we're doing at GCC, for example. When we recruit for new positions, we're definitely asking the headhunters to bring us candidates from outside of the industry. We always like to try to bring talent into the company by giving the opportunity to our own internal employees and asking them to compete with people in the industry and outside the industry. When we can, obviously, we try to promote from within, but we're always looking for external talent.

Cement Americas: I've often heard that the great threat to our industry in terms of employee retention is not from other cement companies, but from without.

Enrique Escalante: I think we have a lot to gain by opening up recruiting outside the industry. I think that there is a need to bring in different thinking and different ways of managing. The combination will result in a more competitive industry.

Cement Americas: Are there particular regions you anticipate big changes happening in terms of demand needs and hopefully lead the trend out of this downward turn?

Enrique Escalante: That's a good question. If I really knew the answer to that question, I'd be building a new plant in that place [laughs]. I think there's enough capacity currently and being built as we speak that will come on line in the next few years to make certain that every market will have enough product for any project in any market.

Cement Americas: A lot of the new technology that has been introduced to the industry in recent years has been about getting emissions reduced. Are there any other technological advances you're hearing about that you believe might change the way cement is produced or distributed?

Enrique Escalante: I think that the industry needs to continue putting specific effort into helping to develop those changes in technology. The cement industry hasn't come with any significant breakthrough in technology since the preheater kiln. I think that was a very significant breakthrough in the past for the industry to really improve its energy efficiency consumption. After that, there have been a lot of efforts in terms of emissions, but I haven't seen any big breakthrough in the industry, and I think we need to keep working with equipment manufacturers, government agencies, universities, and research institutes to develop the next generation of technology that we should have to significantly reduce emissions. For example, everybody is aware of the CO2 emissions of the industry from the processing of materials. There is not today an economically feasible technology to significantly reduce those, and we need to continue looking for those solutions.

Cement Americas: Do you believe that the incoming administration will be more or less willing to hear what the construction industry has to say than the Bush administration was in terms of infrastructure and just how much money will really be needed to see those projects through?

Enrique Escalante: I'm expecting a better response, definitely. I think that we expect the new government to shift part of its spending from abroad in things like the war to more domestic spending to improve the standard of living of the American people. That's my personal view. In the long term, projects in the construction industry will benefit U.S. citizens and will have a higher priority than in the past.

Cement Americas: Let's talk more about GCC. Is the company making any adjustments in the way it does business currently in terms of upgrading its own facilities or looking at new markets to move into?

Enrique Escalante: We've been growing very fast in the last year. We have spent considerable money, first and foremost, building our new plant in Pueblo, Colorado. Along with that, we have been modernizing our network of distribution terminals and increasing the capacity of some of them. We just finished building storage domes at two terminals, one in Denver and the other in eastern South Dakota. So we have been building infrastructure and modernizing on the cement side and investing in ready mixed concrete. Within those investments, we're also modernizing all of the batching and dispatching software and infrastructure, across all our ready mixed plants. That will obviously make us a more efficient ready mixed producer. In terms of software, also at the GCC level, we're also switching and implementing new ERP [Enterprise Resource Planning] system, we're going with SAP.

So we continue to spend money on modernization and looking for efficiencies in the company at this time. We are, as many other companies are in the industry, a lot more careful about new investments and new capital project for the next couple of year. But still, we'll continue with the modernization projects in our different plants. In terms of new markets, I think we have enough new investments at this moment. There is a lot of potential for us to bring our new capacity online in the markets where we are currently competing, so we're not expanding into any new markets at this time.

As for the Pueblo plant, it's up and running. It's producing and we're shipping cement from Pueblo to the Colorado market and South Dakota through our distribution terminals.

Cement Americas: Your operations are all in environmentally sensitive states. What has GCC been doing in terms of community relations to let the people in those states to let the citizen know that the company is operating with their environmental interests in mind?

Enrique Escalante: We definitely take the environmental part of our business very seriously. We're convinced that we have to continue to invest in the more modern control systems in order to decrease our emission as much as possible. But sometimes, the communities where we do business will not understand unless we tell our story. So in order to do that, GCC tries to be sensitive to the concerns of the communities where we do business and to implement communication programs with neighbors and communities, and have them informed about what we do and how we do it. We opened the doors of our plants and organize tours of our plants. We try to educate students in the community about what we do inside our gates. We invite the families of our employees to come to the plants and see what we do and learn how we're trying to be a more responsible company.

I guess in a nutshell, we try to participate in the communities where we do business with communication and involving ourselves in community projects. We try to support and sponsor local projects for the citizens around our plants, especially in the education field. We also try to involve ourselves in community work though our employees, local charities, arts, cultural issues. We try to get involved with the chamber of commerce and other local associations to be close to the citizens.

AT A GLANCE…

Elected chairman of the Portland Cement Association (PCA board of directors during the association's Fall board meeting in Dallas, Texas Enrique Escalante will serve a two-year term, succeeding Charlie Sunderland of Ash Grove Cement Co.

Escalante is the current president of GCC of America, Denver, Colo. He joined GCC in 1999 as president of its Mexican division, moving to his current position in 2000. Prior to joining GCC, Escalante had more than 20 years experience in management and sales positions in heavy industry and construction materials.

In addition to his work as PCA's vice chairman for the past two years, Escalante served as chairman of Research and Technical Council and Product Standards and Technology Committee. He also was a member of the Regional Promotion and Publications committees.

Escalante is a graduate of the Monterrey (Mexico) Institute of Technology with an Engineering Degree, and he earned an MBA from Cornell University.