Black Swan Events

Black Swan Events
The old saying goes that “necessity is the mother of invention” and recent years have given executives across the cement sector plenty of opportunities to be inventive!

 

The global pandemic that we are currently living through has us considering what commentators call a Black Swan event and how the cement sector manages, reacts and adapts to this type of development. The events of the last month (and the coming months) may have long-term impacts on the sector, necessitating new working practices, new technology to be implemented and new thinking in the way businesses operate. It may be that changes already being driven by increased digitalisation and environmental awareness across the sector are accelerated – or we may see completely new practices and business structures emerge.

 

Black Swan events are generally characterised by three criteria:

 

  1. The event is a surprise (to the observer).
  2. The event has a major effect.
  3. After the first recorded instance of the event, it is rationalized by hindsight, as if it could have been expected

 

The term was popularised by finance professor Nassim Nicholas Taleb, gaining popular traction after the 2008 Global Financial Crisis. Taleb argued that Black Swan events are almost impossible to predict yet have far-reaching consequences, therefore, people should always assume that a Black Swan event would take place and plan accordingly. The COVID-19 pandemic can easily be characterised as such; taking Governments and businesses unaware and leading to lockdown across much of the world and by UN estimates a global $2 trillion shortfall in income. However, this is not the first pandemic, nor the first COVID coronavirus, and with hindsight even looking back two months to the impact of the disease in China, it could be argued, the wider effects could have been expected – and by extension better prepared for.

 

As a strategically important industry, that can be considered both global and hyper-local, and is CAPEX heavy - the cement sector is always exposed to both international and domestic events. One can point to multiple instances where the cement industry has changed and evolved due to external geopolitical, societal events and financial crises over the decades. The best risk management plans build these Black Swan events into their strategising to limit exposure. But in the cement sector, it has often been the case that change follows as a reaction to external pressures – a recent example can be seen in the way the Egyptian cement industry pivoted from heavy fuel oil to coal and increasingly RDF as an indirect result of the Arab Spring.


Looking back further, you can see how the global shape of the industry changed after both the 2008 Global Crash and the Asian Financial Crisis. This is something we might be interested to discuss further in future articles but in both instances the approach of the major multi-nationals changed, driving M&A activity 

 

Even now in reaction to COVID-19, companies are streamlining their operations, working to make logistics more efficient and embracing new technology to allow some staff to work remotely. In this instance, necessity is driving change and many of these new practices may stay in place once we reach a “business as usual" scenario. There was a meme on LinkedIn the other day which asked “who drove remote working in your organisation? A) CEO, b) CTO, c) COVID-19?

 

Because of the high CAPEX costs involved, investors and management in the cement sector have to take a long-term approach to business, basing decisions not just on market conditions in the short and medium-term but on long term demographic projections and per-capita consumption forecasts etc. When modelling different scenarios, companies will factor in overcapacity and exportable surpluses but Black Swan events like this pandemic are for more difficult to account for. 

 

We can debate whether overall the industry is in a better position to face a possible recession/crash now than it was in 2008, or going back further to the Asian financial crisis in the late 90s. But perhaps in truth we have a multi-tiered industry approach with some companies holding much stronger contingency plans than others. Some things, such as a company’s exposure to debt repayments can be controlled and can play an important part in how they react, whereas other influencing factors, like timing, can not be predicted.

 

What all companies need to do when faced with these events is to focus first and foremost on customer and employee safety. After this, everyone is worried about liquidity so executives need to make a new cash-flow forecast for at least six months and plan for this new reality. Then look at how you can adapt, increase efficiency, cut costs, or run your business while the workforce may be sick or self-isolating. Think back to ideas that you may have had in the past, presentations that you saw at INTERCEM, business cards you have tucked away at the back of a draw and articles that you might have read. There are people who can assist you with all these things if you reach out and talk to them. 

 

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