European cement industry on the way from laggard to return generator

• Jasmeet Munday
  Fund manager of the Global Opportunities Fund
  J O Hambro

In a market where many companies look expensive, finding an investment edge means identifying sectors with improving fundamentals that are not yet reflected in prices. One such area may be European cement, long ignored because of persistent oversupply and low returns. As structural shifts in supply and new sources of demand begin to reshape the industry, the outlook for the sector is starting to improve.

The phasing out of free carbon credits is likely to raise production costs for the sector and reduce oversupply. European infrastructure spending is set to lift demand as supply tightens. These structural shifts are improving returns in a sector long dismissed by investors.

The Carbon Correction

The cement industry has long been defined by rigid production economics: once built, plants are so capital-intensive and costly to maintain that operators have typically run them at or near full capacity, regardless of demand. At the same time, cement production is highly carbon-intensive, leaving the sector acutely exposed to rising costs. With free EU Emissions Trading System credits beginning to phase out from 2026, every tonne of cement produced will carry a meaningful and unavoidable carbon charge—turning what was once an incentive to run flat-out into a financial penalty and reshaping the industry’s supply dynamics.

With production expected to become approximately 60% more expensive, Europe’s larger cement producers are poised to become beneficiaries of this change. Their scale has allowed them to develop lower-carbon products, use alternative fuels, and invest in carbon capture, with some cement producers now producing zero-carbon cement. These capabilities, reinforced by management incentives tied to higher return targets, are driving a structural shift toward greater discipline.

Growing Demand, Shifting Dynamics

Expansionary fiscal plans, such as Germany’s constitutional reform and the creation of a new infrastructure fund, are expected to accelerate investment in roads, housing, and energy systems. The country’s spending is due to increase from 2026 onwards, which will coincide with the start of cement supply restrictions. Early signs of this shift are already evident in improving margins for large European cement producers, despite weaker sales volumes in recent quarters.

Rather than operating as a commodity industry driven by persistent oversupply, cement is starting to show traits associated with higher-valued industrial sectors, including tighter capacity, disciplined production, and improving margins. This rise in public investment should help lift volumes, giving the sector a more solid base for firmer pricing and better returns.

An Opportunity Takes Shape

After decades of oversupply and weak returns, European cement is set to become a more disciplined and profitable industry. For investors, this shift matters: increasingly restricted supply and stronger pricing create the conditions for sustainably higher returns. With supply reshaped by carbon rules and demand supported by infrastructure spending, European cement is shifting from a perennial laggard into a sector with genuine return potential.