European Cement CO2 Costs Not Yet Passed Through to Prices, Decarbonization Leaders Hold Key Advantage

Overview

This Goldman Sachs report focuses on pricing drivers for the European cement industry. The core finding contradicts general consensus: 2026 cement price increases were not caused by CO2 cost pass-through. Analyzing CO2 emission and quota data from approximately 200 European cement plants and testing five candidate factors, we found market consolidation, supply-demand, and CBAM (Carbon Border Adjustment Mechanism) are the three real drivers, while CO2 cost gaps and recent energy inflation have limited association with pricing. The report also looks ahead to industry profit prospects through 2030, emphasizing that pricing pass-through capability is the key variable determining whether the industry can sustain high profits, and highlights leading companies with advanced decarbonization investments.

Core views

The core conclusion of the report is that CO2 costs have not yet been passed through to European cement prices. Specifically, neither countries with 2025 CO2 quota deficits (Italy -9%, Czech Republic -4%, Poland -2%) nor Poland and Germany with the largest cumulative deficits since ETS launch saw higher 2026 pricing growth than other markets. This finding breaks the simple logic that "carbon costs automatically push up prices". The three drivers of 2026 pricing each have their mechanisms: Supply-Demand: Spain and Italy achieved highest price increases of +6% and +4% due to strong demand over the past 12 months, confirming positive correlation between cement prices and capacity utilization. CBAM: Countries with high import dependence like Italy, Spain, France, and Romania benefited most. After CBAM implementation in 2026, even the most energy-efficient importers faced cost jumps >€8/t, causing imports to fall >25% YoY. Every 10% import decline provides roughly 1% volume opportunity for domestic producers. Import prices in Jan-Feb already rose €9/t (+13%) vs Q4 2025. Market Consolidation: Herfindahl-Hirschman Index (HHI) correlates positively with price increases. Highly consolidated markets like Romania and Belgium have stronger pricing power, while fragmented markets like Germany and Poland face greater challenges. Holcim has the highest weighted average HHI in Europe (~28%), Heidelberg Materials ~24%, Buzzi ~18%. Looking forward to 2030, the report identifies a "carbon cliff": Free quotas will gradually decrease from 100% in 2025 to only about 48.5% by 2030. This means CO2 costs will rise further from the current level of approx. 40% of sales. If annual +MSD (mid-single digit) pricing growth is not achieved, industry earnings face mean reversion risk. However, full pass-through of CO2 costs may not happen until FY28, as companies still have excess quotas accumulated over the past 15 years to consume.

Analysis framework

Goldman Sachs adopted a multi-factor regression analysis framework to identify the real pricing drivers for European cement. The methodology's key points are: do not presuppose causality, instead construct a database of approximately 200 plants and cross-verify variables including CO2 emissions, quota surplus/deficit, import dependence, market concentration (HHI), energy prices, and capacity utilization. Specifically, the research team first built a "Five-Factor Model," using PPI increases across regions in 2026 as the dependent variable to test the explanatory power of five candidate independent variables separately. Then they identified outliers and regional characteristics via scatter plot visualization rather than simple correlation analysis—for example, Greece has high import dependence (11%) but did not enjoy CBAM benefits due to weak demand (-6%). In the forward-looking section, the team constructed a "2030 European Cement EBITDA Bridge Model," performing sensitivity analysis on variables like rising CO2 costs, decarbonization cost curve advantages, and pricing growth scenarios to judge profit paths under different assumptions. This combination of "bottom-up plant data + top-down scenario analysis" is key to understanding the complex dynamics of this industry.

Methodology notes

• Industry Analysis FrameworkSupply-demand framework

  Application of Supply-Demand Framework in Cyclical Trends

  As a heavy-asset, highly localized industry, cement pricing hinges on regional supply-demand balance. By tracking the positive correlation between capacity utilization and prices, Goldman Sachs identified that areas with demand recovery like Spain and Italy have higher price elasticity. This is foundational to understanding cyclical characteristics of the sector.

• Industry Analysis FrameworkCost curve analysis

  Decarbonization Cost Curve and Competitive Advantage

  As carbon costs rise, differences in decarbonization investment among enterprises translate into position differences on the cost curve. Heidelberg Materials and Holcim invested early in SCM (Supplementary Cementitious Materials) and carbon capture, gaining cost advantages of €3-10/t by 2030. This "green premium" may become a new competitive barrier.

• Competition and Strategy FrameworkIndustry Concentration Analysis

  Relationship between HHI Index and Pricing Power

  The Herfindahl-Hirschman Index (HHI) measures market concentration; higher values indicate fewer firms hold larger market shares. The report found HHI positively correlated with cement PPI increases, meaning in highly consolidated markets, companies find it easier to maintain pricing discipline and avoid price wars. This is an important tool for understanding regional pricing differences.

• Cycle and Sentiment FrameworkInflection Point Analysis

  Identification of Policy-Driven Cost Inflection Points

  The European cement industry faces a "carbon cliff" driven by ETS quota cuts and CBAM implementation—cost structures will qualitatively change 2028-2030. Identifying these policy-driven inflection points is more critical than traditional demand cycle judgments, as companies must complete decarbonization investment setups beforehand.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Heidelberg Materials (HEIG.DE)

  European decarbonization leader benefiting from cost curve advantage and significant EBITDA improvement potential

  Strengths

  Lowest European clinker target (60% by 2030); decarbonization cost advantage €5-10/t; significant cost reduction space; large European infrastructure exposure

  Weaknesses

  Exposure to fragmented markets like Germany; pricing power limited in short term

  Comparison

  Advanced decarbonization progress relative to Holcim; larger cost advantage magnitude

  Risks

  European cycles weaker than expected; peers' irrational competition; energy inflation; CBAM execution pace; headwinds in US market; CCUS bottlenecks

• Holcim (HOLN.S)

  Highest integrated cement company in Europe benefiting from market structure advantages and decarbonization investments

  Strengths

  Highest weighted average HHI in Europe (~28%); best market consolidation; decarbonization cost advantage €3-6/t; Latin America business provides diversification

  Weaknesses

  Valuation relatively higher than Heidelberg Materials; smaller upside (+10% vs +29%)

  Comparison

  Stronger market structure advantage than Heidelberg Materials; but smaller decarbonization cost advantage magnitude

  Risks

  Sustained energy inflation; European cycles weaker than expected; sustainability of Latin America/Mexico margins; CBAM execution pace

• Buzzi (BZU.MI)

  Neutral rated; benefits from improved regional pricing due to CBAM but lacks decarbonization cost advantages and consolidation space

  Strengths

  Exposure in US and CBAM sensitive regions (Italy, Central Europe); potential asset monetization space

  Weaknesses

  No decarbonization cost advantage; high Europe business mix but lacks pricing power; ROCE trend declining

  Comparison

  Lag behind Heidelberg Materials and Holcim in decarbonization progress and cost advantage

  Risks

  Rising European costs; intensified US competition; ETS quota reductions; maintenance capex exceeding expectations

Key data

• 2026 Average European Cement Price Increase+3%Below industry +MSD target; regional divergence significant (Spain +6% to Poland -2%)
• European Cement EBITDA/Ton>€30/tDoubled compared to €15-20/t in 2010s; industry profitability significantly recovered
• CO2 Cost as % of Sales~40%Current level; every 10% carbon price increase supports approx. 4% pricing growth
• Import Cost Jump Caused by CBAM>€8/tImpact on importers in 2026; led to imports down >25% YoY
• Heidelberg Materials Decarbonization Cost Advantage€5-10/t2030 expectation based on €75-150/t CO2 price scenario
• Holcim Decarbonization Cost Advantage€3-6/t2030 expectation; lower than Heidelberg Materials but still significant advantage
• Free Quota Reduction MagnitudeDecrease to 48.5% by 2030100% in 2025, dropping to 97.5% in 2026 thereafter accelerating
• Heidelberg Materials Target Price / Upside€235 / +29%Based on 50% DCF (WACC 7.2%, TGR 1%) and 50% PE valuation
• Holcim Target Price / UpsideCHF 82 / +10%Based on 50% DCF (WACC 7.1%, TGR 1%) and 50% PE valuation

Impact & implications

The report argues investment logic for European cement is shifting from "cyclical repair" to "structural pricing power + decarbonization divergence." In the short term, 2026-2027 remain relatively benign years where companies rely on historical quotas as buffers, but true cost pressure arrives post-2028. This means: on one hand, the industry needs to achieve annual +MSD pricing growth to maintain current high profits; on the other, decarbonization leaders gain sustainable cost advantages, potentially accelerating industry consolidation. For investors, the key divergence point is when and to what extent CO2 costs pass through to prices. The report leans towards full pass-through being highly probable, though timing and pace are uncertain. In this context, companies with stronger infrastructure exposure, tighter supply-demand patterns, and lower decarbonization costs will benefit relatively. Heidelberg Materials and Holcim, given their leading positions in European decarbonization cost curves, are granted higher certainty premiums.

Risks

• Risk of partial CO2 cost pass-through: If industry fails to effectively pass rising carbon costs to prices, current high valuation multiples may face downward risk
• European cycles weaker than expected: Weak German fiscal stimulus and residential recovery will drag demand
• Peers' irrational competition: Sacrificing prices for volumes undermines industry pricing discipline
• Energy inflation pressure: Rising energy costs directly erode margins
• Uncertainty regarding CBAM execution and quota reduction pace: Policy changes may affect relative performance
• CCUS (Carbon Capture) project bottlenecks: Progress in transport and storage partnerships slow
• Overrun on decarbonization capex: Green investment returns below expectations

What to watch

• Impact of energy costs on margins in H2 2026 (expected more significant after Q3'26)
• Monthly changes in European national cement PPI data, especially in CBAM-sensitive regions
• Trends in import volumes (currently down >25% YoY) and Turkish export dynamics
• ETS quota auction prices and free quota reduction progress
• Progress in implementation and cost curve changes for major companies' decarbonization investments (SCM, carbon capture)
• Effectiveness of German infrastructure and climate funds in boosting cement demand
• Industry M&A activity: Decarbonization leaders may utilize cost differences to drive consolidation