BMI View: Weak European construction has long been the major drag on the world's largest cement producers. However, just as we anticipate Europe's construction industry to stabilise and recover, operations in higher growth emerging markets are hitting speed bumps. A combination of currency fluctuations and inflation, particularly in Asia, is undermining improving margins and an ameliorating European picture. Overall, companies will continue to focus their efforts on cost efficiencies, debt reduction and streamlining operations to mitigate an uncertain operating environment.
Following the nine month financial results from the world's largest cement producers, a number of key trends can be highlighted:
Flat to weak growth outlook for the year overall.
Cost reduction programmes remain central to corporate strategies.
Net debt reduction targets will see continued asset divestment.
Currency fluctuations have been negative for most producers.
Asia will remain mixed, with financial performance weighed down by currency weakness.
European region stabilising, with recovery taking hold in some countries.
US will continue to outperform.
Nine Month Financials, Selected Major Cement Producers
| || Sales || Operating EBITDA || Net income || |
| || 2012 || 2013 || % Change || 2012 || 2013 || % Change || 2012 || 2013 || % Change |
| Holcim, CHFmn || 15,908 || 14,941 || -6.1 || 3,077 || 2,951 || -4.1 || 1,093 || 1,277 || 16.8 |
| Heidelberg, EURmn || 10,525 || 10,450 || -0.7 || 1,779 || 1,764 || -0.8 || 403 || 912 || 126.3 |
| Lafarge, EURmn || 12,007 || 11,484 || -4.4 || 2,579 || 2,309 || -10.5 || 282 || 388 || 37.6 |
| Cemex, US$mn || 11,274 || 11,353 || 0.7 || 2,008 || 2,001 || -0.3 || -411 || -512 || 24.6 |
| Source: Company Reports |
Flat To Weak Growth Outlook
In general, the first nine months of 2013 have been a mixed period for the global cement industry. Of the four major producers, Heidelberg is the most optimistic for the year overall, anticipating an increase in both its top and bottom lines which it is likely to achieve given the strong nine month performance. The others, however, hold a more muted outlook; Lafarge is anticipating a 3% increase in overall cement volumes for 2013, whilst Cemex sees a 1% increase in aggregates and 1% decline in cement volumes. Holcim is the least optimistic, anticipating 2013 sales volumes to come in below 2012.
Strategic Alignment: Improving efficiency and reducing debt
All four major cement producers highlighted cost reduction programmes as a key strategy. Companies have focused on reducing costs and improving operating efficiency in the hope of improving margins amidst the current climate of weaker demand. However, despite gains in margins over the past year, the impact has been offset by detrimental currency and inflationary pressures.
Lafarge has one of the most ambitious cost reduction strategies, and the company announced an extension of its existing plan to increase EBITDA through a combination of cost reduction and innovation gains in its 9M13 results. Between 2010 and 2014, the company is targeting EUR1.75bn in EBITDA growth and appears on course to achieving this goal. Indeed, in its 9M13 results, it confirmed its EUR650mn and EUR600mn targets for 2013 and 2014 respectively. It also expanded the plan through to the end of 2016, where it is hoping to secure an additional EUR1.1bn, taking the total gain to EUR2.85bn.
| Coming Down From A High |
|Cement Majors, Net Debt, EURmn|
Lafarge has also been focusing on reducing its debt pile. In an effort to rebuild its credit rating following a substantial expansion in net debt, the company has been offloading assets. In the first nine months of 2013, it has divested EUR1.05bn in assets and this has helped to reduce net debt levels by EUR1.3bn as of September 30 2013 (compared to the same time in 2012).
The company is not the only one to be focused on net debt reduction, and asset divestments and exchanges. All four cement majors have been working on reducing their debt piles, and released a number of assets to the market over the past year. In September, Lafarge sold its assets in Honduras for EUR232mn, and in June offloaded its North American Gypsum unit for US$700mn, whilst Holcim divested assets in Thailand and Guatemala in December 2012. In addition, asset swaps have also been seen in order to realign interests and benefit from great economies of scale ( see, 'Cemex European Asset Swap To Unlock Further Upside', September 4). We expect both trends to continue over the coming 12 months.
Currency: Exchanging Strength For Weakness
As mentioned, currency woes have eroded operating profits for the major cement producers. For the three European based cement producers, the impact of currency fluctuations notably worsened in Q3 2013, and we believe there will be little improvement over the near term. As anticipated by our Country Risk teams, emerging market currencies have substantially weakened against the Euro (and Swiss Franc), thereby creating a greater detrimental currency burden on the cement majors. This will in turn worsen bottom line performance by eroding like-for-like sales and EBITDA growth.
| Diverging Impact |
|Euro (EUR), Swiss France (CHF) & Mexican Peso (MXN) Exchange Rate Forecasts|
Swiss based Holcim has struggled with the strength of the Swiss Franc on and off since 2011. In 2013, this has been further exacerbated by weaker Asian currencies - a region which accounts for the largest portion of sales at 36.4% in the first nine months of 2013. Overall, in like-for-like terms, the company posted a 1% year-on-year (y-o-y) increase in operating EBITDA for the nine month 2013 period, however, factoring in currency effects (as well as structural changes), this translated into a 4.1% y-o-y decline for the period. This was largely due to a 4.6% negative currency impact on operating income from the Asian region.
| Currency Strength Is A Weakness |
|Heidelberg - Currency Impact On Revenue, EURmn (LHS), And Holcim - Currency Impact On Net Sales, CHFmn (RHS)|
A similar picture has dragged down sales growth at Heidelberg and Lafarge. The strength of the Euro, combined again with weakness in Asian currencies, saw Heidelberg take a substantial currency hit. Indonesia, the company's second largest market by revenue, was a major source of currency impact, taking a EUR25mn hit in Q3 2013 alone on the Indonesian rupiah. The company has also highlighted ongoing currency concerns as a key risk to hitting its full year financial guidance. For Lafarge, the company cited a EUR29mn negative impact from currency fluctuation in Q3 2013 (versus a positive EUR48mn impact in Q3 2012).
Cemex is the one exception here. The company has benefitted from a weaker Mexican peso to post improved results versus its like-for-like performance. However, with domestic woes proving to be the biggest drag on results, this has not been the silver bullet Cemex may have hoped for, and the company is therefore unable to capitalise on this current competitive advantage over its peers.
| Currency Weakness Exacerbates Demand Slump |
|Indonesia (IDR) And India (INR) Euro Exchange Rate|
Asia: Currency Weakness And Inflationary Pressures
Currency weakness across major cement markets in Asia has only further exacerbated an already mixed performance for cement and aggregate demand. Whilst all companies have cited the Philippines as an outperforming market, and China as stable, Heidelberg and Holcim have both highlighted weakness in Indonesia and India. In both markets, inflationary pressures and declining demand have led to a decline in like-for-like performance, with a sharp depreciation in their currencies further dragging down overall regional performance.
| Detrimental Growth Impact |
|Asia Pacific Operating EBITDA % Change, First Nine Months 2013, By Company, Actual And Like-For-Like*|
We see little sign of improvement for both markets over the medium term. In Indonesia, we maintain our expectation that 2013 and 2014 will post below trend construction performance, with further downside risks from inflationary pressures amongst other factors ( see, 'Bearish Near-Term Construction Outlook In Full-Flight', October 24). In India, long-standing structural issues and poor monetary conditions are expected to continue to dampen our growth outlook over the short-term, leading us to revise down our forecast for growth with weakness now to persist through to 2014/15 ( see, 'Construction Outlook To Darken Before The Dawn', November 13).
| Growth Recovery Pushed Back |
|India And Indonesia - Construction Industry Value, Real Growth, % y-o-y|
Whilst previously buoyant markets experience weakness, we are finally seeing Europe's construction industry stabilising. The general perception amongst the major cement producers is that the worst is over, and we should see growth return to the European construction sector from the rest of 2013 and 2014. However, within this outlook there are clear outperformers and underperformers. Many remain negative towards Spain and Romania especially; indeed, we do not anticipate the Spanish construction industry to return to growth until 2015 at the earliest, whilst Romania is on track to see lower construction growth in 2013 than 2012, echoing the substantial drops in cement and aggregate sales reported.
On the other hand, our positive views on Germany and UK are reinforced by higher cement sales, and we expect these two countries to continue to lead the European construction recovery over the near term.
| Western Europe And US Recovery Sets In |
|Western Europe And United States Construction Industry Real Growth, % y-o-y|
US Recovery Continues
A major trend seen across cement producers, and among global construction, engineering and building materials companies, has been the ongoing recovery of the US construction industry. Following seven years of decline, the world's largest construction industry returned to growth in 2012, and is continuing to show strength in 2013. Indeed, we anticipate that the industry will remain in positive territory through to the end of our forecast period. The biggest gains will be felt over the near term; with residential construction continuing to rebound at an impressive rate (fixed investment into real estate is up 23% year-on-year in the first eight months of 2013). Whilst infrastructure is expected to remain a weak spot, in light of ongoing fiscal austerity, we believe that demand from industrial and residential construction will continue to see the US market outperform for cement majors.
Elsewhere in the Americas, the picture is also optimistic. Whilst Canada has shown some weakness in 2013, Western Canada remains an outperforming region, as substantial expansion in oil and gas exploration and production drives demand for cement. Further south, Latin America is highlighted as a positive for most companies. Colombia, Ecuador, Chile, Argentina, Panama and Costa Rica all receive special mention.
For Cemex however, which generates 38% of its revenues domestically, Mexico has been a major drag on performance. Following the leadership transition which saw President Enrique Pena Nieto elected, a lull in infrastructure spending, combined with a crisis in the homebuilder market following the new housing plan, has seen demand for cement and aggregates struggle to reach the heights seen in previous years. Cemex reported a 6% y-o-y decline in sales in the nine month period, with an 11% y-o-y decline noted in Q3 2013 alone. We anticipate Q4 2014 to be equally as difficult, but expect a recovery in 2014, when the government's US$315bn National Infrastructure Plan moves forward and energy sector reform will hopefully drive expanded demand from hydrocarbons exploration and production.
Indeed, over the next 12 months, as we anticipate a recovery to take hold in Mexico's construction sector, we should see an improvement in Cemex's financial results relative to its peers. Indeed, with the European construction sector poised for recovery, Mexico is the last piece of the puzzle for a company which has staged an impressive comeback from the verge of bankruptcy.