Global Cement: Key Views Playing Out

BMI View : Our core views for the global cement industry are playing out, with the four largest cement producers remaining reliant on developed markets for growth, whilst their exposure to emerging markets hurts their bottom line. We are maintaining our views and continue to highlight Cemex as best placed to mitigate industry headwinds. 

We are maintaining our core views for the global cement majors, following a realisation of the major trends we highlighted in November 2013 ( see, 'Cement Producers Face Uncertainty As Asian Woes Offset European Recovery', November 14 2013).

We believe global cement majors will continue to benefit from an accelerating recovery in the European construction industry, as well as stable demand from the United States. However, offsetting this will be sustained challenges in emerging markets over the 6-12 month time horizon, especially currency costs for the European majors. In this mixed operating environment, we expect companies to continue to focus on debt reduction, consolidation and cost efficiencies.

Cemex Outperformance On Currency Advantage
Cemex, Holcim, Lafarge, Heidelberg Share Prices, Rebased: 100 = 01/01/2013

BMI View : Our core views for the global cement industry are playing out, with the four largest cement producers remaining reliant on developed markets for growth, whilst their exposure to emerging markets hurts their bottom line. We are maintaining our views and continue to highlight Cemex as best placed to mitigate industry headwinds. 

We are maintaining our core views for the global cement majors, following a realisation of the major trends we highlighted in November 2013 ( see, 'Cement Producers Face Uncertainty As Asian Woes Offset European Recovery', November 14 2013).

Key Cement Industry Views
BMI Views Performing Company Updates
Flat to weak growth outlook for the year overall Partially All companies expect volumes to increase in 2014 (versus 2013). We expect weak to flat profit outlook
Cost reduction programmes remain central to corporate strategies Yes Yes, asset divestments continue (Lafarge), and Lafarge/Holcim merger continues to be on track
Net debt reduction targets will see continued asset divestment Yes All companies reported net debt reduction in H1 2014
Currency fluctuations have been negative for European producers Yes All European producers cited significant negative currency impact on revenues (Holcim: CHF452mn (Q2), Lafarge: EUR224mn (Q2), Heidelberg: EUR482mn (H1)), Cemex continues to benefit from currency (USD65mn gain in Q2).
Cemex will outperform Partially Cemex posted greatest revenue growth in H1 2014 and biggest improvement in Q2 net income
Asia will remain mixed, with financial performance weighed down by currency weakness Yes All companies reported revenue contraction in APAC in H1 2014
European region stabilising, with recovery taking hold in some countries Yes Heidelberg, Holcim and Cemex reported increased European earnings
US will continue to outperform Yes Holcim, Cemex and Heidelberg reported positive sales growth H1 2014
Increased competition by regional and local players in EMs Yes Rise of Dangote, Indocement, Siam Cement etc in Africa and Asia
Source: BMI

We believe global cement majors will continue to benefit from an accelerating recovery in the European construction industry, as well as stable demand from the United States. However, offsetting this will be sustained challenges in emerging markets over the 6-12 month time horizon, especially currency costs for the European majors. In this mixed operating environment, we expect companies to continue to focus on debt reduction, consolidation and cost efficiencies.

We continue to highlight Cemex as an outperformer. The company is insulated from the currency impact hurting the European producers, and is well placed in key emerging markets - continuing to expand its position further whilst most majors are seeking consolidation. As such, it is perhaps the best placed of the majors to acquire productive operating assets cheaply and benefit from asset swaps ( see, 'Cemex Will Continue To Outperform Its Peers', May 13).

Cemex Outperformance On Currency Advantage
Cemex, Holcim, Lafarge, Heidelberg Share Prices, Rebased: 100 = 01/01/2013

Consolidation To Continue

Debt reduction, cost efficiencies and consolidation remains the primary goal of the major cement producers. Despite some improvement in volumes, operational pressures continue to erode revenues and profits. As such, reducing debt through a series of asset divestments and efficiency drives remains a target. All four companies recorded lower net debt compared to the same period in 2013, whilst the Holcim/Lafarge merger, announced in April 2014, is the most significant development in line with our long held view for consolidation in the industry ( see, 'Merger Plans Support Cement Industry Views', April 9).

Currency Risk Easing

One of the major risks highlighted in our previous analysis was currency exposure for the European producers. Despite continued efforts to reduce costs and improve margins, domestic currency strength for the European majors combined with Emerging Market currency weakness - in particular in Asian and Latin America - continues to erode profits substantially. All three European majors cited currency weakness as significantly eroding revenues in domestic currency terms, and undermines relatively better results recorded in volume terms.

We anticipate broad Euro weakness, which should help to ease some of this strain over the multi-quarter horizon; however, we expect currency weakness to remain a key concern for the European based cement producers over the remainder of 2014. Conversely, Cemex will continue to benefit from its domicile. While we expect multi-quarter appreciation in the Mexican peso, a sell-off over recent months will see the company continue to positively benefit from a weaker currency position over the remainder of 2014.

Getting Back To A Level Playing Field
Euro (EUR), Swiss France (CHF) & Mexican Peso (MXN) Exchange Rate Forecasts

Volumes Improving, But Competition Growing

Continued operational risks will weigh on bottom lines over the remainder of 2014, and we see the overall sales picture as remaining fairly stagnant on average the year as a whole. Although major cement companies are targeting higher volumes for the year as a whole, we see a recovery in Europe and solid demand in the US being offset by continued weakness in emerging markets over the second half of 2014, especially Asia and Latin America. Over the multi-quarter horizon, there is scope for a recovery in volumes in key emerging markets, with Cemex likely to see a turnaround in its domestic market take hold later on in 2014 and into 2015, whilst key Asian markets are seeing slow signs of improvements. Whilst this will help to support sales volumes, the currency impact will weigh on revenues over the near term.

Struggling To Capitalise On Improving Outlook
Holcim: 6 Month Operating EBITDA By Region, Like-for-Like* and Total, % Change y-o-y

In addition to fundamental weaknesses in several emerging markets, we also see the market share of the majors being eroded in key emerging markets. Compared to a sustained period of consolidation by the majors, local and regional players have expanded their operations, and have thus been far better placed to gain market share in key emerging market regions. In particular we see this trend playing out in Asia and Africa, and highlight companies including Indocement, Siam Cement and Dangote.

Against this backdrop, the Holcim/Lafarge merger could represent a further evolution of the competitive landscape. With a number of asset sales expected as a result of the merger, small and medium sized cement producers will be in a position to snap up operating assets and compete in new markets. In contrast, as major cement producers continue to focus on debt reduction and are targeting asset disposals and cost reduction themselves, it is questionable whether they will be in a position to seek acquisitions.

First Half FINANCIALS, SELECTED MAJOR CEMENT PRODUCERS
  Sales     Operating EBITDA   Net income  
  2013 2014 % Change 2013 2014 % Change 2013 2014 % Change
Holcim, CHFmn 9,649 9,061 -6.1 1,819 1,627 -10.6 760 657 -13.6
Heidelberg, EURmn 6,187 6,318 2.1 908 928 2.2 241 182 -24.5
Lafarge, EURmn 6,234 6,000 -3.8 1,167 1,155 -1.0 84 70 -16.7
Cemex, USDmn 7,322 7,737 5.7 1,251 1,270 1.5 -433 -220 -49.2
Source: Company Reports

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