Spanish cement woes continue

Spanish cement consumption continues its downward spiral with latest data showing monthly figures hitting a 46-year low as budget austerity and high unemployment continue to inhibit activity. Depressed volumes are now forcing local producers to initiate restructuring and cost-cutting measures as the bottom of the decline is yet to be seen.

Following the spectacular burst of the Spanish housing bubble in 1998, the country's residential sector has faced high housing inventory levels and a lack of financing, with housing permits at all-time lows. Moreover, large budget cuts and limited economic resources have affected infrastructure activity while unfavourable macroeconomic conditions have also impacted on work from the industrial and commercial sectors. Last month, the ratings agency Standard & Poor's (S&P) cut Spain's credit rating two notches to BBB+ and warned that the country could have to take on more debt to support its banking sector. It also placed Spain on negative outlook, meaning that there is risk of further downgrades to come. S&P predicts the economy will shrink by 1.5% this year, having earlier forecast growth of 0.3%. For 2013, a 0.5% contraction is forecast against predicted growth of 1% previously.

Domestic cement demand, meanwhile, is now in its fifth year of decline, plunging 64% from a high of 56.2Mt in 2007 to just 20.2Mt in 2011. This year has also begun on a very weak footing, with consumption falling 33.8% YoY to 4.729Mt and production down 27% to 5.67Mt. Demand during April 2012 alone plunged 41.1% to just 1Mt compared to the same month the year before and the scale of the drop is even more pronounced compared to April 2007 when, at the height of the Spanish real estate boom, deliveries reached 4.4Mt – four times the figure of present-day demand.

Consumption levels this low have not been seen since 1966, Oficemen highlighted in a statement. "The cement industry is experiencing its darkest hours," association CEO Aniceto Zaragoza, said. "Without a rebound in construction, which seems even more distant, and with the Spanish economy entering a new recession, the domino effect that is undermining all industries that depend on this sector will continue," he added. According to a Labour Force Survey, in 1Q12, 29% of the construction sector workforce was unemployed.

Latest construction figures from Eurostat, the statistics arm of the European Commission, shows that while overall output in the member areas rebounded by 12.4% MoM in March 2012, Spain reported the third-largest decrease of 1.8% behind Romania and Portugal. On an annual basis, Spanish output was down 10.9%. Mr Zaragoza is now urging the government to "give priority" to the implementation of new Pitvi infrastructure plan, whose approval is scheduled for July "given that Spain still has a high stock of unsold new homes, it is not likely that in the next two to three years the number of housing starts will improve, or that the sector's recovery may come from the hand of the building industry."

Major producers in the Spanish market reported double-digit drops in their first-quarter sales figures. For Cemex, the second-largest producer in Spain, domestic grey cement deliveries dropped by 42% and ready-mixed concrete deliveries by 48% with the company noting weak demand in all markets, with the Aragon and Levante regions being particularly badly hit. Lafarge's volumes were down 27.6%, although it did see a 0.4% improvement in prices, while Holcim recorded a 35.6% decline in deliveries. Indeed, over the past five years, Holcim volumes have fallen 63% and in the first four months of the year. The group said conditions have deteriorated by 40% YoY in the domestic markets it serves. This ailing performance led the Swiss-based major to announce earlier this week that it is initiating a new restructuring plan which, among other measures, includes cutting 373 local jobs, representing 35% of its local workforce. It is also indefinitely shutting down two lines at its Yeles factory and entire production at its factory in Lorca.

However, on a more upbeat note Spanish market leader, Cementos Portland Valderrivas, said that thanks to the implementation of its Plan NewVal, which was launched this year, it expects a return to profit in 2013. During the company's general shareholders meeting on 18 May, CEO Juan Bejar, said NewVal Plan 2012-13, which includes both cost reduction initiatives and the search for new revenue, will generate around E80m of EBITDA. Its successful implementation will achieve the objectives of the company's 2012-17 business plan, which foresees a return to profits and an EBITDA of E200m in 2013.

Mr Bejar noted that for 2012, domestic cement consumption is expected to decline to 16Mt, a YoY drop of around 21%. However, analysts at Bernstein forecast a 12% decline in 2012 and 7% in 2013, stating: "Prolonged economic difficulties and ~1m units of unsold housing means we do not expect a return to growth until 2014-15." In the long run, the research house expects demand to return to 20-25Mt, well below half the former peak.