European construction outlook revised
The increasing perception that Greece will default and exit the eurozone together with rising fears of contagion has led Euroconstruct, a group of research institutes and consulting firms, to significantly downgrade its European construction forecasts for this year and next.
At a meeting held last week, the group said Europe's construction forecasts for this year and next have been downgraded from -0.3% to -2.1% in 2012 and from +1.8% to +0.4% in 2013. Looking further ahead, it highlights: "Even with an improving growth rate of 1.7% in 2014, construction output across the Euroconstruct network will still be nearly 12% down on its 2008 outturn at the end of the current forecast period." During the last period of growth (1992-07) the annual average construction output increase across the network was 1.5%. "Applying this growth rate to the future suggests that activity will not return to 2008's level until around 2023," Euroconstruct warns.
Civil engineering is expected to be the worst performing sector over the next three years to 2014 with an annual average rate of decline of 1.4%. This is compared to a smaller yearly fall of 0.4% for the non-residential sector and growth of 0.9% annually for residential construction. However, both these sectors are recovering from a lower base compared to civil engineering.
Analysts at CM-CIC Securities and ESN have since highlighted some differences between their expectations compared to Euroconstruct's outlook. For example, ESN sees a 12% drop in Spain whereas Euroconstruct expects -21.1% due to falls in civil engineering sector. In France Euroconstruct foresees an improvement this year whereas CM-CIC take a more prudent stance (-2.3%) for two main reasons. Firstly, it states that after a much better-than-expected 2011, property developers are expected to adopt a more restrictive approach and housing starts are expected to take a much bigger dip than building permits. Secondly, a fall in local council tax receipts, "which is likely to trigger a downturn in civil engineering expenditure in a budgetary environment that leaves little room for enthusiasm," the research house notes.
Latest data from Eurostat, the European Union's official statistic arm, shows that construction output in the 17 nations that use the euro decreased in April, after returning to growth in the previous month. Construction output fell 2.7% on a monthly basis in April. The decline was widespread across the currency area, with the largest monthly reductions in the UK (-18.1%), Slovenia (-9.3%), Portugal (-6.7%) and Germany (-6%). Among the eurozone's larger economies, only France posted a significant increase, of 2.3%.
The cement markets of Greece, Ireland, Portugal, Italy and Spain still continue to be among the hardest hit by the European debt crisis as volumes have fallen from highs seen in the last decade to currently depressed levels. Earlier this week Spanish cement association Oficemen said consumption in May plunged 37.2% YoY to 1.26Mt. Between January-May 2012, demand has dropped 34.6% to almost 6Mt. As Spanish cement consumption endures its fifth consecutive year of decline, Oficemen reiterated that the demand levels currently being registered were last witnessed in the 1960s.
Also this week, UBS started coverage of Italian cement majors Italcementi and Buzzi Unicem, and stated that overall it expects local cement sales to slump 20% this year. Italcementi has recently said it would sell its Pontassieve factory to Colacem and shut down two mid-sized plants by 3Q12 on the back of challenging market conditions. UBS noted that Italcementi is strongly affected by the current recession in Italy and its stock could resume to rise "only if signs of recovery occur which, however, is not expected in two or three years."
Euroconstruct's commentary also notes that there is to a degree evidence of a north/south pattern to projected construction performance over the next few years, with northern European countries outperforming their southern counterparts. Denmark and Norway are forecast to experience growth in excess of 2%, while a much larger group of nine countries including Austria, France and Germany, are expected to see modest growth (0.1-2% over the forecast period) and five markets including Czech Republic and Italy are likely to see no growth to moderate declines (0-3%).
