Fitch Ratings says 3Q12 results reported by Fitch-rated Europe Middle East and Africa (EMEA) cement companies, Holcim Ltd ('BBB'/Stable), HeidelbergCement AG ('BB+'/Stable) and Lafarge SA ('BB+'/Stable) showed a number of positives, but confirmed that general market conditions are still challenging and the outlook remains uncertain.
Europe disappoints
The European markets represented a negative surprise, mainly due to a weakening in volume sales. This not only reflects some peripheral countries (Spain and Greece) where a persisting decline was well anticipated, but also other countries such as France, Germany and UK, for which expectations were for relative stability. Eastern European countries' trend has also been disappointing, with the exception of Russia, where demand continues to be strong. Modest improvements in prices were not sufficient to avoid a profitability decline.
North America surprises
Conversely, the North America market revealed stronger than expected trends, with both volume and price increases allowing cement producers to post sound profitability improvements. As far as emerging markets are concerned, Latin America and Asia continue to show solid growth in volumes and positive developments in prices. In particular, Fitch notes that in India the price trend has so far been significantly better than the agency expectations at the beginning of 2012, allowing producers to fully recover cost inflation. By contrast, new production capacity is putting pressure in some African markets (namely Morocco and Egypt).
Price improvements
In general, cement producers were able to improve profitability thanks to a better price environment and to the effects of cost cutting measures that are now delivering material savings. The reduction in maintenance capex (partly due to lower utilisation of plants in Europe) and the prudent approach to expansion capex boosted cash generation and debt reduction. Fitch's Stable Outlook of all the main ratings in the sector reflects this constant deleveraging process, despite challenging market conditions.
Uncertain outlook
Fitch believes the outlook will remain uncertain. European markets should continue to remain weak, with volumes declining even further, while the US market recovery could prove fragile. Demand in emerging countries is expected to remain solid. However, cost inflation will persist in 2013, although energy price increases are likely to be lower compared to 2012, and cement producers will need to further increase prices to defend margins.
On the positive side, the effect of cost cutting measure should become more and more visible. In such a scenario, Fitch expects a modest improvement in operating performance in 2013.
M&A activity likely to remain modest
The agency expects investment policies to remain prudent. M&A activity is also like to remain modest, as deleverage remains a top-priority for many issuers. However, the agency believes that non-cash deals, such as assets swaps or joint ventures (such as Lafarge's deal with Tarmac in UK) could be possible in order to optimise geographical footprints in those markets that are most affected by the crisis.
