Euroconstruct has reduced its forecasts for European construction output for both for this year and next, with a slow recovery expected for 2014.
The forecasts released at its twice-yearly conference for the 19 countries under its coverage contain significantly reduced estimates compared to those published in June 2012. The research group now expects the volume of European construction output to decline by 4.7 per cent this year, 2.6 percentage points (pp) lower than it predicted six months ago. A further decline of 1.6 per cent is envisaged in 2013 (from a previous forecast of +0.4 per cent), putting demand below 1995 levels. In 2014, the research house sees growth of one per cent (previously +1.7 per cent). Its initial estimate for 2015 is +1.9 per cent. Commentary by CM-CIC Securities say these new forecasts have been brought down to a more realistic level compared to the June 2012 estimates, which it believes were "overly optimistic."
Outlook for main markets
Sovereign debt crises and the uncertainty in the eurozone are continuing to constrain construction spending growth in many western European markets. Austerity measures in several countries have also focused on the postponement or cancellation of many planned infrastructure projects. Of Europe's larger markets, Euroconstruct expects Germany to remain resilient with growth figures for 2013 and 2014 relatively unchanged (2.5 and 1.8 per cent, respectively). France is likely to see output decline by 0.9 per cent in 2013 from a previous estimate of +0.3 per cent, but the 2014 outlook is similar to six months ago. The same is so for Italy where Euroconstruct has reduced the estimates for 2013 from 0.5 per cent to -1.4 per cent but for 2014 its estimate is similar to June.
The Nordics are broadly stable, with Benelux continuing to remain weak at a level similar to 2012. Estimates from The Netherlands have been brought down from -4.8 per cent to -6.9 per cent and for 2013 from -0.4 per cent to -2.8 per cent. Poland will remain weak with public spending down -6.4 per cent. Polish construction output in 2012 has been revised from six per cent to 1.6 per cent, while for 2013 it has been cut from -2.1 per cent to -3.4 per cent. No recovery is in sight from the peripheral markets. Euroconstruct has substantially reduced its 2013 forecast for Spain from -8.1per cent six months ago to -23 per cent now, and for 2014 from -2.1 per cent to -6.3 per cent. Portugal's estimates have also been slashed for 2013 from -8.9 per cent to -16.5 per cent, although 2014 figures are similar to earlier estimates.
Civil engineering continues to be main drag
In terms of the construction by segment, the civil engineering sector is predicted to be the worst performing over the forecast period. The reduction in Euroconstruct's forecasts for 2013 see -1.8 pp for both housing and non-housing, and -2.2 pp for civil engineering. A recovery is forecast to start in 2014 in housing (+2.3 per cent) and non-housing (+0. 3 per cent). However, a further fall of 0.7 per cent is forecast for civil engineering in 2014 with an upturn not expected until the following year.
Impact on cement producers
Third-quarter 2012 results by European companies including Holcim, Lafarge and HeidelbergCement confirmed that general market conditions in Europe are still challenging, mainly due to weakening sales volumes. This was not only reflected in some peripheral countries, for example, 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. The trend in eastern European countries was also disappointing, with the exception of Russia, where demand continues to be strong. Modest improvements in prices were not sufficient to avoid a decline in profitability.
The news that Germany is likely to be the main beneficiary from increased construction output in 2013 bodes well for HeidelbergCement given its exposure to this market. CRH, on the other hand, is likely to be negatively impacted by the more pessimistic outlook for The Netherlands where it generated 10 per cent of EBITDA in 2011. Analysts at Jefferies International noted that overall risks remain on the downside and it continues to prefer companies less dependent on Europe like Holcim and Lafarge.
