Global demand growth outlook downgraded
A recent report by Morgan Stanley has lowered the growth outlook for global cement demand for 2013 to adjust for a changing economic landscape in emerging regions.
Following economic updates by its analysts, which cut GDP forecasts for most emerging countries, cement volume expectations have been significantly trimmed in half of the world’s regions. The research house now expects two per cent growth in global cement demand in 2013 (excl. China) followed by 3.5 per in 2014 – marking the slowest rate of growth since 2001, excluding the recession years of 2008-9. For 2015, an increase of 4.6 per cent is anticipated which should be the start of a ‘normal’ long-term growth trend of around 4.5-5 per cent.
Rethinking emerging markets
The revised forecast materially lowered the outlook for key emerging markets including Indonesia and India, both of which are among Morgan Stanley’s ‘Fragile Five’ together with Brazil, South Africa and Turkey.
The deepest cuts were made to India’s GDP forecasts as a struggling economy has prompted a large negative adjustment. Cement demand in the industry’s second-largest market in turn has continued to disappoint throughout the year, as evidenced by quarterly results by India’s top three cement producers this week. The near-term outlook is expected to remain challenging and the path of recovery slow but progress of the government’s structural reforms are expected to lead the rebound.
In Indonesia, the formal property sector is expected to be hit hard by fast-rising interest rates as well as tighter mortgage conditions. Expectations are high for an acceleration in infrastructure growth driven by the MP3EI programme. The informal housing segment is expected to be more resilient due to less sensitivity to interest rates, but growth should moderate given the impact of increased fuel price rises. Cement demand growth is expected to slow sharply from double-digit rises over the past two years, but the country’s key demand fundamentals remain in tact, paving the way for a longer-term recovery.
In Latin America, there is a sizeable downgrade to Brazil but it is largely offset by higher expectations for Mexico and Argentina. Both cement volumes and prices will be under pressure in Brazil, especially after the support from sporting event preparation ends. The end of these drivers will lead to a further slowing in cement volumes in 2014-15.
Europe: a mixed picture
Despite Europe having emerged from a protracted recession, and a stabilisation in some cement markets being witnessed, a strong bounce back in demand is not envisaged. A mixed picture is emerging in Western Europe where the UK is proving to be a particular beacon of light driven by a recovery in housing and infrastructure projects, but volumes are still expected to fall in France, Italy and Spain and the long-term outlook for Germany is one of stablisation.
A large reduction in Morgan Stanley’s forecast for Eastern Europe is mainly due to Turkey in response to a sharp rise in interest rates which is likely to dampen the country’s performance both this year and next. Meanwhile in Poland, construction confidence indicators bottomed in the spring and are now on a clear recovery even though this has not yet translated to cement demand recovery. As the economic downturn ends, the cement sector is expected to emerge from the slump witnessed over the last two years.
North America: continued recovery
The recovery in North America is likely to continue for the next five years. After what many observes deemed a disappointing first-half growth performance in the first six months of this year, Morgan Stanley forecasts a reacceleration of growth in the second half with the main effects of the fiscal drag on public spending largely behind us as well as the pace of capital spending gaining momentum. Moving into 2014, non-residential building and the crucial road building segments are expected to swing to growth but a moderation in housing, the main engine of recent recovery, is anticipated.
Earnings downgrade
Applying its new cement model to stocks, Morgan Stanley now expects aggregated EBITDA to decline three per cent and in 2014 to improve by only 7.5 per cent.
Holcim has seen the largest earnings downgrade given its material exposure to India and Mexico. Moreover, yesterday Credit Suisse downgraded HeidelbergCement to ‘underperform’ from ‘neutral’ on concerns that consumer spending is expected to slow in Indonesia. It also raised concerns that significant volumes of new capacity in the next two years will lead to a deterioration in capacity utilisation and pricing power in the country.
Morgan Stanley does not believe that the growth story for emerging markets is over, but rather that the “path will be more moderate,” and therefore presumably more sustainable. Despite this change in forecast, demand in emerging countries is still generally positive, even if the rate of growth is lower than previously envisioned.
