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Eastern European and CIS construction and cement markets: Bartlomiej Sosna, PMR (Poland)

Filmed at Cemtech Europe 2015, 20-23 September, Intercontinental Hotel, Vienna, Austria.

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Well, good morning or almost afternoon. So two hours ago I had a presentation on the Central Europe, European market, now I was asked also to include the CIS region which I will do with pleasure. So firstly, just quickly about our company,who we are, what we do? So PMR is a [xx] based in Poland along development research company, established 20 years ago.

We conduct every year around 200 different research projects, produce around 70 industry reports, we employ in-house around 100 professionals and cover up 25 countries in the Central and Eastern Europe. Our co-activity is business consulting, market research, data analyzing internalizing and to work different industry portals.

This is just a scope of our offer, intelligence portals, industrial reports,special sector newsletters and all accounts of different industry databases and just for more info about our company visit ceeconstruction.com. Then our presentation, first we must look at the first part of the presentation, Central Europe. In PMR we define and analyse Central Europe as a group of six countries, Poland, Czech Republic, Slovakia, Hungary. These four countries entered the European Union in 2004, and the two other countries, Romania and Bulgaria entered the union a few years later. Firstly, let's look at the structure of the region, by far Poland is the major market in the region with 40% percent of the population, and as much as 60% of number of housing completed, so the residential construction is very strong in Poland compared to other countries in the region. The second country is Romania with around 22% of cement consumption, and the third most important country is the Czech Republic the most developed country with highest GDP per capita and the Czech Republic is responsible for around 11% of cement consumption so in total the top three countries represent 80% of the cement consumption in the region and now let's have a look at the trends of the development in the Central Europe since the beginning of the financial crisis. So as you can see on the chart Poland is in a totally different reality for the couple of years compared to other countries. While the other countries were into recession and deep slow down in the construction market, Poland was rapidly developing mostly because of this preparation for the Euro 2012 football championships after that there was like two years of market reduction but then the Polish economy and construction market started to recover.

The second country with impressive recovery is Hungary, three years of impressive growth mostly thanks to recovery in civil engineering and numerous residential construction and only those two countries are above the 2008 level at the moment. The third one's Czech Republic around 80% of the pre-crisis level and other countries around 70% of 2008 level. What's interesting finally this year, the whole group, all these six countries will register market increase and yesterday I just checked my presentation from two years ago, and exactly as I predicted because I'd mentioned two years ago that 2015 would be the year of market recovery in the Central Europe and hopefully I was right, and then just let's focus on key drivers in particular countries.

So by far the most important, driver not only in Poland but also in other countries, is the new EU budget. In the new EU budget Poland will even receive slightly more EU funds compared to the previous fund. Still there's a huge potential for transport infrastructure projects. Many [xx] tenders were recently announced this year and in the previous year few [xx] projects under construction mostly hardcore, [xx] and gas fires power plants and in general there's strong improvement in residential construction mostly because of the very low interest rates for the citizens.

It makes no sense to keep the savings in the bank. It's better just to purchase [xx] and to rent it on the market with our higher interest rates. And the results for the cement consumption because in Poland there was a huge peak in 2011 because of the preparation for the European [xx] and after that, after three years of slowdown, hopefully now the Poland cement industry itself will recover and the previous peak, 90 million tons per year will be probably exceeded around 2017 or 2018.

It depends how speedy the big road construction projects are doing advanced. There are some of course barriers for the market to grow like the expected slowdowns of railway construction which is because of the switch from the old to the new year budget. Still poor results of some non-residential segments like public buildings and retail buildings, high level of local authorities which will invest less compared to the previous years in general huge market competition [xx] competition on the market and just one note [xx] the LarfargeHolcim merger will not have any impact on Polish markets since Holcim is not present in Poland.

And now another important country in the region Romania again the major driver for the market for the comenteers is the new EU budget, other important factors are but Romania has made significant progress with the execution of the EU funds plus additional [xx] the country is very successful with fighting the corruption compared to the situation that was in the past.

However, the country probably would not fully use up all these EU funds which should be because projects should be completed by the end of this year and in March 2015, there was like 49% of EU budget absorption. And another important factor Romania has a successful residential government, and residential construction support program which is called Prima Casa, and there're some of course, restraints for the Romania market like limited purchasing power of the citizens some legal changes related to the renewable energy projects and as a result this sector will develop less unexpected rather than expected and because of this drop in oil and gas prices some Romanian companies decided to cut their investment programs for this year, and probably for next year as well.

What I do is for the cement industry in Romania. So after last year recovery, like 5% growth, this year, the cement production in Romania will increase by another 7% and there will be an interesting change on the cement market because as a result of this LafargeHolcim merger, Larfarge will sell its Romanian asset to the Irish CRH. When it comes to the Czech Republic, drivers are similar. Huge improvement in railway construction in order to fully use up the EU funds, low interest rates that stimulate the residential construction. After a few years of declines finally last year the number of homes started increased and this trend continue this year.

Important factor the demand for investor facility is picking up mostly because of very strong automatic sector in the Czech Republic. And there is a general improvement when it comes to market confidence coming from the contractors. The nature of barriers for the market, fixed price competition on the market and just competition for getting new contracts.

Slow recovery in office construction, and in general, low liquidity of construction companies. However, despite that the cement consumption in Czech Republic started to recover last year by 89% and the data for the first half of the year are also promising there is 8% increase in cement production as much 14% in cement consumption.

Just quickly because this insignificant smaller countries are switched to the second part of the presentation. Just mentioned that Slovakia and Hungary the impact of LarfargeHolcim merger will be that house will sell to CRH its asset in Slovakia and Hungary. So the CRH was present mostly in Poland thanks to this merger where the Irish group will also be presenting three other countries of the region, and just to sum up our forecasts for the countries in the region in the coming years.

We expect the highest growth rate of construction output in Romania and Bulgaria, because these are countries that are less experienced with usage of EU funds and definitely in the next year budget, the countries will be just able to verify a better absorption of the EU funds.

Another country with quite significant growth is Slovakia. However all three countries. These are the countries that are on the second slide were at 70% of 2008 level so this is mostly the result of very low comparative base for their growth and the end of [xx] is Poland the region with either the highest level of construction output, and because of the high cooperative base, and three years of growth and then two years of decline.

The average growth rate for Poland is quite low. But in general the trends for the upcoming [xx] are quite odd if I will say because huge amount of EU funds plus recovery in residential construction. So the growth it will come now the problem isn't the managers and construction companies at least in Poland, are mostly thinking growth will happen after 2020, after finishing of this the new EU budget because probably there won't be another one seven years deep through our budget.

Probably there are Polish companies, Polish investors who will need to focus more on public private partnership. This is probably the only solution to maintain the high levels of investments in the region. Which will be definitely challenging to be done. And the second part of the presentation is CIS region. In PMR we analyze four countries of the region namely Russia, Ukraine, Belarus and Kazakhstan and again lets have a look at the structure of the region. Of course Russia is the leader in the country in population, construction output and other indicators however, there is some difference between construction output and cement consumption there is a 10% of difference.

This is probably mostly because of the Russian economy heavily investing in oil and gas projects which does not use a lot of cement. The second country in terms of population is Ukraine. However at the moment the situation requiring this variable countries not very well developed and so 20% of population only 10% share of cement consumption.

The countries, Kazakhstan quite stable, 8% of population almost 10% of cement consumption and last country is Belarus with 5% of cement consumption in the region. In this similar chart, the trends in construction output for the last seven years. As you can see the Ukraine at the moment is up to around one third of 2008 level. So this is result not only of the recent problems with Russia but in 2009 [xx] a private investors with the countries the state budget was limited for new projects and there was a possibility for market to recover for Euro 2012 preparations like in Poland but after that economic recession problems with Russia will continue and Ukraine will end up this year at 33% of 2008 level.

This is interesting climb for Kazakhstan, the country is very stable with its development, single digit growth every year. According to official statistics the market Belarus is also slightly above 100% of 2008 level and Russia the last two years is a decrease in construction output, not very significant. And when it comes to key trends in the CIS region, let's deal with Russia. So the major market driver for the coming two years is the preparation for World Cup Championships next year and in 2017 all the stadiums will be under construction, there are huge investments in road construction and hotel construction. In general there is implementation of 2014, 2020 Transport System Development Program, however because of the budget deficit the program was cut from the start, or reduced from the start by 30%. There's some interesting investments in the Moscow and Moscow region like Central Ring Road, New Metro Hub, or just renovation of exit roads and of course huge investments in oil and the gas industry, like the latest news of expansion of Nord Stream, there's still huge potential to invest in shopping and residential, [xx] circulation, and because of lack of the public funds, there's a possibility for an increase of public private function partnerships in the country.

When it comes to major the barriers for Russia, for this year the GDP decline will be at 34%aca with as much as 89% of reduction in construction output and the major problem expected low oil prices in next year and in 2017 as well. This is actually the major problem at the moment for Russia because, the previous three year budget which was prepared in late 2014 was assuming the oil prices were at $94 per barrel.

Since that the oil prices drop nearly 50%, and this is problem for the Russian state budget, how to finance all these investments that were planned for the coming years. But also with very poor level results of this business agreement with China, India and the Middle East countries and in general there is a substantial capital also from Russia.

Last year it was 153 billion this year it will be slightly less 100 billion, however is much higher in number, but 50 billion pump in the 2012, 2013, and how this will impact the cement industry in Russia. So last year was very good for the cement industry in Russia mostly because of strong residential and non residential construction, the risk new record of 68 million of tonnes in the cement production, however this year the market will experience at least or around 10% decrease to 62 million tones.

The trends for another CIS country is Ukraine, the positive factors are now the government is really doing a lot to prepare the country for the hopefully the upcoming growth, there are some important changes in the legislation. In general there are important reforms in the country, the good news is that there's the low comparative price affected the value of constructional market is so well that even small recovery will result in a significant increase in construction output.

There are huge investment needs in transport infrastructure, in energy, in residential construction and still in this regions of Donetsk and Luhansk some engineering projects need to be done in order to offset the damages. However there's a major problem, the lack of funds to finance all this investment needs, as you can see this year, Ukraine it's even hard to estimate exactly that's why it's around 10, 15 % of GDP fall for its massive decrease and only small recovery next year and still there is possibility that Ukraine will not regain full control in the Donetsk and Luhansk provinces.

Moreover the Ukrainian government doesn't want to support anyway the residential construction, so probably the residential construction will remain however week in the coming years and also property developers have a lot of problems with financing the planned projects. Now the trends in the Kazakhstan is the most stable serious market.

The important fact is that there are huge financial reserves in Kazakhstan which help the country to maintain GDP growth and to finance all these grand infrastructure projects given the slight drop in oil prices. The GDP growth in the coming year should be around 2% or even higher which is maybe not excellent but very good trend.

There is a huge program for accelerated industrial and innovative development in Kazakhstan, 28 billion Euros is twice as much compared to this similar program for 2010-2014. And important, the shopping centers investments because in the past, the developers were investing most in just two cities, Almaty and Astana, now there are more projects in other countries in the region.

Which is a good thing for the market. Major barriers for the market, the government are going to reduce budget deficit, so this means that it's possible there will be less funds to finance all these projects. However in general the prospect for the Kazakh market are very good, and what's important the cement industry is developing rapidly in Kazakhstan. Before 2010 there was just five cements plants in Kazakhstan between 2010, 2015 another five were opened and in the coming three years, additional four cement plants are planned to be opened.

Then the trends in Belarus. So definitely the government is more opened compared to the situation in the past, it's more open to FDI and privatization, there are better relationships with the European Union, there are huge investment needs in the infrastructure. Two big nuclear power plants under construction two reactors, 1, 200 megawatts each. The first one should be completed in 2018 and other one in 2020, and the contractor is the Russian Atomstroyexport.

Of course there're some barriers for the Belarus market to grow, mostly very weak private sector, and the government and nation not to support for the residential constrction and as a result the GDP for this area will decrease by one and a half or 2%, with a 9% decrease in construction output and 6% decrease in silent output.

And just to sum up the trends in the region, similar chart like with Central Europe, as you can see the average growth rates for the coming five years are lower compared to the central Europe, because they are two different regions, two different realities so Central Europe is heavily investing from the EU funds plus revival of residential construction and the CIS countries have huge problems with low oil prices, and there are huge barriers to finance all these projects that were planned for the coming years.

The highest growth is expected for the Ukraine however taking into account the very low competitive base, this is not a impressive significant growth at the end of this it's Kazakhstan like in Poland in Central Europe countries with the highest level on development and very stable and there are other countries like Russia, Belarus we expect 2, 3% of growth of construction output in the coming years and of course because the situation very dynamic in the region so this forecast based on assumption that there won't be any important huge events like Russia inviting Ukraine or the further drop in oil prices. We expect that the oil prices will remain stable on a low level next year and maybe 2017 as well.

And I've just ended my presentation. Thank you.

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