Exane BNP Paribas Building Materials XXI General Assembly and - - PowerPoint PPT Presentation
Equities Equities Exane BNP Paribas Building Materials XXI General Assembly and Congress of Partners FICEM World Cement markets trends Exane BNP Paribass new Scenario for 2011-2012 Quito, October 2011 (INTERNAL USE ONLY)
Exane BNP Paribas’s new Scenario for 2011-2012
Quito, October 2011
(INTERNAL USE ONLY)
construction@exanebnpparibas.com Yassine Touahri +44 207 039 95 23 yassine.touahri@exanebnpparibas.com Team construction@exane.com
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Yassine Touahri (London): ✉ yassine.touahri@exanebnpparibas.com
☎ + 44 207 039 95 23
Yassine Touahri, 28, graduated with a MsC in Management from Grenoble’s Ecole de Management and spent one year studying at the Warwick Business School in 2006/2007. In 2006, Yassine worked in Saint-Gobain’s investor relations department and joined Exane’s Building Materials and Construction team in 2007.
European Building Materials: Introduction
> We work closely with the Infrastructure Team of Nicolas Mora and Stanislas Coquebert (contactable on infrastructure@exane.com)
Paul Roger CFA (London): ✉ paul.roger@exanebnpparibas.com
☎ +44 203 430 84 15
Paul Roger, 34, graduated from Durham University in 1998 and has a decade’s experience covering the Building Materials sector at HSBC, ABN AMRO, Deutsche Bank and ING. He has also managed money for a top London hedge fund and spent a year working for Renaissance Capital in Russia, covering global infrastructure markets. Paul is a Chartered Financial Analyst and Chartered Accountant. He joined as Sector Head of Exane’s Building Materials Team in 2010.
Rohit Bhatia (London): ✉ rohit.bhatia @exanebnpparibas.com
☎ + 44 203 430 84 33
Rohit Bhatia, 25, graduated from Leeds University in 2007, and started his career at WestLB as a Debt Origination Analyst. Subsequently, he worked as an Equity Research Associate at Société Générale within the Telecoms Team. Rohit has completed his CFA exams and is awaiting his charter. He joined Exane’s Building Materials Team in 2011.
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Summary
What’s changed during the past few months?
Our New Scenario for construction markets in 2011-2012
Challenging price-cost dynamics in 2011 and a question mark for 2012
An overview of the relationship between the steel and cement industry
Conclusion
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Main take-aways from H1 2011
by bad weather in Europe and North America)
Canada, lacklustre demand in India, very weak volumes in Southern Europe)
Q111 cement volume trends (YoY) Q211 cement volume trends (YoY)
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What’s changed over the last few months: increased pressure on mature markets banks and governments
50 100 150 200 250 300 350 Greece Hungary Croatia Italy Latvia Ukraine Lithuania Romania Slovenia Belgium Poland Austria France Bulgaria Denmark Spain Slovakia Estonia Netherlands Germany Iceland Czech Republic Sweden Australia Switzerland Norway United Kingdom Portugal Ireland Change in CDS spread between end June & end August 2011
European sovereign CDS spread have increased by more than 50 bps on average since June
100 200 300 400 500 600 Dec 05 Apr 06 Aug 06 Dec 06 Apr 07 Aug 07 Dec 07 Apr 08 Aug 08 Dec 08 Apr 09 Aug 09 Dec 09 Apr 10 Aug 10 Dec 10 Apr 11 EU BANKS SECTOR CDS INDEX 5Y - CDS PREM. MID
European bank CDS have also continued to surge to an unhealthy level this summer
European sates have been facing increasing market pressure to reduce debt European banks are now facing increasingly high financing costs
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What’s changed over the last few months: deteriorating confidence
well below its pre-crisis level
(35.0) (30.0) (25.0) (20.0) (15.0) (10.0) (5.0) 0.0 Jan 05 May 05 Sep 05 Jan 06 May 06 Sep 06 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Europe consumer confidence indicator
Deteriorating business confidence Negative inflection in consumer confidence Europe USA
30 35 40 45 50 55 60 65 Jan 05 Apr 05 Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 US ISM PURCHASING MANAGERS INDEX (MFG SURVEY) SADJ 20 30 40 50 60 70 80 90 100 110 120 Jan 05 May 05 Sep 05 Jan 06 May 06 Sep 06 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 US consumer confidence index
10 Jan 05 Apr 05 Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11
Business Climate Indicator in Europe
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What’s changed over the last few months: Lower growth prospect in emerging markets
(1.5) (1.0) (0.5) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Brazil India Nigeria China Australia Phillipines Indonesia Russia Mexico Egypt South Africa Current Central bank interest rates vs. 2010 rates
Tightening monetary policy in emerging markets Exane economists now expected a marked slowdown in emerging market GDP growth 2012
2011 2011 2011 2012 2012 2012 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 May Scenario
Emerging and Developing Economies GDP forecasts for 2011 & 2012 Change in central bank reference rates since 2010
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Summary
What’s changed during the past few months?
Our New Scenario for construction markets in 2011-2012
Challenging price-cost dynamics in 2011 and a question mark for 2012
An overview of the relationship between the steel and cement industry
Conclusion
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US housing still hovers around the bottom
450 650 850 1,050 1,250 1,450 1,650 1,850 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 (60%) (40%) (20%) 0% 20% 40% 60% USA- Housing Permits ('000s) USA- Housing Starts ('000s) YoY % Change - Permits YoY % Change - Starts 500 1,000 1,500 2,000 2,500 Q1 2002 Q3 2002 Q1 2003 Q3 2003 Q1 2004 Q3 2004 Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Estimated excess level of vacant home for sale or for rent ('000)
...and excess inventory remains high
10 20 30 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 (40%) (30%) (20%) (10%) 0% 10% 20% Impact of housing market prospects on mortgage demand (LHS) Housing Permits EU27 YoY % change (RHS)
European housing permits are resilient but lending activity is likely to slowdown
Residential construction: Potential weakness in Europe / Slow recovery in the US
housing (over 1m per year)
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Non-residential construction: deteriorating leading indicators
business climate with a time lag of one to two years
will impact non residential investments in 2012 or 2013
historically been well correlated with non residential trends 12 to 18 months
Deteriorating non residential indicators suggest a slowdown or decline in non residential activity USA EUrope
10 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11
Business Climate Indicator in Europe (20%) (15%) (10%) (5%) 0% 5% 10% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012e 2013e (35.0) (30.0) (25.0) (20.0) (15.0) (10.0) (5.0) 0.0 5.0 10.0 Non Residential Spending in Europe Business Climate Indicator in Europe 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 USA - AIA Architecture Billings Index (35%) (25%) (15%) (5%) 5% 15% 25% 35% May 97 May 98 May 99 May 00 May 01 May 02 May 03 May 04 May 05 May 06 May 07 May 08 May 09 May 10 May 11 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0 70.0 USA - Construction spending private non residential -YoY % change ( 3 month average) USA - AIA Architecture Billings Index - 3 month average
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Infrastructure: austerity measures and phasing
In the US, states are under pressure to cut spending and there is no clear consensus at the federal level on infrastructure Large budget deficit in Europe suggest that debt reduction will be a priority
European 2011 budget deficit as a % of GDP Gap between planned tax revenues and expenditure by states
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Cement Volume Scenario 2011
Our demand assumptions for the full year 2011
and Philippines (delay in infrastructure projects)
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A tentative scenario for Cement demand in 2012
world economy
Cement Volume Scenario 2012
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Summary
What’s changed during the past few months?
Our New Scenario for construction markets in 2011-2012
Challenging price-cost dynamics in 2011 and a question mark for 2012
An overview of the relationship between the steel and cement industry
Conclusion
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Cost inflation is a key issue in 2011
50 100 150 200 250 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Coal USD/t C&F Petcoke USD/t C&F Oil prices (USD / barrel)
Evolution of coal, Petcoke and oil prices since 2000
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Price hikes in 2011 were often not sufficient to fully pass on cost inflation
passed on to clients and margins came under pressure.
Q1 cement margin evolution Q2 cement margin evolution Cement Prices in 1H 2011 +3% excl. China (YoY% change)
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Cost pressures should abate in 2012
Which means easing energy cost inflation in 2012 Energy prices are starting to come down (notably Petcoke) Recent evolution of International Petcoke & Coal prices Estimated average cement energy bill in EUR/t
50 100 150 200 250 Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Coal USD/t C&F Petcoke USD/t C&F Oil prices (USD / barrel) (1.0) 1.0 3.0 5.0 7.0 9.0 11.0 13.0 15.0 17.0 2010 2011 2012 International Coal Petcoke Local coal Alternative fuel Gas & other Electricity
+13% +1%
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However utilisation rates remain very low in many mature markets
Cement utilisation rates in 2012
World average 74% (mature market 57%, emerging markets 77%)
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And new entrants are creating a question mark on prices in some emerging countries
fragmented
Estimated market share of new entrants by 2015
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Summary
What’s changed during the past few months?
Our New Scenario for construction markets in 2011-2012
Challenging price-cost dynamics in 2011 and a question mark for 2012
An overview of the relationship between the steel and cement industry
Conclusion
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Should steel producers invest into the cement industry?
We see three main criteria to look at for a steel player to invest cement:
Pure steel manufacturers need first to
invest in maintenance
Debt reduction is often a priority Investment to optimise costs are likely
to be considered
Integration into mining to secure raw
materials is likely to be considered a priority over diversifying into new sectors
Steel manufacturers that are largely
vertically integrated into mining have potentially large cash reserve
Mining assets are expensive (high
coking coal and iron ore price)
Overcapacity in steel often make
further investment irrelevant
Diversification into cement can make
sense in profitable cement markets
Other investment opportunities in the steel & mining sector
Low return and/or limited growth
potential for the local cement industry
Vertical integration may offer a cost
advantage but total return may not be attractive (low margin on clinker production)
There are probably better investment
High return and/or attractive growth
prospect of the cement industry
Return on capital is attractive even
without a slag cost advantage
Diversifying in cement can appear an
interesting option if other investment
Profitability and growth prospect
Limited slag production and/or slag
prices close to clinker costs
Using slag only offer cement producers
marginal margin benefit
Selling slag to cement producers is
nearly as profitable as vertical
Slag is available and prices are
substantially lower than clinker cost
Cement manufacturers are capturing
the incremental value
Integrating into cement enable steel
producers to capture the differential
Availability of slag and differential between clinker cost & slag prices Elements to be considered against entering the cement industry Elements to be considered for entering the cement industry
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Many steel industry players are facing cash-flow constraints as margins are under pressure
remain near historical high
Declining Steel prices Iron ore prices near historical high Coking coal prices also remains very high
1 0 0 2 0 0 3 0 0 4 0 0 5 0 0 6 0 0 7 0 0 8 0 0 9 0 0 Q 1 0 2 Q 1 0 4 Q 1 0 6 Q 1 0 8 Q 1 1 0 1 Q 1 2 USD/tonne 5 0 % 6 0 % 7 0 % 8 0 % 9 0 % 1 0 0 % 1 1 0 % M a r g in o v e r r a w m a te r ia ls ( s p o t) O E C D u tilis a tio n r a te ( % )
As a result, steel industry profitability is under pressure
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Integration into cement can make sense in some emerging markets for miners/steel producers that have cash
2011e EBITDA per tonne (in $) in the cement industry Crude Steel Production by Country (2010
Emerging markets with large steel production , and relatively attractive growth prospect & profitability Emerging markets with large steel production , attractive growth prospect & potentially attractive return if margins & prices improve Emerging markets with large steel production and attractive margin but limited growth profile
cement industry). CSN mining assets have also been very cash generative.
players have started to invest in cement but the case for diversification could become more compelling with better utilisation rates and/or higher cement margins.
advantage of using slag a bit less attractive that in other countries. The prevailing steel technology is also producing less slag.
visibility on cement margin are likely to deter investment
the cement industry unlikely
Attractive market are likely to be favoured Market with large steel industry
Country in which steel manufacturers have started to integrate into the cement industry
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Summary
What’s changed during the past few months?
Our New Scenario for construction markets in 2011-2012
Challenging price-cost dynamics in 2011 and a question mark for 2012
An overview of the relationship between the steel and cement industry
Conclusion
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Change in cement volumes between 2006 and 2010
An overview of what happened during the crisis
Since 2006, demand fell by more than 30% in mature markets … While volumes increase by more than a third in emerging countries.
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Conclusion
For 2012 we have reviewed down our scenario of recovery
We have cut our Europe & US infrastructure assumptions to reflect austerity measures and the phasing out of stimulus. We have also cut Europe and US housing forecasts in view of the risk created by forthcoming austerity programmes and the high levels of unemployment. In addition to that, we have reviewed downward our estimates for non residential construction and renovation in mature markets to take into account tougher macro-economics trends, even if we expect both to stabilise. Looking at emerging markets, trends have until now been in line with our estimates and we have not materially changed our assumptions as regards volumes for 2011. We however expect a slowdown in emerging countries next year reflecting lower economic growth worldwide.
Two key industry challenges for international players: restructuring in mature markets and investing in emerging markets
Infrastructure activity in mature markets is likely to remain depressed until 2015 as governments are reimbursing their debt. In this scenario, utilisation rates for the cement industry would stay at a low level. We believe that one the main challenges facing the international cement players will be to restructure their mature markets positions in order to improve profitability. The recovery of cash flows in mature market is indeed key to restore the ability to invest in new plants in emerging market, capture growth opportunities and deter new entrants.
A new paradigm for the cement industry?
Emerging market companies (within and outside the cement industry) did not face the collapse of cash flow in Europe and North
that are now becoming more fragmented. For instance, some steel and mining players have started to invest in cement in Brazil, India, Russia, and China. Reversing the fragmentation of emerging markets by acquiring new entrants could require a lot
markets and the pace of cash flow recovery is uncertain in mature countries. Consequently, many majors could have to first focus on key markets and divest non core assets while many emerging market players have the cash flow to invest.
Do not hesitate to contact me during the conference if you want to discuss other potential outcomes or if you want be added to our mailing list and receive our research.
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