Nov 12 - Fitch Ratings says Q312 results reported by Fitch-rated 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.
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
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).
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.
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.
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