The Cement Majors of the Future? Feedback from our 1 st Emerging Markets Seminar on 25 September 2012

Transcription

1 EQUITIES BUILDING MATERIALS (+) The Cement Majors of the Future? Feedback from our 1 st Emerging Markets Seminar on 25 September SEPTEMBER 2012 Paul Roger, CFA (+44) paul.roger@exanebnpparibas.com Yassine Touahri (+44) yassine.touahri@exanebnpparibas.com Rohit Bhatia (+44) rohit.bhatia@exanebnpparibas.com construction@exanebnpparibas.com Our 1 st Emerging Markets Cement Seminar on 25 September 2012 We hosted a Seminar called The Cement Majors of the Future? in London on 25 September Seven participants from the industry attended. These included producers from Latin America, Asia, Sub Sahara Africa, MENA and Eastern Europe. A reassuring message on most emerging markets According to the producers, demand in Sub Sahara Africa is very strong in most countries (especially Nigeria); trends in Russia and Latam are robust; and volumes in MENA have stabilised (excellent demand in Algeria, surprising resilience in Egypt). The concern is China. WCC was cautious on the outlook for demand, despite seeing a pickup in infrastructure spending recently. Focus on the impact of a slowdown in China The industry thinks the threat from Chinese exports is quite low in most regions. There is a risk in East Africa, however, and PPC, Baobab and ASEC commented that pricing in some coastal countries have started to fall in this region. WCC also highlighted the potential for the big Chinese state controlled companies (such as Conch or CNBM) to increase investment overseas in order to compensate for weaker domestic cash flows. This could pose a challenge to existing leaders in countries such as Indonesia, in our view, especially if Chinese producers are prepared to use aggressive pricing strategies to gain a foothold in new markets. An attractive opportunity in Sub Sahara Africa This region was highlighted as one of the most attractive in terms of long term growth and returns. Barriers to entry in Sub Sahara Africa are high. They include scarcity of limestone reserves, understanding the local cultures, complex logistics and strong relations with unions. There are no big "ego new entrants" in most countries (ex Sudan) in this region, unlike in MENA, and governments are generally supportive of local producers. The challenge in the region is bringing on supply fast enough to satisfy demand growth, which suggests high ROCE in the region is sustainable for some time, according to the companies. Please refer to important disclosures at the end of this report

2 Contents The Cement Majors of the Future? 3 Key takeaways 4 1. Demand in emerging markets 4 2. The impact of a slowdown in China on the global cement industry 4 3. Africa as an investment opportunity 4 4. Focus on innovation and sustainability 5 Company feedback: disclaimer 6 Company presentation: Argos 7 Company position and strategy 7 The outlook for key markets 11 Company feedback: ASEC 13 Company position and strategy 13 The outlook for key markets 16 Company Feedback: Baobab Advisory SARL 19 Company position and strategy 19 The outlook for key markets 19 Company feedback: Dangote 23 Company position and strategy 23 The outlook for key markets 28 Company feedback: LSR 31 Company position and strategy 31 The outlook for key markets 34 Company feedback: Pretoria Portland Cement (PPC) 36 Company position and strategy 36 The outlook for key markets 41 Company feedback: West China Cement (WCC) 47 Company position and strategy 47 The outlook for key markets 50 Appendix 1: why look at the emerging market producers? A recap. _ 52 2 BUILDING MATERIALS 26 September 2012

3 The Cement Majors of the Future? We held our 1 st emerging market cement seminar in London on 25 September The Seminar was called The Cement Majors of the Future? Figure 1: The programme included seven industry participants from emerging markets Source: Exane BNP Paribas estimates Figure 2: A better insight into emerging markets Source:Baobab Advisory SARL 3 BUILDING MATERIALS 26 September 2012

4 Key takeaways The main topics covered by the Seminar, and the key takeaways, were: 1. Demand in emerging markets Demand in emerging markets is still quite strong. Sub Sahara Africa is doing very well (especially Nigeria, with some short term concerns in South Africa), Russia continues to boom, Latam is robust (focus on Colombia) and MENA has stabilised (very strong trends in Algeria, better than expected resilience in Egypt). The concern is China. WCC commented that central government has started to "write cheques" again but was cautious on the outlook overall. 2. The impact of a slowdown in China on the global cement industry A rational response in China to the slowdown... According to WCC the local producers have been quite rational in response to a slowdown. In Saanxi Province, for example, producers are now working on 80% utilised shifts. The Chinese government also continues to push for consolidation via policies such as capacity controls (key in the East of the country) and tough new regulation on smaller plants. The government wants a cement industry dominated by 10 large producers and 50 regional champions (vs 6,000 producers in 2006 and 2,000 in 2009), according to WCC.... but some risks as Chinese producers export to coastline East Africa. PPC and Baobab Advisory both flagged the risk of Chinese imports along the coast in East Africa. PPC commented that the CIF price for Chinese imports is around USD /t vs USD /t local price, and that they are therefore competitive before having to move inland. Baobab mentioned that prices have come under pressure already in Sudan (from USD315/t to USD200/t now, also partly due to market fragmentation, according to ASEC) and Ethiopia (from USD302/t to USD170/t now).... and Chinese state owned champions consider investing overseas. The Chinese majors may look to invest outside of the domestic market into countries like Indonesia to compensate for weaker cash flows in China, according to WCC. This could pose a risk to established producers, especially if companies such as Conch are aggressive on pricing in order to gain a foothold / market share. WCC used the example of how Conch adopted this tactic in Saanxi and ultimately forced consolidation in that local market. 3. Africa as an investment opportunity Sub Sahara Africa is one of the most attractive regions from a returns perspective in the global cement industry. The barriers to entry are high. They include scarcity of limestone reserves, understanding the local cultures, complex logistics and strong relations with unions. There are no big "ego new entrants" in most countries (ex Sudan) in this region, unlike in MENA. Investment strategies in Sub Sahara Africa will focus on small greenfield projects. Plants need to be smaller because of the low population density and poor infrastructure. Investment cost in SSA is around USD250/t "all in" (ie including associated infrastructure). Consumption in much of Africa is dictated by supply rather than demand. Baobab estimate a need for 10mt new capacity each year in Sub Sahara Africa and believe a lot of the planned 180mt announced new capacity will not be built, because of the high barriers to entry outlined above and implementation risk. 4 BUILDING MATERIALS 26 September 2012

5 The scope for M&A and brownfield expansion in Africa is quite limited. The tight supply situation means that any producers looking to enter the market need to commit to expand capacity. There are some targets but they are relatively small (Baobab mentioned potential for consolidation in Kenya, Zambia, Ethiopia; and ASEC discussed the scope for reconsolidation in Sudan). Governments are generally supportive of local producers. In Nigeria, for example, producers enjoy export incentives, a five-year tax holiday on new capex and protection via an import tariff. In Algeria the government's strong surplus also means there is no incentive to remove subsidies on fuel, according to ASEC. The exception is Egypt where the deficit situation, lack of foreign reserves and political tension has meant that the government encouraged new entrants and removed fuel subsidies for the industry. 4. Focus on innovation and sustainability Producers can achieve a price premium through innovation, even in emerging countries, according to the companies present. PPC discussed its repositioning of premium products such as higher strength 42.5 and 52.5 grade cement and Argos commented that the group typically commands a 4-8% price premium in cement and 8-10% premium in readymix in Colombia thanks to "innovation". EM producers are also looking to improve sustainability, efficiency and cost controls. Argos discussed the need to reduce clinker factor; LSR highlighted that the use of shale ash as an alternative fuel source at its new Slantsy, Leningrad facility gives it a ~40% cost advantage vs local producers; and ASEC illustrated the importance of plant efficiency by discussing the return to profitability of its Zahana facility in Algeria thanks to new investment and increases controls, for example. 5 BUILDING MATERIALS 26 September 2012

6 Company feedback: disclaimer The feedback below summarises the slide presentations by the companies. Exane BNP Paribas does not cover any of the companies, has not independently verified any financial information and does not have an investment view on the stocks. 6 BUILDING MATERIALS 26 September 2012

7 Company presentation: Argos Company position and strategy Argos is the fifth largest cement company in Latin America. The group is based in Colombia and also has strong positions in the South East US and Caribbean. Figure 3: Argos at a glance Source: Argos The group s share is quite high in most of the markets it operates. 7 BUILDING MATERIALS 26 September 2012

8 Figure 4: Strong market positions Source: Argos Post the spin off of the group s cement assets the focus of management is on efficiency and optimisation. Initiatives to reduce clinker factor, increase use of alternative fuels and improve productivity should help to improve returns. Figure 5: A closer look at efficiency and optimization Source: Argos 8 BUILDING MATERIALS 26 September 2012

9 The group is also looking at innovation. Over 50 full time staff work on innovation initiatives. These initiatives, and the strong market position, enable Argos to charge a price premium vs local competitors in Colombia (typically in the region of 4-8% in cement and 8-10% in readymix, according to Argos). Figure 6: Innovation is also an important strategy for the group Source: Argos The group has a long history of capital recycling. Most recently in 2011 the group acquired the assets of Lafarge in South East US for USD760m. The deal strengthened Argos position in the South East US, where demographics are attractive, and consolidated the vertical integration chain. 9 BUILDING MATERIALS 26 September 2012

10 Figure 7: A long record of M&A and capital recycling Source: Argos 10 BUILDING MATERIALS 26 September 2012

11 The outlook for key markets Demand in Colombia is likely to remain robust, given the low penetration rate of cement compared to other countries in Latam and the government s commitment to infrastructure spending. Figure 8: Strong growth prospects in Colombia Source: Argos Management was also optimistic on the long-term prospects for the South East US region. Demographics are attractive and demand is seen to be at depressed levels. In terms of gross margins, the group thinks producers in the US will be able to increase prices at more than cost inflation, thanks partly to cheaper energy costs. 11 BUILDING MATERIALS 26 September 2012

12 Figure 9: Attractive demographics and demand profile in SE US long term Source: Argos 12 BUILDING MATERIALS 26 September 2012

13 Company feedback: ASEC Company position and strategy ASEC is a leading cement producer in the MENA region. It was founded by Citadel Capital (which now has a 39.4% holding) and has strong positions especially in Egypt, Sudan and Algeria. The group planned a licenced project in Syria, but this has been postponed due to the political situation in the country. Figure 10: ASEC ownership structure Source: ASEC The group currently has 12mt of capacity. It is still loss making, as most capacity is still in ramp-up stage and results have been impacted by the Arab Spring in Looking ahead the group targets USD418m of EBITDA by BUILDING MATERIALS 26 September 2012

14 Figure 11: ASEC at a glance Source: ASEC Growth and profitability improvement should be driven by operating initiatives, a recovery in Egypt, long-term growth in other MENA markets and capacity expansion. The slides below show the current capacity footprint and expansion projections. 14 BUILDING MATERIALS 26 September 2012

15 Figure 12: ASEC capacity plan Source: ASEC Figure 13: ASEC capacity plan (ctud) Source: ASEC 15 BUILDING MATERIALS 26 September 2012

16 The outlook for key markets Demand in Egypt has been surprisingly resilient, according to management, and volumes are forecast to grow in The greatest challenge is passing on cost inflation in the context of higher natural gas costs (end to subsidies) and new entrants. Figure 14: Market outlook Egypt Source: ASEC Algeria is currently a very strong market. The government is investing heavily in housing and infrastructure. The risk of higher gas prices is considered to be low (the government has a surplus and ample foreign reserves) and supply in the market is very tight, meaning demand needs to be satisfied by imports. 16 BUILDING MATERIALS 26 September 2012

17 Figure 15: Market outlook Algeria Source: ASEC The Sudanese market is more challenging. Demand fell by 20% in and management sees an ongoing risk of market fragmentation due to new entrants. Longer term cement penetration rates are very low, however. 17 BUILDING MATERIALS 26 September 2012

18 Figure 16: Market outlook Sudan Source: ASEC Overall the group believes high cement penetration rates in some MENA countries (Egypt, Algeria) is sustainable because there are few substitute products, infrastructure is still quite poor and urbanisation is a growth theme. 18 BUILDING MATERIALS 26 September 2012

19 Company Feedback: Baobab Advisory SARL Company position and strategy Baobab Advisory SARL is an independent consultancy that specialises in Africa and provides advice on issues including growth outlook, industrial strategy, performance management, governance relations, licensing and health & safely. Tony Hadley, Managing Director of Baobab Advisory SARL, was previously CEO of Dangote Cement (Nigeria) and Regional President of Lafarge Africa. Mr Hadley provided an overview of the outlook for African markets and discussed some of the challenges and opportunities of operating in the region. The outlook for key markets The structural growth theme in Africa is clear. Cement penetration rates and economic development are both currently very low, even compared to other emerging markets. This is the last frontier in terms of growth opportunities. Figure 17: Cement penetration in Africa is very low Source: Baobab Advisory SARL Growth should be driven by economic development and other factors, including urbanisation and demographics. Population growth in a number of mega cities in Africa could exceed 100% to BUILDING MATERIALS 26 September 2012

20 Figure 18: Urbanisation is a key growth driver in Africa Source: Baobab Advisory SARL The African populace is also becoming more educated and the brain drain is starting to reverse. Africans are starting to repatriate their skills and return home. Figure 19: Africans are educated and going home Source: Baobab Advisory SARL 20 BUILDING MATERIALS 26 September 2012

21 Pricing and returns in Africa are very high, especially away from the East coast. High pricing reflects the cost base (fuel oil is expensive), poor infrastructure (meaning local markets are generally protected), government support in most countries and high barriers to entry in many countries (scarcity of limestone, government support). Figure 20: Pricing is mostly high in Africa Source: Exane BNP Paribas estimates High returns have encouraged new entrants and capacity expansion in many markets in Africa. However, given the barriers to entry and high execution / implementation risk, it may be unlikely that the 180mt capacity expansion announced by producers actually comes on stream. Deconsolidation is likely to be an ongoing theme given high indebtedness at some of the majors operating in Africa, but the situation is likely to differ by country. 21 BUILDING MATERIALS 26 September 2012

22 Figure 21: The outlook for the industry in Africa Source: Baobab Advisory SARL There are many challenges to doing business in Africa. This could deter some new entrants and also help support high returns for established players with the capital and expertise to successfully expand via Greenfield projects. Figure 22: The challenges of doing business in Africa Source: Baobab Advisory SARL 22 BUILDING MATERIALS 26 September 2012

23 Company feedback: Dangote Company position and strategy Dangote is the largest local cement producer in Nigeria and Sub Sahara Africa. Figure 23: Dangote at a glance Source: Dangote The group currently has three main cement facilities in Nigeria and controls the largest distribution network in the country. 23 BUILDING MATERIALS 26 September 2012

24 Figure 24: The largest distribution network in Nigeria Source :Dangote From its base in Nigeria the group plans to expand to other countries in Sub Sahara Africa. The plan is to increase capacity to 51mt by Figure 25: A strong base with competitive advantages in Nigeria Source: Dangote 24 BUILDING MATERIALS 26 September 2012

25 Figure 26: A roadmap for expansion Source: Dangote Figure 27: Plan to increase capacity to 51mt by 2015 Source: Dangote 25 BUILDING MATERIALS 26 September 2012

26 The group is targeting countries with strong demand potential, barriers to entry and available limestone reserves. Dangote also plans to implement an export strategy in some countries in the region, such as Liberia and Ivory Coast. Figure 28: Expanding for African growth Source: Dangote In addition to top line expansion the group also wants to maintain or expand its very high margins. Management identified a number of drivers and was encouraged by government support for the industry in the domestic Nigerian market. This is evidenced by the government s export incentives, protection against imports vs an import tariff and the five-year tax holiday on new capex, according to the producer. 26 BUILDING MATERIALS 26 September 2012

27 Figure 29: Margin expansion potential and drivers Source: Dangote 27 BUILDING MATERIALS 26 September 2012

28 The outlook for key markets Volume and price trends in the domestic Nigerian market are strong and expected to remain so near-term. The group identified a number a demand drivers and barriers to entry that should protect returns. Figure 30: Strong demand drivers in Nigeria Source: Dangote 28 BUILDING MATERIALS 26 September 2012

29 Figure 31: Market dynamics in Nigeria are favourable, according to Dangote Source: Dangote However, the group recognises that prices may soften slightly medium term as industry capacity increases. Longer term Dangote sees significant potential in the rest of Sub Sahara Africa and believes returns in most countries in this region will remain attractive. 29 BUILDING MATERIALS 26 September 2012

30 Figure 32: A growth story in Sub Sahara Africa Source: Dangote Figure 33: Investment highlights for Africa Source: Dangote 30 BUILDING MATERIALS 26 September 2012

31 Company feedback: LSR Company position and strategy LSR group is a building materials conglomerate based in the North West of Russia. It operates in two main divisions: real estate & construction and building materials. Over 50% of LSR s cement output is utilised by other group businesses. Figure 34: LSR at a glance Source: LSR Cement production in the group s region within Russia is starting to recover post the crisis, but most facilities in the North West of the country are old and operating old technology. 31 BUILDING MATERIALS 26 September 2012

32 Figure 35: The group s core region is dominated by old wet kiln plants Source: LSR The group s strategy is therefore to modernise and leverage the cost advantage of new capacity. It has completed a second plant at Slantsy, Leningrad region, that uses ash and other waste products left over from shale gas production as an alternative energy source. The plant also operates a dry kiln. Management estimate it has a 40% cost advantage vs regional competitors such as Eurocement and Heidelbergcement. 32 BUILDING MATERIALS 26 September 2012

33 Figure 36: A new greenfield plant in Slantsy Source: LSR Figure 37: Innovation and energy efficiency Source: LSR 33 BUILDING MATERIALS 26 September 2012

34 The outlook for key markets Cement demand in Russia is recovering to pre-crisis levels and the outlook is encouraging. Production could reach 77mt by 2015, according to management. Figure 38: A return to pre crisis levels Source: LSR Dynamics in the North Western region are similar to the rest of Russia. Demand is expected to exceed pre crisis levels in BUILDING MATERIALS 26 September 2012

35 Figure 39: Market dynamics in Northwestern Federal District Source: LSR Prices continue to increase, according to management, but are still some way below the pre-crisis peak of over USD200/t. The group sees further hikes as possible and is not unduly concerned about the risk of higher gas prices (removal of subsidies has been discussed but not implemented for some time). 35 BUILDING MATERIALS 26 September 2012

36 Company feedback: Pretoria Portland Cement (PPC) Company position and strategy PPC was founded in 1892 and has been listed since It has a c35% share in the domestic South African market and positions in other Sub Sahara countries including Zimbabwe (acquired from Anglo American for USD54m in 2001) and Botswana. Figure 40: PPC at a glance Source: PPC The group s strategy is to focus on the home market ( keeping the home fires burning ) whilst expanding to other attractive countries in Sub Sahara Africa. 36 BUILDING MATERIALS 26 September 2012

37 Figure 41: PPC strategy Source: PPC The group will target other Sub Sahara countries with strong growth dynamics, attractive market structures and barriers against new entrants. The East Coast is not attractive to PPC, given the risk of imports from countries such as China. 37 BUILDING MATERIALS 26 September 2012

38 Figure 42: A new focus on Sub Sahara Africa Source: PPC The group is working on four other projects, in addition to a confirmed new plant in Ethiopia. Not all of these four projects may be implemented, but management seemed confident that three would go-ahead. For commercial reasons the group did not provide more disclosure on where the next projects will be located. 38 BUILDING MATERIALS 26 September 2012

39 Figure 43: Projects in Sub Sahara Africa Source: PPC The target is to increase the share of revenue from Sub Sahara Africa ex South Africa from 20% in 2011 to 40% by Figure 44: Moving beyond South Africa Source: PPC 39 BUILDING MATERIALS 26 September 2012

40 In the domestic market, given near term concerns about demand, one area of focus is product differentiation. The group is trying to increase penetration of higher strength cement in order to command a price premium. Figure 45: A differentiated product strategy Source: PPC 40 BUILDING MATERIALS 26 September 2012

41 The outlook for key markets The near-term outlook for the industry in South Africa is quite challenging. Demand growth of a still-healthy 4-5% pa is likely to 2015, but in this scenario utilisation rates could remain under some pressure medium term. The group also notes the arrival of a new entrant (Dangote) in 2013 and risk that this could destabilise pricing initially. Figure 46: Overcapacity an issue in South Africa Source: PPC Although growth rates may be slightly lower than other markets in Sub Sahara Africa, most regions of South Africa are experiencing positive trends. 41 BUILDING MATERIALS 26 September 2012

42 Figure 47: Near term demand outlook Source: PPC Pricing is also improving a bit, despite lower utilisation rates, in Zimbabwe and key parts of South Africa. In contrast pricing in Botswana is under pressure, as it is in Mozambique and the East Coast where imports are a threat. 42 BUILDING MATERIALS 26 September 2012

43 Figure 48: Near term pricing outlook Source: PPC The long term dynamics of Sub Sahara Africa outside of South Africa are very encouraging. Penetration rates are low and demographics positive. There is potential for an extra 40mt pa demand by BUILDING MATERIALS 26 September 2012

44 Figure 49: Favourable long term dynamics in Sub Sahara Africa Source: PPC 44 BUILDING MATERIALS 26 September 2012

45 Figure 50: A 40mt pa growth opportunity Source: PPC PPC will look to exploit this opportunity via more Greenfield investment. The typical investment cost of a new Greenfield facility is USD250/t all in (ie including all related infrastructure). 45 BUILDING MATERIALS 26 September 2012

46 Figure 51: Summary of growth dynamics and returns profile Source :PPC 46 BUILDING MATERIALS 26 September 2012

47 Company feedback: West China Cement (WCC) Company position and strategy West China Cement (WCC) was founded in 2003 and listed in Hong Kong in August 2010 (having previously been on London s AIM market from 2006). The group currently has c22mt of capacity and will expand this to almost 24mt by year end. This makes WCC the number 18 player in China. Figure 52: WCC at a glance Source: WCC Most of the group s production is in Shaanxi, a province in the West of China. It has a 26% share of this local market and a stronger foothold than competitors in the south of Shaanxi, where limestone reserves are more scarce and the industry less fragmented. 47 BUILDING MATERIALS 26 September 2012

48 Figure 53: Market leader in Shaanxi province Source: WCC The group has expanded rapidly since its first facility in 2003 and wants to increase capacity to 30mt by This will give WCC scale and an increased influence in Beijing. Figure 54: A history of rapid expansion Source: WCC 48 BUILDING MATERIALS 26 September 2012

49 Figure 55: Ambitions to expand to 30mt capacity Source: WCC WCC is also interested in some consolidation opportunities, when debt is repaid in 2016 and new capacity is on stream. It recently entered into cooperation with Italcementi in the country. Figure 56: A recent partnership with Italcementi Source: WCC 49 BUILDING MATERIALS 26 September 2012

50 The outlook for key markets The group is generally cautious on the outlook for China and has seen a slowdown over the past 18 months. However, recently the government has started writing cheques again and the infrastructure pipeline in the group s Shaanxi and Hotan provinces is quite encouraging. This should provide support in the event of a wider economic deterioration in the country. Figure 57: Infrastructure spending to drive demand in Shaanxi Source: WCC 50 BUILDING MATERIALS 26 September 2012

51 Figure 58: Also lots of schemes in Hotan Source: WCC Pricing has come under pressure in the West because of increased capacity and new entrants at a time of weaker demand. State owned Conch has been especially keen to increase share and drive consolidation, according to WCC. Sequentially the situation appears to be stabilising, and the group highlighted the improvement in prices QoQ in most regions they operate. Figure 59: Pricing under pressure Source: WCC 51 BUILDING MATERIALS 26 September 2012

52 Appendix 1: why look at the emerging market producers? A recap. During the crisis cement volume growth in emerging markets and the developed world decoupled. Consumption declined in OECD by over 30% whereas demand in emerging markets increased by more than 40%. Figure 60: Cement volumes decoupled during the crisis % chg cement volumes NA -40% WE -22% EE -7% -5% Med Rim +39% Asia +52% Latin America +43% +6% Mideast +53% Strong Increase: > 30% Slight Increase: 0 to 30% Stagnation Small decrease: 0 to -20% Big decrease: < -20% Not covered Source: Exane BNP Paribas estimates Africa +31% The contrasting fortunes created a new paradigm in the global cement industry. Emerging market producers now play a much more significant role in the global industry. 52 BUILDING MATERIALS 26 September 2012

53 Figure 61: The industry was dominated by Pan Euro majors before the crisis Leading cement producers 2005 (mt) Holcim Lafarge Cemex Heidelberg Italcementi Taiheiyo Conch Buzzi Unicem Eurocement Votorantim Ultratech Siam Cement Cimpor Mitsubishi Mats. Vicat CRH Sumitomo-Osaka Ube industries Ltd Titan Cement Orascom Source: Exane BNP Paribas estimates Figure 62: EM producers now play a more important role in the industry Leading cement producers 2011 (mt) CNBM Lafarge Holcim Conch Heidelberg Jidong Cemex Sinoma Italcementi CR Cement Votorantim Aditya Birla Group Taiheiyo Taiwan Cement Shamn Shui Huaxin Buzzi Unicem Eurocement Camargo Correa Hong Shi Cement Tian Rui Cemnet BBMG Siam Cement Asia Cement Source: Exane BNP Paribas estimates 53 BUILDING MATERIALS 26 September 2012

54 Looking ahead emerging markets should continue to offer some of the best opportunities in terms of growth and returns. The map below provides our forecast cement demand growth to Figure 63: Near term growth to come mostly in emerging markets % chg cement volumes e North America: +18% Latin America: +20% > 25% 20% to 25% 10% to 20% 0% to 10% < 0% Non-operating countries (Sources : Exane BNP Paribas estimates) Source: Exane BNP Paribas estimate 0% +25% -9% +20% -1% -5% +4% +20% -6% W. Europe: 0% -20% -13% +14% -29% E. Europe: +21% +16% +16% +24% +20% -1% +19% +34% +22% +19% +20% +17% +20% +22% +17% +24% +29% +18% +20% +4% Mid. East & Africa: +14% +4% +11% 0% Asia: +21% -1% Longer term, the combination of low cement penetration rates and favourable demographics should also support superior emerging market volume growth (with a few exceptions, most notably China were penetration is already very high). Figure 64: Emerging markets also offer the highest growth rates Cement consumption CAGR e North America +1.0% +1.0% +1.4% +1.8% +3.2% W.E 0.0% E.E -0.3% Med Rim +0.5% +1.8% +0.3% -0.7% +0.8% +0.6% +0.3% -0.3% -0.3% -0.2% +0.8% +1.1% -1.5% +3.4% -1.8% Latin America +1.7% +1.4% +6.2% +6.9% +3.1% +4.1% Emerging Asia ex China +2.4% > 3% 2% 3% +2.0% +2.5% +0.9% 1% 2% 0% 1% < 0% < 0% Sub Saharan Africa +5.2% (Sources : Exane BNP Paribas estimates) Source: Exane BNP Paribas estimates 54 BUILDING MATERIALS 26 September 2012

55 The structure of most emerging markets is quite attractive. EBITDA/t, pricing and ROCE on new capacity is highest in Africa, Latam and parts of Asia ex China. In contrast returns and cash generation in OECD markets are subdued at present necessitating cost cutting and new self help initiatives by companies with exposure to North America and Europe. Figure 65: Emerging markets are also quite profitable, cash generative and attractive in terms of ROCE Theoretical ROCE on new Greenfield capacity at current investment cost, EBITDA/t, price, utilisation rates, tax rate per market North America 1% 9% W.Eur 2% 4% 9% 1% 9% 22% E.Eur 5% Med Rim 7% 8% 1% 1% 5% -1% 6% 7% 15% 4% 13% 8% 6% Latin America 10% 11% 26% 17% 23% South East Asia 13% 14% 14% 9% > 15% 10 15% Sub Saharan Africa 21% 7% - 10% 3 7% < 3% (Sources : Exane BNP Paribas estimates) Source: Exane BNP Paribas estimates In this context it is possible that the importance of the emerging market cement producers will continue to increase in the next cycle and that their strategy, pricing and approach to capital allocation will be a major determinant of industry dynamics. We therefore decided to hold our 1 st emerging markets cement conference to gain a better insight into: - some of the fastest growing emerging market cement names. Participants included producers from Latam, Asia, Eastern Europe, MENA and North Africa; - the near and long term outlook for emerging markets, according to the producers that operate in them; and - future dynamics in the global cement industry. 55 BUILDING MATERIALS 26 September 2012

56 Analyst location As per contact details, analysts are based in the following locations: London, UK for telephone numbers commencing +44; Paris, France +33; Brussels, Belgium +32; Frankfurt, Germany +49; Geneva, Switzerland +41; Madrid, Spain +34; Milan, Italy +39; New York, USA +1; Singapore +65; Stockholm, Sweden +46 Rating definitions Stock Rating (vs Sector) Outperform: The stock is expected to outperform the industry large-cap coverage universe over a 12-month investment horizon. Neutral: The stock is expected to perform in line with the industry large-cap coverage universe over a 12-month investment horizon. Underperform: The stock is expected to underperform the industry large-cap coverage universe over a 12-month investment horizon. Under review: The rating of the stock has been placed under review for following important news. Any possible change will be confirmed as soon as possible. Sector Rating (vs Market) Outperform: The sector is expected to outperform the STOXX Europe 50 over a 12-month investment horizon. Neutral: The sector is expected to perform in line with the STOXX Europe 50 over a 12-month investment horizon. Underperform: The sector is expected to underperform the STOXX Europe 50 over a 12-month investment horizon. Key ideas BUY: The stock is expected to deliver an absolute return in excess of 30% over the next two years. Exane BNP Paribas Key Ideas Buy List comprises selected stocks that meet this criterion. Distribution of Exane BNP Paribas equity recommendations As at 02/07/2012 Exane BNP Paribas covered 606 stocks. The stocks that, for regulatory reasons, are not accorded a rating by Exane BNP Paribas are excluded from these statistics. For regulatory reasons, our ratings of Outperform, Neutral and Underperform correspond respectively to Buy, Hold and Sell; the underlying signification is, however, different as our ratings are relative to the sector. 41% of stocks covered by Exane BNP Paribas were rated Outperform. During the last 12 months, Exane acted as distributor for BNP Paribas on the 1% of stocks with this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 6% of the companies accorded this rating*. 38% of stocks covered by Exane BNP Paribas were rated Neutral. During the last 12 months, Exane acted as distributor for BNP Paribas on the 0% of stocks with this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 4% of the companies accorded this rating*. 21% of stocks covered by Exane BNP Paribas were rated Underperform. During the last 12 months, Exane acted as distributor for BNP Paribas on the 1% of stocks with this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 4% of the companies accorded this rating*. * Exane is independent from BNP Paribas. Nevertheless, in order to maintain absolute transparency, we include in this category transactions carried out by BNP Paribas independently from Exane. For the purpose of clarity, we have excluded fixed income transactions carried out by BNP Paribas. Commitment of transparency on potential conflicts of interest Complete disclosures, please see Exane Pursuant to Directive 2003/125/CE and NASD Rule 2711(h) Unless specified, Exane is unaware of significant conflicts of interest with companies mentioned in this report. Company Investment banking Distributor Liquidity provider Corporate links Analyst's personal interest Equity stake US Law Equity stake French Law Amended after disclosure to company Additional material conflicts Saint-Gobain NO NO YES NO NO NO NO NO NO Vicat NO NO NO NO YES NO NO NO NO Source: Exane See for details BNP Paribas Exane is independent of BNP Paribas (BNPP) and the agreement between the two companies is structured to guarantee the independence of Exane's research, published under the brand name Exane BNP Paribas. Nevertheless, to respect a principle of transparency, we separately identify potential conflicts of interest with BNPP regarding the company/(ies) covered by this research document. Potential conflicts of interest: Lafarge: As of 31/08/2012 BNPP owns 1,15% of LAFARGE SA Source: BNP Paribas 56 BUILDING MATERIALS 26 September 2012

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