Exane BNP Paribas Building Materials. XXVIII Technical Congress FICEM-APCAC Fundamentals Deteriorate

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1 Exane BNP Paribas Building Materials XXVIII Technical Congress FICEM-APCAC Fundamentals Deteriorate World Cement markets trends Exane BNP Paribas s new Scenario for São Paulo, September 2011 (Internal use only) construction@exanebnpparibas.com Yassine Touahri yassine.touahri@exanebnpparibas.com Team construction@exane.com

2 European Building Materials: Introduction Equities 2 Paul Roger CFA (London): paul.roger@exanebnpparibas.com 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 Yassine Touahri (London): yassine.touahri@exanebnpparibas.com 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 Rohit Bhatia (London): 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 > We work closely with the Infrastructure Team of Nicolas Mora and Stanislas Coquebert (contactable on infrastructure@exane.com)

3 Summary 3 What s changed during the past few months? - Main take-aways from H Increased pressure on mature markets banks and governments - Deteriorating confidence - Lower growth prospect in emerging markets Challenging price-cost dynamics in Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressures may however abate in 2012 Our New Scenario for construction markets in Residential / Non Residential / Infrastructure - Our Scenario for cement volumes in A tentative scenario for cement volume in 2012 Conclusion

4 Main take-aways from H Demand was very strong in Q1 11 (favourable base effect because Q1 10 was heavily impacted by bad weather in Europe and North America) - In contrast, trends in Q2 11 have been relatively disappointing (tough weather in the US, and Canada, lacklustre demand in India, very weak volumes in Southern Europe) 4 Q111 cement volume trends (YoY) Q211 cement volume trends (YoY)

5 What s changed over the last few months: increased pressure on mature markets banks and governments - European governments have come under renewed pressure to reduce debt - Investors are also starting to question the strength of banks balance sheets European sovereign CDS spread have increased by more than 50 bps on average since June European bank CDS have also continued to surge to an unhealthy level this summer 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 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 Change in CDS spread between end June & end August 2011 EU BANKS SECTOR CDS INDEX 5Y - CDS PREM. MID

6 (1.0) (2.0) (3.0) (4.0) (5.0) What s changed over the last few months: deteriorating confidence - In Europe both business and consumer confidence deteriorated this summer - In the ISM (US business climate) was clearly disappointing and consumer confidence remains well below its pre-crisis level 0.0 (5.0) (10.0) (15.0) (20.0) (25.0) (30.0) (35.0) 6 Jan 11 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 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 May 11 Deteriorating business confidence Negative inflection in consumer confidence Business climate indicator for the euro area Europe consumer confidence indicator USA Europe Sep 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 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 Jan 11 May 11 US ISM PURCHASING MANAGERS INDEX (MFG SURVEY) SADJ US consumer confidence index

7 What s changed over the last few months: Lower growth prospect in emerging markets - Monetary tightening (need to control inflation) - Lower world GDP growth (potential stagnation of some large mature markets). Tightening monetary policy in emerging markets Change in central bank reference rates since 2010 Exane economists now expected a marked slowdown in emerging market GDP growth 2012 Emerging and Developing Economies GDP forecasts for 2011 & (0.5) (1.0) (1.5) 5.9 Brazil India Nigeria China Australia Phillipines Indonesia Russia Mexico Current Central bank interest rates vs rates Egypt South Africa May Scenario Aug. Scenario Sep. Scenario

8 Summary 8 What s changed during the past few months? - Main take-aways from H Increased pressure on mature markets banks and governments - Deteriorating confidence - Lower growth prospect in emerging markets Challenging price-cost dynamics in Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressure may however abate in 2012 Our New Scenario for construction markets in Residential / Non Residential / Infrastructure - Our Scenario for cement volumes in A tentative scenario for cement volume in 2012 Conclusion

9 Cost inflation is a key issue in Petcoke and coal prices have increased significantly vs. early We estimate that in 2011, the energy bill of cement players is on average up 13% vs. last year. Equities 9 Evolution of coal, Petcoke and oil prices since 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)

10 Price hikes in 2011 were often not sufficient to fully pass on cost inflation -Price hikes were often announced because of the rise in costs -However, in most regions (with the notable exceptions of China) cost inflation could not be fully passed on to clients and margins came under pressure. Q1 cement margin evolution 10 Cement Prices in 1H % excl. China (YoY% change) Q2 cement margin evolution

11 Cost pressures may however abate in Petcoke prices and other inputs look to have stabilised - Energy cost inflation forecast in our simulation to fall to +3% YoY in 2012 vs +13% in 2011 Equities Energy prices have stabilised at a high level This suggest easing energy cost inflation in Recent evolution of International Petcoke & Coal prices 18.0 Estimated average cement energy bill in EUR/t % +3% (e) Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul Coal USD/t C&F Petcoke USD/t C&F Oil prices (USD / barrel) International Coal Petcoke Local coal Alternative fuel Gas & other Electricity

12 Summary 12 What s changed during the past few months? - Main take-aways from H Increased pressure on mature markets banks and governments - Deteriorating confidence - Lower growth prospect in emerging markets Challenging price-cost dynamics in Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressures may however abate in 2012 Our New Scenario for construction markets in Residential / Non Residential / Infrastructure - Our Scenario for cement volumes in A first tentative of scenario for cement volume in 2012 Conclusion

13 * Mortgage Approvals ** Housing starts Decline > -15% 5%< Decline < 15% 0% < Decline < 5% Stagnation 0%< Growth < 5% 5% < Growth <15% Growth > 15% -33% Jun % Jun. 11 Residential construction: solid trends in Northern Europe in 2011 but a question mark in housing trends have so far developed in line with our expectations - However, we believe that banks woes, austerity and unemployment put the recovery at risk - Some leading indicators are pointing to a slowdown or potential decline in some countries European Housing Permits YTD trends +5% Mar % May % Jun % Jun % Apr % Jun % Mar % Jun % +20% May 11 +9% Apr % May 11 * +18% Mar % Jun 11-2% Mar. 11 Jun % -30% Mar. 11 Mar % -9% +9% May. 11 ** May 11Jun % Mar % Jan % 40% 30% 20% 10% 0% (10%) (20%) (30%) (40%) (50%) Danish residential home sales Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Residential properties sales YoY % change A potential slowdown in French housing in YTD 13 50% 40% 30% 20% 10% 0% (10%) (20%) (30%) (40%) (50%) 20% 15% 10% 5% 0% (5%) (10%) (15%) (20%) French new home sales by developers (yoy % change) - LHS French Housing Starts (yoy % change) - RHS

14 1,850 Residential construction: slow recovery in the United-States - US housing permits and starts have been hovering around k per year since early There is a large underlying need for housing (over 1m per year) - However unemployment failed to abate and excess inventory remains very high - We have adopted a significantly more cautious pace of recovery for US housing starts US housing still hovers around the bottom 60% 2,500...and excess inventory remains high 14 1,650 40% 2,000 1,450 1,250 1,050 20% 0% 1,500 1, (20%) (40%) (60%) 0 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 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q USA- Housing Permits ('000s) YoY % Change - Permits USA- Housing Starts ('000s) YoY % Change - Starts Estimated excess level of vacant home for sale or for rent ('000) 10.5 US Unemployment has failed to abate... 2,500...we have adopted a more cautious stance on US housing recovery ,000 1,500 1, Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 US unemployement rate (%) Nov 10 Jan 11 Mar 11 May 11 Jul US Housing starts (million) & Exane BNP Paribas new forecast US Housing starts (million) & Exane BNP Paribas old forecast e 2012e 2013e 2014e 2015e

15 60.0 Non-residential construction: deteriorating leading indicators - In Europe, non residential trends have historically been well correlated with the business climate with a time lag of one to two years - This suggest that the erosion of business confidence witnessed this summer will impact non residential investments in 2012 or From 2011 to 2013, we have tried to extrapolate the recent business confidence trends and have adapted our non residential activity forecast accordingly Deteriorating business confidence trends point to a slowdown or decline in non residential activity % FRANCE (20.0) (40.0) (60.0) (10.0) (20.0) (30.0) (40.0) 10% 5% 0% (5%) (10%) (15%) (80.0) (50.0) (20%) 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 e 2012e 2013e France Manufacturing output level - General confidence index France Manufacturing output level - General confidence index - LHS France Non-residential spending (YoY % change) - RHS % % GERMANY % 0% (5%) (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 e 2012e 2013e (15%) Germany business confidence indicator (IFO) - LHS Germany business climate index (IFO) Germany Non-residential spending (yoy % change) - RHS

16 USA UK Non-residential construction: deteriorating leading indicators - In the US and in the UK, the leading indicators for non residential construction (ABI and permits) have historically been well correlated with non residential trends 12 to 18 months later - The deterioration of these indicators witnessed in 2011 points to lower growth or a decline in the next couple of year Deteriorating non residential indicators suggest a slowdown or decline in non residential activity Jan 00 Jul 00 30% 20% 10% 0% (10%) (20%) (30%) (40%) (50%) Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 USA - AIA Architecture Billings Index 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 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q % 25% 15% 5% (5%) (15%) (25%) (35%) May 97 15% 10% 5% 0% (5%) (10%) (15%) May 98 May 99 May 00 May 01 May 02 May 03 May 04 USA - Construction spending private non residential -YoY % change ( 3 month average) May 05 May 06 USA - AIA Architecture Billings Index - 3 month average May 07 May 08 May 09 May 10 May % 10% 5% 0% (5%) (10%) (15%) (20%) (25%) (30%) UK - Public New Non residential Orders UK - Private commercial New Non residential Orders UK - Private industrial New Non residential Orders UK Non-residential spending (yoy % change) - RHS UK Non-residential permits (yoy % change) - LHS

17 Infrastructure: austerity measures and phasing out of stimulus create a risk on Significant indebtedness and stress in many mature markets - Infrastructure trends above historical averages in many markets (Stimulus) - History suggests potential for big declines if political will breaks down 17 State Budget Shortfalls 2011e European budget deficits

18 Our demand assumptions for the full year In Mature market: we expect demand to decline very slightly (weak trends in Southern Europe and Ireland offsetting growth in Northern Europe ) - In Emerging markets, we expect demand to be solid with the exception of Egypt (Arab Spring) and Philippines (delay in infrastructure projects) Cement Volume Scenario Mature markets -1%, Emerging markets (ex. China) +4% 18

19 A tentative scenario for Cement demand in A slight decline in US demand (phasing out of stimulus projects) - Weak European trends but more resilient in Northern Europe - Emerging countries are growing but at slower pace in many countries due to the slowdown if the world economy Cement Volume Scenario Mature markets -1%, Emerging markets (ex. China) +4% 19

20 As visibility is very low, we have considered alternative scenarios - Pessimistic case assumes a recession but not the collapse of 2009 (lower base) - Optimistic case broadly similar to our former scenario - Pricing power expected to be quite strong in all scenarios (though not covering all costs in bear case) 20 PESSIMISTIC SCENARIO: Volume declines in developed markets but not as bad as 2009 (base is much lower) A new round of cost cutting OPTIMSTIC SCENARIO: Based on our former scenario low growth not no growth Low single digit volume growth in developed world 2012 followed by acceleration from 2013

21 What potential for further restructuring? - Utilisation rates have collapsed in developed markets - Consequently profitability has declined and emerging markets have become more important - Analysis supports view that sector has scope for more cost cutting if management takes view that demand will be lower for longer. - However CO2 rights in Europe and the potential for long term recovery in US creates the risk that the industry does not cut capacity. This would means that other ways of restructuring may have to be explored (higher productivity, higher plant efficiency). EBITDA per tonne of cement 2007 (USD/t) Forecast utilisation rates are low in cement in mature markets to % 90% 85% 80% 75% Change in EBITDA per tonne between 2007 & % 65% 60% 55% North America Western Europe

22 Summary 22 What s changed during the past few months? - Main take-aways from H Increased pressure on mature markets banks and governments - Deteriorating confidence - Lower growth prospect in emerging markets Challenging price-cost dynamics in Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressures may however abate in 2012 Our New Scenario for construction markets in Residential / Non Residential / Infrastructure - Our Scenario for cement volumes in A tentative for cement volume in 2012 Conclusion

23 Conclusion 23 No major change in our 2011 volumes scenario Our overall picture for 2011 demand has not materially changed. We continue to expect relatively solid growth in emerging markets. In mature markets, we believe that the decline in cement demand in Southern Europe will offset growth in Northern Europe. We are expecting stable cement volumes in the United States. 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, 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. 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 We however expect a slowdown in emerging next year reflecting lower economic growth worldwide. Low growth in mature markets may raise the question of further capacity reduction 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 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 and capture growth opportunities.

24 24 Thank you