Equities INTERCEM Barcelona Global Cement Industry Facing the challenges and taking the opportunities Barcelona, June 2011 construction@exanebnpparibas.com Paul Roger +44 203 430 84 15 paul.roger@exane.com Team construction@exane.com
European Building Materials: Introduction 2 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 20. Yassine Touahri (London): yassine.touahri@exanebnpparibas.com + 44 207 039 95 23 Yassine Touahri, 27, received his MSc in Management from Grenoble s Ecole de Management in 2008 and spent one year studying at the Warwick Business School in 2006/2007. In 2006, Yassine worked in Saint-Gobais investor relations department and joined Exane s Building Materials and Construction team in August 2007. Abhi Parthasarathy (London) abhi@exanebnpparibas.com + 44 207 039 94 76 Abhi Parthasarathy, 25, graduated from University College London in 2006 as a Bachelor of Law. He then qualified as a Chartered Accountant with Deloitte (20), working as part of the financial services team. Abhi joined the Exane s Building Materials team in September 20.
Summary of the presentation Revisiting the crisis a reminder of what happened 2007-20 3 The latest production trends Our scenario for volumes in 2011 and 2012 Price-cost dynamics and the outlook for returns Conclusion
31% fall in cement volumes Clear opportunities 1) Structural growth in emerging markets 2) Cyclical recovery in developed markets? Change in cement consumption per capita 2006-20e World : +18% 4 NA: - 46% - 11% Decrease Pressure Stagnation Slight Increase Strong Increase Not covered - 48% WE: - 28% - 65% +9% - 16% - 32% - 34% EE: - 17% - 19% - 9% - 33% - 58% - 3% - 12% - 41% Med +23% +33% +44% - 3% Rim.: +31% +55% - 4% - 30% +39% +32% +5% +55% +21% - 15% +36% +35% +34% +30% +38% - 17% +53% +26% Middle +37% East: +28% +46% +35% - 13% +12% +4% +16% +24% - 7% - 17% South America: (Sources : Exane BNP Paribas estimates) Volumes up 36% +12% +3% - 7% - 32% Africa: +12% - 12% Asia: +33% Oceania: - 8% - 12%
Emerging market story is exciting, but developed markets continue to disappoint. An L shaped recovery is possible - US trends are poor. We understand volumes were disappointing in April and May - Southern Europe impacted by weak demand - Poor weather and sluggish demand impacting Australia after a good 1Q - Excellent trends in most emerging markets. North Africa and Middle East rebounding 5 Cement Q1 volumes Mature markets +9%, Emerging markets +% / World: +% First statistics for Q2 cement volumes Mature markets -2%, Emerging markets +9% / World: +7%
Our scenario for volumes in 2011 and 2012 how we forecast 6 Continuity in approach used by Arnaud Pinatel (now Deputy Head of Research at Exane BNP Paribas) We rely on a number of indicators and inputs to forecast volumes: Industry survey thank you for your participation Review of 250 lead indicators and datapoints, with focus on: Permit data Mortgage availability and credit conditions Industry specific surveys like the Architectural Billings Index in US Lending trends Budget deficits and political developments (for infrastructure demand) Monitoring of results & outlooks of 300 companies worldwide Production data (to analyse base effect and spot inflection points)
Our scenario for residential construction - cautious on the US for 2011 and 2012 - Europe strong but ECB & debt crisis are risks - slower but still strong growth in emerging markets 7
Our scenario for non residential construction - lending conditions still challenging in developed markets - modernisation to support growth in emerging markets 8
Our scenario for infrastructure construction - growing concerns in the US - austerity in Europe - slower spend in emerging markets - new funding mechanisms will become increasingly important 9
New volumes scenario assumes no strong recovery in developed markets - US volumes expected to be weak - Risks in Southern Europe and NW Europe contagion from sovereign debt? - Emerging markets not without risks given high food inflation and monetary tightening Cement Volume Scenario 2011 Mature Countries: +0% Emerging markets excl. China +5% (world up 6%)
New volumes scenario assumes no strong recovery in developed markets - US volumes expected to be weak - Risks in Southern Europe and NW Europe contagion from sovereign debt? - Emerging markets not without risks given high food inflation and monetary tightening Cement Volume Scenario 2012 Mature Countries: +3% Emerging markets excl. China +6% (word up +6%) 11
(Sources : Exane BNP Paribas estimates) Introduction Pricing trends in 20 - Low utilisation rates led to declined in many markets - Cost inflation started to push pricing up towards end of 20 - Better developments in some emerging markets Cement Prices in FY 20-2% excluding China, -2% including China (YoY% change) 12 NA -6% +1% Latin America +1% -7% 0% 0% -5% -8% +13% WE -7% EE -6% Med. Rim 0% +1% 0% 0% 0% -4% -6% -1%-5% -6% 0% -1% +6% +2% -7% -7%-24% -2% -1% +1% +2% 0% +4% Africa -1% +1% +2% Mid. East -4% -4% +2% Strong Increase Slight Increase Stagnation Pressure Decrease Not covered -3% +2% -3% +2% -5% +4% +3% +3% South East Asia -2% Oceania +3%
Pricing still weak YoY in developed markets - US prices down 6% YoY - Europe generally weak as well - Mixed trends in emerging markets: most regions strong but in context of high cost inflation World cement prices in 1Q11 +3%. World excl China and India +1% Mature market -5% 13 North America: -6% +1% -6% Low utilisation rates NWE: -1% SWE: -8% EE: +0% +2% -3% -2% +6% -3% -3% +1% Decline Latin America +5% Pressure Stagnation Slight increase Strong increase +5% -2% +16% +5% Med. Rim +1% New entrants -2% -14% -4% -1% +3% -3% -5% -1% Africa: -1% Mid. East +4% +5-8% -22% +8% +12% -4% +3% Emerging Asia (excl India & China) +9% Oceania +3%
Prices increasing sequentially in developed markets - US price increase of $5/t is sticking - Europe also seeing increases in several markets (Spain, UK, France, Italy) 14 US cement price index European cement price index 202.0 120.0 200.0 198.0 119.0 196.0 118.0 194.0 192.0 117.0 190.0 116.0 188.0 186.0 115.0 184.0 182.0 114.0 180.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 11 Feb 11 Mar 11 Apr 11 May 11 113.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 11 Feb 11 Mar 11 Apr 11 USA - PPI: Cement (0 in 1982) EU 27 - PPI: Manufacture of cement (0 in 2000)
Higher prices unlikely to cover cost inflation - We forecast +3% global pricing = not enough to cover costs - Outcome will depend on industry discipline and strategic objectives of participants 15
Returns under pressure? - Low utilisation rates (developed markets), regulatory scrutiny, trade flows redirected from North Africa could cap pricing in some regions - Energy cost inflation may have peaked but are still high - Other costs also rising (esp in emerging markets) and a question mark over the future direction of investment, regulatory and CO2 costs - Fragmentation in some emerging markets? Forecast utilisation rates 2011 Pet-coke prices 16 20.0 150% 15.0.0 0% 5.0 50% 0.0 0% (5.0) (.0) (50%) (15.0) (0%) Q1 09 Q2 09 Q3 09 Q4 09 Q1 Q2 Q3 Q4 Q1 11 Q2 11e Q3 11e Q4 11e USD/t Variation USD/t YoY variation (%) - RHS Forecast utilisation rates 2012 Coal prices 20.0 50% 15.0 40% 30%.0 5.0 20% % 0% 0.0 (5.0) (%) (20%) (30%) (.0) (40%) (50%) (15.0) (60%) Q4 09 Q1 Q2 Q3 Q4 Q1 11 Q2 11e Q3 11e Q4 11e USD/t Variation USD/t YoY variation (%) - RHS
Conclusion 17 Opportunities in 2011-2012 mostly in emerging markets Risks of an L shaped recovery in US Europe also under pressure as ECB tightens and debt crisis causes uncertainty Growth likely to remain good in emerging markets, but with some risks (monetary tightening, food cost inflation, political) Pricing trends improving but a question mark over future returns Prices rebounding sequentially in developed markets and encouraging in emerging markets Cost inflation and low utilisation rates pose a challenge short term Longer term rising investment costs, CO2 costs and new regulation pose a challenge to returns Opportunities for market consolidation? New entrants in emerging markets embracing the opportunities Consolidation likely in response to the more challenging returns outlook? More scope for vertical integration, even in emerging markets?
Part III: A new Paradigm? Equities 18 Muchas gracias / Thank you