Analysis

Spend, spend, spend has been the advice for CRH this week. The suggestion by an industry analyst this week that Irish building material conglomerate CRH should go on a shopping spree seems almost perverse! Or at least like stockbrokers trying to drum up excitement.

Just as all of the big multinational cement producers are selling assets and tightening management structures to cope with the ongoing financial turmoil, CRH is the only player that hasn't ruled out acquisitions in 2012. The analyst from Dublin stockbroking firm Davy predicted that CRH could spend up to Euro3.5bn on acquisitions while remaining within its banking agreements; a more level-headed figure was given as Euro1.5bn.

CRH broke down its revenue in 2011 to 55% to the European divisions and 45% to the American ones, with European Distribution, Americas Materials and European Materials being its top three sections. European Materials, the worldwide division containing cement assets generated Euro2.99bn, 16.5% of total group revenue.

With 85% of CRH's European Materials division concentrated on Switzerland, Finland, Benelux, Eastern Europe, Turkey and Asia its exposure to the Eurozone economic slowdown has been reduced compared to the competition. Yet what to buy next is fraught with risk. If Greece exits the Euro for example, then there may be some bargains going, but how long it would take these assets to become profitable is a big unknown.

Similarly, the over-indebted Mediterranean countries present opportunities and challenges. CRH's decision to transfer its 49% holding in Portuguese cement joint venture Secil to Semapa in May 2012 may indicate CRH's intention to stay well away from the Eurozone until the dust settles. Given the amount of cash that CRH could potentially throw around however, it seems odd that the company didn't try to disrupt the ongoing Cimpor takeover by two Brazilian firms. If anything happened to the bid by Camargo Corrêa and Votorantim then CRH would be in a prime position to benefit should it wish.

Whatever CRH decides to do with its money, it's a good problem to have! Lafarge, Cemex, HeidelbergCement and Holcim must all wish they had the same dilemma.

Two trends have put the squeeze on the Indian cement industry this week. Firstly it emerged that producers were slashing prices ahead of the coming monsoon season. Then the Centre for Monitoring Indian Economy (CMIE) proclaimed that it expected cement prices to rise by 5.9% in the 2013 financial year.

Producers cutting prices in May, before the monsoon, is important because it suggests that overall cement demand is already down. Once the rains come demand will go down even more. A slowdown in construction, particularly in infrastructure projects, a labour shortage and a sand shortage have all been blamed. Looking ahead however, as the CMIE has done, suggests that prices have to go up due to the increase in railway freight charges announced in March 2012 and the excise duty hike announced in the Union Budget 2012-13. All that remains in the middle are the profit margins that the cement industry has become accustomed to.

Back in January 2012 Fitch Ratings predicted a 'negative outlook' for the Indian cement industry in 2012, based on overcapacity and higher interest rates. Now it seems that total capacity utilisation is down in 2012 compared to 2011, from 76.2% to 71.3%. Throw in the railway and duty increases and one might be tempted to feel that Fitch went easy on the subcontinent.

Yet, the cement producers have already found one silver lining in the monsoon season. Industry sources were soon reported as using price increases in the country's south zone and price decreases in the north zone as evidence that cartel-like behaviour couldn't possibly be happening. In a country as large as India perhaps they should have added the words 'nationally coordinated.' Despite the price drops, prices in the cities have been reported at an all-time high due to supply shortages - a situation that may be familiar to some consumers in Saudi Arabia.

Two stories this week on alternative fuels illustrate their current place in the cement industry succinctly. Sumitomo Osaka Cement in Japan plans to increase the sales of power generated in-house at its Tochigi Prefecture plant using wood biomass fuel. Meanwhile on the other side of the Pacific Cemex US is planning to cut costs and carbon emissions by installing wind turbines at its Victorville site in California.

At the recent Global CemTrader conference on supplementary cementitious materials (SCMs), coal and petcoke and logistics for the global cement industry, Patrick Peenaert of Lafarge delivered a presentation entitled the 'Global Overview of Worldwide Coal & Petcoke.'

In his talk Peenaert revealed, unsurprisingly, that fossil fuels dominate the global cement industry for the energy consumption of the top four international producers, with coal and petcoke making up over 70% of usage. However, alternative fuel usage has grown from 13% in 2008 to 18% in 2011. As price pressures on fossil fuels grow from other industries so too will investment into alternative fuel options.

The Japanese story demonstrates this well, especially given that the economic fallout of the 2011 earthquake on the Japanese power industry has made an alternative fuel process considerably more valuable for a plant with a temporary closed kiln. By contrast the US story is more nonchalant: operations will proceed at the Californian plant regardless of whether the turbines are built or not.

Yet hedging one's bets with power sources is increasingly seen to be a prudent long term strategy in an uncertain world. A familiar refrain in the recent batch of cement producer financial reports has been mounting energy costs. This week's half-year results for the Pretoria Portland Cement in the bullish African market is no exception.

Watch the video of Patrick Peenaert's presentation at the Global CemTrader 2012 conference, and all the other presentations

Given the legal scuffles over the Environmental Protection Agency's (EPA) emissions timetable it was nice to see this week how Ash Grove Cement is responding at its Midlothian plant in Texas. The plant is seeking tax breaks on potential upgrade work that it is planning to implement before the current 2013 deadline for the EPA legislation.

For those following the fight between the EPA and the US cement industry here is a recap on the story so far:

The EPA issued a national emission standard for hazardous air pollutants rule to reduce the sector's air toxics in September 2010, alongside a new source performance standard to cut criteria pollutant emissions. In May 2011 the EPA both partly granted and denied petitions from cement industry representatives and environmentalists. In December 2012 the US Court of Appeals for the District of Columbia remanded the cement air toxic rule back to the EPA, delaying the deadline for the cement industry to seek a rehearing or review. Then in April 2012 the cement industry agreed not to seek a rehearing if the EPA extended its deadline until September 2015. The EPA has now sent for the White House Office of Management & Budget (OMB) to review its proposed revisions to its emissions rules, ahead of a tentative 15 June 2012 deadline.

While the EPA and the cement sector continue to battle it out plants like Ash Grove can do little except keep an eye on the bottom line until the dust settles... in whatever legally mandated fashioned is eventually approved. The Global Cement Directory 2012 lists 22 wet and semi-wet kilns in the US. While some are mothballed, others are likely to be affected by the rules. While the arguments continue the upgrade timetables of these plants hangs in the balance.

Five of the big European producers posted their first quarter results this week and the figures were frosty.

Mirroring the north-south fault-line tearing Europe's economies apart, Germany's HeidelbergCement, Switzerland's Holcim and France's Lafarge showed improvements in overall sales volumes for the first quarter. Italy's Italcementi and Greece's Titan saw total sales volumes fall.

Looking closer, the results revealed that Western Europe was a dead zone for everybody. Despite its restructuring, Lafarge's sales fell by 11% in the region for the quarter. Similarly HeidelbergCement's sales fell by 6%, Holcim's sales fell by 13% and Italcementi's sales fell by 11%. Titan, by contrast, posted a 4% decline in sales in its heartland in Greece and Eastern Europe. Unsurprisingly it attributed the fall to the collapse of the construction sector in the wake of the Greek debt crisis. Even the weather seemed to be against European production, with more than one report blaming an unusually cold February 2012 for the poor results.

As is usual for European cement news in recent years the action in the first quarter of 2012 was all elsewhere, and this is where new profits have been found for these European producers, specifically in Asia and the Americas. It's in these places that Lafarge, Holcim and HeidelbergCement have reported sales increases of 10% and above for the quarter. Unfortunately 'elsewhere' for Italcementi and Titan has included Egypt with all its ongoing political and economic uncertainty, and the US where demand is in a sustained slump.

Bruno Lafont, CEO of Lafarge, summed it up nicely: "Emerging markets continue to be the main driver of demand and Lafarge benefits from its well balanced geographic spread of high quality assets." In a bid to capture some of that spread, it was also announced this week that the Italcementi subsidiary, Ciments Français, is striving to acquire a 6.25% stake in West China Cement. No wonder!

Each of the five producers are continuing to find savings in Western Europe through restructuring efforts but how painful will it become before the market revives? Unfortunately HeidelbergCement's outlook is the most candid. "In the Western and Northern Europe Group area, HeidelbergCement expects further economic growth but a slight overall dip in demand and falling sales volumes in cement and aggregates." Yes, it's going to get worse. Let's hope it's a warm winter in 2013.