24 posts
TimePosted 09/03/2009 14:15:00

Don't try this at home

The UK papers are full of news and debate about quantitative easing. At first sight one might be forgiven for thinking this was a new type of laxative but the reality is that this is pure financial jargon for printing money – except in todays hi-tech world one doesn’t print money any more, one apparently creates instant money electronically by adding (say) 150 billion to the US Federal Reserve, or the Bank of England’s balance sheet and there you have it – the country is 150 billion richer, which the Central Bank then spends quickly, before it disappears again, buying up financial assets, government bonds, toxic assets, etc. In turn, this same virtual money then filters down through the banking system, individual bank reserves become more secure, these banks then lend out that extra money to businesses and consumers, the money in general circulation goes up. Better still the velocity of money going round the economy increases (for any economists reading!) and we all become better off. So far so good? Like it or not, this is, apparently, the only thing left in our financial armoury to fight a doomsday depression scenario, now we have reached almost zero interest rates.

I much prefer the alternative option where everybody in the western world gets  5000 dollars/UK£/Euros put into their bank accounts which they then spend on more unnecessary consumer items. Businesses prosper and better still, all those millions of workers in China who now make everything we buy, remain in full-time employment. As a further lift to global morale, a much greater humiliation of at least 25 of the world’s leading bankers, or even Chinese public execution displays of those same miscreants, would no doubt encourage people to smile again and who then would probably spend even more money on more things they don't really need. I could be wrong, but I have the distinct feeling that I am just a few short column inches away from a Nobel economics prize!

But I digress. This month’s main talking point in cement is the future for HeidelbergCement, now being run successfully by Bernd Scheifele and his senior management team, but who are collectively hamstrung by the well-publicized misfortunes of HeidelbergCement’s owners, the Merckle family who between them own a 79.1 per cent stake in the group held through the German Spohn Cement and the family's master holding company VEM. The debt of Spohn Cement, to a large extent financed by the Royal Bank of Scotland (that has since has had to be rescued from bankruptcy by the British government) had already been reduced about a year ago by the sale of a stake in HeidelbergCement to VEM for around €600m, leaving Spohn Cement with a holding of 53.6 per cent. In reality, all that move did was to shift the debt within the Merckle empire, but it does show that the pressures on Merckle were there well before things came to a head following the disastrous gamble in VW shares. Before all that of course, HeidelbergCement itself had geared up heavily, notably through the purchase of Hanson at a high price, in spite of divesting the 35 per cent shareholding in Vicat and of Maxit.  Hopefully the intended sale of the pharmaceutical group Radiopharm should shortly reduce the financial pressure on VEM somewhat.  
HeidelbergCement has strong industrial positions, being the global market leader in aggregates, number three in cement and joint number three, with Lafarge, in ready-mixed concrete.  It will not be in the interest of creditors to substantially weaken these positions.  A wholesale sale of the individual cement assets to the highest bidder is thus an unlikely scenario as this would be a value-destroying exercise, in particular in the current market conditions. What the banks might choose to do is to bring in some additional equity capital to put the business on a sounder footing.  This might come from venture capitalists and possibly also from Schwenk family interests, which used to hold an interest in HeidelbergCement of over 22 per cent, but which it reduced to around seven per cent when Dr. Merckle made its offer for the company.  It should also be borne in mind that Dr. Merckle's widow is a member of the Schwenk family.  

That HeidelbergCement's equity base needs to be boosted is beyond doubt. What is less clear at this stage, is whether the equity injection will be made entirely into HeidelbergCement directly or also through VEM or its associates.  Another possible move in this direction would be for Schwenk to purchase HeidelbergCement's interests in the Hungarian and Bosnian subsidiaries, where it is already a substantial shareholder, but that would not provide much money in relation to what is required. 

Holcim has also been mooted as a potential purchaser of some HeidelbergCement group assets, possibly a complete clean-out of the group’s UK operations, but this remain somewhat speculative. Some would also suggest a major Chinese cement group could be another potential buyer – a move given some impetus recently by Guo Wensan, the leader of China’s No 1 cement group Anhui Conch, who expressed an interest in buying some overseas cement assets, especially now that prices are tumbling, and while apparently, he has free access to massive state funding for expansion purposes. Perhaps it's only a matter of time, before the Chinese arrive in Europe, giving a whole new slant on the rather presumptive Western views on the benefits of globalisation.


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2 posts
TimePosted 22/09/2009 19:38:01
forinton says

re: Don't try this at home

Dear David,

I enjoyed your digression and believe it raises an important point that deserves further treatment because it affects future cement sales -  as we are all waiting and hoping for improvement.

Now that indicators (those that served us so well lately!) are pointing up and some large banks are somehow paying back govt loans, the problem of any recuperation in major economies' growth will surely depend on the method used to pay back this enormous government borrowing and modern alchemy.

In the case of the US, we can begin with the example of borrowing from China in the form of chinese investment in USD denominated govt debt. There are, in my opinion, only 2 ways out of this hole:

(1) Everyone works damn hard for little pay and less benefits and the govt actually saves some of their income which is used to buy back debt; or

(2) The USD depreciates significantly against the Yuan, then debt is quickly reduced using the newly printed cash, or selling assets at then higher USD valuations.

Being an almost sensible person, I would discount option (1) as quite improbable given recent performance, so since printing (or typing) new money will naturally cause inflation, the USD will have to depreciate, efforts will be made to reduce debt, Yuan will become stronger, USD will lose its position as the central banker's automatic currency of choice and the EUR and GBP will be in a fix...follow suit or cause exports to fail.

In any case, I believe there is a cat and mouse game being played, whose consequences are yet to be felt because the mouse is still alive.

And now digressing back to your final point: I do not believe the Chinese will easily invest in Heidelberg because they have their own economic issues of falling exports. I do not see the purchase of stocks in foreign companies worthwhile for them, except to quietly offload USD denominated cash, and more effectively, to secure raw materials & technology. Maybe Heidelberg stock presents a transfer from USD to EUR but I see little value otherwise since it offers little new technology and the raw materials can only be used locally.

I propose that the intention of Mr. Guo's comments have to be separated from his intention.