More downside risk for European producers

More downside risk for European producers
Published: 25 July 2011



Cemex’s somewhat disappointing Q2 results announced late last week suggest that there is further downside risk to estimates for the European cement companies, especially from likely price increases not offsetting cost increases. Consensus estimates still look too high, think analysts at Jefferies, particularly for Holcim. It does however remain positive on Saint-Gobain and on companies like CRH, the third largest aggregates company in the US. In fact, Cemex reported average price increases in its US aggregate business of 9% between Q2-2010 and Q2-2011 and of 4% comparing Q2-2011 with the previous quarter, Q1-2011. This was the third quarter in succession that its US aggregate prices had increased.



All seven of the European cement companies that Jefferies covers expected to report lower EBITDAs in Q2-2011 than in the same quarter last year. HeidelbergCement will, most likely report the smallest percentage decline (-2%) and Titan the largest (-27%), CRH and Saint-Gobain only report half-yearly however, but Jefferies expect both to report an increase in their half-year results but to comment that the rate of growth slowed in Q2. Cemex’s results suggest that the risk for the European cement companies is probably still on the downside, although any reductions after the results will probably be comparatively small. The main problem for the cement companies is that prices are increasing more slowly than costs. Indeed Cemex reported prices in the second quarter that were lower in four of its six regions than they were in the first quarter

.

Holcim consensus too high? Bloomberg’s consensus estimate for Holcim’s 2011 EBITDA is for it to be similar to 2010. Management has already stated that the company’s long-term target of 5% pa growth will be difficult to achieve this year. Added to this,  if exchange rates remain at their current level, the Swiss Franc will have devalued by 11% on average in 2011 as compared with the 2010 average.



Stronger than expected aggregates pricing in the US. If correct, this is encouraging news for CRH, the third largest aggregates company in the US, and HeidelbergCement, the fourth largest. Cemex’s price increases in US ready-mixed concrete of 2% sequentially and 3% on Q2-2010 were also encouraging for the US aggregates companies, as the ready-mixed concrete industry is an important customer for the aggregates industry – concludes Jefferies.