Improving prospects for the construction sectors in the core markets of the main global cement producers heralds a more positive outlook for corporates over 2010 and 2011, argues the latest Building Materials Sector Report from analysts at Jefferies.
The main source of this optimism is a belief that that the US construction sector has troughed and is set to experience a ‘significant recovery’, with construction output forecast to increase by 2% in 2011 and 10% in 2012. Cement demand will increase by an estimated 3% and 5% in 2011 and 2012, respectively, with Florida and California leading the recovery.
The outlook is also favourable in major European markets. France is expected to stabilise, following a 4% contraction in 2010, while output in Germany will increase. CRH’s strong exposure to the anticipated recovery in the USA and emerging growth in Europe has prompted Jefferies to make CRH its top stock pick, arguing that improved prospects may encourage the company to accelerate its acquisition programme.
Italcementi is upgraded from Hold to Buy, mainly due to a more optimistic view on the outlook in its domestic market in Italy, where prices appear to have stabilised at around €50/t following a price war in 2010, with slow recovery anticipated in through 2011.
Jefferies predict continued growth in emerging markets throughout 2011 and 2012, with double-digit percentage increases in cement consumption during this year in the markets of Brazil and Indonesia. In 2012, demand is seen to slow to 8% and 7%, respectively in these two key markets. High single-digit growth is forecast for India in both years. Mexico will enjoy reasonable rises at between 3-5% over the same period.
The issue of energy prices will be a cause for concern in 2011, as fuel costs increase by a forecast 9-10%, potentially squeezing margins. According to Jefferies, a 1% price increase by cement producers will be required to offset this increase. However, a weaker pricing environment will prevail due to the decline in the cement industry’s capacity utilisation level to an estimated 77% in 2010-11 versus 92% in 2007.