Cemex US markets under pressure in 2009

Cemex US markets under pressure in 2009
Published: 30 December 2008

Cemex could face more price declines in 2009 in the US, as lower-cost cement imports erode profit in the Mexican company’s largest market, weighing on efforts to reduce its $16.4 billion debt burden, according to a new Bloomberg report.

Falling shipping costs may mean cheaper imported cement, reversing a trend where higher shipping expenses helped sustain U.S. prices until late June, said Mike Betts a UK-based JPMorgan analyst.  The industry potentially also faces more of an import threat with lower freight rates,” Betts. Cement prices “could, in the medium- and long-term, drop to the mid US$80s. While Cemex doesn’t disclose prices, analysts put it at about US$105 a ton last quarter.

Cemex said in October it plans to boost US cement prices by US$15 a ton starting Jan. 1. The company may have to re-think that strategy, said Gonzalo Fernandez, an analyst with Spain’s Banco Santander SA in Mexico City. “With this environment, it would be a surprise if the increases stick,” Fernandez said.

Cemex has 14 cement plants in the U.S. and only imports to supplement that production. Shipping costs for a tonne of cement have fallen from as high as US$90 earlier this year amid soaring oil prices to about US$20, said Edward Sullivan, chief economist for the PCA. Furthermore US cement demand is forecast to drop 13 per cent this year and decline 12 per cent in 2009, according to the Portland Cement Association. Cemex said Dec. 15 its 2008 US cement volume will likely fall 14 per cent.

Foreign cement companies that operate in the U.S. including Cemex, Holcim and Lafarge control more than 90 percent of US cement imports, Sullivan said. It’s in their best interests not to let cheap imports drag down prices, Sullivan said.

A bigger decline in US cement prices would mark another blow to profits as Cemex seeks to refinance about US$6 billion of debt maturing next year. Investors and bankers have been reluctant to extend loans to Cemex because of falling demand in its main markets of the U.S., Mexico, Spain and the UK.

The company said Dec. 22 that banks agreed to extend US$1.5 billion of a US$3 billion bank loan due in December 2009, and refinance US$2.2 billion in short-term debt. Cemex said it will cut costs by $500 million next year, scale back on expansion projects and sell assets to free up more cash to reduce debt.

Debt maturing in 2011 “clearly cannot be paid” with the cash Cemex generates from operations, forcing it to seek more refinancing, Fernandez said in a Dec. 23 note. The company will have US$11 billion of debt coming due in 2010 and 2011, three times annual estimated operating cash flow, Gordon Lee, a New York-based analyst with UBS AG, wrote in a Dec. 24 note.

Cemex’s earnings before interest, taxes, depreciation and amortization was 4.4 times greater than its interest cost at the end of June. That’s half of rival CRH Plc. The more times cash flow exceeds interest expense, the more financially sound a company is – concluded the Bloomberg analysis.