With a 74% drop in profits posted for 3Q08 by Cemex, the global financial crisis seems to be taking its toll on the country’s cement industry.
BNamericas spoke with financial group IXE analyst Rodrigo Heredia about the perspectives for the Mexican cement industry in the light of the current economic turbulence.
BNamericas: How has the local cement industry evolved in 2008?
Heredia: For the local cement industry, 2008 has been and will be a year of very, very modest growth. Demand for cement is only expected to grow 3-4% at the end of the year.
However, demand is expected grow in 2009 due to the ambitious [US$50bn/y] national infrastructure program [PNI] the Mexican federal government has put in place, and this is clearly reflected in projects implemented by cement companies to increase their capacity.
Lafarge and Cruz Azul have opened new plants, while others such as Cemex have increased their capacity. Moctezuma is building a new cement producing facility in Veracruz state.
BNamericas: What are the factors behind that modest growth? Is the high price of cement recorded in mid-2008 one of them?
Heredia: For starters, the Mexican cement industry has very particular idiosyncrasies and is very different from its US and European counterparts.
At the same time, the prices of cement are very inelastic, so higher prices do not necessarily result in reduced consumption.
However, the price hikes we saw some months ago were part of a global trend of price increases, caused by cement deficits in some countries.
BNamericas: Why did the price of cement go up in Mexico?
Heredia: In Mexico’s case, the rises were driven mainly by increases in the cost of energy and fuel. We need to remember that, in general, the cement industry is very energy-intensive.
Having said that, the Mexican cement industry is very, very dependent on energy and fuels because a great part of the supply is commercialized in 50k bags, and that requires a very varied transport fleet.
This need arises because there is an important do-it-yourself construction segment - made up of individual buyers and construction workers, among others - and the country’s geography is very complicated, on top of the fact that transport infrastructure is not adequate to begin with.
BNamericas: The price of oil is currently going down. Will that boost demand for hydraulic concrete, since highway-construction firms seem to prefer it to asphalt.
Heredia: Asphalt is an oil derivative and, therefore, its price goes up or down in line with the price of petroleum.
Now, what happens when the decision is taken to use cement or asphalt? Obviously, the price is a factor.
However, the durability and maintenance procedures required for asphalt are completely different from those required for concrete.
BNamericas: What are the advantages of hydraulic concrete versus asphalt?
Heredia: Carrying out a road project with concrete would be initially more expensive, considering the current price of oil, which has gone down.
However, concrete requires much less maintenance and thus the overall quality of the highway will be better, because it is a much more resistant material.
Asphalt was cheaper a year ago but it requires much more maintenance.
In any case, you need to analyze the bidding rules for projects. What material do they specify? In each case, the technical proposal determines the economic proposal.
BNamericas: Let us talk about cement companies. How do you see the outlook for smaller firms?
Heredia: Cementos Moctezuma does not have any debt and I believe it could maintain its sales volume next year if prices don’t see any important variations, compared to current prices.
Therefore, the outlook is stable for Cementos Moctezuma. This is a company that has very attractive margins - up to 55% Ebitda on average. No other Mexican firm has these margins. Moctezuma is a very conservative company that does not like debt.
In the case of Grupo de Cementos Chihuahua [GCC], the perspectives in Mexico are good. However, the perspectives for the US market are more complicated.
Nearly 55% of GCC’s sales come from the US. Obviously, the outlook in that country is not very promising.
BNamericas: What about Cemex?
Heredia: Three of the firm’s four main markets - the UK, Spain and the US - are in recession, so even if the results for the first quarter were positive, that was only due to the incorporation of [Australian construction materials company] Rinker.
On an operational level, perspectives look more complicated due to the current economic situation.
The company has a high leverage, and in this new scenario cash flow will decrease. In addition, the speed with which the company hoped to reduce its leverage will also slow.
Cemex hoped to obtain a net debt-to-Ebitda ratio of 2.7 times for mid-2009. It now looks very difficult for them to reach this goal, even when they are expected to see some extraordinary cash flow from the sale of some non-strategic assets in Europe and Cemex Venezuela.
BNamericas: Do you think the firm will suffer a lot of damage from the current financial crisis?
Heredia: We’re already seeing this in the firm’s results for the third quarter of 2008.
Obviously, Cemex is taking all the necessary actions to reduce the impact caused by the deterioration of operations in the US, Spain and the UK. Nonetheless, there is an impact.
BNamericas: What do you think 2009 has in store for Cemex?
Heredia: In 2009, the main challenge facing Cemex is minimizing the impact of slower operations in the US, Spain and the UK.
At the same time, it will have to make the most out of markets with good perspectives, such as Mexico and Latin America, Australia and some areas in Europe.