Lafarge may be next to trim global expansion plans

Lafarge may be next to trim global expansion plans
Published: 06 November 2008

According to a report by Bloomberg, Lafarge may be the next cement maker to scale back global  expansion plans as the US construction slump spreads to markets from Russia to China.

Lafarge’s intention is to boost production by 36 per cent with new plants in the four years through 2010. The company may provide an outlook when it reports earnings tomorrow.

“It will be very difficult for Lafarge to justify all of next year’s investment plans given current market conditions,’’ said Eric Schneider, an analyst at UBS AG in Paris, who has a "buy’’ recommendation on the stock.

Chief Executive Officer Bruno Lafont is overseeing EUR2bn of spending this year alone to achieve one- fifth of the expansion in factories. The company intends to invest a similar amount in 2009, a year when its selling prices are set to fall in Asia and North America, said Davy Stockbrokers analyst Tim Cahill.

Lafarge, burdened with EUR17.3bn of debt after buying the cement assets of Egypt’s Orascom Construction Industries, has dropped 57 per cent in Paris trading this year, cutting its market value to EUR10.4bn. Holcim has fallen 47 percent in Zurich for a value of 16.8 billion Swiss francs ($14.4 billion).

It will be difficult for Lafarge to cut spending on new plants next year because of the long lead-times in adding production, Davy’s Cahill said in a note Nov. 4.

The Orascom acquisition made Lafarge a ``highly indebted company,’’ the analyst said. While that doesn’t threaten short- term liquidity, the company may breach banking covenants in December 2009, forcing it to renegotiate banking terms at higher interest rates, he said.

“Lafarge needs to focus on their debt load and bulk up their cash holdings,’’ said Jacques Porta, a fund manager at Groupe Ofi in Paris, which oversees about EUR14bn in assets. Porta said he doesn’t hold cement maker shares because of concerns about pricing and capacity.

Growth plans by Holcim may also worry investors. The Zurich-based company’s commitment to adding 28.9Mt of capacity by 2011 will “lead to elevated debt levels and a potential cash shortfall relative to maturities in 2010,” Eshan Toorabally, an analyst at Goldman Sachs in London, said in a note on Oct. 17. Goldman cut Holcim to “sell,” citing concern about cement pricing and volumes.

Davy cut its Lafarge 2009 estimate for earnings before interest, tax, depreciation and amortisation by 17 per cent and the estimate on Holcim by 25 percent on the same basis, according to the note entitled ’Cement’s 2009 `annus horribilis.’

Cement prices at Lafarge may fall by 10 per cent next year in North America, and Holcim may get six per cent less for the building material, the Davy note said. That compares with an estimated drop in Asia of six per cent for Lafarge and a decline of the same proportion for Holcim in the Asia-Pacific region.