Construction held by challenging macroeconomic environment

Construction held by challenging macroeconomic environment
Published: 08 October 2012


A recent research note by analysts at CM-CIC Securities sees four main themes for the global construction sector in light of a prevailing harsh macroeconomic environment. While diverse trends are being witnessed in the US and Europe and emerging markets are expected to see a slowdown in growth, a turning point could be reached in 2012-13 in terms of margins.
 
Taking a historical look, the France-based research house highlights that today's construction industry crisis, which was fuelled by past excesses in property building, is not unique. However, it is far more complex than a downturn faced between 1991-95 when certain countries such as France, Monaco and particularly the UK witnessed almost a complete halt in new construction due to a glut of unsold housing, land and offices. Property owners back then weathered the storm by sacrificing one year of results to bring the value of property commitments on their balance sheets back to market price levels, helping restore the solvency of buyers and get property and new construction activity moving again. The present-day scenario, however, sees markets being "held hostage" to the macroeconomic environment, which is expected to remain difficult in developed countries, particularly Europe.
 
In particular, CM-CIC Securities sees what it deems a "crack" in the growth model. Growth in developed countries over the 2000-07 period was largely supported by strong consumption and a property boom, both of which were fuelled by cheap credit. This model came to abrupt end in 2007 to reach a point of no return as mature countries now face debt reduction measures that are penalising both governments and households. Furthermore, persistently highly levels of unsold house inventories in countries hit by over-construction (Spain, US, Portugal and The Netherlands) are causing a fall in prices which are weighing on the economy. CM-CIC Securities stresses that if we are to see stabilisation in the construction sector, "the most urgent requirement now is to break this vicious cycle at all costs by adopting measures that will stop the growth in housing inventories and then reduce them."  This, it stresses, requires relief for households and companies struggling with negative equity.
 
It notes that the worst appears to be over in the US and construction investment will rebound on the particularly low 2011 base. Over in Europe, unlike the situation in 1995, when the players concerned (ie banks and industrial groups) were able to foot the bill themselves, the scale of the damage in 2012 is such that losses cannot be recovered at a national level and intervention at the EU level has proved inevitable.

Implications for the cement industry
CM-CIC foresees four central scenarios for the global cement industry: 1) a gap between North America market (which is visibly rebounding) and European markets (which have been deteriorating more sharply than expected); 2) strong activity in Russia and Ukraine; 3) continued growth in emerging markets but at a slower rate than the strong levels witnessed in 2011 (notably in China and Brazil); 4) barring unforeseen events in countries showing highest risk (Spain and Italy), some recovery in margins thanks to higher prices and slower rises in energy costs.

The impact of the 2007-11 financial crisis saw EBITDA margins slashed to varying degrees especially in France, Europe and North America. Last year's lack of price increases was unable to offset rises in energy costs causing margins to plummet. CM-CIC expects the situation to be easier in 2012 assuming a very modest volume growth (+1.9 per cent worldwide including an expected decline of 12 per cent in Europe) and more positive price increases of 2-3 per cent coupled with a slowdown in the rise in energy costs. Together with ambitious cost cutting measures being initiated by a number of producers, margin recovery should be able to gain momentum for the first time since 2007.