Positive trends in European construction recovery

Positive trends in European construction recovery
14 July 2017

The recovery in European construction activity appears to be making progress with improvements being seen in the housing segment in some key markets, while civil engineering activity is expected to pick up going forward.

Eurostat's construction index shows that the downturn in activity for construction within the EU-28 brought on by the global financial crisis lasted longer than for the industry sector. Despite occasional short-lived periods of growth, the index of production for construction fell from a peak in February 2008 to a low in March 2013, a decline that lasted in total five years and one month, and left construction output 26.2 per cent lower than it had been. Construction output expanded by a total of 7.6 per cent during the next 13 months, and between then (April 2014) and the most recent period for which data are available (January 2017) output remained relatively stable.

In its 2016 Activity Report published last month, European cement association CEMBUREAU describes 2016 investments in construction for the EU28 as "steady" with an expected increase of 1.7 per cent. The outlook for 2017 is more positive, with a potential increase of up to 2.7 per cent. The non-residential market, the association notes, is at an early stage of recovery and office construction, in particular, is on the rise. Having suffered from years of fiscal tightening, civil engineering fell by around one per cent in 2016. Going forward, CEMBUREAU points out that most EU member states are expected to increase expenditure in this sector, with eastern European countries leading the way. The European Fund for Strategic Investments (EFSI) is expected to boost investments in Europe over the coming years with significant funds to be available for the period up to 2020, according to reports.

Meanwhile, CM-CIC Securities reports that housing maintenance-rehabilitation – the most downstream segment in the housing-construction cycle and which represents 50 per cent of housing activity in France and Europe – has finally lifted off. Latest data shows that France posted six-month YtD growth of 1.9 per cent (up four per cent in June alone), the UK demonstrated double-digit growth with more than 20 per cent in June, Germany was up 4.3 per cent YtD (up two per cent in June) and Nordic countries showed a six-month YtD trend of +4.5 per cent (+4.2 per cent in June 2017).

Major European cement markets
In terms of cement consumption, last year eastern Europe was particularly disappointing, with declines ranging between -3 and -4 per cent, due largely to the collapse in demand in Russia (-11.6 per cent in 2016). Central Europe weakened in 2016 but remained in growth, while western Europe saw demand expand by a small but significant 0.7 per cent in 2016 to 126Mt, the latest data and analysis presented in the Global Cement Report 12th Edition (GCR12) reveals.

In terms of major regional markets, Germany – the largest cement market in the European Union – saw a recovery in demand in the first and second quarter of 2016. With the pace continuing in the third quarter, full-year volumes are estimated to have reached 28.64Mt, up 3.9 per cent YoY. However, while construction investment and GDP are set to grow over the next few years, the pace of change is likely to be unspectacular. GCR12 analysis projects that demand for cement will probably remain broadly in line with these two indicators, increasing by no more than three per cent each year at most.

On the other hand, recovery appears to be well anchored in France with the latest indicators showing an acceleration in activity. New housing sales and the drive of investors in the rental sector are being passed downstream to housing starts, which were up by 15 per cent in the March-May 2017 period compared to 2-3 per cent growth in previous quarters. Positive trends have led CM-CIC Securities to revise its growth forecasts for construction spending in 2017 up from three per cent to 3.3 per cent. Only the renovation-maintenance segment, which is the furthest downstream in the value chain, continued to struggle and is only likely to increase by 0.9 per cent, the research house notes.

This quicker-than-expected turnaround is providing further momentum to the European recovery and Bernstein expects an acceleration in French cement demand from 2H17 onwards. Its projection supports estimates by the cement association of France, SFIC, which also said it expects a second-half acceleration led by the boom in the domestic housing market. While in 2016 cement consumption reached 17.5Mt, SFIC forecasts growth of 3-4 per cent in 2017, translating into volumes of 17.9-18.1Mt.

While Italian cement consumption contracted again in 2016 (down 3.4 per cent to 18.93Mt), the general consensus is that the worst is largely over and a more positive outlook is expected for 2017 and 2018. However, no more than a low single-digit recovery can be expected in the short term, suggesting that volumes in 2018 will probably still be lower than those achieved in 2014 (20.10Mt).

The outlook appears sunnier in Spain where this week local cement association Oficemen reported a 10.8 per cent increase in consumption over the first five months of this year as a significant increase in May (+15.3 per cent) offset the decline seen April (-2.3 per cent). Should the current growth rate be maintained, full-year demand is expected to reach 12.3Mt compared to 11.14Mt in 2016. However, data for the 12 months to the end of May 2017 showed a market expansion of just 2.2 per cent.

Oficemen Vice-President, Isidoro Miranda, described the sector improvements as modest, but the overall picture is seemingly one of growth. The association points out that housing is increasing at a rate of 26 per cent (with 13,000 new permits in 2016), and growth of 12 per cent (10,000 permits more) is expected by 2017. This, coupled with a growth of less than 10 per cent in the non-residential building segment, has enabled the Spanish cement industry to post positive results, a trend which the industry body hopes will continue in 2018 with some planned civil works projects already underway.

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