Building materials concern

By Sandy Guthrie10 October 2011

The current concerns about sovereign debt in various countries in Europe could lead to a revising of the "stable" rating of the European building materials sector.

In an Industry Outlook report, rating agency Moody's Investors Service said that since it changed its industry outlook for the European building materials sector to stable in April, downside risks had increased.

Stanislas Duquesnoy, a vice-president in Moody's Corporate Finance Group, said, "We would consider revising our outlook to negative if volumes were to fall back as a result of renewed economic concerns related to sovereign debt in selected European countries, or a global macro slowdown."

Moody's noted that several important markets remained structurally weak, with a substantial overhang of residential construction inventory which would have to be worked off before a firmer recovery could take hold.

It also said that weak public finances could lead to austerity measures that would, in turn, reduce public construction spending.

Moody's found that volumes in the building materials sector increased over the past three quarters in most Western European markets, excluding countries on the periphery of the Euro area.

It said volumes had also grown in important Eastern European markets - mainly Russia and Poland - after bottoming out in the third quarter of 2010.

In emerging markets, volumes continued to grow more vigorously, said Moody's, while the North American market had stabilised at a low level. It warned that volumes were likely to continue to grow only very modestly - low single digits at best - in the second half of 2011, and said this would not lead to significantly improved usage of capacity for most players.

Despite the upbeat tone at the beginning of the year surrounding price increases across a range of materials and regions, those price hikes have not completely taken hold, according to Moody's. Pricing was lower year-on-year for most producers, and only slightly higher from the end of 2010.

Moody's said it expected pricing to improve modestly in the second half of 2011 but that it would be unlikely to offset energy cost inflation fully.

It said that issuers with exposure to healthier Western and Eastern European markets -for example, HeidelbergCement, Dyckerhoff and Wienerberger - had performed better than peers with exposure to the Middle East and North Africa (MENA), and Asia.

In Moody's view, vertically integrated players Compagnie de Saint-Gobain and CRH were likely to perform better than their peers Holcim and Lafarge. It said this was because their vertical integration offered more resilient demand patterns and less exposure to energy cost inflation.

Moody's said it was unlikely to change its outlook for European building materials companies to positive in the next 12 to18 months.

For Moody's to consider such a move, there would need to be a more sustained recovery in volumes across the most important geographies, as well as more tangible evidence that producers, especially energy-intensive cement producers, were able to recoup energy costs - something the rating agency does not expect to occur over the next two quarters.

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