Building materials stable

By Sandy Guthrie10 March 2011

The European building materials market can now be regarded as stable, according to analysts, although there is a slight negative bias which is being based on the uneven recovery in demand that is expected across Europe, the Middle East and Africa (EMEA) during 2011.

Moody's Investors Service, which provides credit ratings, research, and risk analysis, has changed its outlook on the European building materials sector from negative to stable, with a negative bias.

It said this reflected its view that fundamental credit conditions in the industry would neither improve nor erode in the next 12 to 18 months.

Moody's said that demand for cement appeared to have stabilised at a low level in the fourth quarter of 2010.

Stanislas Duquesnoy, vice president - senior analyst, said he expect volumes to improve gradually in 2011, primarily supported by a recovery in residential construction.

"However," he added, "the recovery in volumes is somewhat skewed by weak comparatives with 2010, which was marked by an extreme winter in Western Europe and spring floods in Eastern Europe.

"We do not expect demand levels to return to pre-recession levels in the short term. We expect commercial construction and overall demand in some countries to remain under pressure."

Stable volumes are expected in North America in the first half of 2011, with a modest recovery in the second half. He said that in Europe, positive momentum in demand in France, Germany, Scandinavia and Poland was predicted, while he felt demand in the UK and Benelux should be "stable to only modestly positive year-on-year".

Mr Duquesnoy said, "Our negative bias on the outlook is mainly based on the uneven recovery in demand likely across EMEA in 2011.

"Pockets of weakness will remain, particularly in countries at the periphery of the Euro zone, such as Spain, Ireland and Greece, where economic recovery has been slower and where governments are still struggling to reduce their debt burdens."

He predicted that Central and Eastern European countries such as Romania and Bulgaria would also lag behind in terms of demand.

"In the medium term, we see risks that a decline in demand due to the phasing out of stimulus packages in 2012 might not be offset by an increase in private residential and commercial construction."

He added that while social unrest in the Middle East and North Africa, where rated issuers Lafarge and Italcementi have larger exposure than some of their peers, had not yet led to material production disruptions, Moody's was concerned about medium-term negative implications if the current unrest were protracted.

"That could result in a slowdown in public infrastructure spending as well as a drop in private non-residential and residential real estate projects. Ultimately, weaker demand growth in the Middle East and North Africa could lead to overcapacities and pricing pressure, because an estimated 30% of all new global cement capacity between 2006 and 2010 came on stream in those regions."

Raw material cost inflation would be an issue this year, he said, as oil, gas, electricity, thermal coal and petcoke prices were all rising.

Mr Duquesnoy said most issuers had hedged up to 50% to 60% of their overall energy exposure for 2011 and had announced price increases effective in the first and second quarters of 2011 to counteract input cost inflation.

"The ability to pass on higher input costs to end customers will depend upon the strength of the recovery in demand. Modest pricing pressure could arise in some Western European and regional North American markets if volumes do not pick up sufficiently in the short term," he said.

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