2010 China International Cement Conference presentation... · Volume collapsed outside Asia-MENA-Multinationals reacted in a rational way. The present : 2010 , a slow & progressive

EquitiesEquities

Exane BNP Paribas Building Materials & Infrastructure

[email protected] Pinatel +44 207 039 94 67

[email protected] Su Zhang +44 207 039 94 18 [email protected] Godet

+44 207 039 95 43

[email protected]

2010 China International Cement Conference“Navigating the bumpy road to recovery”

2010 World cement trends overview

Beijing, 31 March –

2 April 2010

mailto:[email protected]

2Equities

Arnaud Pinatel (London): [email protected] +44 207 039 94 67

Arnaud Pinatel, 44, graduated in Economics from the Sorbonne University in Paris and went on to gain the French SFAF qualification (French financial analysts’

association). Arnaud began his career at Group Ciments Vicat (1992-1997) where he worked first as a financial controller and later as a strategic assistant to the Chairman and CEO of the Group. In 1997 he moved to Oddo Equities in Paris

as an equity analyst covering the Building Materials sector on a Pan-European basis. Arnaud joined BNP Paribas in London in July 2001 and heads the European Building Materials and Construction team at Exane BNP Paribas.

Nicolas Godet (London): [email protected] +44 207 039 95 43

Nicolas Godet, 31, graduated from ESSEC in Paris in 2001. He started his career at Lazard Asset Management as a analyst covering

small & mid-cap companies. He joined Exane’s Midcap team in 2002 and then spent a year at the company’s New York subsidiary covering S&P stocks. Nicolas joined Exane’s Building Materials and Construction team in August 2003.

Su Zhang (London): [email protected] + 44 207 039 94 18

Su Zhang, 33, received his B.Econ

from Fudan

University, Shanghai, an MBA from HEC, Paris, and an MSc

in Accounting and Finance from the London School of Economics. He started his professional career at PricewaterhouseCoopers as an auditor and at Standard Chartered Bank as a credit

analyst. He joined Exane BNP Paribas' Construction and Metals and Mining teams in January 2007.

Yassine Touahri (London): [email protected] + 44 207 039 95 23

Yassine Touahri, 26, received his MSc

in Management from Grenoble’s Ecole

de Management in 2008 and spent one year studying at the Warwick Business School in 2006/2007. In 2006, Yassine worked in Saint-Gobain’s investor relations department and joined Exane’s

Building Materials and Construction team in June 2008.

Nicolas Mora (London): [email protected] +44 207 039 95 38

Nicolas Mora, 32, graduated from ESSEC in Paris in 2002. He began his career at Societe

Generale

in London, as an equity research analyst covering UK Food Retail, and then joined the Hedge Fund Group within Societe

Generale, as an analyst on Merger Arbitrage and Special Situations. In 2006, he moved to Ecofin, a London-based Utilities and Infrastructure hedge fund, as a European analyst. Nicolas joined Exane's

Building Materials & Infrastructures team in June 2009, with a focus on Infrastructure and Construction stocks.

Stanislas Coquebert (London): [email protected] +44 207 039 94 14

Stanislas Coquebert, 26, graduated from HEC Paris in 2007 with a

specialization in Macroeconomics. After some experience

in auditing in Paris at PricewaterhouseCoopers and in M&A in London at UBS, Stanislas joined Exane BNP Paribas as a telecom operators analyst. He joined the Building Materials

and Construction team in 2009 with a focus on Infrastructure and Construction stocks.

European Building Materials and Infrastructure team

3Equities

The recent past : 2009 was a very challenging year-

Volume collapsed outside Asia-MENA

- Multinationals reacted in a rational way

The present : 2010 , a slow & progressive improvement-

A weak start in the northern hemisphere in Q1 2010

- A progressive recovery expected in H2 2010

- What scenario for cement prices ?

The future : recovery is expected in 2011-

Back to normal trends in 2011 ?

- Capex

to deliver & capture growth in emerging markets

Conclusion

Summary

“Navigating the bumpy road to recovery”

4Equities

2009 was a very challenging year Volume collapsed outside Asia-MENA

-

Mature markets (USA, Western Europe, Oceania, Japan) collapsed -

Emerging markets in Asia, Middle East and Africa posted strong growth (especially China & India)

-

Latam

and south East Asia weakened

West Eur. -19%

Latin America -2%

North America -25%

Sub-Saharan Africa + 1%

Mid. East.+9%

Asia +15%

Oceania-11%

East Eur. -22%

DeclineSlight decreaseStagnationSlight growthStrong growthNot covered

(Sources : Exane BNP Paribas estimates)

-18%

-26% -8%

-30%-16%

-9%

-22%-19%

-40%-10%

-20%

-33%

-24%

-35%

+0% +5%

-3%+6%

+10%

+3%+20%

-10%+5%

0%

-13%

+19%

+11%

+1%

-14%

-3%

-4%

-2%

-10%

-5%

+15%

-1%

-13%

-15%

+6%

Med. Rim.+8%

2009 Cement volume trends +6.5%e (-6%e excl China)

5Equities

Multinationals acted in a rational way in 2009 A quick reaction to adapt costs to demand -

Savings represented 34%e of 2009

EBIT

as an average for the multinationals -

Closures and mothballing of plants represented ~ 5%e of world capacity in 2009

Tight balance sheets imposed discipline

-

Focus on debt & free Cash flows imposed by tight balance sheets

-

Capital increases could not be avoided

Cement capacity closed, mothballed &/or postponed(announced between Nov 2008 & March 2009)

Debt evolution (EUR Bn)(based on 10 main international players)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010e

2011e

2012e

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Sector

net debt Average

net debt/EBITDA

6Equities

Prices remained relatively resilient in 2009

As a consequence of the rational behaviour adopted by the industry , prices remained resilient

-

Even if historically high, Prices remained overall positively oriented in spite of the demand collapse -

However, Prices eroded quarter after quarter (Q1 :+6.5%, Q2: +3% , Q3: 0% Q4 : -1%e excluding China) -

Regional differences in pricing trends were visible

Cement price in 2009: +1.5%e excl. China ; -3%e incl. China

WE 0%

Latin America +8%

NA -2%

Africa +9%

Mid. East.-12%

Asia -2%

Oceania10%

EE -14%



+2%

-3%

-13%

+3%

+7%

+2%

-6%

+6%-2%

-30%

-11%

+8%

-3%

+14% +9%

+2%+3%

-15%

+6%+13%

+7%+4%

+17%

-13%

11%

-4%

+9%

+13%

+10%

+8%

+13%

-11%

+2%

0%-5%+1%

-14%

+3%

-22%

+13%

+7% +9%

-3%

+4%

7Equities










- Capex


Conclusion

Summary


8Equities

DecreasePressureStagnationSlight IncreaseStrong IncreaseNot covered


+13%

+11%*+6%

+3%

+2% *

+12% *

-37%*

-20%*

-13%

-55%-22%

** cumulated trend end of February ; otherwise , trend reported in January

-22%

+42% *

-15%

+5%

-5%

-2.5%*

-5%

-4%

-50%

+26% *

+11%

A weak start in the Northern hemisphere in Q1 2010

Regional differences in demand trends in January-February 2010

-

USA and Europe demand was severely impacted by bad weather

-

Growth in Emerging markets continued especially in Asia and Brazil

WEAKNESS AGGRAVATED BY BAD WEATHER IMPACT

-20%*

9Equities

A progressive recovery is expected in 2010 A modest improvement is expected for cement demand in 2010 excl-China

-

USA : 1st step of modest recovery expected in H2 2010 (PCA +5.2% for the FY)

-

Western Europe: could bottom out end of 2010 . 2010 sovereign debt issues?

-

Eastern Europe : continuing weakness. Russia to recover ? -

Latam

:better trends , especially in Brazil -

Asia & MENA :continuing growth

2010 Cement volume trends +7%e (+4%e excl China)

WE -7.5%

Latin America +3% to 6% ?

NA + ?%

Middle East +7%

Asia +10%

Oceania-3%

EE 2%


DecreasePressureStagnationIncrease Strong IncreaseNot covered

+2%

0 to +3%?-6%

-8%

-5%

-3%

-5%-11%

-5%-12%

-10%+4%

-12%

+6%-5%

-4%

+6%/+9%

+4%

-1%+10%

+6%+10%

+0%

+4%

+5%

+1%

+5%

-3%

+10%

+10%

+6%

-5%

+1%

0%

+4%

-3% -3%

+1%

+0%

+15%+6%

0%

+4%

-5%

+4%

+4%+4%

+5%

+3%

+3%

+5% +18%

+6%

+6%+6%

Africa +4%

Med. rim +7%

10Equities

Sequential erosion :H09 prices less H109 prices variation

What scenario for cement prices ? Pricing erosion was visible in 2009 -

Pricing erosion was visible … even if prices remained overall firm

-

However, the more pronounced deterioration was located in 4 main regions : Med Rim, Black Sea , MENA & Africa

Quarterly cement world pricing trend excl. China (%e)

(4%)

(2%)

0%

2%

4%

6%

8%

10%

12%

14%

Q1 02

Q3 02

Q1 03

Q3 03

Q1 04

Q3 04

Q1 05

Q3 05

Q1 06

Q3 06

Q1 07

Q3 07

Q1 08

Q3 08

Q1 09

Q3 09

11Equities

What scenario for cement prices ? Pricing erosion was driven by low utilisation rates -

Utilisation rate decreased due to lower demand and additional capacity

-

Net Capacity addition continued in spite of closures/mothballing => UR should remain a negative driver for prices in 2010 and we expect the surplus situation to continue

World cement Average cement Utilization rates vs. average price (USD/t) Global Cement

supply

demand

balance


0%

2%

4%

6%

8%

10%

12%

1990e

1995e

1996e

1997e

1998e

1999e

2000e

2001e

2002e

2003e

2004e

2005e

2006e

2007e

2008 e

2009 e

2010 e

World Demand

evolution

% (3 years

average)

World Capacity

evolution

% (3 years

average)

40

45

50

55

60

65

70

75

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008 e

2009 e50%

55%

60%

65%

70%

75%

80%

World average

Cement

price

USD/t Implied

Utilization

rate

WORLD

12Equities

What scenario for cement prices ? Capacity addition continues, especially in emerging markets

-

Capacity net addition continued in spite of H1 2009 closures/mothballing -

This particularly true for markets where growth have continued to be strong in 2009 (like India)

Capacity addition net of closures 2008-2012 (e) India : cement capacity addition 2008-2012 (e)


13Equities

What scenario for cement prices ? The theoretical surplus should increase (bf. further capacity closures or export cuts)

-

2010 = 33mt (e) of exportable surplus before additional closures or export cuts ?

-

In 2009 capacity closures helped to limit the surplus

-

Exports were also cut worldwide by 15% between 2007 & 2009

World Cement Import-export flows 1985-2012(e)World theoretical cement surplus (mt)


300

500

700

900

1,100

1,300

1,500

198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008 e2009 e2010 e

-5

0

5

10

15

20

25

30

35

40

Theoritical

Total surplus (Capacity

less

production)Export less

import (exportable surplus)

-100

-80

-60

-40

-20

0

20

40

60

80

100

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009 e

Western Europe Eastern

EuropeMiddle East and North

Africa LatamNorth

America Sub-saharan

AfricaAsia

excl

China & India IndiaChina Oceania

net importers

net exporters

14Equities

Asian FOB cement prices USD/t (e)Freight rates : Baltic Dry bulk index

What scenario for cement prices ? Pricing erosion is also due to lower export prices (FOB) and low

freight rates -

Export volume have declined in spite of overcapacity & low maritime freight rates

-

Asian FOB prices have not collapsed but are under pressure

0

2000

4000

6000

8000

10000

12000

14000

2003

2003

2003

2004

2004

2004

2005

2005

2005

2006

2006

2006

2007

2007

2007

2008

2008

2008

2009

Baltic

Exchange Dry Index (BDI) -

PRICE INDEX

15

25

35

45

Dec

95

Dec

97

Dec

99

Dec

01

Dec

03

Dec

05

Dec

07

Dec

09

Asia

-

Cement

Export Price FOB (USD/T) (average

China-Japan-Thailand-Indonesia)

15Equities

What scenario for cement prices ? Pricing erosion is driven by regional pricing differences-

Significant price increases between 2003 & 2008 (Tight supply /

Record freight rates & energy cost)

-

Domestic prices on Export markets are among the lowest in the world (MENA/Asia)

2009 Cement Prices (USD/t)


16Equities

Evolution of Export-Import flows between 2006 & 2009 :


What scenario for cement prices ? …already reflected in new trading dynamics

-

Several regions (with access to cheap energy or geographically close from import markets)

started to export massively … when others cut export

-

US and Spain have stopped importing

-

New Import needs were visible mainly in North Africa (and Russia before the crisis)

17Equities

World Cement maritime trading flows& import-export markets : 2008

What scenario for cement prices ? Maritime trading patterns changed leading to regional pricing pressures

Until 2008, World maritime trading was dominated by Transocean shipping flows after 2008, A shift from Transocean shipping flows to local flows has been visible The emergence of regional trading clusters , where surplus is located, can explain local pricing erosion.

World Cement maritime trading flows

& import-export markets

: 2009

The shift from global Transocean maritime cement trading to regional local trading clusters, implies that the pressures on pricing will stay localised in several markets rather than spread globally.

18Equities

What scenario for cement prices ? Energy cost inflation is back as a positive driver for pricing resilience ?

-

Energy cost has decreased since the peak of 2008

-

Recent trends are showing an increase in coal prices in 2010

-

Several markets could implement price hikes to recover this inflation

Cement : Multinational groups’

theoretical combustible bill in EUR/tonne

(e)(power not included)


Coal and petcoke

spot prices in USD/tonne

(e)

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Average

2006 Average

2007 Average

2008 Average

2009 Average

2010

Fuels billin EUR/t

+6%e

0.0

50.0

100.0

150.0

200.0

250.0

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Coal $/t CIF ARA Petcoke

$/t C&F W Europe

19Equities

What scenario for cement prices in 2010 ? We believe that pricing erosion could continue in 2010 but visibility is low

-

Q1 2010 prices could continue to erode in the Northern hemisphere as demand is weak -

Energy cost inflation is back in certain markets…

and should help price hikes -

More visibility on real pricing trends is expected in Q2 2010

Scenario for Cement prices in 2010: -2.5%e excl. China; +1.5%e incl. China

WE -2%

Latin America +1%

NA -3%

Africa -2%

Mid. East.-8%

Asia +3%

Oceania-2%

EE -2%



+0%

-3% ?

-7%

+0%+0%

-2%-5%

-5% +1%

0 to -3% ?

-5%

+0%

-2%

+3% -5%

-2%+2% -10%

+0%+2%

-2%+0%

+2%

-5%

-2%

+4%

-5%?

+5%

+3%

-3%

+5%

+5%

+0%

0%-2%-3%

-2%

+0%

-3%-15%

+3%

+5%

+1% +4%+0%

-25%

-2%

+0%

Med. rim-1%

20Equities










- Capex


Conclusion

Summary


21Equities

A tentative of scenario for Cement Volumes in 2011: +6%e excl. China

WE +5%

Latin America +3%

NA +12.5%

Sub-Saharan Africa + 6%

Mid. East.+5%?

Asia +3.5%

Oceania+5%

EE +8%



+8%

+13% +6%

+8%+7%

+4%

+5%+6%

-1%+9%

+8%

+3%

+4%

+8%

+6% +6%

+8%+10%

+3%+4%

+7%+5%

-2%

+5%

+5%

?+10%

+6%

+5%

+7%

+4%

+8%

+6%

+8%

Back to normal trends in 2011 ? Decoupling between mature and emerging markets was more visible

-

Mature markets (USA, Western Europe, Oceania, Japan) to recover

from very low levels -

Continuing growth in Emerging markets

-

A big question mark for China ?

22Equities

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

9,000.0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Growth

Capex

Cement Maintenance Capex

Cement

Capex

to deliver & capture growth New cement plants will continue to be commissioned -

India has the largest growth potential

-

A strong effort has been done in MENA

-

Africa , Latam

, Eastern Europe and Rest of Asia should catch up

1999-2012: Capex

development (EURm)

Source: Exane BNP Paribas estimates

2008-2012: Net Cement new capacity commissioned (excl China)(sample = main multinationals)

(World cement industry)

-100

-50

0

50

100

150

200

250

300

350

400

450

1988-1998 1999-2008 2009-2012

Mature markets Asia

excl

China MENAAfrica LATAM Eastern

Europe

23Equities2009 was a very challenging year for the industry, but discipline prevailed 2009 cement volume trends collapsed, except in several big emerging markets. The cement industry reacted quickly & rationally to the

new environment by focusing on restructuring (capacity closures). Tight balance sheets management imposed to groups to remain discipline and as a consequence cement prices were relatively resilient.

2010 volume could be weak in mature markets but solid in emerging markets There is a certainty that Q1 top lines will be exceptionally weak, severely impacted by harsh winter weather in Europe and the USA.

However, housing lead indicators (permits, mortgage applications) are positive in a number of markets and trends remain very solid in emerging markets. Non-residential volumes are declining . There is also a question mark on the benefits of the infrastructure spending in USA (sequence of the stimulus package) and in Europe (sovereign debt). Growth in emerging markets is anticipated in 2010 and visible in Q1.

Further pricing erosion in 2010 is a scenario, but visibility is

very low on the real pricing trendsIn early 2009, many cement companies increased their prices, but

prices then eroded during the rest of that year. Therefore, Q1 10 price effects are often likely to be more negative than in Q4 09 as price hikes have been implemented with difficulty in a weak volume

environment in Q1. The Industry will not be able to gauge the reality of the pricing power until Q2. The shift from global Transocean maritime cement trading to regional local trading clusters, implies that the pressures on pricing will stay localized in several markets where a surplus is visible rather than spread globally.

Rebound in energy prices points to cost inflation Prices for coal have risen sharply since late 2009 following a decline from their 2008 peak. Although energy prices have come down a

touch over the past few weeks, cost inflation could return later

in 2010.

The weak Q1 is pushing the industry’s majors to be very cautious regarding 2010 : there is still no clear visibility on demand trends in 2010, on operating leverage (volume driven margin improvement is a scenario for 2011-

2012) or on M&A deals (limited to small-

to mid-sized transactions & disposals in the short term).

Most players should continue to focus on cost-saving measures in mature markets…

and continue to commission new plants to capture growth in emerging markets.

Conclusion

24Equities

If you would like to receive our research , please contact us during the conference (or by e-mail after)

Mr Su Zhang , analyst at Exane BNP Paribas in London can communicate in Chinese

Su Zhang

+ 44 207 039 94 18 [email protected]

Thank You

EquitiesDisclaimer

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Documents

2010 China International Cement Conference presentation... · Volume collapsed outside Asia-MENA-Multinationals reacted in a rational way. The present : 2010 , a slow & progressive