Glimmers of hope on the horizon

The outlook for the European building materials industry remains negative, reflecting the ongoing economic weakness in some markets and continued depressed demand, Moody's Investors Service said in a new report of 11 companies it rates. However, there are signs that the decline in volumes is not getting any worse in mature markets and may even start to improve from 2010.
"Overall end-market demand for building materials is expected to remain weak in H2 2009," said Matthias Hellstern, a senior vice president in Moody's Corporate Finance Group. "Indeed, forecasts indicate that global cement consumption is expected to decline by around 16% in 2009, excluding China."
Although economic stimulus packages in the mature countries should help offset declines in demand for building materials from commercial or residential construction, Moody's expects that growth in public construction projects will not be sufficient to fully offset such declines going forward.
"It will take more time for building material volumes to recover," explained Hellstern.
"As a result, profitability and cash flow generation will remain affected for the time being and it is unlikely that levels reported in 2007 and 2008 will be reached in the intermediate term."
However, in line with economic indicators, Moody's believes the current cycle for European building materials companies has reached its bottom.
Indeed, despite the reduction in demand, prices for building materials, especially cement, remain stable overall. Furthermore, liquidity concerns have largely been addressed by many of the building companies, and Moody's believes that the short-term liquidity position of nearly all its rated companies should be sufficient to cover liquidity needs in the next 12 months. However, as a result of past acquisitions, many rated issuers still have major maturities to be covered in 2011 and 2012; thus, Moody's will continue to closely monitor liquidity in the industry.
Moody's also recognises that cement and other building materials producers have set ambitious cost cutting targets and, combined with a reduction in energy costs, should be able to report improving margins in H2 2009 despite the expected ongoing weak demand. Companies are also expected to generate positive free cash flow going forward, by cutting maintenance capex to the minimum, reducing expansion capex and efficiently managing working capital.
Assuming better visibility and positive volume trends, there is a possibility that Moody's could change its outlook for the sector to stable from negative in the next few months. Moody's will continue to assess the situation and take rating action as and when necessary.