Stable outlook for European building materials industry, credit risk increased

Moody’s Investors Service holds a stable outlook for European building materials companies for 2008. Expectations of a stable or even slightly positive market environment in the first half of 2008 are balanced by the challenges that may lie ahead in the second half when the impact of the liquidity crunch and subsequent reduced economic growth in developed regions becomes clearer, Moody’s said in its new Industry Outlook report.

“Our outlook for the building materials industry remains stable despite the slowdown in US construction and financial market turmoil,” said Matthias Hellstern, a Moody’s analyst and author of the report. “However, risks for the sector clearly have increased, given companies’ greater dependence on emerging markets and reduced economic growth in the mature markets of Western Europe,” he continued.

Consolidation between 2005 and 2007 has left several of the major competitors with integration risk and elevated debt levels for their rating category, and a slowing economy could pressure the ratings of those players. While Moody’s expects a smooth integration of acquired operations and steady debt reduction, the ratings of Lafarge S.A. and HeidelbergCement AG, for example, have limited headroom for earnings pressure in the event of a business slowdown.

At the same time, however, most European building materials companies’ ratings benefit from geographic diversification. In Moody’s opinion, this should go some way towards mitigating the impact of the slowdown in residential construction in the US (and potentially a slowdown in US commercial construction as well).

Among the issues Moody’s will be tracking over the next 12-18 months are:
– The severity and duration of the US residential construction downturn and potential spillover to other markets, such as commercial construction in the US and construction markets elsewhere.

– The extent to which companies maintain solid operating performance and keep and improve debt-protection measures, given the expectation of ongoing corporate activity.

– The impact of the EU Emission Trading Scheme on companies’ performance and market position.

– Measures to tackle potential liquidity shortfalls if the capital markets remain as weak as they have been in the last seven to eight months.