Negative outlook for European building materials companies

The outlook for European building materials companies is negative, reflecting the industry's ongoing challenges of weakening demand, pricing pressure and tight credit set against the backdrop of a global economic downturn, Moody's Investors Service said in a new report.
The growth in shipments of building materials globally slowed markedly in H2 2008 and companies' results were affected by the deteriorating economic conditions as early as Q3 2008. Since October 2008, Moody's has downgraded the ratings or changed the outlooks on 10 of the 11 European building materials companies it rates, reflecting leverage ratios that eroded at an unprecedented pace.
Moody's notes that the stagnant residential, non-residential and public construction markets, especially in mature economies such as the US and Western Europe, are hurting demand across all building materials sub-industries.
"This demand reduction, coupled with some new capacity, mainly for cement in North America and emerging markets expected to come on stream in 2009 and 2010, is likely to put further pressure on prices," explained Matthias Hellstern, a Vice President-Senior Credit Officer in Moody's Corporate Finance Group. "Furthermore, although the costs of energy and raw materials have eased from their peaks in summer 2008, lower fixed costs will not fully offset the pressure on profitability caused by lower volumes and weakening pricing trends." European building materials companies also may no longer be able to count on traditionally faster-growing regions such as Eastern Europe to offset weaker performance in Western Europe or North America.
In this environment, liquidity remains a concern, especially for companies that funded recent acquisitions with debt and for whom refinancing obligations are coming due. Therefore, Moody's expects that companies will increasingly seek to implement cost-cutting measures and scale back capital expenditures in an effort to conserve cash. Moody's also does not expect any major debt-financed transactions in the sector in the near term.
"Some companies are seeking to sell non-core assets, which could trigger smaller deals involving regional participants that have not taken part in the industry consolidation of the past few years," said Hellstern. "However, Moody's believes that overall profitability for the sector will remain weak during 2009 and well into 2010."
Moody's recognises that government economic stimulus packages could provide a boost to the public construction segment, partially offsetting the reduction in demand in residential and non-residential markets. However, it cautions that any effect on companies' performance is not likely to be felt before H2 2009.
Moody's currently rates 11 European building materials companies, located in Austria, France, Germany, Ireland, Italy, Russia and Switzerland.