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TEXT-Fitch: US recovery, emerging markets profits themes of building materials
April 5, 2012 / 2:12 PM / 6 years ago

TEXT-Fitch: US recovery, emerging markets profits themes of building materials

April 5 - Fitch Ratings says that recovery prospects for mature markets,
particularly the US, and the profitability trend in emerging markets, were the
key themes in the agency's recent building materials tour.	
Fitch believes that the outlook for mature markets remains difficult for 2012.
In particular, under its conservative assumption Fitch does not anticipate any
recovery in the US cement market in 2012, despite most cement producers being
confident of passing price hikes and improving profitability. However, Fitch
notes that for most of the Western European cement producers, the US represents
a relatively low share of consolidated EBITDA. Thus, a moderate improvement in
the North American market situation would be rating neutral. A strong recovery
in the US market, leading to a solid profitability improvement, could be rating
positive, but Fitch considers this scenario unlikely in the current
macroeconomic situation.	
Similarly, Fitch does not anticipate a significant improvement in the outlook in
Europe, where a weak recovery in Northern countries should be counterbalanced by
a still significant decline in Southern markets.	
Major European cement producers Holcim Ltd ('BBB'/Stable), Lafarge SA
('BB+'/Stable) and HeidelbergCement AG ('BB+'/Stable) face margin pressure in
emerging countries, due to on-going high cost inflation. In particular, energy
cost increases will remain an issue in 2012, although Fitch expects cost
inflation to be weaker in 2012 than in 2011. In addition, overcapacity and
strong competition in some regions, namely India and Middle East, could prevent
producers from increasing prices at the same pace as cost inflation and
therefore squeezing profitability.	
Investors were particularly interested in M&A prospects in the sector, with
Holcim, Compagnie de Saint-Gobain ('BBB+'/Stable), and CRH Plc ('BBB'/Stable)
considered to be potential buyers of assets. Fitch believes that all the rated
issuers will maintain a prudent stance toward acquisitions and will continue in
their current tight financial and leverage discipline. In the agency's view,
some issuers, such as CRH and Saint Gobain, will continue in their current
policy of minor acquisitions, aimed at optimizing the assets portfolio. However,
these acquisitions have limited impact on credit metrics. By contrast, Fitch
believes Lafarge will continue in its programme of non-core assets disposals
with the aim of reducing leverage.	
Investors have also raised the question of whether HeidelbergCement and Lafarge
could return to an investment grade rating. In Fitch's view, the business
profile of both companies, in terms of market positioning and geographical
diversification, is still compatible with an investment grade rating. The
current rating is however constrained by the high leverage and debt reduction is
therefore key for a potential positive rating action. However, given the current
market outlook, Fitch does not expect credit metrics to improve significantly in
2012 for the two companies. A potential rating upgrade is therefore subject to a
more solid recovery in 2013 in mature markets, on which however visibility
currently remains poor, and to the ability of the companies in preserving
profitability in emerging countries. As for Lafarge, Fitch believes that the
successful execution of the disposal plan is also a key factor for deleveraging
and improving credit metrics.	
Fitch's EMEA building materials investor round tables and one-to-one meetings
took place in late March in London, Paris, Frankfurt and Munich.	
Additional information is available at

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