05 cement bnp

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Please refer to important disclosuresat the end of this report.

Building Materials Sector rating: Outperform

Equity Research

Report

2 February 2005

Cement: revisiting our 2005 scenario

2005 organic growth should be driven by a strong pricing effectLike-for-like trends in 2005 will be influenced by challenging base effects andcost inflation. In this report, we revisit our entire cement scenario on volumesand prices by country. We estimate that top-line organic growth will remainstrong (around +8.5%) due to firm demand (average +2.5%e) and a strongerpricing effect (average +6%e) in cement markets than in 2004.

2005 margins are less at risk than in our initial scenarioIn this environment and despite H2 04 and 2005 incremental cost inflation,we believe that cement margins are less at risk than we estimated in Q3 04.We have recently confirmed or raised by an average of 3-5% our 2005 and2006 estimates for cement companies, except for Italcementi.

2006: firm demand and better pricing power in Europe and NorthAmericaRecent sector consolidation (RMC/Cemex, AI/Holcim) and impliedrestructuring in Germany, the USA and the UK should strengthen theindustrys pricing power in Europe and North America (two majoraggregate/concrete producers have disappeared). Volumes should remainfirm in Europe, as the new EU norm on concrete (EN 206-1) takes effect,implying 2% more cement consumption.

We prefer Lafarge and HeidelbergCementWe now estimate that HeidelbergCement will report the strongest organicgrowth in 2005 at 10.9% (Outperform; target price: EUR60), followed byHolcim at 8.5% (Neutral; target price: CHF79), Lafarge at 8.6% (Outperform;target price: EUR84) and Italcementi at 7.3% (Neutral; target price: EUR11.5).

Arnaud Pinatel & Nicolas Godet

Arnaud Pinatel Josep Pujal Nicolas Godet+(44) 20 7039 9467 +33 (1) 42 99 25 17 +33 1 42 99 52 [email protected] [email protected] [email protected]

Rel. Perf. Construction / DJ Stoxx50

2002 2003 200450

60

70

80

90

100

110

120

130

140

150

DJ STOXX CON & MAT E - PRICE INDEXDJ STOXX CON & MAT rel. to DJSTOXX 50

Source: Datastream

Stock recommendationsRating Price Price Upside

(EUR) target (downside)(EUR) (%)

Big capsHeidelberg Cement + 54.0 60.0 11.1Holcim R (CHF) = 74.8 79.0 6Lafarge + 79.3 84.0 6

Mid capsCiments Franais + 73.9 80.0 8Dyckerhoff Pref + 26.5 29.0 9.4Italcementi = 13.0 11.5 (12)

2 Building Materials

Contents

Revisiting 2005 scenario ___________________________________ 3

Organic growth anticipated by producer _______________________ 6

Western Europe__________________________________________ 9

North America __________________________________________ 16

Latin America___________________________________________ 19

South-East Asia _________________________________________ 24

Eastern Europe _________________________________________ 32

Med. Rim & Middle East __________________________________ 35

Africa & Oceania ________________________________________ 38

Financial Highlights ______________________________________ 43

Index of countries________________________________________ 49


Revisiting 2005 scenario

The Construction sector outperformed the DJStoxx50 index by 24% in 2004, mainlydriven by the concession businesses and acquisition premiums paid on stocksfollowing the UK sector consolidation. As a result, the cement sub-segmentunderperformed the rest of the sector.

In this report, we revisit our cement scenario on volume and price by country toanticipate both good and bad surprises on top-line growth and margins. This is basedon the interviews we conducted in December 2004 and January 2005.

It will be difficult to forecast trends in 2005 as like-for-like figures will be influenced bybase effects and cost inflation. As a result, the sustainability of cement margins in 2005will be the main question mark. We believe stock performances should be differentiatedby the variations in prices published by the groups, as volumes should remain firmacross a majority of countries.

Volume: unfavourable base effect, but firm demandAlthough demand is expected to remain firm in 2005, the total volume effect will bechallenged by a less favourable base effect, especially in H1.

Volume growth should remain firm across Europe and could be sustained in 2005 and2006 by the implementation of the new European Union standard EN 206-1 onconcrete. One of the main consequences of this new standard, to be adopted on1 January 2005, is the higher dosage of cement (5-10k) per m3 of concrete. This couldcreate an additional 2% in cement consumption throughout Europe in 2005 and 2006.

Demand should also remain firm in North America, where supply is tight and fuelled byfirm Residential demand albeit slowing down , gradual recovery in Non Residentialdemand and the support of public works. In some regions impacted by hurricanes,recent reconstruction helped boost the trend in the last few months.

Strong growth is also expected in most emerging markets, except Latam and a fewAsian countries where demand is improving but growth remains modest compared withother regions.

World cement volume trends Mature markets cement trends Emerging markets cement trends

-15%

-10%

-5%

0%

5%

10%

Jan-

98

Aug

-98

Mar

-99

Oct

-99

May

-00

Dec

-00

Jul-01

Feb-

02

Sep

-02

Apr

-03

Nov

-03

Jun-

04

Jan-

05

Aug

-05

World sample emerging markets samplemature markets sample

-15%

-10%

-5%

0%

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10%

Jan-

98

Aug

-98

Mar

-99

Oct

-99

May

-00

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-00

Jul-01

Feb-

02

Sep

-02

Apr

-03

Nov

-03

Jun-

04

Jan-

05

Aug

-05

Western Europe Southern EuropeNorthern Europe North America

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Jan-

98

Aug

-98

Mar

-99

Oct

-99

May

-00

Dec

-00

Jul-01

Feb-

02

Sep

-02

Apr

-03

Nov

-03

Jun-

04

Jan-

05

Aug

-05

Eastern Europe Latin AmericaSouth East Asia Oceania

Source: Exane BNP Paribas Source: Exane BNP Paribas Source: Exane BNP Paribas


Prices: strong improvement, except in a few marketsIn 2005, we believe the price effect will vary depending on the country:

In the US, the UK and Germany, cement producers have already announced majorprice increases. In the UK, cement players want to recover sharp cost inflation andmake up for three years of stagnation, whereas in Germany prices are moving backtowards historical levels, following the 2003 price war. In the US, high dependence onimports combined with rising freight costs are changing the supply/demand balance.Hence the major price increases in April 2004, August 2004, January 2005 andprobably summer 2005. This strong pricing power should be particularly high andvisible in Q1 05, as some price increases have been implemented early in the year(January instead of March). The pricing effect should offset the cost of H2 04 inflationand additional inflation in 2005. We believe that operating margins should be stable oreven recover from H2 04 in most cement markets.

Conversely, the pricing effect could be limited in some markets where new entrantsare creating additional competition or where governments are freezing price hikes. Thiscould be the case especially in Italy and Latin America, and perhaps in Spain and someSouth East Asian countries. In those countries, we believe producers will not be able torecover cost inflation.

World cement prices in 2005 (% change)

> 10%

5% to 10%

4% to 5% 0% to 4%

not covered

0%

0% to -2%

> -2%

Source: Exane BNP Paribas

Costs: significant inflationAll cement producers are set to face significant cost inflation due to the expected sharprise in coal, petcoke and freight prices, together with higher electricity costs and theimpact of new EU legislation (addition of iron sulphate in cement, CO2 emissions,working time) in some countries. In our scenario, spot prices could stabilise at highlevels or even decline slightly in H2 05 for both coal and petcoke.

Note: in one tonne of cement, electricity represents around 11% of total costs, fuel:11%, labour costs: 15% and transport: 20%.


Evolution of coal prices (FOB and CIF)

10

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50

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Dec-81

Oct-8

2

Aug-8

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4

Apr-8

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6

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6

Oct-8

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8

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0

Feb-91

Dec-91

Oct-9

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Dec-9

6

Oct-9

7

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Apr-0

0

FOB RSA Freight

USD/t

Nota:FOB = Free On Board;CIF = Cost Insurance Freight

Coal and Petcoke prices have surged dramaticallyAccording to the outlook disclosed by the industry, we believe theworst of combustible cost inflation is behind us. In our scenario, bothcoal and petcoke prices could stabilise at high levels or even declineslightly in H2 05.

Coal prices expected to ease

At the current USD50/t FOB pri ce, steam coal is well above the 20-year historical average ofUSD30/t. South African steam coal has increased in dollar terms,following the appreciation of the SA rand vs the dollar (2x in twoyears) In 2005, we believe prices should ease as supply offsetsdemand. On the supply side, export capacity is being developed byeastern Europe, Russia and American producers. On the demand side, consumption of steam coal by utilitiesshould decrease owing to the new CO2 emissions legislation and theswitch to other energies (gas, subbituminous coal). Also, freight costs are expected to ease in 2005 due to thecommissioning of new vessels, which will have a favourable impacton CIF prices.

Evolution of petcoke prices (FOB and CIF) Petcoke: further increase expected, but the worst is behind us

0

10

20

30

40

50

60

Dec-81

Oct-8

2

Aug-8

3

Jun-8

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Apr-8

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6

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6

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7

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8

Jun-8

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0

Feb-91

Dec-91

Oct-9

2

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Apr-9

5

Feb-9

6

Dec-9

6

Oct-9

7

Aug-9

8

Jun-9

9

Apr-0

0

FOB US Freight

USD/t Petcoke prices are expected to catch up to coal prices in theshort term, as demand outpaces supply. On the supply side, the fact that current inventories are at 50% oftheir 2003 level makes a bullish case for petcoke. Also, plannedmaintenance stoppages in 2005 in refineries providing petcokeshould create a tight supply situation this year. On the demand side however, some favourable factors shouldlimit the rise of petcoke. First, over a FOB price of around USD30/t,petcoke becomes uncompetitive for utilities compared to steam coal.Second, the expected decline in steam coal should limit the rise. Last,petcoke buyers have recently postponed petcoke shipments due tolower-than-expected consumption.

Compared Evolution of steamcoal and petcokeprices, in USD/Kcal

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Jan-8

6

Jan-8

7

Jan-8

8

Jan-8

9

Jan-9

0

Jan-91

Jan-9

2

Jan-9

3

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4

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5

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7

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8

Jan-9

9

Jan-0

0

Jan-01

Jan-0

2

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3

Jan-0

4

Steam coal $/Kgcal Petcoke $/Kgcal

Currency impact is uncertain but certainly priced inThe currency effect also remains an uncertainty especially forcompanies exposed to USD weakness. Excluding Cemex, which isthe only company that benefits from a potential positive effect as itreports in USD and now has greater access to European marketswith RMC, the companies the most exposed remain Holcim, Lafarge,HeidelbergCement, and to a lesser extent Italcementi.Nevertheless, the high euro dollar exchange rate should not beconsidered a major risk on European cement stocks for the followingreasons:

We believe that the market has already priced in the USDweakness scenario. Our estimates include a USD/EUR rate at 1.32. As noted below, combustibles and freight prices aredenominated in dollars, which makes cost inflation less painful fornon-USD reporting companies. Currency risk in only a translation risk, as cash is usuallyreinvested in the country in which it was generated, and thus notconverted into EUR or CHF. Also, debt is generally in local currency.


Organic growth anticipated by producer

Organic growth should remain strong in 2005, but differs among actorsWe have tried to base pricing and volume trends in our 2005 scenario on the volumesold locally by each producer in each country.

To simplify the exercise, our calculation assumes that each producer will face the sametrends in each country. On this basis, we tried to identify which companies in oursample could post the highest l-f-l growth and which could benefit from the highestpricing effect to recover cost inflation.

Top line l-f-l growth in 2004 was estimated at around 9%e for the industry, with a 4.5%epricing effect and a 4.5%e volume impact, which was mainly linked to the strongrebound in demand in H1 04 (favourable base effect). In 2005, we expect the pricingeffect to drive up organic growth, as the volume base effect will be less favourable evenif demand remains firm.

As a result of our calculation based on our new assumptions for 2005, we expect topline l-f-l growth in 2005 to be close to 8.5%, with volume at 2.5% and prices at 6%e asan average for the industry. In H1 05, the pricing effect will be strong and particularlyvisible in mature markets benefiting from earlier price hike announcements (Januaryinstead of March). These price increases are necessary to try to recover operatingmargins impacted by additional cost inflation in H2 04 and 2005e.

Top line organic growth is expected to differ among cement producers, which arenot exactly exposed to the same cycles. We assume that HeidelbergCementcould post the strongest organic growth at 10.9% (Outperform; Target price:EUR60/share), followed by Holcim at 8.5% (Neutral; target price: CHF79/share),Lafarge at 8.6% (Outperform; target price: EUR84/share) and Italcementi at 7.3%(Neutral; target price: EUR11.5/share).

Cement organic growth implied by our 2005 scenario

1.8%3.8% 3.3% 3.4%

6.8%4.7%

7.6%

3.9%

0%

2%

4%

6%

8%

10%

12%

Lafarge Holcim HeidelbergCement Italcementi

Volume Pricing

Source: Exane BNP Paribas estimates


HeidelbergCement is benefiting from the highest pricing effect, estimated at 7.6%. Themain drivers remain ongoing recovery in German pricing, but also strong priceincreases expected in the UK, the USA, Western Africa, Eastern Europe and Turkey.The price effect in Benelux should remain poor, if HeidelbergCement decides to regainmarket share on German imports. The volume effect is anticipated at 3.3% despite thecontinuing weakness of German demand (-4% in our scenario), but is helped by thestrong increase in Indonesia (good underlying demand and reconstruction after thetsunami) and Turkey. Eastern Europe and African volume trends should also remaingood.

Holcims pricing effect estimated at 4.7% is below that expected for Lafarge andHeidelbergCement. The pricing effect is still penalised by the anticipated trend in Latamand Asia, two main regions for Holcim, where new entrants, additional capacity, andgovernment price controls explain weaker emerging market trends integrated in ourscenario. However, organic growth expected at 8.5% remains strong and reflects thevolume effect of 3.8%. This growth mainly comes from Holcims exposure to emergingmarkets.

Lafarges organic growth of 8.6% anticipated for 2005 is a combination of a low 1.8%volume effect (compared with Holcim +3.8%) and a strong 6.8% pricing effect, which isreassuring in a cost inflation environment. The volume effect is penalised by the declineexpected in Greece (post Olympic games) impacting southern European trends, and inemerging markets in Asia (further decline in South Korea and ongoing weakness inMalaysia). The pricing effect should benefit from US, UK and German pricingrecoveries, the strong 5% increase posted in France, and ongoing trends in African andEastern European prices.

Italcementis organic growth anticipated at +7.3% is the lowest in our sample ofcompanies, due to a limited pricing effect (3.9% vs. an average 6.2% for peers).Volume growth should reach 3.4%, in line with the sector. The groups strong exposureto the Italian and Benelux markets, where we have integrated slight volume growth andpotential pricing pressures, explains this lower trend and also reflects the significantweight of the mature markets within the group. Italcementi is also relatively lessexposed than its competitors to the strong pricing effect expected in North America.

Cement volume weight by producer (as % of total volume)Lafarge Holcim HeidelbergCement Italcementi

Northern Europe 9 11 33 2Southern Europe 18 11 0 52Total Western Europe 28 22 33 54North America 18 18 18 14Oceania 0 3 0 0Asia Mature 5 0 0 0Total Mature markets 50 43 51 68

Med. Rim and Middle East 10 7 3 13Eastern Europe 9 8 19 4Latam 6 20Asia emerging 18 21 21 15Africa 7 2 7 0Total Emerging Markets 44 55 46 29

Total Group 100 100 100 100



Estimated 2005 volume effect by producer (%)Lafarge Holcim HeidelbergCement Italcementi

Northern Europe (1.8) (2.1) (0.5) 2.5Southern Europe (1.1) 0.8 1.0Total Western Europe (1.3) (0.6) (0.5) 1.0North America 2.3 2.4 2.3 2.5Oceania 1.3Asia Mature (5.0)Total Mature markets (0.4) 0.8 0.5 1.3

Med. Rim and Middle East 4.3 1.0 7.0 5.4Eastern Europe 4.3 5.6 3.6 10.0Latam 4.5 5.3Asia emerging 3.4 8.7 9.6 9.3Africa 4.9 7.0 4.0 0.0Total Emerging Markets 3.7 6.1 6.3 8.0

Total Group 1.8 3.8 3.3 3.4


Estimated 2005 pricing effect by producer (%)Lafarge Holcim HeidelbergCement Italcementi

Northern Europe 12.1 5.3 8.3 (3.0)Southern Europe 4.1 2.5 1.4Total Western Europe 6.8 3.9 8.3 1.2North America 12.3 12.5 12.1 12.9Oceania 4.0Asia Mature 0.0Total Mature markets 8.1 7.5 9.6 3.6

Med. Rim and Middle East 7.1 3.5 12.5 7.1Eastern Europe 9.0 8.4 7.5 10.0Latam (0.4) (1.2)Asia emerging 3.0 3.1 1.0 1.1Africa 10.0 10.0 10.0 0.0Total Emerging Markets 6.3 2.7 6.1 4.5

Total Group 6.8 4.7 7.6 3.9


Estimated 2005 top line organic growth by producer (%)Lafarge Holcim HeidelbergCement Italcementi

Northern Europe 10.3 3.2 7.7 (0.5)Southern Europe 3.1 3.3 2.4Total Western Europe 5.5 3.3 7.7 2.3North America 14.7 14.8 14.3 15.3Oceania 5.3Asia Mature (5.0)Total Mature markets 7.7 8.2 10.1 4.9

Med. Rim and Middle East 11.4 4.5 19.5 12.5Eastern Europe 13.3 14.0 11.1 20.0Latam 4.1 4.1Asia emerging 6.4 11.7 10.5 10.4Africa 14.9 17.0 14.0 0.0Total Emerging Markets 11.0 8.8 12.4 12.6

Total Group 8.6 8.5 10.9 7.3



Legend

Volume: 2005 projectionPrice: 2005 projectionMain companies: companies in our sample exposed to the country! Strong decrease" Strong increase# Stagnation$ Slight increase% Slight decrease

Western Europe

Weight of European countries in European cementconsumption

2005 comments: stagnating volume but better pricing

Spain 21%

Italy 20%

France 10%

Germany17%

UK6%

>15%> 5%> 3%1% to 2%

Western Europe: cement volume trend

11,000

12,000

13,000

14,000

15,000

16,000

01-97

06-9711

-9704

-9809

-9802

-9907

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-0211

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-05

-4%

-2%

0%

2%

4%

6%

8%

12-mth moving avg. ('000 tonnes) % change

Volume: quarterly base effects

-6%

-4%

-2%

0%

2%

4%

6%

Q1eVol. 2003

Q3e Q1eVol. 2004

Q3 e Q1eVol. 2005

Q3 e

Northen Europe Southern Europe Western Europe

A less favourable base effect, but firm demand Cement demand in Europe remains firm in most of the countrieswith low interest rates, which support residential construction andinfrastructure spending beneficial to public works. The implementation of the European standard EN 206-1 shouldhelp the cement industry in 2005. The new measure has two majorimplications. First, the dosage of cement required to produce onecubic meter of concrete will increase for certain types of concrete.Second, concrete producers will now be legally bound to comply withthese cement dosages (stricter controls are also in the works). As aresult, the proportion of cement per cubic metre of concrete producedwill increase, which could mean an additional 2% in cementconsumption in the EU in 2005-2006. In turn, this confirms ourconfidence in mature markets exhibiting firm demand, as the volumeof cement consumed by downstream markets (e.g. ready-to-useconcrete, precast and prefabrication) will increase independently ofthe construction cycle, all other things being equal. On our calculations, an additional 5-10kg/m3 of cement onaverage will be necessary to conform to the new standard. Theaverage dosage of cement per cubic metre would thus rise to 285-290kg versus 280-285kg currently. The impact of this new measurewill be gradual, and we are convinced that demand will remain solidin 2005 and 2006 in the European Union, despite a less favourablebase effect in H1 05. This is clearly good newsflow for cement producers, but not asgood for companies producing concrete, which will have to recoverboth cement price increases and the additional cost linked to thehigher dosage of cement within the concrete (cement represents 65%of the raw material cost of one cubic meter of ready mixed concrete). NB: although visible in the national statistics published by tradeassociations, part of the volume benefit will not be seen at aconsolidated level, as intra-group sales should be eliminated betweencement and concrete subsidiaries within the same group.


Price: quarterly base effects Pricing effect is expected to be stronger

-20%

-10%

0%

10%

20%

Q1ePrice 2003

H1 Q4e Q1ePrice 2004

H1 Q4 e Q1ePrice 2005

H1 Q4 e

Northen Europe Southern Europe Western Europe

We have assumed an average 5% pricing effect for westernEurope in 2005, which reflects a high 10% in northern markets and alow 2% in southern markets.

Price hikes announced are particularly high in western Europecompared with recent years and could be explained by:

A catch-up to historical pricing levels on markets impacted byrecent competitive issues (price war in Germany, imports in UK) A catch up to recover H2 04 cost inflation and to offset additionalcost inflation expected in 2005 (all over Europe). Price increases effective on 1 January 2005, whereas in recentyears they were applied in April for some markets.However, two factors could temper this enthusiasm:

Several investigations, started in 2004 for pricing collusion, areunderway in concrete and cement businesses (Netherlands,Switzerland) New entrants have to create their market share in some southerncountries (Italy, Spain) in a more or less stable demand environment,creating a question mark on pricing evolution in these markets.

Main companies: Italcementi (70% of group sales)/Ciments Franais(57%), Cimpor (67%), Titan (60%), Buzzi Unicem/Dyckerhoff (57%),HeidelbergCement (51%), Lafarge (41%), Holcim (30%), Cemex(11%).

Germany: Cement deliveries 2005 comments: continuing pricing recovery in a weak demandenvironment

1,500

2,000

2,500

3,000

01-96

07-96

01-97

07-97

01-98

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07-99

01-00

07-00

01-01

07-01

01-02

07-02

01-03

07-03

01-04

07-04

01-05

07-05

-20%

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-5%

0%

5%

10%

15%


nnn

Volume: %%%% -4% The BDZ, a German cement trade association, recentlydisclosed its forecast of a 4% decrease in domestic cement deliveriesfor 2005, following the 5% expected for 2004. (HeidelbergCementand Dyckerhoff communicated on the same figure).

Prices: """" +20% We expect the pricing recovery to continue. A new increase ofEUR9.5/t has been announced, which represents a 20% increase onthe average EUR46/t expected in 2004. We estimate that spot pricesat the end of December 2004 were between EUR45/t and EUR50/t.Further restructuring (Cemex/RMC) and consolidation(HeidelbergCement bought Teutonia ZW) should help the priceincrease. At the end of 2005, we expect prices to be around EUR55/t,still below their historical level of EUR65/t.

Costs: $$$$ Cost inflation should be tempered by additional use of waste fuel,a better cost structure following the restructuring and logisticsoptimisation (end of unprofitable cross regional deliveries).

Main companies: HeidelbergCement (19% of group sales),Dyckerhoff (46%), Buzzi Unicem/Dyckerhoff (23%), Cemex/RMC(16% of RMC), Lafarge (4%), Holcim (3%).


UK: Cement deliveries 2005 comments: stagnating demand, but strong price increase

800

850

900

950

1,000

1,050

01-97

06-9711

-9704

-9809

-9802

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-0108

-0101

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-0510

-05

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%


Volume: # # # # +/- 1% Cement demand should continue to be more or less stable in2005. The Quarry Product Association is expecting flat volume inConcrete, -1% in Aggregates and -1% in Asphalt. With the new Anglo American cement plant in Buxton, cementproducers and importers will also have to give back market share toTarmac (Anglo Americans UK building materials subsidiary). Imports terminals are penalised by freight rates and the lack ofexport capacity in Europe. However, Aggregate Industries confirmedthey would import 300kt in 2005.

Prices: """" +8% Prices have been stable in the last three years and there is aclear need to make up for this situation and 2004-2005 additional costinflation. Cement producers have announced a 10-15% price increase(GBP6/t). We are more optimistic than a few months ago that 8%could stick, as, since then, concrete producers have announcedsimilar price hikes on the downstream market. Castle Cement is due to hike prices by as much as 15% for itsmaterial from the beginning of 2005. Other producers like RMC, Hanson and Lafarge have announcedcomparable price increases around GBP5/cubic meter of concreteand GBP7/t of cement (from January or March 2005). Tarmacannounced the following price increases: primary quality aggregates7-10%, asphalt 8-11%, ready mixed concrete 9-10%. We also believe that the UK cement industry should regainpricing power, following further consolidation linked to theHolcim/Aggregate Industries and Cemex/RMC deals. The verticalintegration of cement producers within the concrete market, and thedisappearance of two major concrete & aggregates players, shouldgive the cement industry much more control in the market.

Costs: """" Even if combustible waste use increases thanks to the permitsobtained by several plants to burn them, cost inflation will be clearlyhigher than in the rest of Europe (coal market, electricity is up 20% to50%, European directives on transport, mainly affecting UK haulage,CO2 and chromium VI). HeidelbergCement could be impacted by thestart-up costs of its new cement kiln in Padeswood.

Main companies: Lafarge (10% of group sales), HeidelbergCement(4% of group sales), RMC/Cemex (26% of RMC), Hanson (29%),Aggregate Industries (46%).


Belgium: Cement production Benelux. 2005 comments: more restructuring.

250

300

350

400

450

500

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

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-0001

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-0111

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-0312

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-0410

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-0508

-05

-15%

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0%

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10%

15%


Volume: $ $ $ $ +2% In 2004, cement consumption declined 3% in Belgium and wasflat in the Netherlands. Euroconstruct is expecting 8.7% and 2% growth in cementconsumption for Belgium and Netherlands, respectively, in 2005. Weestimate a more modest trend of +2% for both countries.

Prices: % % % % -3% Benelux prices were still under pressure in 2004 due to Germanimports and probably the new grinding capacities launched bytraders. In 2005, despite the pricing recovery in Germany andcapacity closures (HC in Maastricht), we believe some localproducers could aggressively try to gain back the market share theylost in 2003/2004 from German importers, through price decreases.We estimate a 3% price decline for 2005, although one local producerhas already announced a price increase of around 1.5%. We also believe that the outlook for prices is poor in theNetherlands due to the current antitrust investigation. In April 2004,the Dutch anti-cartel authority (Nederlandse Mededingingsautoriteit)began an investigation on 11 concrete companies for pricing collusionover the 1998-2002 period. However, producers are restructuring their assets throughcapacity closure (Maastricht for HeidelbergCement) and headcountcuts, and expect significant savings (Holcim, HeidelbergCement).

Main companies: HeidelbergCement (10% of group sales), CimentsFrancais (6%)/Italcementi (4%), Dyckerhoff (9%)/Buzzi Unicem (4%)and Holcim (5%).

Switzerland: Cement deliveries 2005 comments: decline in volumes and cartel probe

250

260

270

280

290

300

310

320

330

340

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-15%

-10%

-5%

0%

5%

10%


Volume: % % % % -4% Cement demand in 2004 was particularly strong (+7% accordingto the Cemsuisse Association); mainly due to the realisation of thelarge Gothard tunnel project, which should create a challenging baseeffect in 2005. In 2005, Cemsuisse expects a 3-5% year-on-year drop in cementsales. We estimate a 4% decline.

Prices: $ $ $ $ +2%The Swiss anti-trust authority (WEKO) started an investigation inH2 04 on reported pricing collusion among concrete and cementsuppliers for a tunnel in the Alps. Although they deny price fixing, we believe that in such anenvironment, cement producers could reduce the price increase theyneed to recover cost inflation in 2005. We estimate a slight priceincrease of 2%.

Main companies: Holcim (7%).


France: Cement consumption 2005 comments: continuing growth and price increases

1,500

1,600

1,700

1,800

1,900

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%


Volume: $ $ $ $ +2% Cement demand in France increased 5-6% in 2004 helped by agood underlying trend (strong residential construction fuelled byRobien law and social housing programmes), a higher number ofworking days and good weather conditions in Q4 04. In 2005, the base effect should be more challenging even ifunderlying demand remains good. As a result, we expect a 2%increase in volume.

Prices: $ $ $ $ +5% After the 1.5% price increase in 2004, we expect a strong 5%price hike to be implemented in January 2005. It should stick andmore than make up for cost inflation (smaller contribution of animalmeal and higher cost of coal and petcoke). We expect the concrete price to increase by 7%, which reaffirmsour confidence that the cement price increase will stick. Also, theaggregates industry should post a 5% price increase.

Costs: """" We believe that the absolute priority for the French industry willbe to produce more cement, as underlying demand is strong and theutilisation rate saturated. One technical solution to increaseproduction with the current saturated capacity is to switch fromalternative combustibles to common combustibles (coal, petocke), asalternative combustibles impose production constraints. Moreover, the availability of alternative fuels like animal meal hasdecreased on the French market. We believe the strong price increase should make up for cashcost inflation.

Main companies: Lafarge (14% of group sales), Ciments Franais(42%)/Italcementi (27%), Holcim (6%).

Spain: Cement consumption 2005 comments: close to the cycle peak, still adding capacity

1,750

2,250

2,750

3,250

3,750

4,250

01-96

07-96

01-97

07-97

01-98

07-98

01-99

07-99

01-00

07-00

01-01

07-01

01-02

07-02

01-03

07-03

01-04

07-04

01-05

07-05

-5%

0%

5%

10%

15%

20%


Volume: # # # # +/- 0% Demand in Spain was well oriented in 2004, with an expected3.5% increase, following several years of growth. Cemex expects cement volumes to decline 3% in 2005.Residential is expected to decline slightly from its current high levels. We assume flat demand in 2005 at very high levels, owing to adecrease in both private and public housing, and to the CO2 EUdirective on the cement sector. Oficemen, the national trade association disclosed a stablevolume assumption for Spain in 2005. It also mentioned that it hasnot detected any slowdown in public construction, while highlightingthe strength of residential activity. Euroconstruct is more optimisticwith a +3.6% volume forecast.Prices: $ $ $ $ + 3%/4% Our assumption for 2005 is an average increase of 3-4%, butwith differences between regions. We believe that we could see somepricing pressure with the start in Q1 05 of the new Balboa cementplant (1MT to be produced by the Alfonso Gallardo metallurgist groupthat represents 2%e national market share) in Badajoz. Several other projects for new capacity exist even if Spain is atits cycle peak. This creates clear question marks for 2006-2007pricing and market share at time when demand should go down.Costs: """" There is clear uncertainty regarding how the CO2 EU directivewill affect cement industry production costs in 2005. Spain alsomainly burns petcoke whose price is increasing and catching up oncoal. Electricity is expected to increase less than the average 10-15%expected in western Europe.Main companies: Cimpor (24% of group sales), Cemex (11%),Lafarge (4%), Holcim (6%), Italcementi (6%)/Ciments Franais (9%).


Italy: Cement consumption 2005 comments: pricing pressure due to new entrants?

2,500

3,000

3,500

4,000

01-96

07-96

01-97

07-97

01-98

07-98

01-99

07-99

01-00

07-00

01-01

07-01

01-02

07-02

01-03

07-03

01-04

07-04

01-05

07-05

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%


Volume: # # # # + 1% In 2004, volume growth should reach 2%, at the historically highlevel of 45MT. In 2005, we assume that cement consumption will continue todecelerate to reach +1%. According to Euroconstruct, civil works willcontinue to be very well oriented (+3.6%), but residential and non-residential should be weak (+0.5% and -0.8%, respectively). Demand should be different region by region, with better growthin the South and the Islands (infrastructure projects) than in theNorth, where we expect flat volumes.Prices: % % % % - 1% In Q1 05, Cemex will commission two grinding stations, locatednear Parma and Rome for a estimated combined cement capacity of0.7MT. We believe the cement industry could try to push price increasesin regions where Cemex is not starting its grinding stations. Weconsider that the industry will need another 4-5% price increase torecover cost inflation. In the regions where Cemex has to create market share, cementproducers could decide to grant discounts to defend their flatvolumes. It means that the average price increase in Italy could bepoor. We have assumed a 1% decline for 2005.

Costs: """" Italian cement producers will face significant cost inflation in2005. The main cost inflation items should be fuel (Italian producersare more dependent on hydrocarbons than peers and have shorter-term contracts making them more vulnerable during rising costperiods). Also, they will be impacted by the rise in electricity,transport, and the compulsory use of iron sulphate.

Main companies: Italcementi (33% of group sales), BuzziUnicem/Dyckerhoff (29%), Cementir (30%), Cemex by 2005, Lafarge(2%), Holcim (3%).

Portugal: Cement consumption 2005 comments: another year of decline?

500

600

700

800

900

1,000

01-97

06-9711

-9704

-9809

-9802

-9907

-9912

-9905

-0010

-0003

-0108

-0101

-0206

-0211

-0204

-0309

-0302

-0407

-0412

-0405

-0510

-05

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%


Volume: % % % % -2% At the end of October 2004 (last available statistics), cumulatedcement volumes in Portugal were down 2.6%, with a sharp 20.2%drop in October 2004 alone, penalised by a marked decrease inpublic works. As a result, consumption should be down by 3-4% inFY04. After three years of ongoing decline, we assumed a further 2%decrease in 2005 reflecting the poor government budget voted forinfrastructure.

Prices: $ $ $ $ +4% We have assumed that Portugal, as a duopoly, could announcea 3-4% price increase to recover cost inflation. However, there isuncertainty regarding the new 1mt Alfonso Gallardo plant coming onstream in Q1 05, which located at the Portuguese-Spanish border inBadajoz.

Main companies: Cimpor (44% of group sales), Semapa (49%owned by CRH).


Greece: Cement production 2005 comments: end of Olympic games

1,050

1,100

1,150

1,200

1,250

1,300

1,350

01-97

06-9711

-9704

-9809

-9802

-9907

-9912

-9905

-0010

-0003

-0108

-0101

-0206

-0211

-0204

-0309

-0302

-0407

-0412

-0405

-0510

-05

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%


Volume: ! ! ! ! -5% Domestic volume should continue to decline on the back of theend of the 2004 Olympic games. We assumed a 5% declinecomparable to the forecast disclosed by Titan for 2004 and 2005. However, export volume should increase and could easily findbuyers given the currently tight supply environment in severalcountries (USA, Middle East, etc) and the export capacity deficitthroughout the world.

Prices: $ $ $ $ +5% In a consolidated market like Greece, we assumed a priceincrease of 5%, similar to that posted in 2004, to recover cost inflation(Petcoke, electricity, Chromium VI EU directive). Export prices should also increase due to the deficit of exportcapacity across the world.

Main companies: Titan (48% of group sales); Lafarge (3%),Italcementi(2%)/Ciments Franais (3%).

Source: Exane BNP Paribas, trade associations


North America

Market sizes as a % of total consumption

L ake Huron

Lake E

rie

Lake O ntar io

Mi c

higa

n

Lak

e

St.

Law

r enc

e

0

0

200 MI.

200 KM.10050

50 100

Pennsylvania

CT

MA

NJ

DE

RI

MD

S. Carolina

Maine

Louisiana

Alabama

Missi

ssippi Georgia

Kentucky

TennesseeCarolina

North

NHVT

New York

Ohio

IllinoisIndiana

Missouri

Iowa

Wisconsin

M i c h i g a n

Arkansas

F l o r i d a

Southern T e x a s

Minnesot a

Oregon

North

C a l i f o r n i a

Arizona

Nevada

Colorado Virginia W

est

Virgi

nia

Sout h Dako ta

North Dakot a

Wyoming

Idaho

Washington

Arizona

Utah

M o n t a n a

Nebraska

Kansas

South

C a l i f o r n i a

OklahomaNew Mexico

Northern T e x a s 7%

5%

4%1%

1%

4%

1%

1%

1%1%2%

4%

5%5%

1%

2%

Missouri river

Mississippi river

Ohio rive

r

Inter

coast

al

Water

way

Inter

coast

al

Water

way

Main consumption aeras

9%

3%

1%

1%

1% 1%

1% 1%

1%

1%

1%

1%

1% 1%

8%

1%

1%1%

1%

2%

Others aeras

% of total cement consumption

3%3%

5%1%1%

1%

North America: Cement volume trend

7,000

8,000

9,000

10,000

11,000

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%


US Prices: quarterly base effects

-5%

0%

5%

10%

15%

20%

25%

Q1ePrice 2003

Q3e Q1ePrice 2004

Q3 e Q1ePrice 2005

Q3 e

2005 comments: strong pricing and ongoing growth

Favourable base effect for pricing in 2005We assume an average 10-15% pricing effect for North America in2005, which reflects several issues: A catch up on historical pricing levels on markets impacted byrecent competitive issues (capacity additions between 1999 and2003, aggressive imports developed by independent traders). A catch up to recover 2004 and 2005 cost inflation.The Q1 05 base effect will be particularly favourable because: A gradual impact of the two main price increases announced inApril and August 2004. Two new price increases are also expected in2005, whereas historically the industry implemented just one peryear. Price increases will be effective on 1 January 2005, whereasthey have gone through in April in the recent years for most markets.The reasons to believe that these price increases can stick are thefollowing: Imports are less competitive due to the freight rates which areagain at their highest historical spot rates since Q4 04 (USD30/t andUSD50/t to transport 1 tonne of cement from Europe and Asia,respectively, to the USA). No new major capacity addition is planned in the USA before2007-2008, and the tight supply situation (shortages) should continuein 2005. The world cement trading market is showing a clear deficit inexport capacity. Recent consolidation and vertical integration of cement players(Cemex/RMC, Holcim/Aggregate Industries, Lafarge/The ConcreteCompany) implies that the upstream market is gaining control andpricing power on the downstream market.

US volumes: quarterly base effects

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Q1eVol. 2003

Q3e Q1eVol. 2004

Q3 e Q1eVol. 2005

Q3 e

Less favourable base effect for volume in 2005

In 2004, demand remained firm in North America, where a tightsupply situation still exists, and was fuelled by firm residentialdemand which should decline in 2005, the gradual recovery in nonresidential and the support of public works, which should beconfirmed in 2005. Recent reconstruction helped the underlying trendin some regions impacted by hurricanes. The slightly positive outlookon 2005 demand is tempered by the tight supply situation. In 2005,cement producers will again have to demonstrate their ability toincrease imported volume (+13%e in 2004 and +8.6% in 2005according to PCA) in difficult conditions (world deficit of exportcapacity, low availability of bulk carriers, freight at its highest rates).Main companies: Titan (40%), Lafarge (30% of group sales), BuzziUnicem/Dyckerhoff (31%), Cemex (29%), Holcim (21%), CimentsFranais(21%)/Italcementi(13%).


USA: Cement shipments 2005 comments: strong pricing and sustained volume growth

6,000

8,000

10,000

01-96

07-96

01-97

07-97

01-98

07-98

01-99

07-99

01-00

07-00

01-01

07-01

01-02

07-02

01-03

07-03

01-04

07-04

01-05

07-05

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%


Volume: $$$$ +3% Volume growth in 2004 in the USA should reach 3.9%. Cemex expects cement volumes to grow 3% in 2005, despite anexpected 6% decline in residential demand, and thanks to a 5% increaseexpected in public works. The TEA-21 amount for 2005 should be in theUSD34bn range, to which another USD2bn will be added, as this moneywas not used in 2004. The combined USD36bn represents a 15%increase compared to 2003 levels according to Cemex. We assumed 2.5% incremental demand for 2005, comparable to the2.6% forecast of the PCA (Portland Cement Association). However, thecurrent tight supply situation and cement shortages, experienced mainlyin the south-eastern and western states, are creating a question markabout how to supply this additional demand when the utilisation rates ofthe plants are close to 100%. As a result, we believe that the situation in 2005 should becomparable to that in 2004, especially if demand is sustainable.Overseas imports should continue to increase, as local producersabsolute priority will be to supply their market share, even if importsare not profitable with the current freight spot rates. Additionalhandling capacity for barge traffic on the Mississippi River should alsoallow more cement to be shipped from the US gulf region to theNorth.

Prices: " " " " +10% to 15% After the two price increases in 2004 (USD2/t to USD3/t in April,and USD5/t in August), we expect the cement industry to implementtwo new hikes in 2005 (USD6-8/t in January and USD6/t in July). Itrepresents an average 13% price increase for 2005 according to ourcalculations. This increase should help to recover the impacts of costinflation (electricity, coal, and transport) and the zero margin imports. We also expect concrete prices to increase significantly on thedownstream market, even if there is uncertainty regarding thepossibility of immediately passing on raw material cost inflation to thefinal customer. The fluctuating price of cement and raw materialsresulted in 2004 in a tough commercial situation where concreteproducers cannot reliably anticipate production costs. Hanson isexpecting 3-4% price increases for aggregates in 2005.

Costs On top of the energy price increase (both electricity and coal), wehave assumed that import logistics costs will increase with the surgeof freight rates. NB: US cement consumption is still 20% dependenton imports. The saturation of assets for almost 18 months could also createsome additional maintenance costs during the year.

Main companies: Cemex (29% of group sales), Lafarge (21%),Heidelberg (16%), Italcementi (12%)/Ciments Francais (19%), Holcim(13%), Dyckerhoff/Buzzi Unicem (31%).


Canada: Cement production 2005 comments: slight growth but strong price increases

800

900

1,000

1,100

1,200

1,300

01-96

07-96

01-97

07-97

01-98

07-98

01-99

07-99

01-00

07-00

01-01

07-01

01-02

07-02

01-03

07-03

01-04

07-04

01-05

07-05

-4%

-2%

0%

2%

4%

6%

8%

10%

12%


Volume: $$$$ +2% Volume growth in 2004 in Canada was 3.9%. We assume 2% growth in 2005 comparable to the +2.1%forecast of the PCA (Portland Cement Association).

Prices: """" +13% Holcim subsidiary, Saint-Laurent, announced a significant priceincrease of CAD10/t in Ontario and CAD6/t in Quebec for January2005. It represents a 10% increase according to our calculations. Weassume a comparable level for other producers in Canada, whichshould clearly help to recover cost inflation in 2005. We also expect competitive issues in concrete to ease in 2005,after the price war that occurred in 2004.

Main companies: Lafarge (9% of group sales), Holcim (8%),HeidelbergCement (7%), Ciments Francais(2%)/Italcementi (1%).



Latin America

Market sizes as a % of total volumes

J AMA ICAMEXICO

COLOMBIA

GUATEMALA

B ELI

ZE

HONDU RAS

EL SALV ADOR

NICARAGUA

CO S T A

RIC A

PANAMA

C A R I B B E A N S E A

P A C I F I C O C E A N

Gulf ofPanama

Bel mopa n

Teg uc igalpaS a n S a lva

d o r

Managua

P an am a

GUATEMALA

San J os

PA NA MAVENEZUELA

BOLIVIA

WEST INDIES

Caracas

CARIBBEANSEA

GeorgetownParamaribo

Cayenne

Quito

Lima

La Paz

Santiago

Bras lia

Montevdeo

BogotCOLO MBIA

Rio de Janeiro

URUGUAY

Ascunsion

PARAGUAY

PERU

BRAZIL

Buen o s A ires

ECUADOR

CHILE

Guyan a Fr en ch Guy ana

AT LAN T IC

OCEAN

PACIFIC

OCEAN

ARGENTINA

Surinam

U N I T E D S T A T E S

CENTRALAM ERICA

MEXICO

Chihuahua

Guadalajara

Tapachula

0 100

>15%> 5%> 3%1% to 2%

Mexico 26%

Brazil 36%

Argentina 5%

Columbia 5%

Latin America: Cement volume trend

6,000

7,000

8,000

01-97

06-9711

-9704

-9809

-9802

-9907

-9912

-9905

-0010

-0003

-0108

-0101

-0206

-0211

-0204

-0309

-0302

-0407

-0412

-0405

-0510

-05

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%


Latin American prices: quarterly base effects

-10%

-5%

0%

5%

10%

15%

20%

Q1ePrice 2003

H1 Q4e Q1ePrice 2004

H1 Q4 e Q1ePrice 2005

H1 Q4 e

2005 comments: weak pricing and slight recovery in volume

Pricing effect should remain weakSeveral parameters explain our projection of a slight decrease inpricing for 2005 in Latin America. Prices are among the highest in the world in most countries. It should be another year of modest growth in volume for thecontinent, although an improvement will be visible compared to 2004. Governments control prices (Venezuela, Honduras) and havefrozen all price increases for 2005. A few anti-cartel investigationdiscussions are also underway. New entrants and new capacity are coming on stream, puttingprices under pressure (Brazil, Mexico) or leading to preventive warsto discourage newcomers (Colombia). The continuing revaluation of local currencies implies stable ordeclining prices in US dollars or euros.

Ongoing but still modest growthWe expect volume in Latin America to grow by 4%. Modest growth on the two main markets (Brazil and Mexico)which represent 62% of Latin American volume and should grow 3-4%. However, Brazil has started to recover after four years ofcontinuing decline. Continuing recovery of the markets impacted by recent economiccrises (Argentina, Venezuela), but with a less favourable base effect. Growth in other markets.

Main companies: Cemex (56% of group sales), Holcim (24%),Cimpor (13%), Buzzi Unicem/Dyckerhoff (5%), Lafarge (5%).


Mexico: Cement deliveries 2005 comments: modest growth, but weak pricing still an issue

1,750

2,000

2,250

2,500

2,750

3,000

01-96

07-96

01-97

07-97

01-98

07-98

01-99

07-99

01-00

07-00

01-01

07-01

01-02

07-02

01-03

07-03

01-04

07-04

01-05

07-05

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%


Volume: $$$$ +3.5% After a weak H1 04, demand increased in H2 04. Productionsurged by 9.7% in November, still fuelled by residential and publicworks, but also due to a more favourable base effect (weather andworking days). As a result, cement production has surged by 4% in2004. We reproduced the 2004 scenario of a modest increase for 2005,as GDP growth should be comparable for both years. For 2005, weassumed that cement demand could increase by more than 3.5%helped by housing and infrastructure construction. However, Apasco(Holcim subsidiary) recently mentioned that it expects 2.5% volumegrowth in 2005. Cemex expects domestic volumes to rise 4%. We believe that anti-dumping barriers between Mexico and theUSA are unlikely to be removed in 2005. We have not integrated anincrease of volumes that would be driven by additional exports to theUS, despite the shortage situation in North America.

Prices: %%%% -2% to 3% Holcim/Apasco announced a 5% price increase for 2005, a levelcomparable to the February 2004 price increase which did not stick.Cemex announced it wishes to increase prices in step with inflation. Even if we avoid any scenario of a price war, we have adopted amore cautious assumption of -2% to 3% for 2005, comparable to2004, despite additional cost inflation (especially on the transportside). Our main concern remains the 1.3mt capacity addition launchedby Buzzi Unicem/Moctezuma in H2 04 in San Luis Potosi as weexpect the new plant to supply the north east market where prices arethe highest (as in Monterrey). The CDM import project is not a major concern in our view sincethe company was not allowed to unload its first vessel. CDM ispreparing to appeal the embargo decision taken by customs, and isalso preparing to send a second vessel to Mexico. The rumours of aJV between Cemex and CDM could lead to the end of the conflictbetween the two companies. However, high Mexican prices could continue to attract otherimport projects and new entrants in the coming years. Global Cementhas plans for a grinding station project in Guatemala starting in 2005that will export to Mexico.Main companies: Cemex (39% of group sales), Holcim (10%), BuzziUnicem/Dyckerhoff (15%).

Brazil: Cement deliveries 2005 comments: better volume, but weak pricing

1,500

2,000

2,500

3,000

3,500

01-96

07-96

01-97

07-97

01-98

07-98

01-99

07-99

01-00

07-00

01-01

07-01

01-02

07-02

01-03

07-03

01-04

07-04

01-05

07-05

-20%

-10%

0%

10%

20%

30%


Volume: $$$$ +3.5% After three years of decline and a gradual stabilisation of demandin 2004 (decline in H1 and improvement in H2), we expect modestgrowth of 3.5% in 2005 comparable to GDP growth. The smallconstruction segment is expected to push sales.

Prices: %%%% -1% New entrants adding capacity in 2004 and VAT implementationput pricing under pressure in H2 04. Price recoveries are expected in some regions but decreasescould continue in others. As a result, we assume that average pricesin local currency should be slightly down, as prices are stabilising butthe base effect is not favourable (prices declined by 7% in Q3 04 andby 2% in H1 04). More new capacity projects are planned for 2005/2006.Main companies: Cimpor (13% of group sales), Holcim (3%),Lafarge (2%).


Argentina: Cement deliveries 2005 comments: ongoing volume recovery

200

400

600

800

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%


Volume: """" +10% After an 18% increase in 2004, we assumed a +10% for 2005,which is comparable to the figure disclosed locally by Holcimssubsidiary (Minetti). It should help to go back to pre-crisisconsumption levels. Argentina's construction growth is expected to be12% both in 2004 and 2005 according to recent comments by theArgentinean Chamber of Construction.

Prices: #### +/- 0% We expect prices to be stable in an environment where the maincompany, Loma Negra, is officially to be sold, and where rumours ofnew entrants developing grinding station projects or local producers(Petroqumica Comodoro Rivadavia SA) extending capacity areexpected to continue over the next few years.

Main companies: Holcim (1% of group sales).

Colombia: Cement deliveries 2005 comments: a pre-emptive price war?

250

500

750

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%


Volume: $$$$ +5% Consumption is expected to have risen 2.8% in 2004. Colombiais still recovering from a strong decline in 1999. We assume a 5%increase for 2005 to reflect the large programme of transportinfrastructure spending (new roads, highways, ports and tunnels).

Prices: !!!! -5% Despite cost inflation, prices in local currency are down by 5% in2004 due to what we perceive as a pre-emptive war betweenproducers defending their market share and two new entrants addingcapacity. For 2005, we assume a further 5% decline. Moreover, therevaluation of the local currency by more than 6% is not recovered inprices in USD.

Main companies: Cemex (3% of group sales), Holcim (1%).

Venezuela: Cement deliveries 2005 comments: government controls prices

150

250

350

450

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Venezuela % change

Volume: """" +10% Cemex expects volumes to surge 15% in 2005, reflecting afurther step in the recovery. We assume 10% growth for 2005 reflecting a further steptowards recovery following the recent crisis and after the strong+30%e rebound expected for 2004.

Prices: #### +/-0% The government fined the cement industry for pricing collusion in2003. The government has controlled the cement price since August2004, thus we assume that prices will be frozen in 2005, despite thecost inflation environment. The government is also talking about apotential greenfield project of 1mt to be financed with Iranian partners(Venezuela consumes 3-4mt for 6mt capacity and is alreadyexporting its surplus).

Main companies: Cemex (7% of group sales), Holcim (2%), Lafarge(1%).


Chile: Cement deliveries 2005 comments: slight growth, stable prices

200

250

300

350

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%


Volume: $$$$ +3% As medium-sized projects have replaced large infrastructureprojects, we assume modest 3% volume growth for 2005, slightlybelow the 4% expected for 2004.

Prices: #### +/- 0% Better control of imports from Asia, partially due to an exportshortage there, should help to stabilise prices or to increase themslightly in the short term. However, the revaluation of the local currency should not be fullyrecovered in prices in USD. More recently, Cementos Bio-Bio hasannounced capacity extension in its cement business. As a result, we also assume that cost inflation should not be fullyrecovered.

Main companies: Lafarge (2% of group sales), Holcim (2%).

Peru: Cement deliveries 2005 comments: slight increase in pricing

150

250

350

450

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-20%

-15%

-10%

-5%

0%

5%

10%

15%


Volume: $$$$ +5%We assume continuing growth in Peru with a 5% increase in demandfor 2005, following 3.5% expected for 2004.Prices: $$$$ +1%/2% We assume a 1-2% price increase in local currency, as cementprices in local currency are normally indexed to the USD when thereis a devaluation of the Sol. However, we do not expect therevaluation of the Sol (+5%) to put under pressure cement prices inlocal currency.

Main companies: Holcim.

Honduras: Cement production 2005 comments: prices are frozen by government

N/A Volume: """" +5% We assume ongoing growth in Honduras of 5% in 2005 following7% expected for 2004.

Prices: !!!! -5% After the price war due to new entrant Cement America (Cemar),prices in Honduras rose 10% in 2003 and 12% in H1 04. Rumoursare circulating regarding Holcim taking over Cemar. As a result, the government made several decisions in H2 04,which lead us to believe that prices should decline by 5% in 2005despite higher cost inflation (coal, electricity, transport and tax).Honduras has removed duties on imported cement and adopted anexecutive decree that fixed cement prices. The government is alsotalking about a potential anti-cartel investigation. Prices were down by 12.5% in Q3 04. We expect a 5% price decline in 2005.

Main companies: Lafarge, Holcim.


El Salvador: Cement deliveries 2005 comments: back to strong volume growth rates

50

60

70

80

90

100

110

120

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-10%

-5%

0%

5%

10%

15%

20%



Volume: """" 4% Cement consumption in El Salvador grew by a healthy 5.2%average p.a. in 1995-2003. In 2004, consumption slowed, accordingto the latest statistics released by the Central Bank: these reported1.5% growth at end-September, but a 10% decline in the month ofSeptember alone, due to a decrease in public works spending. We have assumed a consumption rebound of 4% in 2005, in linewith the 1995/2003 level.

Prices: #### +/- 0% CESSA is the sole producer in El Salvador and has 90% marketshare with its 1.8mt of capacity. Consequently, prices are very high(USD90/t). In our view, the main threat remains the arrival of a new entrantin Guatemala in 2005. Global cement in Guatemala (owned bySpanish traders and local investors) is starting a grinding stationproject and has built a cement terminal to import clinker. Thecompanys target is to acquire 10% market share in Guatemala in2005 (or an estimated 250kt of cement), and to devote 30% ofproduction to exports (to El Salvador, Mexico and the USA). Globalcement is also planning to act on pricing to create its market share.As a result, even if the volumes concerned are low (250kt) potentialpricing pressures could occur in 2005 in El Salvador. We assume flat prices in 2005.

Main companies: Holcim.


South-East Asia

South-East Asia: Cement volume trend (excludingChina, India and Japan)

2005 comments: weak pricing but good volumes

8,000

9,000

10,000

11,000

12,000

13,000

14,000

01-97

06-9711

-9704

-9809

-9802

-9907

-9912

-9905

-0010

-0003

-0108

-0101

-0206

-0211

-0204

-0309

-0302

-0407

-0412

-0405

-0510

-05

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%


Volume: $$$$ Most South-East Asian markets should continue to see stronggrowth in 2005. However, Malaysia and Philippines should berelatively stable while South Korea continues to decline.

Prices: #### The price outlook is mitigated. Whereas we expect increases inVietnam (recovery of cost inflation), The Philippines (end of price war)and India (strong demand and new taxes), other countries (Indonesia,Thailand, Malaysia, South Korea) should post flat trends due to thecompetitive environment or direct and indirect price controls by localgovernments.

Impact of the tsunami The major question is how the recent tsunami will impactregional GDP growth and national construction output for thecountries that were affected by the catastrophe. We believe that the tsunami will have a marginal positive impacton cement consumption, which is difficult to estimate. However, weconfirm our initial scenario of growth for the region and do not expectthe tsunami to impact the long-term prospects of countries in South-East Asia.We assume the following consequence on demand andprices:Demand. The countries impacted should see a marginal increase incement demand, as reconstruction has already been announced,especially in regions where government or tourist infrastructures(Hotels) have been damaged.Thailand and Indonesia are good examples even if the provincesimpacted represent only 2% of GDP for both countries. Othercountries, like India and Sri Lanka, should not see any major impacton future cement demand as the type of construction destroyed,mainly coastal huts, do not require a lot of concrete. The trend willdepend on whether the government decides to rebuild the temporaryhouses in concrete. However, the track record is poor; althoughcyclones have regularly damaged this type of construction in recentyears, the government has not decided to rebuild huts in concrete.The tsunami has apparently hurt only two cement plants. The Lafargeplant in Sumatra was seriously damaged and will not be reopenedquickly. The Holcim plant in Dewata, Sri Lanka has been shut downsince the disaster but will reopen soon. We do not expect this eventto have any major impact on either groups results in 2005.Price. The tsunami impact on building materials and cement prices ismitigated. In Thailand, the government has decided to freeze priceincreases for at least six months and is even asking for a 15%discount on cement prices for the regions impacted by the tsunami.We also believe that the decision of government-owned cementcompanies to cut Indonesian exports to supply the Aceh region,where the Lafarge plant is damaged and had 90% market share, willaggravate the export/import deficit in cement world trading. Indonesiaremains a major cement exporter.In India, cement price increases have already been announced bywestern region producers following the surge in orders from Gulfcountries heavily dependent on Indian exports to supply the currentconstruction boom. Gulf countries believe that the tsunami impact onIndian consumption could reduce volume to export markets. As aresult, export prices could reach USD45/t (USD35/t for clinker).Main companies: HeidelbergCement (10% of group sales), Holcim(9%), Lafarge (8%), Ciments Franais(7%)/Italcementi (6%).


Indonesia: Cement deliveries 2005 comments: strong growth, but weak pricing?

1,500

2,000

2,500

3,000

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-40%

-30%

-20%

-10%

0%

10%

20%

30%


Volume: " " " " +10% In 2004, cement demand is expected to have increased by 8%,even though the November trend of 1.7% reflected modest activity inthe construction market. With the Indonesian government planning more infrastructureprojects in the next few years, we assume that national demand willgrow by 10% in 2005 after the 8.5% expected in 2004. As a result, several producers are planning to cut their exports toredirect production to the domestic market.

Prices: $$$$ +2% The government recently threatened local producers with a banon cement exports if the cement prices continue to increase, eventhough they are facing strong cost inflation (fuel and coal prices havedoubled over the last 12 months) and in spite of the fact that prices in2004 were up modestly. According to labour unions, if Cemex were allowed to take amajority stake in Semen Gresik (currently controlled by thegovernment), 93% of the industry would be owned by Internationalgroups. Some believe that this is not good for the public, as priceswould increase and government infrastructure projects could behampered. We have assumed a slight increase for 2005, as we believe thatthe government will not accept a price hike greater than 2%.Impact of the tsunami The recent tsunami impacted mainly northern Sumatra. Sumatrarepresents 20% of Indonesian consumption. NB: Aceh representsaround 2% of the Indonesian economy. We believe that it is a supportfor the construction market, but that we should not see anacceleration of demand, which is already expected at a double digitgrowth for the coming year. The Lafarge plant has been closed in this region since thedisaster. It produced 1.3MT, representing 80-90% market share inAceh. The plant is not expected to reopen quickly, even if thegovernment takes action for the plant to resume operations as soonas possible. Indonesia made a contribution of EUR4-5m to Lafargesoperating profit. Lafarge now plans to accelerate the construction of a new plantin Sumatra for additional capacity of 1MT. The closest operating plant is Semen Padang, which belongs toSemen Gresik (government-controlled, and 25.5% owned by Cemex).We believe the plant currently dedicates around 1MT pa of itsproduction to exports, and should now deliver this cement to the Aceharea. Indocement (61% owned by HeidelbergCement) recently statedthat demand will increase in the Aceh region once reconstruction hasbegun, and that they could supply part of the additional demand.

Main companies: HeidelbergCement (8% of group sales), Holcim(2%), Lafarge (


Thailand: Cement consumption 2005 comments: strong growth, but mitigated pricing outlook.

1,000

2,000

3,000

4,000

01-96

07-96

01-97

07-97

01-98

07-98

01-99

07-99

01-00

07-00

01-01

07-01

01-02

07-02

01-03

07-03

01-04

07-04

01-05

07-05

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%


Volume: """" +10% 2004 construction levels were impacted by the combined effectof high steel and oil prices, social unrest in the south and the bird flu.However, consumption grew 12% to 27MT in 2004, with totalproduction up 9.4% to 35MT. After strong Q4 04 demand and 12% volume growth expected forFY04, we believe that 2005 will be driven by the government'sinfrastructure spending (THB1.5 trillion announced for the next 5years). Conversely, private investment has slowed since H2 04. We expect 2005 domestic cement demand to increase by 10% to30MT, still far below the pre-1997 crisis levels of 37MT.

Prices: #### +/- 0% Prices declined in Q3 04, but this probably does not indicate aprice war, as prices have remained steady in the last three months of2004. In 2005, their level will depend on the competitive environment,as TPI Polene appears to be aggressive again. Capacity utilisation is still low around 65% and a question markexists regarding recent announcements of capacity utilisation by TPIPolene and Thai Development group. Also, we see a negative mix effect, especially in northern andnorth-eastern Thailand, which account for 30-40% of total sales.Cement companies there are introducing new products like mortarcement, with lower clinker content than mixed cement, and sold at alower price. However, this cement has limited applications and do notfully compete with classical portland cement. In January 2005, prices in the Bangkok area were up more than2%. Following the tsunami, local prices could be affected (see below).Despite the price increase observed in January, we have assumed aflat price effect in 2005.

Impact of the tsunami The tsunami impacted only the western coast of southernThailand. The affected provinces represent only 2.1% of the countrysGDP, but the impact on tourism (December is a peak season) andthe Thai economy is difficult to measure. The region of Phuket needs to rebuild around 6,000 lodgings andat least 13,000 hotel rooms. However, due to low concreteconsumption for beach bungalows and outdoor hotels, we do notbelieve that the long-term trend of the Thai cement market willchange. The impact on pricing should be more visible with recentgovernment comments on price controls in the six southern provinceswith increases to be frozen by at least six months or on 5-15%discounts imposed on cement prices. The most exposed cementcompany is the local Siam Cement, holding 70% market share in thatregion.

Main companies: Italcementi (4% of group sales)/Ciments Franais(5%), Holcim (2%).


Malaysia: Cement production 2005 comments: stabilisation and ongoing pricing pressure

500

1,000

1,500

2,000

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%


Volume: $$$$ +1% Steel shortages and the end of big projects impacted cementdemand in 2004. We expect a gradual improvement in 2005 andmore or less stable demand over the full year. After a strong 2003, we expect a 1% increase, as thegovernment has announced public works spending.

Prices: #### +/- 0% Prices are controlled by the government with a maximum price inKuala Lumpur of MYR198 or USD55/t. Currently, producers areapplying rebates of 15% to 20%. With YTL acquiring Perak Hanjoong, recent market consolidationcould favour a better management of the assets and help pricesincrease up to the level fixed by the government. However, we have assumed flat prices in 2005. Moreover, therecent announcement by Lafarge to reactivate 0.8MT of mothballedgrinding capacity could be perceived by YTL as an aggressivecapacity addition.

Main companies: Lafarge (3% of group sales), Holcim (


Philippines: Cement deliveries 2005 comments: aggressive imports threat?

750

1,000

1,250

01-96

07-96

01-97

07-97

01-98

07-98

01-99

07-99

01-00

07-00

01-01

07-01

01-02

07-02

01-03

07-03

01-04

07-04

01-05

07-05

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


Volume: #### +1% As in 2004, the Philippines should be more or less stable withvery little volume growth expected for 2005. However, a recentlyannounced government plan to increase spending on infrastructure isencouraging.

Prices: """" +12% Prices are currently protected from the aggressive behaviour ofimporters which led to a price war in 2003 - by tariffs on importedcement. The Cement Manufacturers Association of the Philippineshas asked the government to extend the current tariff (PHP15.60 per40-kilogram bag, i.e. EUR0.22) for another four years. After the first step in a price recovery of +28% following the 2003price war, we expect 2005 prices to increase by another 12%. Thisreflects the price hikes announced last year. However, further price increases are unlikely, and spot pricesshould remain more or less stable throughout the year. Restructuringprogrammes have finished at Lafarge and Holcim, which should helpreduce the impact of cost inflation.

Main companies: HeidelbergCement (2% of group sales), Lafarge(1%), Holcim (1%).

South Korea: Cement consumption 2005 comments: weak demand and pricing pressure

3,000

4,000

5,000

6,000

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%


Volume: !!!! -5% Construction orders in Q2 04 fell by nearly a third from a yearearlier because of a soft local economy, following a 14.2% drop forthe first quarter, according to government data. We understand thatH2 04 trends continued to deteriorate significantly, as the policystarted in June 2003 by the government to stabilise the housingmarket is still resulting in an ever-dwindling number of buildingpermits. Given very weak activity, Ssangyong Cement Industrial andLafarge Halla Cement, the country's largest cement makers,temporally shut production lines for maintenance work during H2 04.This kind of job is usually done in the winter, but current stocks are sohigh that the storage capacity is saturated, and inventories cannot besold in this weak demand environment. We believe these conditions should persist in 2005, and weexpect volumes to be down 5%.

Prices: #### +/- 0% Imports from China continued to increase significantly throughoutH2 04. Importers are gaining market share from local producers andintensifying competition. Two big producers (Yoojin Remican and AjuIndustry) have developed their own cement grinding capacity. Despite cost inflation, prices were under pressure in 2004 andwe believe that there is no scope for price increases in 2005: weexpect prices to be broadly flat.

Main companies: Lafarge (2% of group sales).


China: Cement production 2005 comments: lower growth and pricing pressure

20,000

45,000

70,000

95,000

01-99

05-99

09-99

01-00

05-00

09-00

01-01

05-01

09-01

01-02

05-02

09-02

01-03

05-03

09-03

01-04

05-04

09-04

01-05

05-05

09-05

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%


Volume: """" +7% Chinese cement output is expected to be up 14% in 2004.Cement exports increased for the first time since 1997, and reached4.4MT, up 17% at the end of September. Nonetheless, from a peak of 33.5% in February growth slowedquickly month-on-month to 10% in August and 9.7% in September.This is due to the recent governments decision to ease economicgrowth. In 2005, domestic demand for building materials should generallyremain brisk. On the export side, the recovery of the economies inneighbouring countries should boost demand for Chinese buildingmaterials. We expect a 7% rise in demand for 2005 to reflect continuinggrowth.

Prices: !!!! -5% Average cement prices have declined sharply at the end of 2004due to capacity expansions, according to government and companyofficials, from 310 yuan (USD37.5) in July-August, but to 265 yuan(USD32) in September-October and 245 yuan (USD29.6) inDecember. The biggest drop in cement prices was in eastern China andBeijing, where production capacity expanded extensively. For 2005, we assume that prices should remain under pressureowing to an unfavourable base effect and new capacity additions. Weexpect a 5% decline.

Main companies: Lafarge (1% of group sales), HeidelbergCement(


India: Cement deliveries 2005 comments: strong volumes and prices

4,000

6,500

9,000

11,500

01-96

06-9611

-9604

-9709

-9702

-9807

-9812

-9805

-9910

-9903

-0008

-0001

-0106

-0111

-0104

-0209

-0202

-0307

-0312

-0305

-0410

-0403

-0508

-05

-10%

-5%

0%

5%

10%

15%

20%


Volume: """" +6% Although construction demand was hampered in 2004 by a sharprise in steel prices - mainly in the south of India and a shortage ofriver sand, we expect cement consumption to have risen by around6% in 2004, helped by intense road and highway construction works. On top of growing domestic demand, cement producersbenefited from a 15% surge in exported volumes, mainly towards theMiddle East and Gulf countries, where demand is booming (11MTwere exported). This phenomenon should continue in 2005. In 2005, the expected growth in housing and infrastructuresectors should push up demand for cement by another 6% based onour assumptions.

Prices: """" +6% In the last three months, prices have been mostly stable in India. We believe ex-works prices should increase by 5-10%nationwide, even in the south, which represents 30% of the Indianmarket and has traditionally been a tough market in terms of pricing. Delivered prices should also increase following the decision ofthe authorities to increase taxes on cement by another 15%. We expect the price effect for cement companies to be around6% in 2005.

Impact of tsunami: India has been impacted in the southern provinces of Tamil Naduand Kerala, as well as in the Nicobar and Andaman islands. The totalimpact of the disaster could amount to USD1.2bn. However, the additional volume will depend on the decision ofthe government to rebuild in concrete the temporary huts and housesdestroyed by the catastrophe. However, local opinion is sceptical, ascyclones have regularly destroyed this type of construction in therecent years without prompting the government to change its policy. Itis more likely that people will rebuild huts on their own, and cementproducers are projecting only a small incremental demand followingthe tsunami. Allegedly, following the catastrophe, some local companies havedecided to increase the price of 50kg bagged cement by INR20 toINR30 (USD0.45 to USD0.68), the equivalent of a USD11/tonne priceincrease. Cement traders have confirmed these price increases, butcement producers have not. Local demand in the Gujarat state could lead to a cut inshipments towards the Mumbai states, creating shortages. Theconsequence on export prices should be visible after the recentincreases announced by producers in Gujarat and western regionswhich supply the Gulf countries. Fearing a drop in cement exportsfrom India and South-East Asia because of reconstruction, Gulfcountries ordered large quantities of cement from Indian producerswho increased their prices by 20 to 25 RS/bag of 50 kilos, theequivalent of a USD11/tonne price increase. As a result export pricescould reach USD45/t price (USD35/t for clinker).

Main companies: Lafarge (2% of group sales), Ciments Franais(2%) /Italcementi (1%); Holcim (1%, in the process of acquiring astake in ACEL (2MT) and ACC (18MT).


Japan: Cement consumption 2005 comments: restoring prices in a still weak environment

3,500

5,000

6,500

8,000

01-96

07-96

01-97

07-97

01-98

07-98

01-99

07-99

01-00

07-00

01-01

07-01

01-02

07-02

01-03

07-03

01-04

07-04

01-05

07-05

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%



Volume: %%%% -1% Cement consumption in Japan has declined significantly in thepast

05 cement bnp

Documents

cement margins

neutral target price

outperformtarget price

cement companies

cement markets

cement consumption

entire cement scenario

mat e price indexdj