fiimpact of developments in the global cement...
TRANSCRIPT
Equities
Exane BNP Paribas Building materials & Construction
�Impact of developments in the global
cement industry on US imports�
December 2006
[email protected] Godet +33 1 42 99 52 06 [email protected] Pinatel +44 207 039 94 67 [email protected]
Equities2
Construction and Building Materials European team
Arnaud Pinatel (London) :
✉ [email protected] ☎ +44 207 039 94 67 / mobile : +44 77 95 528 372
Arnaud Pinatel, 40, graduated in Economics from the Sorbonne University in Paris and went on to gain the French SFAF qualification (French financial analysts� association). Arnaud began his career at Group Ciments Vicat (1992-1997) where he worked first as a financial controller and later as a strategic assistant to the Chairman of the Group. In 1997 he moved to Oddo Equities in Paris as an equity analyst covering the Building Materials sector on a Pan-European basis. Arnaud joined BNP Paribas in London in July 2001 and heads the European Building Materials and Construction team at Exane BNP Paribas.
Nicolas Godet (Paris) :
✉ [email protected] ☎ +33 1 42 99 52 06 / mobile : +33 6 08 23 97 19
Nicolas Godet, 28, graduated from ESSEC in Paris in 2001. He started his career at Lazard Asset Management as a junior analyst covering small & mid-cap companies. He joined Exane�s Midcap team in 2002 and then spent a year at the company�s New York subsidiary covering S&P stocks. Nicolas joined Exane�s Building Materials and Construction team in August 2003.
Steven Fernandez (Paris) :
✉ [email protected] ☎ +33 1 42 99 25 17 / mobile : +33 6 08 35 86 18
Steven Fernandez, 31, received his BA in political science in 1997, and his MIA in international banking and finance in 2001, both from Columbia University in New York. He started his professional career working in Brio Capital, a New York-based venture capital firm, as an investment analyst. In 2002 he joined Exane's utilities team as a research analyst, and after 2 years moved to Grupo Santander in Spain where he covered both utilities and concessionaire stocks. Steven joined Exane BNP Paribas' construction team in August 2006. .
Equities3
Impact of developments in the global cement industry on US imports
Introduction on the cement trading market World trading map and economics of imports
1. US imports and global cement trends depend upon one anotherImports are critical to the US cement industry��and the global cement industry is critical to US imports2007: still a favorable environment in the US�� but exporters to the US may suffer from the US slowdown
2. Global picture: increasing export availability, decreasing import needs Global 2007 volumes and price trends A new wave of capacity in several regionsBoth imports and exports markets are increasing their capacityThe global supply/demand ratio will depend on China
5. New price differentials lead to new exports strategyThe global map of cement prices has changedNumerous players target the US import marketFocus on Cemex offer on Rinker
6. What reaction from US cement players? Vertical integration!The rationale of vertical integrationSeveral triggers for further vertical integration
Conclusion
Thank you for attending my presentation !
Summary:
Equities4
Import
Export
30mt
25mt
5.5mt
2.5mt22mt4mt
5.2mt
5mt
15mt
2mt
22mt (ow China = 8-10mt)
15mt
Intra regional flow
Long distance flow
4mt
1.8mt
(Source : Exane BNP Paribas estimates)
35mt
2mt
World cement trading5% of the world production is traded- Main importers: US (30%), Spain (9%), GCC (9%),Vietnam/Nigeria (5% each), Bangladesh (4%)- Main exporters: China (28%), Thailand (10%), Japan(9%), India (7%), Egypt (6%), Taiwan (5%), Indonesia (5%)
Terminals
Imports & exports
Equities5
Economics of imports:Value chain of 1 tonne of cement exported from China to the US
Equities6
Impact of developments in the global cement industry on US imports
Introduction on the cement trading market World trading map and economics of imports
1. US imports and global cement trends depend upon one anotherImports are critical to the US cement industry��and the global cement industry is critical to US imports2007: still a favorable environment in the US�� but exporters to the US may suffer from the US slowdown
2. Global picture: increasing export availability, decreasing import needs Global 2007 volumes and price trends A new wave of capacity in several regionsBoth imports and exports markets are increasing their capacityThe global supply/demand ratio will depend on China
5. New price differentials lead to new exports strategyThe global map of cement prices has changedNumerous players target the US import marketFocus on Cemex offer on Rinker
6. What reaction from US cement players? Vertical integration!The rationale of vertical integrationSeveral triggers for further vertical integration
Conclusion
Thank you for attending my presentation !
Summary:
Equities7
Middle East + India0%
Northern Europe5%
Central & Eastern Europe
0%
Americas35%
Others0%
Asia excl China22%
China26%
Med Rim12%
Imports are critical to the US industry�1) 30% of US consumption is imported � imports are mainly controlled by domestic producers2) Several states import much more than the US average3) A swing factor on volumes in case of downturn4) The main source of imports is Asia
Evolution of US imports versus US cement consumption
Source: Exane BNP Paribas estimates-10000
-8000
-6000
-4000
-2000
0
2000
4000
6000
8000
10000
1980
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Imports change (mt) Consumption change (mt)
Dependence on imports in the US
> 40% of demand relying on imports> 30%> 20%> 15%
No overseas imports
Lake Superior
Lake HuronLake ErieLake Ontario
Mic
higa
nLa
ke
PennsylvaniaCT
NJE
RI
S. Carolina
Maine
Louisiana
AlabamaMiss
issipp
i
Georgia
KentuckyTennessee CarolinaNorth
VTNew York
OhioIllinoisIndiana
Missouri
Iowa
WisconsinM i c h i g a n
Arkansas
F l o r i d a
T e x a s
Minnesota
Kansas
Oregon
C a l i f o r n i a
Arizona
NevadaNebraska
Colorado VirginiaWest
Virginia
Oklahoma
South Dakota
North Dakota
WyomingIdaho
Washington
New MexicoArizona
Utah
M o n t a n a
Cemex18%
Rinker7%
Heidelberg14%
Holcim12%
Taiheyo12%
Lafarge9%
Buzzi/Dyckerhof4%
Titan3%
Florida Rock3%
Local prodcers
12% Other6%
Estimated market shares of US cement importsMain sources of US cement imports
Equities8
3$/t
75 to 80%
80 to 90%
90 to 100%
no data
60 to 75%
< 60%
(Sources : Exane BNP Paribas estimates)
Cement surplus can not beexported
Export facilitiesare saturated
ObsoleteTechnology
Cement exports increased in China
Export facilitiesare saturated in South East Asia
Shortagesand strongincrease of
imports
Export cuts//CO2
3$/t
75 to 80%
80 to 90%
90 to 100%
no data
60 to 75%
< 60%
75 to 80%
80 to 90%
90 to 100%
no data
60 to 75%
< 60%
(Sources : Exane BNP Paribas estimates)
Cement surplus can not beexported
Export facilitiesare saturated
ObsoleteTechnology
Cement exports increased in China
Export facilitiesare saturated in South East Asia
Shortagesand strongincrease of
imports
Export cuts//CO2
Cement Volume growth in 2005 : +4%e (excl. China)
Cement Volume growth in 2006 : +5%e (excl. China)
The global industry is critical to US imports (1)1/ Consumption has risen globally2/ Demand for imports has boomed3/ Little additional capacity has been commissioned recently⇒ Consequently, the industry has been saturated and pushed domestic and export prices
0
5
10
15
20
25
30
35
40
1980
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
0%
5%
10%
15%
20%
25%
30%
USA Total Imports USA as % of World Trading
USA cement imports have increased (mt) �
Cement Capacity Utilization rates (2005)
Equities9
The global industry is critical to US imports (2)4/ Freight rates have soared5/ Importing countries� currencies have appreciated versus the dollar5/ US Import prices and US domestic selling are correlated => US prices are depending on global industry trends (= FOB + CIF)
40
45
50
55
60
65
70
75
80
85
90
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Total CIF prices Domestic Prices
US cement prices (USD/t) :Parity between imports and domestic prices
Components : FOB+ Freight=CIF
Maritime Freight spot prices (USD/t)
15.00
25.00
35.00
45.00
55.00
65.00
Apr-01
May-01
Jun-01
Jul-01
Aug-01
Sep-01
Feb-02
Jun-02
Oct-02
Feb-03
Jun-03
Oct-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
10 .00
15.00
20.00
25.00
30.00
35.00
So uth East A sia-US Gulf H andymax T ransat lantic US East C o ast-US Gulf H andysize
US$ / to nne o f cement
⇒ US cement price effect:+
! + 12% to +18% in 2005
! + 15% in 2006e
! +10% announced for 200790.0
95.0
100.0
105.0
110.0
115.0
Dec
-04
Feb-
05
Apr
-05
Jun-
05
Aug
-05
Oct
-05
Dec
-05
Feb-
06
Apr
-06
Jun-
06
Aug
-06
Oct
-06
Dec
-06
Egyptian pound EUR Thai Bath
EURO, Thai bath, Egyptian pound rate versus USD
Equities10
1400
1600
1800
2000
2200
2400
31/0
1/19
98
31/0
1/19
99
31/0
1/20
00
31/0
1/20
01
31/0
1/20
02
31/0
1/20
03
31/0
1/20
04
31/0
1/20
05
31/0
1/20
06
PCA 2007 volume scenario for the US cement 1) PCA expects flat volume in 2007 due to higher cement intensity2) We understood that cement intensity could represent a 2% impact in 2007
NEW HAMPSHIREVERMONT
MASSACHUSETTS
IDAHO
ARIZONA
UTAH
MONTANA
WYOMING
NEW MEXICO
COLORADO
ALABAMA
FLORIDA
SOUTHCAROLINA
TENNESSEE
KENTUCKY
INDIANAOHIO
NORTH CAROLINA
SOUTH DAKOTA
KANSAS
NEBRASKA
MINNESOTA
WISCONSIN
IOWA
ILLINOIS
MISSOURI
ARKANSAS
MISSISSIPPI
OKLAHOMA
NORTH DAKOTA
OREGON
CALIFORNIA
NEVADA
WASHINGTON
TEXAS
MICHIGAN
LOUISIANA
GEORGIA
PENNSYLVANIA
MAINE
VIRGINIA
NEW YORK
RHODE ISLAND
CONNECTICUT
WESTVIRGINIA DELAWARE
MARYLAND
NEW JERSEY
5%< Decline < 15%
0% < Decline < 5% Stagnation0%< Growth < 5% 5% < Growth < 15%
Decline > -15%
Growth > 25%
-63%
-33%
-27%
-10%
-8%
-8%
-7%
-6%
-5%
-4%
-4%
-2% -1%
-1%
3%
3%
3%3%
4%
4%
5%
6%
6%
10%
10%
10%
11%
11%
12%
14%
15%
17%
18%
20%20%
23%
27`%36`%
84%
-14%
-12%-44%
5%
NEW HAMPSHIREVERMONT
MASSACHUSETTS
IDAHO
ARIZONA
UTAH
MONTANA
WYOMING
NEW MEXICO
COLORADO
ALABAMA
FLORIDA
SOUTHCAROLINA
TENNESSEE
KENTUCKY
INDIANAOHIO
NORTH CAROLINA
SOUTH DAKOTA
KANSAS
NEBRASKA
MINNESOTA
WISCONSIN
IOWA
ILLINOIS
MISSOURI
ARKANSAS
MISSISSIPPI
OKLAHOMA
NORTH DAKOTA
OREGON
CALIFORNIA
NEVADA
WASHINGTON
TEXAS
MICHIGAN
LOUISIANA
GEORGIA
PENNSYLVANIA
MAINE
VIRGINIA
NEW YORK
RHODE ISLAND
CONNECTICUT
WESTVIRGINIA DELAWARE
MARYLAND
NEW JERSEY
5%< Decline < 15%
0% < Decline < 5% Stagnation0%< Growth < 5% 5% < Growth < 15%
Decline > -15%
Growth > 25%
-63%
-33%
-27%
-10%
-8%
-8%
-7%
-6%
-5%
-4%
-4%
-2% -1%
-1%
3%
3%
3%3%
4%
4%
5%
6%
6%
10%
10%
10%
11%
11%
12%
14%
15%
17%
18%
20%20%
23%
27`%36`%
84%
-14%
-12%-44%
5%
NEW HAMPSHIREVERMONT
MASSACHUSETTS
IDAHO
ARIZONA
UTAH
MONTANA
WYOMING
NEW MEXICO
COLORADO
ALABAMA
FLORIDA
SOUTHCAROLINA
TENNESSEE
KENTUCKY
INDIANA
OHIO
NORTH CAROLINA
SOUTH DAKOTA
KANSAS
NEBRASKA
MINNESOTA
WISCONSIN
IOWA
ILLINOIS
MISSOURI
ARKANSAS
MISSISSIPPI
OKLAHOMA
NORTH DAKOTA
OREGON
NEVADA
WASHINGTON
TEXAS
MICHIGAN
LOUISIANA
GEORGIA
PENNSYLVANIA
MAINE
VIRGINIA
NEW YORK
RHODE ISLAND
CONNECTICUT
WESTVIRGINIA
DELAWARE
MARYLAND
NEW JERSEY
5%< Decline < 15%
0% < Decline < 5% Stagnation0%< Growth < 5% 5% < Growth < 15%
-26%
Decline > -15%
Growth > 25%
-16%
-28%
-25%
-25%
-24%
-23%
-22%
-21%-20%
-19%-19%
-17%
-17%
-16%
-16%
-12%
-9%
-8%
-7%
-7%
-7%
-6%
-5%
-4%-4%
-2%
-2%
-1%1%
1%
2% 3%
4%
4%
5%
7%12%
8%
35%
CALIFORNIA
NEW HAMPSHIREVERMONT
MASSACHUSETTS
IDAHO
ARIZONA
UTAH
MONTANA
WYOMING
NEW MEXICO
COLORADO
ALABAMA
FLORIDA
SOUTHCAROLINA
TENNESSEE
KENTUCKY
INDIANA
OHIO
NORTH CAROLINA
SOUTH DAKOTA
KANSAS
NEBRASKA
MINNESOTA
WISCONSIN
IOWA
ILLINOIS
MISSOURI
ARKANSAS
MISSISSIPPI
OKLAHOMA
NORTH DAKOTA
OREGON
NEVADA
WASHINGTON
TEXAS
MICHIGAN
LOUISIANA
GEORGIA
PENNSYLVANIA
MAINE
VIRGINIA
NEW YORK
RHODE ISLAND
CONNECTICUT
WESTVIRGINIA
DELAWARE
MARYLAND
NEW JERSEY
5%< Decline < 15%
0% < Decline < 5% Stagnation0%< Growth < 5% 5% < Growth < 15%
-26%
Decline > -15%
Growth > 25%
-16%
-28%
-25%
-25%
-24%
-23%
-22%
-21%-20%
-19%-19%
-17%
-17%
-16%
-16%
-12%
-9%
-8%
-7%
-7%
-7%
-6%
-5%
-4%-4%
-2%
-2%
-1%1%
1%
2% 3%
4%
4%
5%
7%12%
8%
35%
CALIFORNIA
Housing Permits Q1 06: +5%
Q2 06: -10%
(Source : Exane BNP Paribas estimates)
115,000
120,000
125,000
130,000
135,000
140,000
145,000
2004e 2005e 2006e 2007e 2008e 2009e 2010e
Spring 2006 Summer 2006 Fall 2006 Forecast exl. Cement intensity
Total Cement demand in USA
135mt
131mt
128mt
125mt
Housing starts
Q3 06: -24%9m: -11%10m: -12%
Equities11
Impact of US slowdown on global export flows1/ US slowdown should lead to decreasing imports2/ European, Canadian and Mexican imports are captive; Mexican importsshould increase3/ Consequently Asian imports, mainly from China and Thailand should be redirectedNote: Even flat volumes would lead to decreasing imports
Domestically = potential pricing pressures in Thailand and China, as they are both potentially the most impacted markets.
Internationally : In some markets (Africa, Middle East, Asia-Oceania Spain�), prices could be capped or under pressure , but high freight rates are still a �firewall� in 2007 ?
China and Thai cement imports should be cut
Equities12
Impact of developments in the global cement industry on US imports
Introduction on the cement trading market World trading map and economics of imports
1. US imports and global cement trends depend upon one anotherImports are critical to the US cement industry��and the global cement industry is critical to US imports2007: still a favorable environment in the US�� but exporters to the US may suffer from the US slowdown
2. Global picture: increasing export availability, decreasing import needs Global 2007 volumes and price trends A new wave of capacity in several regionsBoth imports and exports markets are increasing their capacityThe global supply/demand ratio will depend on China
5. New price differentials lead to new exports strategyThe global map of cement prices has changedNumerous players target the US import marketFocus on Cemex offer on Rinker
6. What reaction from US cement players? Vertical integration!The rationale of vertical integrationSeveral triggers for further vertical integration
Conclusion
Thank you for attending my presentation !
Summary:
Equities13
Cement Volume in 2007 : our scenario +3.5% to +4% excl. China1) Worldwide tight supply should have disappeared // surplus in Asia due to US imports cuts2) Stable volume in Europe and in USA (US Housing permits // PCA )3) Growth in most emerging markets (oil/commodities)4) Weakness in Asia Oceania
(Sources : Exane BNP Paribas estimates)
DeclineSlight decreaseStagnationSlight growthStrong growthNot covered
+ /- 0%
+0% to +1%
+5%
+10%
+12%+4%
+2%
-3%
+10%
-1%
0%
+5%
WE +1 to 2%
+10%
+7%+6%
+5% to +15%+5%
+7%
+5% to 10% ? 0%
+3%
Latam+4%
NA +0.5%
Sub-Saharan Africa +5 to +7%
Mid. East +10%
Med. Rim +7%
SE Asia(excl. China)
+3%
North Asia(excl. China)
+1.5%
Oceania-1%
-1%
+3%-2%+2%
+1%+2%
+3.5%
+5%
+/-0%+12%
+5%
EE +10%
+10%
+10% to +15%
+6%
Tight supply ?
3%+10%
+6%
+6%
No more tight supply
*** China : no statistics for consumption that we estimate below production trend
SURP
LUS
+5%
No more tight supply
Equities14
Cement Prices in 2007. Our current scenario : +3% to 4% excl.China1) Price increases in USA if freight remains high2) Weakness in China and Asia Oceania (flow back) 3) Moderate price increases in Africa, Latam and Middle East4) Northern Europe recovery (tight supply) + stable Southern Europe (if Spain slows down)
(Sources : Exane BNP Paribas estimates)
Decrease
PressureStagnationIncrease Strong IncreaseNot covered
+/- 0%
+2%
+0%
+0%
+0%
+5%
+6% ?
+0%
+2%
+0%
+0%
+3%
+15%
+2%
+4%
+5%
-1%
Pressures?
Latam+1 to 2%
NA+6%
WE+3.5%
Med Rim+5%
Middle East+5% to +10%?
Sub Saharan Africa+0% to +5%
Competitive issues (market shares, new entrants, Slag, imports�)Governments (ceiling prices/ control/anti-trust investigations)
+10%
+0%
+2%
+10%EE
+6%+3% excl Russia
+0%
+5%
+10%?+5 to 10%
+3%
+5 to +10%+3%
Oceania+0.2%
SE Asia (excl China)
+2%
North Asia(excl. China)
+/-0%
+5%
+0%
+0%
+0%
0%
+0% to +5%
-5%
+5 to +10%
Tight supply ?
SURP
LUS
No more tight supply
Equities15
A new wave of capacity1) Acceleration of capacity addition since 2001 in China and outside China after 20042) More projects are announced between 2005-2010, and not only in China 3) We have listed roughly 770mt of which 170mt without any precise date of commissioning4) Lower barrier to entry (i.e lower cost of equipment) is an incentive to see more capacity addition5) Do we have to expect a surplus in the short term even if long term growth will absorb the capacity?
-50
0
50
100
150
200
1980
e
1981
e
1982
e
1983
e
1984
e
1985
e
1986
e
1987
e
1988
e
1989
e
1990
e
1991
e
1992
e
1993
e
1994
e
1995
e
1996
e
1997
e
1998
e
1999
e
2000
e
2001
e
2002
e
2003
e
2004
e
2005
e
2006
e
2007
e
2008
e
2009
e
2010
e
No
date
World total excluding China China
Projects
(Source : Exane BNP Paribas estimates)
World cement capacity addition 1980-2010 (e)
�Lower barrier to entry is an incentive to see more capacity addition. Chinese technology is 30 to 50% cheaper.�Economics of cement could change (Price/ROCE) if this trend was accelerating . �With this cost advantage, some producers could be tempted to develop long term exports strategies
Chinese technology = Lower �Greenfield� Cost (e)
Low and high range
Equities16
Both imports and exports markets are adding capacity1) Exports availability could increase in the future with new capacity2) Significant projects on exports markets (India, Iran, Pakistan, Russia , Mexico and Turkey �but also on imports markets like GCC, USA, Nigeria, Vietnam3) China should build more capacity to supply an estimated 1.4Bn tonne by 2010 , especially if China is closing 250mt of obsolete technology
New Cement Capacity addition 2005-2010
5 to 10mt
10 to 30mtClosures
3 to 5mt> 30mt 1 to 3mt
<1mt or no project listed
USA30%
Spain9%
GCC9%Vietnam
5%Nigeria
5%
Bangladesh4%
Others38%
Main Seaborne imports markets in 2006
China28%
Thailand10%
Japan9%India
7%Egypt
6%
Taiwan5%
Indonesia5%
Others3%
Black Sea (Romania/Bulgaria/Ukr
aine)
3%
Malaysia2%
Phillipines2%
Colombia2%
Greece4%
South Korea4%
Turkey4%
Scandinavia2%
Venezuela3%
Main Seaborne exports markets in 2006
Equities17
Decreasing import needs: the US exampleAdditional capacity and imports of slag may weigh on the need for US imports=> 22mt of additional capacity projects over 2006/2010=> Some players develop cementitious products imports
-10000
-8000
-6000
-4000
-2000
0
2000
4000
6000
8000
10000
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Imports change (mt) Consumption change (mt)
Evolution of US consumption versus imports (mt)
Source: Exane BNP Paribas estimates
Equities18
! According to the Chinese cement association, demand for cement in China will be 1.4Bn t by 2010 . It implies +7%e average growth p.a. between 2005 and 2010 . It is a lower rate than in the past. ! There is overcapacity and exports have surged from 5mt in 2004 to 35-40mt in 2006 (China received 40mt of orders).! The government is acting : (i) By announcing 250mt of potential closures (ii) By eliminating credit tax on cement exports in the next 3 years. (iii) By confirming that it does not make sense to import energy to export cement . ! The government has also called for regional government agencies to strictly control new projects to curb the excessive growth in fixed-asset investment. ! The government will restructure the industry by supporting selected producers (10 supported by central government and 30 to 40 by local governments) and encourage them to consolidate the industry. New capacity is also more controlled.
The global supply/demand ratio will depend on China1) Chinese producers could be tempted to find new destination for their exports2) However, several actions were approved by the Chinese government to limit export flows3) Depending on Chinese exports flows, the world surplus will be more or less visible by 2010
0
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
1990
1992
1994
1996
1998
2000
2002
2004
2006e
2008e
2010 e
Import needs Export availability (Cement & clinker)
World Surplus if China = 35mt of exports p.a. World Surplus if China = 20mt of exports p.a.
15 to 20mt of surplus by 2010
0
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
1990
1992
1994
1996
1998
2000
2002
2004
2006e
2008e
2010 e
Import needs Export availability (Cement & clinker)
30 to 40mt of surplus by 2010
Equities19
Impact of developments in the global cement industry on US imports
Introduction on the cement trading market World trading map and economics of imports
1. US imports and global cement trends depend upon one anotherImports are critical to the US cement industry��and the global cement industry is critical to US imports2007: still a favorable environment in the US�� but exporters to the US may suffer from the US slowdown
2. Global picture: increasing export availability, decreasing import needs Global 2007 volumes and price trends A new wave of capacity in several regionsBoth imports and exports markets are increasing their capacityThe global supply/demand ratio will depend on China
5. New price differentials lead to new exports strategyThe global map of cement prices has changedNumerous players target the US import marketFocus on Cemex offer on Rinker
6. What reaction from US cement players? Vertical integration!The rationale of vertical integrationSeveral triggers for further vertical integration
Conclusion
Thank you for attending my presentation !
Summary:
Equities20
Relative prices have changed from 1995 to 20051) North American prices are now above South American ones2) Med rim: clear differential between the North and the South3) Asia: clear differential between Australia and South East Asia4) Middle East: clear differentials within the region
70-80 USD/t80-90 USD/t
90-110 USD/t
110 -130 USD/t
> 130 USD/t
No data
50-60 USD/t60-70 USD/t
40-50 USD/t20-40 USD/t
Cement prices in 1995 Cement prices in 2005
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Emerging markets players develop new exports strategies1/ Latin American players are more ambitious than in the past; They are targeting the USA (cost and pricing differentials)2/ They are developing exports strategies, based on captive market shares due to vertical integration into concrete and aggregates and own imports terminals3/ More and more independent US ready-mix players may also wish to control their own import flows
LATAM producers Export strategy to USA
Votorantim invested in a terminal and is exporting from Brazil to USACemex and GCC are planning to export more volume to USA since USA removed tariffs on cement imports from Mexico. Significant capacity addition announced by Cemex in Mexico. Grupo Argos, which acquired ready-mixed concrete and an import terminal in North America targets 12% market share of US imports by 2010 and is increasing clinker capacity in Colombia. June 2006 �We have our own logistics network of ports and fleets , and can source cement (to USA) from differentcountries like Colombia, Venezuela, and Panama�Camargo Correa, Lima and Tupi are reviewing the opportunity to export to USA. USA
The Cemex deal on Rinker:
! We were expecting a vertical integration deal from Cemex⇒ On 14 Sept 06 we wrote: �Does Cemex need more aggregates in the US?�
! Cemex has moved on Rinker (concrete, aggregates and cement producer, with 80% of sales in the US, o.w>50% in Florida)
! Our understanding of the deal � if completed � is that it will:⇒ Replay the very successful integration of RMC (synergies, FCF accretion)
⇒ Create additional captive cement market share through concrete,at a time when Cemex could increase Mexican exports
⇒ Allow Cemex to further protect its US cement market share by increasing its vertical integration
⇒ Reinforce exposure to fast-growing markets like Florida, Arizona and Nevada
⇒ Increase the medium-term financial fire-power of Cemex, in the wake of the consolidation
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Cemex/Rinker Cement + Aggregates + Concrete
Lake HuronLake Erie
Mic
higa
n
Lake
S. Carolina
Louisiana
Alabama
Miss
issipp
i
Georgia
Kentucky
TennesseeCarolina
North
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
Minnesota
Oregon
North
C a l i f o r n i a
Arizona
ColoradoVirginia
West
Virginia
South Dakota
North Dakota
Wyoming
Idaho
Washington
Utah
M o n t a n a
Nebraska
Kansas
South
C a l i f o r n i a
Oklahoma
New Mexico
Northern T e x a s
Arizona
Nevada
Lake Ontario
Pennsylvania
CT
MA
NJ
DEMD
Maine
NHVT
New York
RI
123
4170
66
10 � 20 concrete plants
<10 concrete plants
> 20 concrete plants
10 � 20 quarries
<10 quarries
> 20 quarries
Concrete/Aggregates/Cement:
> 1mT
0.5 � 1 mT
< 0.5 mT
Cemex
Concrete products
Rinker
cement terminal
10
28
14
11
12
92
48
10
26
6
4
5
5
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What strategy for the mainland China and Taiwanese players?1/ Chinese producers have been relying more and more on exports2/ Their main export markets have been the US, the Middle East and Nigeria, whichimport needs are set to decrease3/ We believe they could try to find new markets AND to secure some market share by vertical integration
May 2005 �By comparison with the China market, export markets yield higher profit margins, and so many China cement suppliers have shifted their focus towards supplying overseas markets. Industry players with international sales experience and superior product quality possess a definite advantage, especially those operating with private jetties..�
0.0
0.5
1.0
1.5
2.0
2.5
3.0
01-03
07-03
01-04
07-04
01-05
07-05
01-06
07-06
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
Chinese exports: fast growth
0
10
20
30
40
China
Thailand
Japan
India
Taiwan
Indonesia
South Korea
Malaysia
Philippines
USA Middle East Spain Nigeria Bengladesh Vietnam Others
Asian cement markets main exports destination (mt estimated)
1st example Taiwan Cement : TCC is applying for EU certification to export to Eastern and southern Europe by 2007 thinking : (i) that CO2 emissions legislation is creating opportunities (ii) that European prices are higher than in USA. (iii) that U.S. import market situation should be reassessed due to the removal of tariff on Mexican cement.
2nd example Chia Hsin: Encouraged by the recent rise in international cement prices and a significant increase in its earnings coming from its exports, Chia Hsin Cement Corp ( Taiwan) is planning to export 100% of its output from its two plants in mainland China beginning from 2007 .
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Impact of developments in the global cement industry on US imports
Introduction on the cement trading market World trading map and economics of imports
1. US imports and global cement trends depend upon one anotherImports are critical to the US cement industry��and the global cement industry is critical to US imports2007: still a favorable environment in the US�� but exporters to the US may suffer from the US slowdown
2. Global picture: increasing export availability, decreasing import needs Global 2007 volumes and price trends A new wave of capacity in several regionsBoth imports and exports markets are increasing their capacityThe global supply/demand ratio will depend on China
5. New price differentials lead to new exports strategyThe global map of cement prices has changedNumerous players target the US import marketFocus on Cemex offer on Rinker
6. What reaction from US cement players? Vertical integration!The rationale of vertical integrationSeveral triggers for further vertical integration
Conclusion
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Summary:
25Equities
Vertical integration : the Concrete Value Chain=> an efficient answer to imports
AGGREGATESCEMENT
READY-MIXED CONCRETE
RESIDENTIALNON RESIDENTIALPUBLIC CONSTRUCTION
ASPHALTPRECAST-CONCRETE
75%
13% 12%40% 10%45% 5%
UPSTREAM
ROIC Cement & Aggregates: 10-15%
Carte like behaviour?High margins (15-35%)
High entry barriers
DOWNSTREAM
ROIC Concrete : 10-15%ROIC Distribution:15-20%
Less Pricing Power?Low margins (6-8%)Lower entry barriers
FINAL MARKETS
ROIC Construction: -5% to +20%
Bid on up-front cost basisLow margins (2-4%)Low entry barriers Cement : 50%
Aggregates : 50-60%Cement : 20%Aggregates : 20-25%
Cement : 30%Aggregates : 20-25%
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If Cemex is successful on Rinker, the vertical integration process could accelerate in the coming months, as:
1. The cement industry currently has a huge FCF generation and is willing to reinvest it
2. The Cemex deal would create a gap between Cemex�s FCF and peers⇒ Cement producers may want to close the gap with Cemex in terms of FCF generation
3. Cemex is becoming more and more a client of cement competitors.⇒ Cement producers will likely integrate further to rebalance the situation
4. Some will likely want to increase vertical integration to protect their market share versus imports⇒ Especially the ones with limited downstream exposure
⇒ Big majors have expressed their wish to increase significantly their exposure in US aggregates
5. Cement producers have 2 other incentives to accelerate their vertical integration:⇒ Local concrete/aggregates players could arbitrage in favor of external growth instead of share buy-back programs
⇒ The continuing process of vertical integration by cement exporters from Latin America today and potentially from Asian producers tomorrow: will Chinese and Taiwanese invest into import units and concrete in the US to sustain their long term export strategy?
Several triggers for further consolidation
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Impact of developments in the global cement industry on US imports
Introduction on the cement trading market World trading map and economics of imports
1. US imports and global cement trends depend upon one anotherImports are critical to the US cement industry��and the global cement industry is critical to US imports2007: still a favorable environment in the US�� but exporters to the US may suffer from the US slowdown
2. Global picture: increasing export availability, decreasing import needs Global 2007 volumes and price trends A new wave of capacity in several regionsBoth imports and exports markets are increasing their capacityThe global supply/demand ratio will depend on China
5. New price differentials lead to new exports strategyThe global map of cement prices has changedNumerous players target the US import marketFocus on Cemex offer on Rinker
6. What reaction from US cement players? Vertical integration!The rationale of vertical integrationSeveral triggers for further vertical integration
Conclusion
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Summary:
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1. Import flows are critical to the US industry; consequently, the US industry is depending upon the evolution of the global supply/demand ratio.
2. In 2007 the global balance between supply and demand could be impacted by the slowing demand in the US which implies lower imports needs. Asian exporters will probably have to find new outlets outside the US.
3. The global surplus should be more visible in 2008 and 2009 with the decline of imports needs and the increase of exports availability (slowing demand + increasing capacity in importing markets; additional capacity in exports markets). The order of magnitude of the surplus will depend on the success of Chinese government actions to contain exports.
4. Exporters developing a long term exports strategy may also try to secure captive market share in importing countries, by integrating the distribution channel (acquisition of downstream assets and imports units). Latin American producers have already implemented such a strategy, whereas Asian exporters could decide to do so.
5. The Cemex offer on Rinker � if successful - would increase the captive market share of the group in the USA. Cemex would also become a major client of its competitors. Last this deal would increase the gap between Cemex and other majors in terms of FCF generation.
6. Consequently we see this deal as a trigger to see more consolidation in the USA through the acceleration of he vertical integration of the industry.
7. We are expecting the consolidation of US downstream assets (ready-mixed concrete and aggregates) to pursue actively. More vertical integration should reinforce the position of the industry (control of the end user) and bring more pricing power in front of independent importers.
Conclusion
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