EquitiesEquities

Exane BNP Paribas Building Materials

XXVIII Technical Congress FICEM-APCAC“Fundamentals Deteriorate”

World Cement markets trends Exane BNP Paribas’s new Scenario for 2011-2012

São Paulo, September 2011

construction@exanebnpparibas.comYassine Touahri +44 207 039 95 23 yassine.touahri@exanebnpparibas.comTeam construction@exane.com

(Internal use only)

2Equities

Yassine Touahri (London): ✉ yassine.touahri@exanebnpparibas.com ☎ + 44 207 039 95 23

Yassine Touahri, 28, graduated with a MsC in Management from Grenoble’s Ecole de Management and spent one year studying at the Warwick Business School in 2006/2007. In 2006, Yassine worked in Saint-Gobain’s investor relations department and joined Exane’s Building Materials and Construction team in 2007.

European Building Materials: Introduction

> We work closely with the Infrastructure Team of Nicolas Mora and Stanislas Coquebert (contactable on infrastructure@exane.com)

Paul Roger CFA (London): ✉ paul.roger@exanebnpparibas.com ☎ +44 203 430 84 15

Paul Roger, 34, graduated from Durham University in 1998 and has a decade’s experience covering the Building Materials sector at HSBC, ABN AMRO, Deutsche Bank and ING. He has also managed money for a top London hedge fund and spent a year working for Renaissance Capital in Russia, covering global infrastructure markets. Paul is a Chartered Financial Analyst and Chartered Accountant. He joined as Sector Head of Exane’s Building Materials Team in 2010.

Rohit Bhatia (London): ✉ rohit.bhatia @exanebnpparibas.com ☎ + 44 203 430 84 33

Rohit Bhatia, 25, graduated from Leeds University in 2007, and started his career at WestLB as a Debt Origination Analyst. Subsequently, he worked as an Equity Research Associate at Société Générale within the Telecoms Team. Rohit has completed his CFA exams and is awaiting his charter. He joined Exane’s Building Materials Team in 2011.

3Equities

Summary

What’s changed during the past few months?- Main take-aways from H1 2011- Increased pressure on mature markets banks and governments- Deteriorating confidence- Lower growth prospect in emerging markets

Challenging price-cost dynamics in 2011- Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressures may however abate in 2012

Our New Scenario for construction markets in 2011-2012 - Residential / Non Residential / Infrastructure- Our Scenario for cement volumes in 2011- A tentative scenario for cement volume in 2012

Conclusion

4Equities

Main take-aways from H1 2011-Demand was very strong in Q1 11 (favourable base effect because Q1 10 was heavily impacted by bad weather in Europe and North America) - In contrast, trends in Q2 11 have been relatively disappointing (tough weather in the US, and Canada, lacklustre demand in India, very weak volumes in Southern Europe)

Q111 cement volume trends (YoY) Q211 cement volume trends (YoY)

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What’s changed over the last few months: increased pressure on mature markets banks and governments- European governments have come under renewed pressure to reduce debt- Investors are also starting to question the strength of banks’ balance sheets

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European sovereign CDS spread have increased by more than 50 bps on average since June

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EU BANKS SECTOR CDS INDEX 5Y - CDS PREM. MID

European bank CDS have also continued to surge to an unhealthy level this summer

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What’s changed over the last few months: deteriorating confidence- In Europe both business and consumer confidence deteriorated this summer- In the ISM (US business climate) was clearly disappointing and consumer confidence remains well below its pre-crisis level

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US ISM PURCHASING MANAGERS INDEX (MFG SURVEY) SADJ

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What’s changed over the last few months: Lower growth prospect in emerging markets- Monetary tightening (need to control inflation)- Lower world GDP growth (potential stagnation of some large mature markets).

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Current Central bank interest rates vs. 2010 rates

Tightening monetary policy in emerging markets Exane economists now expected a marked slowdown in emerging market GDP growth 2012

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Emerging and Developing Economies GDP forecasts for 2011 & 2012Change in central bank reference rates since 2010

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Summary

What’s changed during the past few months?- Main take-aways from H1 2011- Increased pressure on mature markets banks and governments- Deteriorating confidence- Lower growth prospect in emerging markets

Challenging price-cost dynamics in 2011- Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressure may however abate in 2012

Our New Scenario for construction markets in 2011-2012 - Residential / Non Residential / Infrastructure- Our Scenario for cement volumes in 2011- A tentative scenario for cement volume in 2012

Conclusion

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Cost inflation is a key issue in 2011- Petcoke and coal prices have increased significantly vs. early 2010- We estimate that in 2011, the energy bill of cement players is on average up 13% vs. last year.

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Coal USD/t C&F Petcoke USD/t C&F Oil prices (USD / barrel)

Evolution of coal, Petcoke and oil prices since 2000

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Price hikes in 2011 were often not sufficient to fully pass on cost inflation -Price hikes were often announced because of the rise in costs -However, in most regions (with the notable exceptions of China) cost inflation could not be fully passed on to clients and margins came under pressure.

Q1 cement margin evolution

Q2 cement margin evolution

Cement Prices in 1H 2011 +3% excl. China (YoY% change)

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Cost pressures may however abate in 2012- Petcoke prices and other inputs look to have stabilised- Energy cost inflation forecast in our simulation to fall to +3% YoY in 2012 vs +13% in 2011

This suggest easing energy cost inflation in 2012

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Coal USD/t C&F Petcoke USD/t C&F Oil prices (USD / barrel)

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Recent evolution of International Petcoke & Coal prices Estimated average cement energy bill in EUR/t

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Summary

What’s changed during the past few months?- Main take-aways from H1 2011- Increased pressure on mature markets banks and governments- Deteriorating confidence- Lower growth prospect in emerging markets

Challenging price-cost dynamics in 2011- Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressures may however abate in 2012

Our New Scenario for construction markets in 2011-2012 - Residential / Non Residential / Infrastructure- Our Scenario for cement volumes in 2011- A first tentative of scenario for cement volume in 2012

Conclusion

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Residential construction: solid trends in Northern Europe in 2011 but a question mark in 2012- 2011 housing trends have so far developed in line with our expectations - However, we believe that banks’ woes, austerity and unemployment put the recovery at risk - Some leading indicators are pointing to a slowdown or potential decline in some countries

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0%< Growth < 5% 5% < Growth <15%

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A potential slowdown in French housing in 2012-2013

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European Housing Permits YTD trends

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Residential construction: slow recovery in the United-States - US housing permits and starts have been hovering around 500-600k per year since early 2009- There is a large underlying need for housing (over 1m per year)- However unemployment failed to abate and excess inventory remains very high - We have adopted a significantly more cautious pace of recovery for US housing starts

US housing still hovers around the bottom

US Unemployment has failed to abate... ...we have adopted a more cautious stance on US housing recovery

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Non-residential construction: deteriorating leading indicators- In Europe, non residential trends have historically been well correlated with the business climate with a time lag of one to two years- This suggest that the erosion of business confidence witnessed this summer will impact non residential investments in 2012 or 2013- From 2011 to 2013, we have tried to extrapolate the recent business confidence trends and have adapted our non residential activity forecast accordingly

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Non-residential construction: deteriorating leading indicators - In the US and in the UK, the leading indicators for non residential construction (ABI and permits) have historically been well correlated with non residential trends 12 to 18 months later- The deterioration of these indicators witnessed in 2011 points to lower growth or a decline in the next couple of year

Deteriorating non residential indicators suggest a slowdown or decline in non residential activity

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Infrastructure: austerity measures and phasing out of stimulus create a risk on 2012- Significant indebtedness and stress in many mature markets- Infrastructure trends above historical averages in many markets (Stimulus) - History suggests potential for big declines if political will breaks down

State Budget Shortfalls 2011e European budget deficits

18Equities

Cement Volume Scenario 2011- Mature markets -1%, Emerging markets (ex. China) +4%

Our demand assumptions for the full year 2011 - In Mature market: we expect demand to decline very slightly (weak trends in Southern Europe and Ireland offsetting growth in Northern Europe )- In Emerging markets, we expect demand to be solid with the exception of Egypt (Arab Spring) and Philippines (delay in infrastructure projects)

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A tentative scenario for Cement demand in 2012 - A slight decline in US demand (phasing out of stimulus projects)- Weak European trends but more resilient in Northern Europe- Emerging countries are growing but at slower pace in many countries due to the slowdown if the world economy

Cement Volume Scenario 2012- Mature markets -1%, Emerging markets (ex. China) +4%

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As visibility is very low, we have considered alternative scenarios- Pessimistic case assumes a recession but not the collapse of 2009 (lower base)- Optimistic case broadly similar to our former scenario- Pricing power expected to be quite strong in all scenarios (though not covering all costs in bear case)

PESSIMISTIC SCENARIO:

Volume declines in developed markets but not as bad as 2009 (base is much lower)

A new round of cost cutting

OPTIMSTIC SCENARIO:

Based on our former scenario “low growth not no growth”

Low single digit volume growth in developed world 2012 followed by acceleration from 2013

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Forecast utilisation rates are low in cement in mature markets to 2015

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EBITDA per tonne of cement 2007 (USD/t)

Change in EBITDA per tonne between 2007 & 2010

What potential for further restructuring?- Utilisation rates have collapsed in developed markets- Consequently profitability has declined and emerging markets have become more important- Analysis supports view that sector has scope for more cost cutting if management takes view that demand will be lower for longer. - However CO2 rights in Europe and the potential for long term recovery in US creates the risk that the industry does not cut capacity. This would means that other ways of restructuring may have to be explored (higher productivity, higher plant efficiency).

22Equities

Summary

What’s changed during the past few months?- Main take-aways from H1 2011- Increased pressure on mature markets banks and governments- Deteriorating confidence- Lower growth prospect in emerging markets

Challenging price-cost dynamics in 2011- Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressures may however abate in 2012

Our New Scenario for construction markets in 2011-2012 - Residential / Non Residential / Infrastructure- Our Scenario for cement volumes in 2011- A tentative for cement volume in 2012

Conclusion

23Equities

Conclusion

No major change in our 2011 volumes scenarioOur overall picture for 2011 demand has not materially changed. We continue to expect relatively solid growth in emerging markets. In mature markets, we believe that the decline in cement demand in Southern Europe will offset growth in Northern Europe. We are expecting stable cement volumes in the United States.

For 2012 we have reviewed down our scenario of recoveryWe have cut our Europe & US infrastructure assumptions to reflect austerity measures and the phasing out of stimulus. We have also cut Europe and US housing forecasts in view of the risk created by forthcoming austerity programmes, the high levels of unemployment. In addition to that, we have reviewed downward our estimates for non residential construction and renovation in mature markets to take into account tougher macro-economics trends. Looking at emerging markets, trends have until now been in line with our estimates and we have not materially changed our assumptions as regards volumes for 2011. We however expect a slowdown in emerging next year reflecting lower economic growth worldwide.

Low growth in mature markets may raise the question of further capacity reduction Infrastructure activity in mature markets is likely to remain depressed until 2015 as governments are reimbursing their debt. In this scenario, utilisation rates for the cement industry would stay a low level. We believe that one the main challenges facing the international cement players will be to restructure their mature markets positions in order to improve profitability. The recovery of cash flows in mature market is indeed key to restore the ability to invest in new plants in emerging market and capture growth opportunities.

24Equities

Thank you