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The Global Cement Battle

March 29, 2010 | About:
Matthew T. Schroeder

INVESTMENTU

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At least for now, Brazilian steelmaker CSN ADR (SID) has failed in its attempt to diversify.

Late last year, it launched a hostile bid for Portugal’s national cement company, Cimpor ADR (CDPGY). And for good reason too.

Put simply, Cimpor is a jewel. It has operations in 20 countries, including promising stars like China, India, South Africa and Turkey. And it would have added nicely to CSN’s existing facilities.

That’s especially true considering heightened demand in Brazil. So naturally, CSN wants to build up operations enough to handle the growing need there.

The Brazilian cement market is experiencing fast-paced growth. Sales grew from 45 millions tons in 2007 to 52 million tons in 2009. This year, analysts expect it to reach 55 million in 2010.

Brazil is the third most rapidly growing cement market, behind only China and India. And with the country hosting both the 2014 World Cup and 2016 Olympics, it should spend even more on cement as it speeds up infrastructure projects. So CSN had every reason to enlarge its position.

Unfortunately, two of its large, local competitors – Votorantim and Camargo Correa – don’t want the extra rivalry. So they both purchased large enough stakes in Cimpor to block CSN.

This Brazilian three-way tussle is hardly the first and certainly not the last heated battle in the global cement market. But it is a great way for investors to get involved.

The Global Mix in Cement

Consider the following facts:

  • Cement demand in developed economies is down.
  • Cement demand in developing countries is up.
These conditions have sparked a war between cement makers around the world. They all want a larger share of the rapidly growing markets that actually matter. And they don’t want to suffer the “painful adjustment” they see ahead for the U.S., European and Japanese construction industries.

As government debt rises, those countries will have to cut back wherever they can… including infrastructure. And despite all the talk of stimulus, cement companies say they still don’t feel the promised effects. Worst yet, they don’t expect any improvements for at least three to five years.

Cement demand on both sides of the Atlantic has fallen sharply in the past two years. The Portland Cement Association expects U.S. demand to fall by 44% this year compared to 2006. And Euroconstruct sees European demand dropping by 30% compared to 2007.

Admittedly, the consultancy forecasts European demand picking up slightly in 2012. But internationally savvy companies have no intention of waiting for that to happen.

Global Cement Giants: Lafarge and Holcim

France’s Lafarge ADR (LFRGY) and Switzerland’s Holcim ADR (HCMLY) – the world’s two biggest cement companies – have led the charge into the emerging markets. In fact, Lafarge began investing in China as far back as 1994, when it was a virtually untapped market.

Their forward thinking stands in stark contrast to Cemex, the number three company, which continues to focus on the stagnant U.S. In doing that, it ignored the increasing demand for better housing and infrastructure elsewhere.

Specifically, China now accounts for half of global cement demand. And India and Brazil make up for impressive amounts as well.

Lafarge Executive Vice-President Jean Desazars de Montgailhard says: “The growth we are seeing in China is incomparable with other markets. There is no question now that it will be the engine of expansion for not just cement, but all construction activity during the next 20 years.

And Holcim CEO Markus Akermann agrees: “The shift of growth from mature to emerging construction markets will be significant over the next decade.

That shift won’t happen tomorrow, however. China, for one, has had to force closures of inefficient cement plants

In the short-term, closing them down creates lower prices, as condemned companies rush to dump their product on the market. But over the medium and long-term, supply and demand will be much better balanced.

The positives definitely outweigh the negatives for the cement companies regardless. At least, it does for those investing in the emerging markets. And thanks to the rapidly expanding middle class in those countries, that trend should last for some time.

As it does, Lafarge, Holcim and possibly even CSN look set to reap the benefits.

Good investing,

Tony Daltorio

http://www.investmentu.com/

About the author:

INVESTMENTU
Matthew T. Schroeder is the President of Anomalous Investments, an independent, value-added advisory service focused on finding small, undiscovered Special Situations in the natural resources industry. Particular focus is on gold, silver, oil & gas and agriculture. He can be reached at matthew.schroeder@anomalousinvestments.com.

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