European Cement And Building Materials Groups Confront Cyclical

Tag : construction and building
The sharp residentialconstruction slump in the U.S., alongside the now unfoldingcyclical downturn in Western European residential markets againstabruptly softening GDP growth, are the major themes in the Europeancement and building materials industry, said Standard & Poor'sRatings Services in its industry report card "European CementAnd Building Materials Groups Face Construction's Cyclical DownturnBut Find Growth In Developing Markets," published July 25,2008, on RatingsDirect.

"A series of signs suggests it may be getting tougher forindustry players to offset the combination of grim U.S. marketconditions and the gradually steepening slide in West Europeanmarkets through business in still buoyant markets in developingeconomies, said Standard & Poor's credit analyst Xavier Buffon."In addition to broadly expected sharp falls in previouslyvery hot markets such as Spain and Ireland, the extent and pace ofthe U.K. housing market drop has exceeded expectations. The Italianeconomy is close to a standstill, while the French housing marketalthough still more resistant is now seemingly heading for asharper-than-anticipated decline. Even the German residentialsegment is softer than anticipated."

The sharp cyclical downturn in construction is being compounded bythe softening of commercial construction markets, with pricingpower decreasing at a time when cost pressures remain intense,given high energy prices. This is reminiscent of the last cyclicaldownturn in the early 2000s, when companies generally embarked onheavy capital outlays to build new capacities and/or to make largeacquisitions.

"In the current backdrop, companies' resulting needs to cutdiscretionary spending to safeguard adequate financial structures,or to not fall short of expected improvements in key metrics, areconsequently becoming more pressing," said Mr. Buffon.

Not all the newsflow is negative, though. Companies continue todraw traction from buoyant business in developing economies, withlarge, rated groups set to reap the benefits in these regions. Onthe whole, these markets still provide a welcome growth source.

Rating activity in the sector has increased in the past six months,clearly skewing negatively with four downgrades and one outlookrevision to negative from stable versus only one positive ratingaction.