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Poor prospects in construction, but the cement company shines

The looming global recession is making life difficult for cement producers. But the Swiss group is easy on itself. His transformation is paying off at the right time.

Land of unlimited roofs: Holcim sees a great future in the USA.

Sborisov / Imago

In the construction industry, it is no longer certain what you can build on. The long-standing growth engine China has lost its rhythm due to lockdowns and is stuttering considerably. House prices in many European countries, as well as in Canada and Australia, are prohibitively expensive and are already – or about to be – falling. In many places, a recession is considered possible, which would not spare the cyclical construction industry. Meanwhile, supply problems are making raw materials more expensive and the Ukraine war is making energy more expensive, which keeps construction costs high.

Business is crumbling at some cement producers. Mexican giant Cemex disappointed analysts this week to report third-quarter operating profit fell a tenth from the same period last year. Heidelberg Cement could lower the forecast next week. UBS estimates that the adjusted operating profit of the German group will shrink by almost 8 percent in 2022. For 2023 there is a risk of a drop of another 9 percent. Comparisons are already being drawn with the global financial crisis.

Everyone is talking about a recession – except for Holcim

But 250 kilometers south of Heidelberg all is well with the world. “There is a lot of talk about recession, but not at Holcim. The prospects are good,” says Jan Jenisch, head of the Zug-based cement and building materials group. According to Jenisch, no threatening global recession can be inferred from the ongoing construction projects and the order books. In the third quarter, Holcim increased sales by a tenth to a record figure of just over 8 billion francs.

Holcim is therefore raising its sales forecast for the third time this year. The recurring operating profit (EBIT), which excludes restructuring costs, among other things, climbed to a record CHF 1.6 billion. The analysts’ expectations were clearly exceeded. Shareholders will benefit from a share buyback with a volume of up to CHF 2 billion, as the company announced on Friday.

At first glance, this does not fit the overall picture: According to the World Cement Association, global demand for cement fell by 8 percent in the first half of 2022 – mainly because of China, where the largest decline in more than twenty years was registered. The share prices of the three largest Chinese cement companies, which are also among the largest in the world, have lost between 40 and 50 percent in value since the beginning of the year. But since the beginning of January, Cemex stocks have also lost almost half, and Heidelberg Cement stocks a quarter. With a minus of only 5 percent, Holcim is still doing well.

Holcim crumbles less

Share price performance since 2018, in %

Anhui Conch Cement (China)

But even Holcim cannot escape the headwind in the cement market. Comparing the continuing operations, the Group sold up to 6 percent less cement in Europe and Asia in the third quarter. However, at that time there was an important step that reduced dependence on Asia: Holcim sold the large cement business in India for 6.4 billion Swiss francs.

Cement takes a back seat

The withdrawal from India is part of Holcim’s strategy to orient itself away from the cement mass market. Instead, you become a construction supplier. The Solutions and Products division, which includes high-quality products such as roof parts and coatings, already contributed 21 percent to sales in the third quarter. In 2020 it was only 8 percent. Holcim is consistently strengthening this segment through acquisitions; four companies were acquired from July to September alone. A large proportion of these products are used for repairs and refurbishment, explains CEO Jenisch – for example in around two-thirds of Holcim’s roofing business. “This ensures stable demand, because even in bad times repairs are made.”

Holcim is also shifting the focus geographically and is orienting itself away from emerging markets. Besides India, the sale of the cement business in Brazil for $1 billion was completed this year. Instead, they’re looking at mature, high-margin markets, most notably the US. The United States should contribute 40 percent to Holcim’s sales this year; In 2019 it was only 24 percent. The USA will become the most important market ahead of Europe.

Jenisch is not concerned about a potential downturn in the American housing market. Because there houses are often built of wood; this has little effect on the cement business. Instead, Jenisch expects a large demand for cement from President Joe Biden’s infrastructure program, which will be felt in the order books in the second half of 2023. In the meantime, Holcim is still well utilized; the volume of cement sold grew 12 percent in North America in the third quarter.

Higher prices are not a matter of course

Across the Atlantic, in Europe, energy has become a major industry concern. The rating agency Scope estimates that energy and fuel costs account for up to half the price of cement. This is why Heidelberg Cement, among others, has already stopped producing cement clinker in Spain.

Ideally, such cost increases can be offset by higher prices. Not every company succeeds in doing this, but Holcim can – also because they turned the price screw early on, before the costs had a full impact. And because the cement on offer is becoming more climate-friendly, for which you can also ask for a surcharge. In addition, as a countermeasure, Holcim switched two-thirds of the energy supply in Europe to alternative sources. “A burden is only a burden if you’re too slow,” says CEO Jenisch.

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