A Brief Discussion of Cement Market Profitability
Buzzi derives 58% of consolidated revenues from Western and Eastern Europe. I am not positive on a
recovery in Western European economies. However, I am optimistic about the outlook for the cement
markets in most of these countries for the following reasons. Most of the markets are deeply depressed.
Even if the economies do not grow or contract, the current level of cement consumption represents
“replacement” demand. Shifts in market structure and competitive actions will be a much bigger driver
of profitability than volumes, and I am optimistic about the trends in most of Buzzi’s markets.
Furthermore, I believe we are on the verge of a meaningful consolidation in Italy which has been the
biggest drag on earnings. Such a consolidation could take the Italian market from deeply unprofitable for
all players on a cash basis to marginally profitable.
Cement markets are regional and market structure determines price. Price is the biggest driver of
profitability by a wide margin, more so than capacity utilization. For example, Mexico, despite a
relatively low 60% capacity utilization, is one of the most profitable cement markets in the world. Cemex
and Apasco, the two largest players represent 70% of production and they exert price discipline.
Geographic characteristics matter too. Geographic barriers create a very high price ceiling for seaborne
imports due to the high cost of transporting cement on land.
The most attractive markets in the world in terms of realized cement price per ton are: Nigeria, Kenya,
Colombia, Argentina, Ghana, Peru, South Africa, France, Tanzania, Canada, Australia, and Mexico, in that
order. The least profitable markets in the world in terms of realized price per ton are: China, UAE,
Vietnam, Turkey, South Korea, and India. As one can see, some of the the fastest growing economies in
the world have some of the least attractive cement markets because of industry fragmentation while
some of the most stagnant economies in the world, such as France and Argentina, have some of the
most profitable cement markets because of industry concentration.
The Outlook for Buzzi’s Markets
Although industry structure is the most important driver of prices and therefore profitability, all things
being equal, given the fixed cost nature of the industry economic tailwinds and growing volumes are
better than economic headwinds and declining volumes. In terms of industry structure, all of Buzzi’s
markets are either stable or getting better. The exception, Italy, is terrible, but has the potential for the
most improvement. In terms of volumes, with the exception of Russia, Buzzi’s markets are currently all
stable or improving. This should lead to stable or gradually improving capacity utilization and margins.
Currently the US and Mexico (if we do a proportional consolidation of Cementos Moctezuma’s EBITDA),
account for 70% of Buzzi’s EBITDA versus 38% in 2007. The US and Mexico are both benefiting from
strong pricing and volume growth. Germany, the third biggest market, is a very mature market with a
very depressed level of construction activity, but trends are positive and the competitive situation is
stable. Luxembourg, Czech Republic, and Poland, are doing well and getting better. Ukraine is recovering
after a major collapse. Russian volumes are still declining but the company is benefitting from a recovery
in the Ruble. Italy is going to be the big swing factor.