Lafarge SA (LG)’s plan to close a cement plant in France and Holcim Ltd. (HOLN)’s asset writedowns in Spain, Hungary and the Czech Republic are spawning concern that Europe’s debt crisis will lead to more factory shutdowns.
Lafarge is closing the site in Frangey amid a building slowdown. Workers are worried the Paris-based company will close others to focus on large, lower-cost plants, said CFDT union official Laurent Carrilero. Holcim has closed two U.S. plants. The Swiss company has shuttered others, though doesn’t plan to make the moves permanent, spokesman Peter Gysel said.
The world’s top two cement makers and HeidelbergCement AG of Germany (HEI) may target assets in Spain and other nations worst hit by the crisis, according to ING analyst Ian Osburn. European cement makers face contracting construction markets and Holcim yesterday said it will book about $380 million in writedowns in the Czech Republic, Spain, Hungary and the U.S.
“The big one where closures will happen is Spain, then Italy, continuing a war of attrition,” said Osburn by phone. “Everybody’s bleeding and it’s just being who blinks first.”
Both Lafarge, the world’s No. 1, and HeidelbergCement, had their credit ratings lowered to non-investment grade last year. Shares of the French company are down 24 percent in six months. HeidelbergCement, the No. 3 maker, has fallen 15 percent and Jona, Switzerland-based Holcim is 6.7 percent lower.
Christel des Royeries, a spokeswoman at Lafarge, declined to comment on the cost cuts.
Feeling the Pinch
Cement makers are feeling the pinch from $213 billion in acquisitions over the past decade, having expanded in times of economic growth before the debt crisis prompted government austerity packages and reduced spending on infrastructure. The region’s slowdown has curbed retail and property development.
The euro area’s economy may contract by 1.2 percent in 2012, and another 0.2 percent in 2013, according to Citigroup. Italy and Spain may shrink 1.9 percent in 2012, it estimated.
Cement consumption in Spain has plummeted by 65 percent since 2008, Holcim said yesterday. The company booked about 229 million francs in writedowns as it revalued property, plant and equipment in the country, with little prospect for a speedy recovery in demand, Gysel said.
“After this election year, we may start seeing some cuts” in France, said Amsterdam-based Osburn. “It depends how bad the sovereign debt crisis gets. In Italy, the sector is caught between a series of rocks and hard places, and it keeps coming back round to low capacity utilization.”
At Lafarge, Chief Executive Officer Bruno Lafont’s strategy may entail shutting smaller plants to focus on the most efficient sites, said union official Carrilero.
Lafont has already pledged record cost cuts this year as rising energy prices dent earnings. All areas of the business have been asked to make savings, and an additional concern is that cement will be imported into France, Carrilero said.
HeidelbergCement (HEI) is currently “well positioned” with its current list of factories and the main priority is to improve efficiency and lower costs of production, CEO Bernd Scheifele said in an e-mail.
“The capacities are built for the 2005, ‘06, ‘07 type of demand in Europe,” Tim Cahill, a Dublin-based analyst at J&E Davy Holdings, said by phone. “Are we going to return to those levels of demand over the next three, four or even five years? We clearly won’t.”
Compounding the situation of European cement makers is a looming need to pay for carbon credits under EU legislation coming into force next year. Free quotas for cement makers will be reduced for all but the most energy-efficient plants.
Lafarge probably earned 162 million euros by selling CO2- emission permits in 2011, equal to 26 percent of its European earnings before interest and taxes, Citigroup estimated in a Jan. 9 report. CO2 revenue represented 65 percent of Italcementi SpA’s (IT) European profit last year, and 55 percent of Athens-based Titan Cement Co. (TITK), the bank said.
“The combination of lower excess CO2 volumes, lower CO2 prices and low medium-term demand/utilisation rates might be a strong incentive to accelerate the restructuring of European cement assets,” Credit Suisse analysts Arnaud Lehmann and Harry Goad wrote in a Jan. 5 report. “Waiting for a cyclical recovery of volumes and profits might no longer be a credible strategy, especially for companies with a highly leveraged balance sheet.”
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