Lafarge Taps Cheaper Housing Boom as Brazil Catches U.S.
Lafarge SA (LG) said some emerging markets such as Brazil and Mexico are now constructing as many new homes as the U.S., allowing the world’s second-biggest cement maker to make up for sluggish growth in western Europe.
“Urbanization is still far from being completed in China, Brazil is building as many homes as the U.S., about 1.5 million per year, and Mexico as well,” Lafarge Chief Executive Officer Bruno Lafont said in an interview at the company’s headquarters in Paris. Lafarge, with a market value of 13.6 billion euros ($17.7 billion) has developed new technologies and services to make new constructions “more affordable whether it’s for a power plant or a family home,” he said.
Lafont needs a boost from emerging markets as he has been cutting jobs and selling assets to counter a construction slump in Europe and repair a credit rating that has fallen below investment grade. The volume of global construction will climb by 70 percent to $15 trillion by 2025 from $8.7 trillion in 2012, with almost 60 percent of growth coming from China, India and the U.S., according to a report released today by research groups Global Construction Perspectives and Oxford Economics.
China and India combined need 270 million new homes in the next 12 years to meet the needs of their growing populations, while Brazil and Mexico together need more than 27.5 million, the report showed.
Affordable Housing Boom
India’s construction market will grow by 7.4 percent on average per year through 2015, just above China’s 7.2 percent growth and Indonesia’s 6.5 percent, Graham Robinson, Executive Director of Global Construction Perspectives, said in an interview. Brazil will grow at a slower rate, at 2 percent, as the market is hampered by higher taxes and red tape, he said.
“We see a huge growth in affordable housing” in emerging markets, Robinson said. Sub-Saharan Africa will be the region with the second-fastest construction growth after Asia, he said.
Lafarge generates 25 percent of its sales in Africa and the Middle East, positioning the French company “very well” to benefit from global construction trends, Lafont said.
Lafarge traded 1.2 percent higher at 47.83 euros in Paris as of 9:27 a.m. The stock has dropped 2.1 percent since the start of the year, prior to today, underperforming the 2.7 percent gain of the French benchmark index CAC 40. Swiss rival Holcim Ltd. (HOLN), the biggest cement maker, dropped 1.6 percent in the same period in Zurich, while Germany’s HeidelbergCement AG (HEI) gained 13 percent in Frankfurt.
Faced with Europe’s economic slump, Lafont last year unveiled a plan to lift operating profit by 1.75 billion euros by 2015 through cost cuts and sales of new products and services. He said this year that most of the target will be reached by the end of 2014.
This year, Lafarge is scheduled to commission a new cement plant in India, where it generates between 4 percent to 5 percent of its sales, and it also plans to add capacities in Iraq and Canada and renovate a facility in the U.S.
The U.S. construction market will grow by 4.5 percent on average per year through 2025, while western Europe’s is stuck at 1 percent, Robinson said.
As a result, European cement makers have reduced capacities in their home markets and Lafarge, whose debt surged after the 2008 purchase of Orascom’s cement operation for $15 billion, decided to idle some plants in its home region. Still, new technologies to construct buildings at lower costs and reduced capacities should allow Lafarge to operate its European business at a profit, Lafont said.
“Europe isn’t dead at all, we’re going to be able to create value through innovation,” the Lafarge CEO said. “All players have already worked on restructuring their capacities, it’s a continued process. I think our current position is rather solid and resilient.”
In China, which represents 3 percent of Lafarge’s assets, “the cement industry went through a slightly tougher period in 2011 and 2012, but you have to look long term,” Lafont said. “We’re making money in China, we should make more and be more efficient.”
This year, Lafarge agreed to sell its U.S. gypsum business for $700 million and a cement plant in the Ukraine for 96 million, and to raise 200 million euros in a capital increase of its Indian subsidiary to fund local growth.
“The company has worked a lot on its portfolio over the past 7 to 8 years,” Lafont said. “These large changes are poised to be completed. Lafarge will continue to optimize its portfolio” to focus “on growth of selected markets where we have better positions.”
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