HeidelbergCement Says House Boom Fails to Cure UK Market

HeidelbergCement AG, operator of the Hanson cement brand in Britain, said a boom in U.K. housebuilding hasn’t raised construction spending to pre-recession levels as investors still hesitate to build office blocks and shopping centers.

“Everyone gets very euphoric about the housing recovery, thinking that the U.K. construction industry has recovered,” Patrick O’Shea, head of the Hanson unit, said in a phone interview. “It’s still 20 percent below where it was at the peak, even with the housing and the infrastructure booms, which are both by-and-large government initiatives.”

U.K. home prices rose to a record last month, helped by Chancellor George Osborne’s loan program to make first-time purchases easier. While the government also invests in major infrastructure projects alongside a separate 51 billion-pound ($85 billion) loan-guarantee initiative, commercial projects don’t benefit from any subsidies, O’Shea said.

“Commercial is the biggest sector at something like 20 billion pounds, but our projection for its growth rate from 2013 to 2017 is only 3 percent annually,” the executive said by phone. In contrast, he predicts housing and infrastructure investment will average about 7 percent growth annually to 2017.

Global Recession

Germany’s HeidelbergCement, which has a market value of 10.7 billion euros ($14.3 billion), acquired Hanson for $18 billion in 2007, just before the global recession led to a slump in construction projects and stripped the company of its investment-grade credit rating. HeidelbergCement shares have slumped about 40 percent since the purchase of the U.K.’s third-biggest cement maker.

HeidelbergCement generated 1.1 billion pounds in sales in the U.K. last year, representing about 10 percent of its total revenue.

The boom in residential building may help HeidelbergCement, the world’s third-largest cement maker, to get more money for the building products unit it’s selling. Demand for that business’s offerings -- mainly bricks and piping products for clients in the U.K. and North America -- is at its highest in years and accounts for more than 90 percent of Hanson’s sales to residential developments, O’Shea said.

Asset Sales

Larger competitor Lafarge SA is buying out Anglo American Plc’s share in a Solihull, England-based tarmac and aggregates joint venture for at least 885 million pounds -- to sell the whole business at a later point -- as the French company seeks to satisfy antitrust concerns ahead of a $40 billion merger with Holcim Ltd. to form the world’s largest cement-maker.

The Lafarge Tarmac venture had already been told to sell a cement plant in Britain by U.K. antitrust authorities, which said that a lack of competition was hurting customers. HeidelbergCement was forced to sell a site producing ground-granulated blast furnace slag, a material used in concrete.

HeidelbergCement last month reported second-quarter profit that missed analyst estimates as rising raw material prices in Asia increased costs.

O’Shea said slower growth in British commercial construction projects does bring some advantages.

“Slower, more measured growth is often a better environment,” since it allows contractors and suppliers to ramp up capacity at a sensible pace without over-paying for raw materials and labor, he said.

Cooling Market?

Despite the government’s efforts to spur demand, some reports have indicated the housing market may be cooling after stricter lending rules introduced this year. London home sellers cut asking prices by the most in more than six years this month, property website Rightmove Plc said this week, adding to signs that the market in the U.K. capital is coming off the boil.

Britain’s construction industry is also struggling to find enough skilled workers, O’Shea said.

The Conservative-led government is seeking to cut net immigration to less than 100,000 people a year. That more stringent policy, combined with companies having taken on fewer apprentices during the recession, has led to a skills shortage and higher labor costs, according to O’Shea.

“A brickie two years ago was probably earning about 100 pounds a day, and now they can be earning up to 200 pounds a day,” he said, using the British slang for a bricklayer. Those sort of higher labor costs means that for many commercial real-estate contractors “the margins are razor thin.”

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