CEE Cement Industry: Heading for a New Dawn

Shushmul Maheshwari, RNCOS, discusses construction activity, cement demand, consumption and regeneration in the region’s cement markets. This is an abridged version of the full article, which appeared in the January 2013 issue of World Cement. Subscribers can view the full article by logging in.

Introduction

The uncertain and uneven pace of economic recovery across the entire eurozone has weighed heavily on the construction industry, especially in Central and Eastern Europe. Heightened sovereign debt concerns and ongoing austerity measures do not promise a healing fate for the CEE region in the near future. The eurozone crisis has had a devastating impact on almost all industries, directly or indirectly, and the construction sector is no exception. With low consumer confidence, suppressed demand and high input costs, the sector is in a crawling phase, if not utterly stagnant. To add to these woes, construction project financing remains a big issue due to the high interest rates charged by private lenders. Even the big cement manufacturers of the CEE region, such as Germany, Bulgaria, Poland and others, are feeling the heat.

Post-2008, which was seen as the year of the construction boom, the construction industry has plummeted year after year. New construction projects, including public and private infrastructure developments, have dwindled and led to a continuous decline. The ongoing slowdown can be recognised in the fact that even the cement majors have either halted production or completely pulled down the shutters on numerous plants due to inadequate demand and over-production issues. Fortunately, renovation activities have helped the industry to some extent.

There are more than 40 cement plants in Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia, with a total installed production capacity of over 50 million t. The majority of these plants are owned by international cement giants such as Lafarge, Holcim, HeidelbergCement, Italcementi, Buzzi Unicem and Cemex.

An update on the mixed performance of Russia and the CEE countries

Russia, the world’s seventh largest cement consuming country, has also experienced faltering cement demand due to the weak economic scenario across the globe. However, the industry is now revamping, and plant modernisation and regeneration is back on track. While cement demand has fallen in recent years, it is now increasing; with a full order book of mega-sized construction projects, Russia’s cement market is climbing up the consumption league ladder. With a double-digit rate of consumer lending, the sector expects to move with strong momentum.

Massive investments are underway to boost construction activity further. Projects such as building new office space in Moscow, together with the growing trend toward green buildings due to tax incentives, will push cement consumption in Russia. In addition, large infrastructure projects such as those surrounding the ATES I Summit 2012, the 2014 Sochi Winter Olympics and the FIFA World Cup in 2018 are all promising buds for the construction sector.

To summarise: amid the global slowdown, the once thriving CEE cement industry has constantly underperformed since the 2008 construction boom phase. Some countries are improving, but the aggregate scenario seems unhealthy.

Germany

The best performer among its peers, Germany saw a remarkable recovery in its construction sector, which grew by 12.5% to reach 28 million t in 2011. The residential sector increased by a whopping 25%. Taking cues from this, in 2012, cement consumption in Germany is expected to remain at the level of the previous year. Germany’s residential construction sector will benefit from the low interest rates that are supporting investments in real estate.

Lithuania

Lithuania’s cement industry looks promising. For instance, around 5100 dwellings were constructed in 2011, which is 38% higher than the number built in 2010. In 2011, the construction of individual houses dominated the market. Of the total 5100 new dwellings constructed, some 3800 were individual houses, accounting for around 75% of the market share, while the remaining 25% was made up of apartments. Construction work increased by 18%, but still remains at about 56% of construction activity carried out in 2008. The increase of Lithuanian exports in 2011 was one of the fastest in the European Union.

Estonia

The economy of Estonia witnessed 26% growth y/y during 3Q11. While its share of new residential buildings has decreased, growth is mostly being driven by the renovation sector. The main contributors to cement, aggregate and ready-mix concrete sales were EU-backed infrastructure projects. The sale of concrete elements was also supported by exports to other EU countries.

Romania

Turning to Romania, 2011 was the first year since the crisis began that an increase in both cement production and cement consumption was recorded. In 2011, the volume of construction work rose by 2.8% compared to 2010. New construction works increased by 2.5% and capital repair works by 10.3%. It is assumed that in 2012, backed by government investment and initiatives, the cement market in Romania will grow by 2 – 3% compared to 2011.

Latvia

Latvia’s cement industry thrived on robust exports. The rapid increase in cement demand can mostly be explained by higher exports of construction materials by manufacturing companies.

Bulgaria

Bulgaria did not exhibit any ups or downs and remained almost at the same level as in 2010. High interest rates on loans remained the main cause of the slump in private investment. Some positive developments emerged from public infrastructure projects, mainly roads. It is assumed that the Bulgarian cement market will decline further by 4 – 5% in 2012.

Czech Republic

Construction activity in the country declined by around 3.1% y/y in 2011. The downturn was due to a drop in construction orders and dwellings. Looking at the steep decline from all related sectors, cement consumption is expected to stagnate or rise slightly in 2012.

Hungary

In Hungary, the construction industry dipped by around 7.8% in 2011 due to a significant fall in home construction and a dearth of large projects. In the near future, however, industry pundits foresee recovery for Hungary’s cement sector. The fall in construction output might come to an end in 2012 and there could be a return to growth as early as 2013.

Slovenia

Slovenia, on the contrary, showed a dramatic decline, with more than a 25% fall in construction activity. The largest drop was observed in the non-residential building sector, which stood at almost 41% lower than the previous year. In residential construction, the volume plunged by 35%. The biggest problems in construction continue to be the lack of public orders, problems with payments and the over-indebtedness of companies.

Looking forward

Construction, with a relatively high ratio of labour intensity per unit of fixed capital formation, represents a comparatively rapid means for generating economic activity, creating jobs and growth, while providing a better infrastructure in the longer-term. As is evident, the construction sector in the CEE contributes a significant sum to GDP. Estimates reveal that every €1 invested in construction provides an additional boost to economic activity of approximately €3. This reflects the importance of construction and related industries in the economic growth of a nation. With well laid out strategic measures, both by governments and industry stakeholders, the construction industry can help recover the CEE countries from recession, along with boosting cement consumption.

Written by Shushmul Maheshwari, RNCOS. This is an abridged version of the full article, which appeared in the January 2013 issue of World Cement. Subscribers can view the full article by logging in.

Read the article online at: https://www.worldcement.com/europe-cis/10012013/cement_industry_central_eastern_europe_russia_1/