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Building Momentum in Latin America

World Cement,

Emerging from the slowdown

As Latin America is emerging from the economic slowdown triggered by the 2008 - 2009 global financial meltdown and worldwide economic downturn, prospects for the cement sector are brightening across the region. In Peru, for instance, cement consumption has been increasing in the first quarter of 2010, as business confidence has continued to improve and a rebound in the construction sector, which in April grew by 21.1% year-on-year (y/y), is leading a strong economic recovery in the Andean country. Cement makers in Brazil are also looking more optimistically towards the future. Between January and May, a total of 23 million t was sold, 16.4% more than over the same period last year, according to data from the Brazilian cement industry association - SNIC. In response to the improving outlook, SNIC has recently increased its forecast for 2010 cement sales from 7 to 12%, compared to the flat performance in 2009 when the sector took a knock as a result of the economic slowdown.

Such brightening prospects are echoed throughout the region. Forecasts from IHS Global Insight’s World Industry Services estimate that total cement and lime sales in 14 major economies in Latin America and the Caribbean will return to positive real growth this year. After contracting in 2009 by more than 5%, total sales will increase by a modest 2.9% (y/y) in 2010, followed by stronger 4.8% growth in 2011. Until 2015, overall growth in cement sales is forecast to remain in the 4 - 5% territory. This would, however, be substantially weaker than before the crisis, when real sales growth averaged 7% between 2005 and 2007. Yet within this V-shaped pattern, differences between countries clearly matter. Cement sales in Honduras plummeted by a staggering 32% in real US dollar terms, as a military coup amplified the economic woes of the Central American country. Sales in Mexico, the second biggest market in the region, had already started to decline in 2008, before slumping by a full 8.8% in 2009 on the back of the worst economic contraction witnessed in decades. Not only has the decline in Mexico been more prolonged and relatively severe, but the recovery will also be weaker, with growth in sales remaining below 4% until 2015. As a result, post-recession levels of sales will not surpass pre-recession levels until 2013.

Multispeed recovery

The recovery of the sector comes against the background of an improving economic environment. Thanks to solid fiscal accounts, an enhanced sovereign debt profile, sound monetary policy, low inflation, and reduced systemic risk in financial systems, the region has, in general, successfully weathered the storm and is now facing a positive outlook. After a relatively mild recession, when regional GDP (excluding Mexico) contracted by 0.4%, the region is set to expand 4.2% in 2010, and after some acceleration in 2011 - 2014, the region should converge to its long-term potential at around 4.0%.

The multispeed recovery of Latin American economies is taking place and the short-term outlook calls for more of the same. Brazil, Argentina, Peru and Colombia will continue to experience very rapid growth. In Chile, rapid growth will resume for the remainder of the year, after a massive earthquake and an ensuing tsunami, which struck the country in February, wreaked havoc on extensive coastal areas and temporarily slowed the economy. In these countries, the driver of growth will be strong investment coupled with domestic consumption and, to a lesser extent, the recovery of exports.

The Mexican economy has made a pause on the recovery path during the first quarter of 2010. Despite very robust growth in external demand, principally from the US, Mexico has not been able to keep up with the momentum of its exports. Positive and moderate growth will resume in the remainder of the year, as domestic consumers and investors regain confidence and there is still ample capacity for growth, as the economy is still well below pre-crisis levels. But medium term growth prospects will be hampered by soaring violence, which threatens to spill over to the general public. Business sentiment will deteriorate progressively and so will investment, since fixing the security problems seems unlikely in the foreseeable future.

While Mexico will return to moderate growth rates after the 2010 recovery, Venezuela remains mired in recession, as years of macroeconomic mismanagement take its toll on the economy. Here, the outlook is gloomy, as the amplified role of the government in the economy, which comes along with nationalisations and an anti-(private) business stance, is increasingly deterring investment, thus hurting current and future growth. 

The faster-than-expected economic growth in Latin America has also raised concerns about possible overheating. In response, central banks are withdrawing monetary stimulus and higher inflation or higher inflationary expectations have led several central banks, including in Brazil, Chile and Peru, to start tightening monetary policy in an effort to soften the expansion of domestic demand. Most governments are now moving toward fiscal prudence and consolidation. Public finances are improving as revenue is increasing, while some spending is being cut.

Spending big on infrastructure

Governments across the region have launched significant attempts to upgrade the region’s outdated infrastructure. Mexico’s 2007 National Infrastructure Programme (PNI), for instance, calls for investing US$226 billion until 2012 in infrastructure works, including in the construction-intensive improvement of highways, ports and airports. Not to be outdone, Brazil earmarked some US$354 billion for infrastructure investment between 2007 and 2010 under its Growth Acceleration Programme (PAC). In March, the government presented the US$532 billion successor package, known as PAC 2, which, alongside the second stage of ‘My House, My Life’, calls for a raft of infrastructure projects, mostly in urban areas, in addition to the works in preparation for the football World Cup in 2014 and the Summer Olympics in 2016. How PAC 2 will be implemented will partly depend on the outcome of the October presidential elections, but, regardless of who succeeds popular incumbent Luiz Inácio Lula da Silva, there is a general consensus over the desirability of infrastructure expenditure.

Spending will also be up in Chile and in Haiti, as both countries have to shoulder massive reconstruction efforts.

Other governments are also pursuing ambitious projects. The massive construction works required to double the capacity of the Panama Canal by 2014 are in full swing and president Ricardo Martinelli has pledged to construct an urban metro system in Panama City. Such public spending will continue to play an important role in propping up the cement sector, in particular when demand for residential construction is sagging. Cement producers in the Dominican Republic, for instance, have reported a 13% increase in cement demand between January and April, compared to the same period last year, which they say has been driven by public transport projects, including construction of a metro line in Santo Domingo and the Corredor Duarte highway project.

For the full article, see the September issue of World Cement available for subscribers to download now.

Authors: Rafael Amiel, Diego Moya-Ocampos, Irenea Renuncio and Christian Voelkel, IHS Global Insight

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