Certainly Mexican cement producer Cemex (CX) isn’t out of the woods yet, but the trees sure look a lot less menacing.
The company wound up buried under cord upon cord of debt, thanks to an aggressive acquisition strategy that culminated in the 2007 purchase of Rinker, an Australian supplier of building materials, for $14.2 billion.
Shortly after that, well, you know what happened. The collapse of the U.S. housing market decimated demand for cement and other building supplies, and the financial crisis put the squeeze on debt-laden companies.
Cemex sold off some assets, but when you’re carrying $18 billion in debt (or $21 billion by U.S. standards), it’s hard to make a big dent unless you’re willing to sell off some of your best assets. That Cemex hasn’t been willing to do. The company has stubbornly held onto the U.S. operations it acquired in the Rinker deal. Those were the reason for doing the deal in the first place.
It now looks like Cemex is going to get some breathing room from its bank creditors. They’ve agreed to restucture about $15 billion of the company’s debt. “Restructure” doesn’t mean “forgive.” And Cemex will have to pay off this debt down the road and at a higher interest rate.
But the deal, and we don’t know the terms yet, gives the company time to wait for a recovery in the U.S. construction industry.
http://www.roadsbridges.com/Cement-consumption-expected-to-drag-for-another-year-newsPiece19697
Cement consumption expected to drag for another year
New report from PCA reveals slow consumption level through 2010
December 3, 2009
Although recent economic news and activity may suggest a technical end to the “Great Recession,” the conditions facing the construction industry are likely to remain weak for another year or more, causing a drag on cement consumption, according to the most recent economic forecast from the Portland Cement Association (PCA).
PCA expects 2009 will represent this recession’s trough for total cement consumption in the U.S.—reflecting a 26.6% decline from weak 2008 levels. A modest 5% increase will materialize in 2010, with significant growth in consumption expected for 2011 and beyond.
“Given this weak outlook for private-sector construction, any near-term turn in overall construction activity will be dictated by public construction,” Edward Sullivan, PCA chief economist said. “Unfortunately here state deficits are sterilizing the spending impacts of the federal economic stimulus plan.”
According to the Center on Budget and Policy Priorities, 33 states are in severe deficit positions for fiscal 2010, compared to 21 for fiscal 2009.
More than 90% of all highway and street spending is put in place by state and local governments. State fiscal conditions influence discretionary public construction spending, and the harsh economic environment facing state and local governments may result in a double-digit decline in discretionary highway/street spending during 2009, Sullivan said.
“Reductions in state spending coupled by the slow release of stimulus funds suggest the cement industry will see very little second-half stimulatory impact during 2009. However, more than 5 million tons of ARRA highway cement consumption should materialize in 2010 and 2011.”
Source: Portland Cement Association December 3, 2009
If cemex is such a debt-laden basket case, why not buy lafarge? It’s making money, has a lot less debt and a p/e of about 6.
http://www.roadsbridges.com/index.cfm?fuseaction=showNewsItem&newsItemID=19005
Stimulus fails to elevate cement industry
PCA expects consumption to decline through 2009
August 19, 2009
Bureaucratic delays in releasing funds coupled with long lags between outlays and construction activity for American Recovery and Reinvestment Act (ARRA) projects will lead to very little stimulatory impact on cement consumption in 2009, according to the most recent economic forecast from the Portland Cement Association (PCA).
PCA expects total cement consumption to decline 22% during 2009 to 75 million metric tons. The meeting of total ARRA obligations in 2010 combined with the beginning of a sustained pick-up in the residential sector will contribute to a 10.9% increase in total cement consumption in 2010, followed by a 13.1% gain in 2011.
“The letting of ARRA dollars has been slower to develop than expected,” Edward Sullivan, PCA chief economist said. “A sustained and dramatic escalation of outlays must occur if a sizeable increase in highway construction is going to materialize in 2009.”
The public construction sector, which typically accounts for 50% of cement consumption, also is hampered by large state deficits caused by a perfect storm of adverse economic conditions and job layoffs, leading to declines in state tax revenue. Sullivan expects as jobs are created and consumer spending returns, public construction spending will rebound, but not until 2011.
“The residential sector has largely run its course as a significant cause of cement consumption declines and will start to be a strong contributor to growth in late 2010, early 2011. Nonresidential construction will continue to be a drag until then end of 2011,” Sullivan said.
Source: Portland Cement Association August 19, 2009
They went deeply into debt in buying Florida Rock and Rinker — just before the bottom dropped out of the economy, thus devaluing the assets they bought in those deals.
Infrastructure stimulus money should be working its way through design and planning stages and actually start being spent on material before too much longer. That should improve CX top line. They still have heavy debt and interest to pay, but higher utilization of semi-idle manufacturing capacity will generate revenue without much further capital investment. At least that’s what I’m counting on.
Cement production, believe it or not, is extremely profitable business. That is why I can hardly understand CX losses and low profit margin.
It’s not only the housing market that impacts cement usage. The Texas Department of Transportation a few years ago had new construction of over $5 billion a year. Last year TxDOT lowered their annual projected construction to $2.4 billion a year for the next 10 years. They’ve now lowered their projected new construction to 1.4 billion next year. This has a dramatic impact on cement, steel and aggregate consumption in TX. This scenario is occuring nationwide. Our elected officials have and are ignoring the need for new sources of revenue for our transportation infrastructure.
One other thing not accounted for yet on the books is the nationalization they suffered of their assets in Venezuela for which they have so far received nothing. They rejected Chavez’s original offer as too low. Most of the earlier confiscations Venezuela made (e.g. telephone) were compensated fairly. The Mexican government has sided with Cemex — Chavez has enough problems with international affairs and will eventually knuckle under. The confiscation came right as oil was dropping and Venezuela’s revenues consequently falling. Eventually CX will get something for those assets (only represented about 2% of company as best I recall).
MEXICO CITY (Dow Jones)–Mexican cement and building materials company Cemex SAB (CX) will limit capital expenditure to $700 million in 2010, raising that to $800 million a year between 2011 and 2013, Chairman and Chief Executive Lorenzo Zambrano said Monday.
Cemex CEO: Sees Ebitda Growth In Low Teens On Reduced Capex
Monday 08/17/2009 11:15 AM ET – FW
MEXICO CITY (Dow Jones)–Fitch Ratings said Tuesday it affirmed cement company Cemex’s (CX) credit rating at B, and changed the outlook to stable following the company’s $15 billion debt refinancing.