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Negative outlook for European building material companies

The outlook for European building materials companies remains negative, says Moody's Investors Service in a new Industry Outlook report. Despite the fact that a bottom may have been reached in terms of volumes in most markets, the industry remains under pressure and signs of recovery remain elusive.

“Demand for building materials in 2010 is likely to remain weak, leading to companies posting - at best only slightly improved results compared with 2009,” says Matthias Hellstern, Moody's senior vice president and author of the report. “Higher energy costs in H2 2010 could also lead to a squeeze in profitability if prices cannot be adjusted accordingly.”

In the report, Moody's says that due to seasonality and the time it takesto implement projects, economic stimulus programs will only have an effect towards H2 2010 and will then only partially help offset lower demand from non-residential and residential construction. Furthermore, with the economic stimulus packages due to expire in 2011, Moody's believes that questions remain regarding how sustainable the recovery in commercial and residential construction in mature markets will be, which
could lead to renewed pressure on volumes and prices.

“Moderate pricing pressure will continue, especially due to low volumes in mature markets, such as the US, the UK or Spain, as well as continued volume declines in some markets in Eastern Europe. Prices should remain stable in the consolidated markets of France and Scandinavia,” Hellstern predicts.

This year's harsh winter weather will most likely lead to extremely weak results among cement companies in Q1 2010, but that should not be reflective of the expected performance throughout the year. Moody's will focus its analysis in 2010 on early signs of recovery of construction activities as soon as the weather allows. “In addition, we will continue to review the companies' short-term liquidity and refinancing situations and their prospects for profitability despite the weak economic environment,” says Hellstern.

The rating agency notes that there are some positive signs in certain markets, such as Africa, South America, India, Indonesia and China in terms of demand, primarily driven by positive GDP growth, population growth and increasing urbanization. “However, we expect the construction industry to continue to struggle this year in the UK and Spain, hence building materials volumes will continue to decline there. Construction activity in other regions, such as Germany and France, is likely to stabilize or decline only slightly, while it should pick up compared to 2009 in other markets, such as Poland, North Africa, South America and Asia,” Hellstern concludes. (BBJ Online)