Europe Materials experienced very challenging trading conditions in almost all markets in 2009. The financial crisis severely impacted investment in new housing and private non-residential building. Government-funded infrastructure and public building reduced this impact somewhat.
The financial crisis created very difficult market conditions for Europe Materials leading to significantly reduced volumes and a drop in margins.
In response, initiatives launched to cut costs and reduce capacity during 2008 were intensified and helped mitigate the impact on profitability.
A curtailment of capital expenditure, together with a reduction in working capital, resulted in a strong cashflow performance for the year.
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Ireland
Construction activity in Ireland fell steeply during the year and cement volumes were down 45% on 2008 levels. Following the market contraction experienced in 2008, the residential and commercial sectors reduced further, reflecting the overall weakness in the wider economy, while the agriculture and infrastructure sectors, which remained resilient in 2009, weakened as the year progressed. Additional cost-reduction programmes were implemented across all the Irish businesses to reduce capacity with consequent one-off rationalisation costs. The decline in sales volumes and the impact of the significant rationalisation costs resulted in lower margins and an operating loss after €6 million asset impairment charges and €58 million restructuring costs.
Benelux
Cementbouw, our cement trading, readymixed concrete and aggregates business, faced a difficult second half of the year in which volumes declined. While cost reductions and lower fuel prices limited the impact of lower volumes, overall operating profit declined.
Central and Eastern Europe
The Polish economy continued to expand with modest 1.5% GDP growth in 2009. Interest rates were reduced to 3.5% as inflation weakened in the second half of the year but unemployment increased. Construction activity in the first half was impacted by a more severe winter than in previous years and by the uncertainty in international financial markets. Activity in the second half improved, especially in infrastructure, and volumes were broadly in line with 2008 levels. Overall for the year, cement volumes were down 10% and volumes of products such as walling and readymixed concrete to the weaker residential and commercial segments were also down. This reflects weaker residential, commercial and industrial construction markets offset by increased public spend on infrastructure and civil engineering. However, with stiff competition in all product areas, margins were under pressure. While this was somewhat offset by significant cost savings initiatives, overall operating profit declined.
In Ukraine GDP fell by 14% in 2009 and consequently construction volumes contracted significantly in the first half. Our cement sales volumes stabilised somewhat at a lower level in the second half to finish the year 35% below the record 2008 levels. While operating profit for the year was well below 2008, stable pricing and significant cost savings, particularly in the area of fuel, resulted in a reasonable performance in a difficult year.
Finland and the Baltics
Economic output in Finland declined by 7.8% in 2009 as the international downturn negatively impacted on the export-led industrial base. Unemployment reached almost 9% by year-end, and is expected to increase further during 2010. Overall construction output in Finland declined by about 15%. Reductions of almost one third were seen in the new residential and new non-residential sectors which are important drivers for cement demand and which contributed to our cement volumes in Finland being 40% lower than in 2008. Central government finances are stable however, and a fiscal stimulus package which focussed on residential and infrastructure construction helped to mitigate somewhat the volume declines. A wide range of cost-reduction initiatives, including extensive production shutdowns and layoffs, were implemented across all businesses and price increases were applied to recover higher energy input costs.
Our operations in the Baltic States of Estonia and Latvia, and in St. Petersburg in Russia, suffered an unprecedented contraction in volumes. In response, significant operating adjustments were implemented including the temporary suspension of some business lines until such time as trading conditions improve.
Overall operating profit declined compared with 2008.
Switzerland
GDP declined by 3.4% in 2009, exports dropped by 12.5% but private consumption remained stable. Construction output rose by 3.3%, the highest growth since 2004. Civil engineering, supported by the national stimulus programme, grew by 8.8% and residential construction was up by 2.3%. Industrial construction activity declined. Lower fuel costs partly due to high usage of alternative fuels, together with increased volumes in our cement business and better margins in our downstream readymixed concrete and aggregates business, led to a profit outcome ahead of 2008.
Iberia
Spanish construction activity continued its decline in 2009, falling by about 20%. Residential and non-residential building fell steeply, only partly compensated by infrastructure spend, resulting in a lower profit outcome.
The Portuguese economy declined by 2.7% in 2009; however construction fell by about 7% with the residential sector registering the largest decline. Our Secil joint venture, with three cement plants in Portugal, suffered from reduced domestic demand but increased its export volumes albeit at lower prices. While Secil enjoyed a good performance in its activities outside Portugal due to favourable demand and pricing coupled with lower fuel costs, operating profit overall was down on 2008.
Eastern Mediterranean
As expected, the Turkish economy and domestic Turkish construction activity continued to contract in 2009. Strong export demand however helped selling prices in the Aegean region to stabilise in the second half of the year and the implementation of strong cost-control measures and improved operating efficiencies helped partly to offset the downturn in domestic demand. Overall operating profit was lower than 2008.
China
Our Chinese operations performed well in 2009 with cement volumes in northeast China increasing by 12% due to strong demand from infrastructure projects which were funded by the government stimulus programme. This increased demand created a favourable pricing environment that enabled our wholly-owned Sanling Cement to improve on prior year’s performance; our new associate Yatai Cement, in which CRH has a 26% share, exceeded expectations and reached record volumes.
India
My Home Industries Limited (MHIL), our 50% cement joint venture in the Andhra Pradesh region of southern India, had a strong performance in the first half of 2009 which benefited from strong government investment in housing and infrastructure. However, following the national elections, market conditions weakened in the second half with newly-commissioned cement capacity putting pressure on volumes and prices across our market. This resulted in operating profit for the year broadly in line with 2008. The new grinding plant near Vishakapatnam in eastern Andhra Pradesh was commissioned in August 2009.
Outlook
Further declines in construction activity in Ireland are anticipated in 2010. Lower consumer confidence, continuing restricted credit availability, unsold building stock and supply overcapacity will continue to put further pressure on volumes and margins.
Polish GDP is forecast to grow by between 1.5% and 2% in 2010, however unemployment is expected to continue to increase. Inflation levels are expected to continue to decline and interest rates are likely to remain low. An increase in overall construction activity is expected, supported by a significant increase in infrastructure contracts awarded and a number of sports and stadium projects required for the European Football Championships in 2012.
In Ukraine, construction activity is forecast to increase modestly in 2010 resulting in improved volumes of cement. This together with continued focus on cost efficiencies should deliver improved margins.
Construction demand in Finland is set to fall further by a mid single-digit percentage in 2010, with continued weak levels of activity in non-residential construction partially offset by improving residential construction and relatively stable infrastructure volumes.
Switzerland is expected to stabilise at current levels. Both residential construction and infrastructure will continue to grow and are expected to compensate for a decline in non-residential activity.
In Portugal, the outlook remains challenging with a further decline in residential activity likely to be offset by increased infrastructural activity. Cost efficiencies and improved use of alternative fuels should help maintain margins, but export markets are expected to be more challenging.
Turkish GDP is forecast to grow by 2.5% in 2010 and domestic construction activity is expected to increase at a similar rate. The positive trends experienced during the second half of 2009 are forecast to continue into 2010 although cement exports are likely to face stiff competition.
Cement demand is expected to grow strongly in northeast China due to the continuing Government stimulus package and an improving residential market. We anticipate further margin improvement at our Sanling Cement business. The ongoing investment programme with Yatai Cement, together with a full year’s contribution from new acquisitions, will bring Yatai Cement’s total cement capacity to 21 million tonnes.
In India, we expect growth in demand in the Andhra Pradesh region to recover during 2010 and this should ease the pressure resulting from additional supply capacity. A full year contribution from MHIL’s new grinding plant is expected to add to sales growth and performance.
Overall we anticipate more stable markets for Europe Materials’ products in 2010 and we expect to benefit from lower energy prices and cost reductions in our operations. Industry capacity reductions and some increase in demand later in the year should be supportive to margins. However, the year has commenced with severe weather in many markets and the extent to which this will impact on demand and pricing levels for the year as a whole remains uncertain.
