Exane BNP Paribas Building Materials XXI General Assembly

Equities Exane BNP Paribas Building Materials

XXI General Assembly and Congress of Partners FICEM “World Cement markets trends ” Exane BNP Paribas’s new Scenario for 2011-2012

Quito, October 2011 (INTERNAL USE ONLY) [email protected] Yassine Touahri +44 207 039 95 23 [email protected] Team [email protected] European Building Materials: Introduction

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Paul Roger CFA (London): ✉ [email protected] ☎ +44 203 430 84 15

Paul Roger, 34, graduated from Durham University in 1998 and has a decade’s experience covering the Building Materials sector at HSBC, ABN AMRO, Deutsche Bank and ING. He has also managed money for a top London hedge fund and spent a year working for Renaissance Capital in Russia, covering global infrastructure markets. Paul is a Chartered Financial Analyst and Chartered Accountant. He joined as Sector Head of Exane’s Building Materials Team in 2010.

Yassine Touahri (London): ✉ [email protected] ☎ + 44 207 039 95 23

Yassine Touahri, 28, graduated with a MsC in Management from Grenoble’s Ecole de Management and spent one year studying at the Warwick Business School in 2006/2007. In 2006, Yassine worked in Saint-Gobain’s investor relations department and joined Exane’s Building Materials and Construction team in 2007.

Rohit Bhatia (London): ✉ rohit.bhatia @exanebnpparibas.com ☎ + 44 203 430 84 33

Rohit Bhatia, 25, graduated from Leeds University in 2007, and started his career at WestLB as a Debt Origination Analyst. Subsequently, he worked as an Equity Research Associate at Société Générale within the Telecoms Team. Rohit has completed his CFA exams and is awaiting his charter. He joined Exane’s Building Materials Team in 2011.

> We work closely with the Infrastructure Team of Nicolas Mora and Stanislas Coquebert (contactable on [email protected]) Summary Equities 3 What’s changed during the past few months? - Main take-aways from H1 2011 - Increased pressure on mature markets banks and governments - Deteriorating confidence - Lower growth prospect in emerging markets

Our New Scenario for construction markets in 2011-2012 - Residential / Non Residential / Infrastructure - Our Scenario for cement volumes in 2011 - A first tentative of scenario for cement volume in 2012

Challenging price-cost dynamics in 2011 and a question mark for 2012 - Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressures may however abate in 2012 - But new entrants in the cement indutry create a question mark on pricing in emerging markets ?

An overview of the relationship between the steel and cement industry - Should the steel Industry invest in cement ? - Many steel industry players are facing cash-flow constraints as margins are under pressure - However some degree of integration in cement make sense in some emerging markets

Conclusion Main take-aways from H1 2011 -Demand was very strong in Q1 11 (favourable base effect because Q1 10 was heavily impacted by bad weather in Europe and North America) - In contrast, trends in Q2 11 have been relatively disappointing (tough weather in the US, and Canada, lacklustre demand in India, very weak volumes in Southern Europe) Equities 4

Q111 cement volume trends (YoY) Q211 cement volume trends (YoY) What’s changed over the last few months: increased pressure on mature markets banks and governments - European governments have come under renewed pressure to reduce debt - Investors are also starting to question the strength of banks’ balance sheets Equities 5 European sates have been facing increasing European banks are now facing market pressure to reduce debt increasingly high financing costs

European sovereign CDS spread have increased by more than 50 European bank CDS have also continued to surge to an bps on average since June unhealthy level this summer 350 600 300

250 500 200

150 400 100

50 300 0

-50 200

-100

-150 100 Italy Spain Latvia Ireland Estonia Poland Austria France Croatia Croatia Iceland Greece Greece Norway Ukraine Ukraine Sweden Sweden Belgium Belgium Bulgaria Portugal Hungary Hungary Slovakia Slovenia Australia Australia Romania Romania Denmark Denmark Lithuania Germany Germany 0 Switzerland Switzerland Netherlands Netherlands Czech Republic Czech United Kingdom United Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11 Dec 05 Aug 06 Dec 06 Aug 07 Dec 07 Aug 08 Dec 08 Aug 09 Dec 09 Aug 10 Dec 10 Change in CDS spread between end June & end August 2011 EU BANKS SECTOR CDS INDEX 5Y - CDS PREM. MID What’s changed over the last few months: deteriorating confidence - In Europe both business and consumer confidence deteriorated this summer - In the ISM (US business climate) was clearly disappointing and consumer confidence remains Equities well below its pre-crisis level 6 Deteriorating business confidence Negative inflection in consumer confidence

10 0.0

0 (5.0)

(10.0) -10

(15.0) -20 (20.0)

-30 (25.0) Europe

-40 (30.0)

-50 (35.0) Jul 11 Jul 10 Jul 09 Jul 08 Jul 07 Jul 06 Jul 05 Oct 10 Oct 09 Oct 08 Oct 07 Oct 06 Oct 05 Apr 11 Apr 10 Apr 09 Apr 08 Apr 07 Apr 06 Apr 05 Jan 11 Jan Jan 10 Jan Jan 09 Jan Jan 08 Jan Jan 07 Jan Jan 06 Jan Jan 05 Jan Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Sep 05 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 May 05 May 06 May 07 May 08 May 09 May 10 May 11

Business Climate Indicator in Europe Europe consumer confidence indicator

65 120 110 60 100 55 90

50 80 70 45 60 USA 40 50 40 35 30 30 20 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Apr 05 Apr Oct 05 06 Apr Oct 06 07 Apr Oct 07 08 Apr Oct 08 09 Apr Oct 09 10 Apr Oct 10 11 Apr Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 11 Jan 10 Jan 09 Jan 08 Jan 07 Jan 06 Jan 05 Sep 10 Sep 09 Sep 08 Sep 07 Sep 06 Sep 05 May 11 May 10 May 09 May 08 May 07 May 06 May 05

US ISM PURCHASING MANAGERS INDEX (MFG SURVEY) SADJ US consumer confidence index What’s changed over the last few months: Lower growth prospect in emerging markets - Monetary tightening (need to control inflation) - Lower world GDP growth (potential stagnation of some large mature markets). Equities 7 Exane economists now expected a marked slowdown Tightening monetary policy in emerging markets in emerging market GDP growth 2012 Change in central bank reference rates since 2010 Emerging and Developing Economies GDP forecasts for 2011 & 2012

4.0 7.1

2012 3.5 6.9 3.0 2011 2.5 6.7 2.0 2011 1.5 6.5

1.0 2012 6.3 0.5 2011 0.0 6.1 (0.5)

(1.0) 5.9

(1.5)

5.7 2012 India Brazil Egypt China Russia Mexico Nigeria Australia Indonesia Phillipines

South Africa 5.5 Current Central bank interest rates vs. 2010 rates May Scenario Aug. Scenario Sep. Scenario Summary Equities 8 What’s changed during the past few months? - Main take-aways from H1 2011 - Increased pressure on mature markets banks and governments - Deteriorating confidence - Lower growth prospect in emerging markets

Challenging price-cost dynamics in 2011 and a question mark for 2012 - Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressures may however abate in 2012 - But new entrants in the cement industry create a question mark on pricing in emerging markets ?

Conclusion Residential construction: Potential weakness in Europe / Slow recovery in the US - In Europe, 2011 housing trends have so far developed in line with our expectations - However, banks’ woes, austerity and unemployment put the recovery at risk - US housing permits and starts have been hovering around 500-600k per year since early 2009 and there is a large underlying need for housing (over 1m per year) Equities -However unemployment failed to abate and excess inventory remains very high 9 US housing still hovers around the bottom European housing permits are resilient but lending 1,850 60% activity is likely to slowdown 1,650 40%

30 20% 1,450 20% 20 1,250 0% 10% 1,050 10 (20%) 850 0 650 (40%) 0% -10 450 (60%) Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Apr 07 Apr Oct 07 08 Apr Oct 08 09 Apr Oct 09 10 Apr Oct 10 11 Apr -20 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 (10%) USA- Housing Permits ('000s) USA- Housing Starts ('000s) -30 YoY % Change - Permits YoY % Change - Starts

-40 (20%) ...and excess inventory remains high -50 2,500

-60 (30%) 2,000

-70 1,500 -80 (40%) 1,000 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 500 Impact of housing market prospects on mortgage demand (LHS) Housing Permits EU27 YoY % change (RHS) 0 Q1 2002 Q3 2002 Q1 2003 Q3 2003 Q1 2004 Q3 2004 Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011

Estimated excess level of vacant home for sale or for rent ('000) Non-residential construction: deteriorating leading indicators - In Europe, non residential trends have historically been well correlated with the business climate with a time lag of one to two years - This suggest that the erosion of business confidence witnessed this summer Equities will impact non residential investments in 2012 or 2013 - In the US, the leading indicator for non residential construction (ABI) has 10 historically been well correlated with non residential trends 12 to 18 months Deterioratinglater. The non figures residential also suggest indicators a slowdown suggest a slowdown or decline in non residential activity

65.0 35% 70.0

65.0 60.0 25% 60.0 55.0 15% 55.0 5% 50.0 50.0 (5%) 45.0 45.0 (15%) 40.0 USA 40.0 (25%) 35.0 35.0 (35%) 30.0 30.0 May 97 May 98 May 99 May 00 May 01 May 02 May 03 May 04 May 05 May 06 May 07 May 08 May 09 May 10 May 11 Jul 00 Jul 01 Jul 02 Jul 03 Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 USA - Construction spending private non residential -YoY % change ( 3 month average) USA - AIA Architecture Billings Index USA - AIA Architecture Billings Index - 3 month average

10 10% 10.0

5.0 0 5% 0.0 -10 0% (5.0) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012e 2013e -20 (10.0) (5%) (15.0) -30 (10%) (20.0) EUrope -40 (25.0) (15%) -50 (30.0)

Jul 00 Jul 01 Jul 02 Jul 03 Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 (20%) (35.0) Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan

Business Climate Indicator in Europe Non Residential Spending in Europe Business Climate Indicator in Europe Infrastructure: austerity measures and phasing out of stimulus create a risk on 2012 - Significant indebtedness and stress in many mature markets - Infrastructure trends above historical averages in many markets (Stimulus) Equities - History suggests potential for big declines if political will breaks down 11 In the US, states are under pressure to cut spending and there is Large budget deficit in Europe suggest no clear consensus at the federal level on infrastructure that debt reduction will be a priority

Gap between planned tax revenues and expenditure by states European 2011 budget deficit as a % of GDP Our demand assumptions for the full year 2011 - In Mature market: we expect demand to be stable (weak trends in Southern Europe and Ireland offsetting growth in Northern Europe ) - In Emerging markets, we expect demand to be solid with the exception of Egypt (Arab Spring) Equities and Philippines (delay in infrastructure projects) 12 Cement Volume Scenario 2011 - Mature markets 0%, Emerging markets (ex. China) +4% A tentative scenario for Cement demand in 2012 - A slight decline in US demand (phasing out of stimulus projects) - Weak European trends but more resilient in Northern Europe - Emerging countries are growing but at slower pace in many countries due to the slowdown if the world economy Equities 13 Cement Volume Scenario 2012 - Mature markets -1%, Emerging markets (ex. China) +4% Summary Equities 14 What’s changed during the past few months? - Main take-aways from H1 2011 - Increased pressure on mature markets banks and governments - Deteriorating confidence - Lower growth prospect in emerging markets

Challenging price-cost dynamics in 2011 and a question mark for 2012 - Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressures may however abate in 2012 - But new entrants in the cement industry create a question mark on pricing in emerging markets ?

Conclusion Cost inflation is a key issue in 2011 - Petcoke and coal prices have increased significantly vs. early 2010 - We estimate that in 2011, the energy bill of cement players is on average up 13% vs. last year.

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Evolution of coal, Petcoke and oil prices since 2000

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0 Jul 00 Jul 01 Jul 02 Jul 03 Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jul Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11

Coal USD/t C&F Petcoke USD/t C&F Oil prices (USD / barrel) Price hikes in 2011 were often not sufficient to fully pass on cost inflation -Price hikes were often announced because of the rise in costs -However, in most regions (with the notable exceptions of China) cost inflation could not be fully Equities passed on to clients and margins came under pressure. 16 Q1 cement margin evolution

Cement Prices in 1H 2011 +3% excl. China (YoY% change)

Q2 cement margin evolution Cost pressures should abate in 2012 - Petcoke prices and other inputs look to have stabilised - Energy cost inflation forecast in our simulation to fall to +1% YoY in 2012 vs +13% in 2011

Equities 17 Energy prices are starting to come down (notably Petcoke) Which means easing energy cost inflation in 2012

Recent evolution of International Petcoke & Coal prices Estimated average cement energy bill in EUR/t 250 17.0 +13% +1% 15.0

200 13.0

11.0 150

9.0

100 7.0

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50 3.0

1.0 0 (1.0) 2010 2011 2012 Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar International Coal Petcoke Local coal Alternative fuel Gas & other Electricity Coal USD/t C&F Petcoke USD/t C&F Oil prices (USD / barrel) However utilisation rates remain very low in many mature markets -With the collapse of volumes in mature markets utilisation rates are now often below 60% -This explain the relatively weak industry pricing power in 2010 & 2011. - With no expected improvement in utilisation rates in 2012, pricing power could remain subdued Equities 18 Cement utilisation rates in 2012 World average 74% (mature market 57%, emerging markets 77%) And new entrants are creating a question mark on prices in some emerging countries - Majors slowed capacity addition and there is an opportunity to take market share in many regions - Many new entrants from emerging countries have announced new capacity between 2010 and 2015 - This is creating a question mark over pricing power of established players in markets that are becoming more Equities fragmented 19 Estimated market share of new entrants by 2015 Summary Equities 20 What’s changed during the past few months? - Main take-aways from H1 2011 - Increased pressure on mature markets banks and governments - Deteriorating confidence - Lower growth prospect in emerging markets

Challenging price-cost dynamics in 2011 and a question mark for 2012 - Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressures may however abate in 2012 - But new entrants in the cement industry create a question mark on pricing in emerging markets ?

An overview of the relationship between the steel and cement industry - Should the steel Industry invest in cement ? - Many steel industry players are facing cash-flow constraints as margins are under pressure - However integration into cement make sense in some emerging markets and some players have cash

Conclusion Should steel producers invest into the cement industry? We see three main criteria to look at for a steel player to invest cement: - Availability of slag and differential between clinker cost & slag prices - Profitability and growth prospect of the local cement markets - Other investment opportunities in the steel & mining sector Equities 21 Elements to be considered for Elements to be considered against entering the cement industry entering the cement industry

Availability of slag and differential Slag is available and prices are Limited slag production and/or slag between clinker cost & slag prices substantially lower than clinker cost prices close to clinker costs Cement manufacturers are capturing Using slag only offer cement producers the incremental value marginal margin benefit Integrating into cement enable steel Selling slag to cement producers is producers to capture the differential nearly as profitable as vertical integration. It is also less risky.

Profitability and growth prospect High return and/or attractive growth Low return and/or limited growth of the local cement markets prospect of the cement industry potential for the local cement industry Return on capital is attractive even Vertical integration may offer a cost without a slag cost advantage advantage but total return may not be Diversifying in cement can appear an attractive (low margin on clinker interesting option if other investment production) opportunities are limited There are probably better investment opportunities elsewhere

Other investment opportunities in Steel manufacturers that are largely Pure steel manufacturers need first to the steel & mining sector vertically integrated into mining have invest in maintenance potentially large cash reserve Debt reduction is often a priority Mining assets are expensive (high Investment to optimise costs are likely coking coal and iron ore price) to be considered Overcapacity in steel often make Integration into mining to secure raw further investment irrelevant materials is likely to be considered a Diversification into cement can make priority over diversifying into new sectors sense in profitable cement markets Many steel industry players are facing cash-flow constraints as margins are under pressure -Demand slowdown has been putting steel prices under pressure while Iron ore and coking coal prices remain near historical high - The lower utilisation rates in the steel industry in mature markets has therefore translated into a profitability that is lower than in the last cycle - As a result, many steel manufacturers are have limited cash flow power Equities - However, miners that are integrated into the steel industry benefited from the high prices of iron ore and/or coking coal and have cash 22 Declining Steel prices Iron ore prices near historical high

Coking coal prices also remains very high As a result, steel industry profitability is under pressure 900 110%

800 100% 700

600 90%

500 80% 400 USD/tonne 300 70%

200 60% 100

0 50% Q1 02 Q1 04 Q1 06 Q1 08 Q1 10 1Q12

Margin over raw m aterials (spot) O E C D u tilis a tio n ra te (% ) Integration into cement can make sense in some emerging markets for miners/steel producers that have cash Equities 23 Attractive market are likely to be favoured Market with large steel industry 2011e EBITDA per tonne (in $) in the cement industry Crude Steel Production by Country (2010

Integrating in cement can make sense in Brazil (large steel & mining industry and profitable Emerging markets with large steel production , and relatively attractive growth prospect & profitability cement industry). CSN mining assets have also been very cash generative. There is a question mark in Russia, Ukraine, Turkey, Iran, China and India. Some steel players have started to invest in cement but the case for diversification could become more Emerging markets with large steel production , attractive growth compelling with better utilisation rates and/or higher cement margins. prospect & potentially attractive return if margins & prices improve In Mexico, ArcelorMittal the largest player face cash constraints. In Saudi Arabia, energy prices and clinker costs are relatively low, which may make the advantage of using slag a bit less attractive that in other countries. The prevailing steel Emerging markets with large steel production and attractive margin but limited growth profile technology is also producing less slag. South Africa growth prospect for cement demand are limited. In Egypt, political risks and limited Country in which steel manufacturers have started to integrate into visibility on cement margin are likely to deter investment the cement industry In mature market, overcapacity and low growth prospect make investments by steel producer in the cement industry unlikely Summary Equities 24 What’s changed during the past few months? - Main take-aways from H1 2011 - Increased pressure on mature markets banks and governments - Deteriorating confidence - Lower growth prospect in emerging markets

Challenging price-cost dynamics in 2011 and a question mark for 2012 - Price hikes in 2011 were often not sufficient to fully pass on cost inflation - Cost pressures may however abate in 2012 - But new entrants in the cement industry create a question mark on pricing in emerging markets ?

An overview of the relationship between the steel and cement industry - Should the steel Industry invest in cement ? - Many steel industry players are facing cash-flow constraints as margins are under pressure - However integration into cement make sense in some emerging markets and some players have cash

Conclusion An overview of what happened during the crisis Since 2006, demand fell by more than 30% in mature markets … While volumes increase by more than a third in emerging countries.

Equities 25 Change in cement volumes between 2006 and 2010 Conclusion Equities 26 For 2012 we have reviewed down our scenario of recovery We have cut our Europe & US infrastructure assumptions to reflect austerity measures and the phasing out of stimulus. We have also cut Europe and US housing forecasts in view of the risk created by forthcoming austerity programmes and the high levels of unemployment. In addition to that, we have reviewed downward our estimates for non residential construction and renovation in mature markets to take into account tougher macro-economics trends, even if we expect both to stabilise. Looking at emerging markets, trends have until now been in line with our estimates and we have not materially changed our assumptions as regards volumes for 2011. We however expect a slowdown in emerging countries next year reflecting lower economic growth worldwide. Two key industry challenges for international players: restructuring in mature markets and investing in emerging markets Infrastructure activity in mature markets is likely to remain depressed until 2015 as governments are reimbursing their debt. In this scenario, utilisation rates for the cement industry would stay at a low level. We believe that one the main challenges facing the international cement players will be to restructure their mature markets positions in order to improve profitability. The recovery of cash flows in mature market is indeed key to restore the ability to invest in new plants in emerging market, capture growth opportunities and deter new entrants. A new paradigm for the cement industry? Emerging market companies (within and outside the cement industry) did not face the collapse of cash flow in Europe and North America. As a result, capacity addition in emerging markets have continued and new players have appeared in many countries that are now becoming more fragmented. For instance, some steel and mining players have started to invest in cement in Brazil, India, Russia, and China. Reversing the fragmentation of emerging markets by acquiring new entrants could require a lot of capital. However, European based players have often balance sheets constraints as cash flow fell dramatically in their core markets and the pace of cash flow recovery is uncertain in mature countries. Consequently, many majors could have to first focus on key markets and divest non core assets while many emerging market players have the cash flow to invest.

Do not hesitate to contact me during the conference if you want to discuss other potential outcomes or if you want be added to our mailing list and receive our research. Equities 27

Gracias / Thank you / Merci