Watching
fuel prices
T
he rout experienced by some ‘new
economy’ stocks has prompted
many investors to adopt a more
Energy is a keyvariablethatshould not be underestimatedinthe building
materials sector. Given the current phase of high fuel prices, Cr4dit
Lyonnais Securities Europe adopts a neutral stance on the sector, with two
exceptions:St-Gobain and Ciments Francaise. Coal and petcoke prices have
risen substantially since mid 1999,and current producers are likely to feel
the effects from 2001,Inthis
articleJean-Chrlstophe
Lef&vre analysesthe
current influence of energy costs ontheleading cement producers.
‘economical’ strategy in order to
reduce risks. This has led them to incorporate into their reflections either the theme
of
assets
offering
recurrent
profitability
outlook, but an undemanding valuation
(particularly industrials). The building
materials sector clearly matches this last
criterion (13.2 x 2001E earnings). After
the recovery seen in
December, from
is it now time to buy the
In 2000, the average
p r i c e o f petcoke ( f o u r p e r
sector? Analysts, Credit Lyonnais Securities
cent sulphur C&F) rose by 85
Europe recommends a cautious approach
for the moment, except for particular
per cent versus the average
cases. As
price trends, the neutral stance on invest-
of general shortages. There
are three main reasons for
ment in the building materials sector is the
this
safe option, except for Saint-Gobain
l
very
low levels,
long
early
as doubts persist over fuel
(less
exposed to energy costs) and Ciments
Francais (speculative appeal).
Fuel accounts for 14 per cent of a dryprocess cement producer’s cash costs in
Europe and about 17 per cent of cash costs
in Latin America. In
it was also
price (CSFfour
per cent sulphur)
SCWh
price for 1999, in a context
development:
demand from Spanish utili-
\
IS +
/
1
ties and Asian and Brazilian
cement producers grew by a
total
l
of 2.5Mt in 2000
the traditional available
supply was no more than
observed that the main fossil fuels burnt at
1.5Mt due to delays to the opening of the
Orion, Philips and Petrozuata crackers
In 2000, the average price of coal (C&F
Ara) rose by 31 per cent versus the average
cement plants have been soaring since
l
the shortfall was made good by reducing
price for 1999, despite very optimistic
late
2000
Figure I: petcoke
1999, as shown by Figures 1 & 2.
July
stocks and selling them at high prices.
forecasts. The C&F price has now reached
l&$4/t ( e q u i v a l e n t t o US$32.5/t R i c h a r d
Table 1: fuel costs of the cement division of the main cement producers, 1999
..
.
Llrfcrrso
Cement
F u e l t-as&
ktcokecustr
; fihd costs (USSm)
ussp
costs (USSm)
.i . . . . . . . . . ..- _....................... I . . ..I. - . . . . . . . . . . . . . . . . . . . . . . ....I___... - . - . . .
300
4.7
74.9
Cimpor
52.6
Holderbank
f
cod to&
(USSm)
,_____._____._. . ,___
104.5
4.2
21.8
335
4.5
40
176.5
48.3
Fmn@se
:
101
4.2
3 1
Nue
CiKle
i
160.6
5.6
12.3
108.9
197.9
4.3
24
123.3
j
23.1
19.5
cfments
Heidelbeger
Zement
,. ,,
--I
G u s custr ( W e s t C a n a d a )
(USSm)
._ _._ . . .
. . _. . . ,.,., .,
11.5
In
2000,
the
sector's
energy
bal-
where prices were already lower, the fall
ance sheet was 'generally posi-
was
tive'. The total energy costs paid
e3.7/100kWh).
There has already been a noticeable
rise in the usage rates of waste fuels
prices on the spot market. This
burned in cement kilns (in
situation is due to the conjunc-
If
tion of exceptionally favourable
ing profits are expected to be depressed by
factors which were felt in 2000
23-40 per cent depending on the company.
.
will
not
necessarily
recur
in
demand for coal from European utilities
calorific value).
fuel prices remain high in 2001, operat-
The forecasts have been based on the
pessimistic assumption that
risks
were
hedged
favourable
conditions
the
from
Learning
cent (to
per
by the five majors remained virtu-
2001:
Bay FOB). What has happened?
five
ally stable despite rising fuel
but
Figure 2: cool price (CS F)
around
lesson
a
under
in
2000:
strategic
petcoke and
coal prices will remain at their current high
levels.
hedg-
Although some buyers have sounded
slightly more optimistic in the last few
ing error by one of the five majors in 1998,
days, it is preferable to present a clear line
and North American and Brazilian indus-
cement producers hedged their risks on
of reasoning for investors.
trial
good terms in the last quarter of 1999.
emphasising that shortages of petcoke are
Most of these contracts are set to expire in
unlikely to improve until the second half of
late 2000/early 2001.
2001, assuming demand remains at current
l
companies
has
increased
the active management of capacity in a
l
consolidating
market has resulted in
tighter controlofsupply.
l
In 2000, cement producers generally
falling
tion
electricity
for
'eligible
The
industrial
customers'
cement producers to buy cheaply since the
operating profits of a 20 per cent rise in
appears to be less scope for them to do so
start of the year. Despite a discreet
prices per tonne of coal versus the
in
approach by the sector, the established
players in Germany and Austria have been
4Q99 (base US$34/t
able
to
lower
their
average
desks
For each of the major companies
prices on their accounts, although there
An attempt to calculate the fuel costs
trading
levels.
has
enabled
incurred by each of the majors in 1999.
central
deregula-
managed to offset the impact of energy
2001.
the
charges:
is worth
It
power
costs
of
covered,
the
additional
impact
e4.2/100kWh in the west (including eco-
assumption
tax after tax allowance), a fall of around
heavy consumers of petcoke).
one third since
1.
July 1998, while
(France,
Spain
.
.
i__
.
@ml
Holderbank
. (SFnn)
Chenk
Portugal
-.
are
-
Heideibetger
,. __ __ ___
(fm)
.
.
Cimpor
_
_
( ml
-24.1
-20.4
-10
-4.4
-7.7
Nqative impact
Io f coal
-21.8
-58.3
-10.1
-23.9
-25.7
-3.0
1N e g a t i v e i m p a c t
IDf gas, W Canada
-6.0
-16.5
-17.4
none
none
none
none
none
none
Negative impact
in
0
Fmnqais
( 4
-.- . . .
and
in France,
Table 1: estimated negative impact of rising fuel prices on a sample of European stocks
-_--
w&w
level
cent increase in petcoke prices (base
US$33/t). This is based on the fuel mix
to
duced, with the exception of Blue Circle,
Table
full-year
C&F) and a 31 per
The result fairly uniform by tonne prosee
on
-5.5
afpeaokc
/Uegative impact
IDf tkeotk?bka1
-18.8
‘t?COtOX’
1Positive fmpact
Df price tfse,
I Fmace
16.7
1pbsftive impact
19f price rise,
IW Canada
7.6
1 bitive fmpact
’ lffecd
i hcinemtian
7.5
6.5
7.5
-38.9
-1.9%
-75.4
-3.3%
-15.1
-2.8%
-28.2
-5.7%
-23.2%
-34.6%
-38.6%
-41.5%
~1 lhomticaf net impact
~ 1 Is % of 2001E
~ I wmtfw Profits
~ 1 Is % change
i .h opemting
p?ufik
~-
13.2
14.8
4.3
-32.1
-4.6%
-8.4
-2.5%
-36.7%
ns
--
-