S&P: Road to recovery could be bumpy for global building materials companies

The two-tier recovery in the building materials industry that was observed in 2010 will continue through 2011, according to a new report by Standard & Poor's (S&P) Ratings Services titled ‘Top 10 Investor Questions: Global Building Materials And Products Companies'. Recovery across this sector is, according to the report, likely to remain bumpy and fragile in 2011.
 
"We don't expect a tangible industry recovery to begin before the second half of 2011, and it could be 2012 before industry players experience a noticeable upside to operating performance and the commercial end markets pick up," said Standard & Poor's credit analyst Sabine Gromer.
 
Over the next 12 months, Standart & Poor's anticipates only a marginal improvement in heavy materials companies' results, owing to possible price pressures together with noticeable input cost inflation, weak trading conditions in many mature markets, potential adverse effects from political unrest in regions such as the Middle East, and the negative effects of public spending cuts. Offsetting these factors, S&P said, will be companies' ability to utilize the efficiency gains from previous cost-saving initiatives, an ongoing focus on cash generation and protection, and, at the same time, a willingness to reduce debt.
 
Overall, S&P expects pricing behavior to remain rational, although it believes that highly fragmented markets will remain exposed to harsh competition. Furthermore, S&P said that it will remain difficult to fully offset increases in input costs with price increases or surcharges, which, in turn, could impair profitability levels in the industry. Overcapacity is still an issue, the report suggested, not helped by the substantial amount of new production capacity coming on stream, particularly in emerging markets.
 
"The above trends lead us to the view that industry results in 2011 will look very similar to those in 2010," added Ms. Gromer.