Jun 17 2008
The Secret Treasure of North Africa
Ask your stockbroker if he reads Cement World. If he says no, fire him immediately.
Here’s why…
When it comes to commodities, cement could be the next oil of emerging-market investors.
In particular, North Africa’s soaring cement prices present a promising ground-floor opportunity, reported a recent article in Cement World. North African cement is one of those gems that once again proves emerging markets could be far more lucrative than the U.S. providing you know where to look — including Cement World.
Sure, cement is as boring as it sounds. You never hear about cement wildcatters or Somali pirates hijacking a boatload of cement. The most exciting thing you probably know about cement is that the Wise Guys in New Jersey use it to make a pair of boots for some deadbeat taking a one-way trip down the Hudson.
Given the headlines, the most obvious conclusion to draw about cement is that the construction bust in the U.S. put a world of hurt on the industry. And if you only considered U.S. cement makers you’d be right.
The Portland Cement Association now expects 2008 cement consumption in the U.S. to decline 11% this year followed by a 5.5% decline for 2009. Those are the kinds of numbers that can give investors that real sinking feeling.
But we’re not about headlines. We are all about digging deep to discover the best opportunities in emerging markets.
Abdalla ElEbiary, a Principal at Citadel Capital, writes in Cement World that the high cost of labor and tightening environmental codes have caused a dramatic shift in cement production patterns during the past decade. Citadel Capital is a private equity firm in the Middle East and North Africa, so this is the boots-on-the-ground report that we love to read.
Notably, the energy boom in emerging markets is attracting Big Cement, with some of the players forecasting up to 85% of their cement manufacturing to come from developing countries by 2020.
Mr. ElEbiary says current cement production in North Africa garners between 3% and 5% of the global market. He expects that the region’s cement industry could grow 7% or 8% annually over the next five years — much bigger numbers than the Portland Cement Association predicts for the U.S.
He revealed that Egypt issued 14 new cement licenses in 2007, which translate into $3.3 billion in new investment. He also bullish on Algeria, Libya, Morocco and Tunisia.
Egypt looks particularly good to him. Approximately 500,000 new real estate units are within the next five years, during which period the country is expected to see 14 new cement plants come on line.
Algeria is also attractive. He says the Algerian government is making significant investments in infrastructure. It’s the second largest exporter of natural gas and is sitting on the world’s the seventh largest natural-gas reserves. Right now there is a cement shortage in Alergia, as supply outstrips demand.
Libya’s growing economy is leading the country to a “significant push” for infrastructure build out. Combined with years of deterioration from Western sanctions, Libya is looking like a strong long-haul opportunity. However, government red tape keeps sufficient foreign capital out of the country for the time being.
How can you cash in on this unique opportunity?
He cites the Lafarge Group as a major cement player in the region. We had followed Lafarge earlier in the year, saying that it was a great way to capitalize on the enormous construction boom in the Middle East. We decided to take another look at the company after reading Mr. ElEbiary’s excellent article.
Lafarge trades on Euronext Paris under the symbol LG. The company’s market cap is 18.7 billion euros as at March 25, 2008.
Here in the U.S., the stock lists as OTC: LFRGY.PK. You can trade it via American Depository Receipts (ADRs), which are stocks of foreign companies traded on U.S. stock exchanges.
As you can see, the company appears ready for another rebound, and the numbers bear this out.
Lafarge entered the Egyptian market in 1999, with the acquisition of a majority stake in Beni Suef Cement Company via the Lafarge Titan joint venture. In May 2008, Lafarge sold its 50% stake in Lafarge Titan in Egypt to its Greek joint venture partner Titan, for 330 million euros (including debt of around 20 million euros).
But Lafarge continues to leverage its crown jewel, Orascom Cement, which it purchased in January 2008.
Orascom holds a leading position in the Middle East and the Mediterranean Basin. It has a cement capacity of 35 million tons in 2008, increasing to 45 million tons in 2010, according to the company.
Orascom is very active in emerging markets. The company states that it occupies number-one positions in Egypt, Algeria, United Arabs Emirates and Iraq. It also maintains “strategic positions” in Saudi Arabia, Syria and Turkey, South Africa, Nigeria and Pakistan.
The Orascom acquisition greatly accelerated Lafarge’s penetration into these fast growing, high-potential markets. Lafarge claims to have taken “the lead in emerging markets, through its presence in all of the world’s fastest-growing regions.”
North Africa and emerging markets in general are paying off for Lafarge based on its Q1 earnings announcement of March 31, 2008 in euros (€):
– Sales up 8% to €4,000 million
– Current operating income up 48% to €512 million
– Strong increase in operating margin to 12.8%, compared to 9.3% in 2007
– Net income Group share (excluding 2007 capital gains up 49% to €150 million
– Earnings per share (excluding 2007 capital gains up 36% to €0.79
Notably, the company broke out that results were up 70% in emerging markets:
– Strong contribution from emerging markets, where trends are very positive overall. — — 70% increase in current operating income in emerging markets in the first quarter.
– Increase in our results in developed markets, despite the slowdown in the U.S. and Spain.
The numbers speak volumes about Lafarge’s prospects in North Africa and other emerging markets. Give your broker a call and see what he knows about North Africa cement.
– Irwin Greenstein
