Europe Materials continued to benefit from strong economic
conditions and increased its profitability significantly during
2007, primarily through organic growth.
In Ireland we benefited from the high levels of infrastructure
and non-residential activity which compensated for the decline in
the residential sector that has emerged following record house
completions in 2006.
The Finnish economy performed well with strong construction
growth, particularly in the nonresidential sector which posted a
double-digit advance. The Baltic States eased in the second half,
but St. Petersburg continued to grow at pace.
Strong growth in foreign direct investment led to high demand
for construction materials in Poland, particularly in the
industrial and commercial sectors. While there was a good level of
activity in roads, this will grow in the years ahead as substantial
European Union funding flows through into construction projects.
High levels of demand helped the pricing environment for all
products.
Following some difficult years, the Ukrainian economy grew
strongly and construction activity benefited resulting in a
significant increase in cement demand.
Switzerland continued on a stable path and CRH operations
benefited from infrastructure projects in its regions.
In Spain housing demand eased, particularly in Madrid and the
South. While volumes were weaker generally, good cost control led
to better margins and profitability.
Portugal again saw a lower level of construction despite a
recovery in the economy. Downstream activity, exports and a good
performance in operations outside of Portugal resulted in an
overall improved performance.
In August we bought out our partners in the Benelux cement
trading, readymixed concrete and aggregates joint venture,
Cementbouw bv. The company was reorganised to report under the
Europe Materials Division and has performed to expectation since
acquisition.
2007 saw the commencement of three major cement projects aimed
at modernising and expanding our cement facilities in Ireland,
Poland and Ukraine. With a combined value of approximately
€0.6 billion, this investment programme demonstrates
CRH’s commitment to investing for the future.
The focus on developing and emerging markets continued and the
Division’s acquisition of a 100% stake in Harbin Sanling
Cement, China and a 50% stake in Denizli Cement, Turkey, has
created new platforms for growth.
Ireland
In Ireland construction demand continued to grow in the first
half of 2007; however, the second half saw an accelerating decline
in residential output. The National Development Plan continued to
underpin demand in the road sector, while private investment
remained strong particularly in commercial and retail projects.
Agricultural construction recovered well, supported by
environmental improvement grant aid. As a result overall demand for
our products was at a similar level to 2006. The Northern Ireland
business, particularly quarry products and construction, benefited
from the general sense of optimism in the economy.
Ongoing programmes to reduce operating costs and improve
efficiency delivered further savings in 2007, particularly in the
area of energy cost reduction. Commercially, the emphasis on cost
recovery through price improvement continued. Profits were ahead of
2006.
Irish Cement commenced a €200 million investment project to
modernise its Platin Works. The investment will create an
ultra-modern, energy-efficient plant meeting world best practice
emissions standards. It is due on-stream towards the end of 2008
and demonstrates CRH’s commitment to meeting the longterm
needs of the Irish economy and construction sector.
Finland/Baltics
The Finnish economy grew by 4% in 2007. Broad-based strength in
construction activity contributed to strong advances in cement,
aggregates and readymixed concrete volumes. There was a
particularly strong increase in new non-residential construction,
which grew by over 20% when compared with 2006 levels. Ongoing
investments in infrastructure such as the Helsinki-Turku motorway
and Vuosaari port, combined with a stable residential construction
market, also underpinned volume growth. All products achieved
improved pricing and this resulted in a very good uplift in
operating performance. The new clinker line at the Lappeenranta
cement plant, commissioned during the first half of 2007 has
performed satisfactorily to date.
Sales volumes in Estonia, Latvia and St. Petersburg were
generally ahead of 2006. Higher input costs remained a challenge,
particularly in Russia, though good cost control and better pricing
held overall profits in line with 2006 levels.
Overall, good volume growth and better pricing delivered
improved profitability in the Finland/Baltic region in 2007.
Central Eastern Europe
2007 was another good year for the Polish economy with GDP
growth at 6.5% and unemployment falling to a new low of 11.4%.
Inflation, although low, rose to an average 2.5% while overall
construction output increased by an estimated 16% on 2006. The
unusually mild first quarter set the tone for cement demand with
annual volumes up 17% on 2006 levels. Our concrete businesses
performed extremely well with improvement in both volumes and
prices across all product groups. Despite some delays in the road
programme our aggregates and blacktop businesses performed well
with a significant increase in hardrock aggregates sales. The lime
group continued to perform satisfactorily with lime product volumes
up 7%. Overall, profits in Poland improved significantly on 2006
levels.
In Ukraine GDP grew by 8% with increased demand for cement.
Higher cement pricing in Russia and other neighbouring countries
had a positive knock-on effect on pricing and profitability
progressed significantly to record levels.
Work has commenced on both the 1.8 million tonne Ozarów
cement capacity expansion in Poland and on CRH’s Joint
Implementation Project JI-0001 to convert its Ukrainian cement
plant from wet to dry process with associated environmental and
operational benefits. These two projects, totalling approximately
€0.4 billion, demonstrate CRH’s commitment to meeting
the growing construction materials needs of these rapidly
developing economies, which in 2007 accounted for approximately
one-third of Europe Materials operating profits.
Switzerland
The Swiss economy grew by 2.8% in 2007 with continuing strong
private consumption and substantially increased exports. Inflation
and unemployment rates remained at low levels. Construction grew by
1.4%, with residential activity reaching its peak mid-year and
levelling off in the second half. Growth drivers were
infrastructure and industrial construction. Startup infrastructure
projects led to an increase in cement sales while excellent weather
conditions in the first quarter of the year, as well as strong
construction activities in all the regional markets, led to better
profitability in downstream, aggregates, asphalt and readymixed
concrete operations.
Iberia
Although the Spanish economy continued to grow, our volumes in
Spain were a little down on the record levels achieved in 2006.
Nevertheless, better pricing and improved cost control led to
higher margins and increased profitability. Activity remained
strong in our main markets with the exception of Madrid.
Corporación Uniland, the Group’s 26% cement associate,
recorded a strong increase in profitability.
The Portuguese economy grew by 1.9% in 2007; however,
construction had another difficult year with activity decreasing
3.9%, reflecting reduced activity in housing. Secil’s three
cement plants operated at full capacity taking advantage of strong
export markets. Overall, Secil recorded a satisfactory year due to
a good advance in profitability in its Tunisian cement operation
and in its downstream activities in Portugal. Ciment de Sibline,
the cement and concrete business in Lebanon in which Secil acquired
a controlling stake in January 2007, performed in line with
expectations.
Eastern Mediterranean
Our investment in Denizli Cement in Turkey provides a platform
for growth in the Aegean region of southwestern Turkey, which is an
expanding construction market. Denizli is one of three large cement
producers in the region and is vertically integrated downstream in
readymixed concrete. The performance of the business since
acquisition has been in line with our expectations and ahead of
prior year results.
In Israel, Mashav, in which CRH holds a 25% stake, performed
slightly ahead of 2006.
China
Our purchase in February 2007 of Harbin Sanling Cement in
Heilongjiang in northeast China represented a first step for CRH in
the Chinese cement and building materials market. Economic and
construction growth in the target region continued as anticipated
and the performance of the company and its integration into the CRH
Group is progressing well. In January 2008, CRH signed an agreement
for the acquisition of a 26% shareholding in Yatai Cement with
capacity to produce 9 million tonnes of cement per annum which is
currently being expanded to 18 million tonnes per annum. This
transaction, which is subject to Chinese regulatory approval and
which is expected to be completed later in 2008, is a further step
in our strategy to build a regional position in cement in
northeastern China.
Outlook 2008
Construction demand in Ireland is expected to decline in 2008 as
housing output adjusts to a more sustainable level. Both
infrastructure and commercial investment are expected to continue
at current high levels, and will help to moderate the demand
reduction. Cost reduction programmes are expected to reduce the
profit impact of lower overall activity.
Finland’s economy and construction demand are anticipated
to grow in 2008, though at a slower pace than in 2007. A decline in
new residential construction will be more than offset by continued
strength in non-residential and infrastructure investment. The
Estonian and Latvian economies face a more uncertain period,
although we expect demand in St. Petersburg to remain strong.
Overall, we expect to see a further advance in profitability in the
Finland/Baltics region in 2008.
Polish GDP is forecast to advance 5.6% with construction output
expected to grow by over 10%. The continued availability of
European Union funding coupled with strong foreign direct
investment will underpin growth.
In Ukraine GDP is projected to grow by 6%. Expanding private
sector investment and ongoing rehabilitation of infrastructure are
expected to be the major drivers of economic growth with increased
demand for all our building products.
GDP in Switzerland is forecast to grow in 2008 by 1.9% driven by
a strong export performance, tourism and good internal consumption.
Construction activity is anticipated to remain stable with further
small declines in housing offset by growth in industrial and
commercial work and a stable infrastructural sector.
In Spain a further decline in housing activity is anticipated.
We expect volume reductions in all regions across the country with
the exception of our principal market in Catalonia where road and
rail infrastructural projects and commercial activity are expected
to mitigate the impact of the housing decline. In Portugal
construction is expected to show a modest recovery in 2008 due to
an expected increase in public capital expenditure.
Continued growth is forecast for construction in Turkey next
year with cement volumes rising accordingly. Denizli should once
again operate to full capacity.
As in recent years, the home market in Israel should show modest
growth but significant progress will depend on the political
environment.
Cement demand in China is again expected to grow at close to 10%
in 2008 and we believe that Harbin Sanling Cement will operate at
full capacity.
Overall, the market outlook for 2008 is good. While organic
growth is unlikely to be as strong as an outstanding 2007, we will
benefit from acquisitions completed during the year, and the major
cement capital expenditure projects underway will contribute
strongly to the development of the Division in 2009 and beyond.
The Europe Materials Division is a major vertically integrated
producer of primary materials and value-added manufactured products
operating in 19 countries and is actively involved in the
Group’s development efforts in Asia. Its principal products
are cement, aggregates, readymixed concrete, concrete products,
asphalt and lime. Ireland, Poland, Finland, Switzerland, Spain,
Portugal and Ukraine are the major markets. In total, the Division
employs approximately 14,500 people at over 540 locations.
*CRH share of annualised production volumes. Cement and
readymixed concrete volumes above exclude CRH share of associates
Uniland in Spain (26.3%) and Mashav in Israel (25%). CRH’s
share of annualised production volumes for these businesses amounts
to approximately 3.1m tonnes of cement and 0.8m cubic metres of
readymixed concrete.