LIVE MARKETS-Is the rally in cement stocks built on shaky foundations?

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IS THE RALLY IN CEMENT STOCKS BUILT ON SHAKY FOUNDATIONS?

European cement stocks have had a strong start to the year, driven by expectations of a ceasefire in Ukraine that could trigger a reconstruction boom, but Barclays believes there's now a sizeable disconnect between sentiment and fundamentals.

Companies in the sector include Heidelberg Materials HEIG.DE, Buzzi BZU.MI, Holcim HOLN.S and Vicat VCTP.PA - all four have risen upwards of 9.5% this year.

Barclays believes benefits for the sector would accrue via two mechanisms:

1/ Volume improvements in Eastern/Central Europe from exporting volumes into Ukraine, or from domestic demand if we see easing risk premia/rates

2/ Lower energy costs if Europe can start to absorb Russian hydrocarbons again

"We think the market is pricing in a 33-40% reduction in European energy costs - or a very significant volume improvement for export markets," Barclays writes.

The amount of volume uplift in Ukraine-adjacent markets needed to justify the year-to-date price moves stands at 36-70%, which Barclays calls "probably impossible" given lack of latent capacity.

That implies that some level of energy inflation must be priced into shares today, according to Barclays.

"Our overall conclusion is that improvement in fundamentals that is priced in today isn't impossible, but there are considerable hurdles still to be cleared for the energy complex to move lower," Barclays says.

"Better volumes (for export into Ukraine for example) would not be enough in itself either to justify the share price moves we have seen."

(Samuel Indyk)

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