Cemex S.A. B de C.V. (ADR) (CX)

Cemex is primarily involved in the business of producing cement, ready-mix concrete, aggregates and clinker. Having an installed cement capacity of 98.2 million tons, it is the third largest cement producer in the world. The company operates in most of the large markets across the globe, with the U.S. and Mexican markets contributing over 40% of the revenues. Cemex is also involved in trading of cement and clicker, where about half the traded volume is purchased from third party vendors.

The cement industry is globally dominated by few large players, holding production plants spread at significant markets. As the industry requires huge capital investment and high lead time, acquisitions are seen as key strategy for capacity expansions. Growth in the cement industry is highly correlated to housing and infrastructure development. At present the rising input cost and U.S. housing market slowdown is affecting companies like Cemex and Lafarge. The long term outlook of the industry appears strong with booming infrastructure and housing sectors in developing markets.

The Mexican major is currently witnessing a strong setback, with massive drop in cement, ready-mix and aggregate volumes in the U.S. market. Looking ahead in 2007, the reduced volumes in U.S. are likely to continue, as housing market slowdown is estimated to prolong till 2008. Adding to it, with Cemex’s $12 billion offer to acquire Rinker Group, the Australian heavy building materials major, is in doldrums with Rinker rejecting the bid. Cemex will have to find a different route to attain inorganic growth. Moreover, considering company’s increasing debt levels, due to recently raised $750 million by selling its bonds, which was done to fund Rinker acquisition; the difficult market conditions; and slow organic growth, it is better to stay away from the stock. However the rising cement prices gives a respite for the makers, yet in the short run, the fixed capacity of the company and lack of any significant inorganic growth makes it very difficult for Cemex to beat the benchmark.