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Morningstar | Cemex’s Mexican Operations Are Suffering From the Cancellation of Major Infrastructure Projects

Cemex's fortunes are tied to local construction in each of its five regions: Mexico; United States; Europe; South America and the Caribbean, or SAC; and Asia, Middle East, and Africa. The global financial crisis wreaked havoc on construction demand in most of its key markets. The postcrisis recovery has been slow. Looking ahead, we expect higher demand growth in Cemex's three most important markets--Mexico, the U.S., and Europe.Mexico is Cemex's most important region, accounting for about 25% of sales but roughly 45% of EBITDA. Unlike developed markets where demand stems mainly from government and corporate customers, retail is roughly 60% of Mexican demand, with roughly half from self-construction. Cemex exploits Mexico’s retail-heavy market through its Construrama distribution network of more than 1,800 stores. This channel allows the company to dominate the retail market, as the stores account for 60% of cement bags sold in Mexico and Colombia. Cemex enjoys significant pricing power in the Mexican retail market, as potential competitors lack this critical distribution channel. Major Mexican infrastructure projects were canceled in the transition to the new president, weakening the outlook for Cemex's most important market. Nevertheless, long-term infrastructure needs should drive recovery and growth.Cemex’s SAC operations generate less than 15% of sales and EBITDA. The market dynamics here are similar to Mexico, with retail constituting a large portion of demand. Cemex has expanded retail distribution into the region, which we believe will allow the company to dominate the retail markets in the region as it has in Mexico. However, an anemic economic growth outlook leads to an underwhelming outlook for building materials.The U.S. accounts for roughly 25% of sales and EBITDA, making it Cemex's second-most important market. The growth outlook is strong, and rising U.S. cement capacity utilization bodes well for pricing increases. However, a stronger U.S. dollar relative to the Mexican peso has limited the benefit for Cemex.