Wolf Richter www.testosteronepit.com [8] www.amazon.com/author/wolfrichter [9]
Bernd Scheifele, CEO of HeidelbergCement—one of the world’s largest producers of construction materials with nearly 55,000 employees at 2,500 locations in over 40 countries—lashed out against European politicians and their inability to bring budgets under control. But he reserved the most devastating judgment for the euro itself.
HeidelbergCement’s long history [10]—it was founded in 1873—almost ended during the financial crisis. For more than 100 years, the company had expanded in Germany. But in 1977, it began to branch out internationally by acquiring Vicat in France and Lehigh Cement in the US. At the end of the 1980s, it invested heavily in Central and Eastern Europe, then moved via acquisitions into Northern Europe, Africa, and Asia—piling on debt as it went. The acquisition spree culminated in 2007, when it paid GBP 9.5 billion for Hansen plc., a British company with 26,000 employees. HeidelbergCement had become one of the world’s largest producers of cements and aggregates, the two key raw materials for concrete.
Then the financial crisis unfolded. Worldwide revenues dropped from €14.2 billion in 2008 to €11.1 billion in 2009, and net profits from €1.92 billion to €168 million. Staggering under nearly €12 billion in net debt, the company laid off 15,000 people. Shares plunged from €120 in May 2007 to €20 in early 2009. Credit became scarce. On the verge of bankruptcy, the company underwent some financial re-engineering that included a capital increase and the issuance of 62.5 million new shares.
It survived. By December 2011, revenues had recovered to €12.9 billion. Net profit approached €1 billion. Net debt had been reduced to €7.8 billion. And shares have more than doubled since their 2009 lows.
“The result of hard work, hard efforts to save money,” Scheifele told the FAZ [11]. The crisis, “an absolutely exceptional situation,” had surprised him. Until then, he said, it was “hard to imagine” that sales would plunge “in almost all countries simultaneously.” But they did.
The entire industry had believed in the guiding principle that declines in one region of the world would be balanced out by growth in other regions. “That was suddenly obsolete,” he said. They’d done stress tests to determine how to react to revenue declines of 20%, but in the US, for example, “sales of cement collapsed within a few months by 50%.” Something that hadn’t happened since the 1930s. And when they needed an extension of their credit lines, they suddenly found themselves “in the middle of a tsunami.”
So never again load up on debt? No, he said, debt helps companies make the necessary investments, but the level of debt, for companies as well as governments, would always have to “remain within a manageable magnitude.” And that’s why he was worried about Europe.
Despite all the to-do about austerity, no country has managed to reduce its debt burden, he said. Instead, debts continue to rise, just more slowly. “I think this is devastating,” he said. “While companies are throttling back their expenditures, politicians keep spending cheerfully.”
But weren’t eurocrats proclaiming victory in fighting the debt crisis? Wasn’t he able to see the signs of progress?
“Hardly,” he said. The world economy wasn’t doing all that badly, Africa and Asia were growing nicely, the US was recovering. “The problem is Europe,” he lamented. “The costs of the monetary union are simply too high; politicians must finally recognize that.”
Harsh words for a German industrialist—words that flew in the face of persistent rumors that German industrialists, eager to expand outside Germany, were supporting the common currency with all their might.
“That’s why we invest in Europe only very frugally,” he added, dousing the future of Europe with gloom. Instead, the company was plowing its money into Asia, source of 40% of its revenues. “In particular, countries like Indonesia, China, and India are important for us,” he said.
Reason: cement, sand, and gravel could only be produced and sold locally, but in contrast to Europe, it was still possible “to open quarries and build new plants” in Asia—where a lot of cement was needed to build infrastructure. Cement consumption serves as a measure of industrial development, he said. “In Indonesia, for example, cement consumption is 230 kg (50 pounds) per capita. That’s currently more than in Great Britain. In some Chinese provinces that grow strongly” —perhaps he was referring to those that were building entire ghost cities—”values of 2,200 kg (4,800 pounds) per capita are not uncommon.”
He’d summarized with a few words how companies were reacting to the miasma in Europe: they were taking their money and investing it elsewhere—contributing to the economic hardship in Europe and to growth overseas. He blamed it on the costs of maintaining the euro, and on politicians who refused to “recognize that.” And just when the hype about Europe’s victory over its crisis reached a feverish pitch.
But not all overseas investments work out: Bolivian President Morales ordered the nationalization of four business units owned by Spain’s largest utility, Iberdrola. Hours later, the army and police seized the company’s offices. So far, 15 companies have been nationalized. Read.... Bolivia Seizes Spanish Utility In Forced Nationalization [12].