For 2013, the GDP growth estimate for Brazil is 3.3%, and assumes the prospect of lower global economic growth for an extended period of time, principally in the Eurozone, as well as economic recovery in the major emerging economies, such as countries in Latin America and Asia. Against this background, the GDP growth estimate for Brazil’s construction segment 3.8% for 2013, according to figures from Brazilian Central Bank (BACEN).
The construction industry is of strategic importance for economic growth and creation of jobs and the generation of income in Brazil. For this reason, the federal government has been substantially increasing its investment in housing, basic sanitation and infrastructure, because in investing in construction incentivises a sector that contributes greatly to the economic development of Brazil.
According to the Brazilian Construction Materials Industry (ABRAMAT), the construction sector is forecasting sales growth of 4.5% for 2013, demonstrating optimism for the sector, as well as expectations for improvement in the infrastructure and real-estate segments compared to 2012. According to the National Association of Construction Material Merchants (ANAMACO), Brazil has approximately 57.8 million permanent homes, and 77% of these homes need some kind of remodelling or expansion.
Currently, poor housing is one of the great indicators of social inequality, as well as having a negative influence on the health, education, productivity and well-being of those living in such conditions, so there is significant pent-up demand to deal with the needs of the population.The housing deficit, estimated at 5.5 million homes, consists of families that occupy houses that are in a precarious situation, who are overburdened with rent, with an excessive density of population living in cramped conditions in a rented housing, and housing holding more than one family group with the intention of each family group subsequently obtaining their own homes. These needs, together with the various others in the sector, such as remodeling and extensions, represent a concentration of self-managed construction projects, because 90.2% of the housing deficit is concentrated among families earning up to 3 minimum salaries, a segment in which there is no significant presence on the part of construction firms.
Just with the generation of jobs and distribution of incomes as a consequence of the works mentioned above, the incentives for the purchase of construction materials, and the investments in infrastructure and basic sanitation commented on earlier, as well as the housing units to be built under the Minha Casa, Minha Vida (my house, my life) program, the housing problem will go some way to being solved, which will also have a positive impact on Eternit’s businesses, generating increased demand for our products, particularly for independently self-managed construction projects.
In order to meet the needs of self-managed construction projects public and private-sector commercial banks have introduced credit lines with the object of facilitating the purchase of construction material, with reduced interest rates and extended payback terms. The Company believes the availability of credit to be important in the financing of construction material purchases, seeing that fiber-cement products, due to their excellent value for money, are in strong demand from among the low-income population.
Eternit seeks to develop products and solutions focused on the needs of construction firms, which could represent a great growth opportunity for the Company. Most of Eternit’s sales come from retail distribution through more than 16,000 sales outlets spread across the Country.
In line with its Program for Structured Expansion and Diversification, the Company has begun a new cycle and is preparing itself to be the most diversified construction materials manufacturing company in Brazil, with approximately 50% of its sales linked to diversification over the long term. The first phase of this program established Eternit as the largest and most diversified roofing material manufacturer in the Country, ending 2012 with approximately 15% of its sales coming from diversification.
Despite the favorable scenario in the construction sector, the Management considers the following challenges in the sector to be of significance: competitive conditions in national industry with respect to infrastructure bottlenecks and currency appreciation; the combat of inflation, availability and training of labor; increased productivity in the construction chain; and the question of housing with respect to the cost of land, which could suffer from excessive appreciation, thus inhibiting investment.
With respect to the challenges faced by the Company, the most important of these is the legal question of chrysotile asbestos, for which a ruling by the Supreme Court is awaited. Independently of any decision by the Supreme Court, demand for products without asbestos is likely to increase over the next few years and Eternit is working towards being able to offer the two alternatives to its customers and to be self-sufficient in this raw material. It is worth pointing out that Brazil is still a long way from obtaining a technical solution that is economically viable for the replacement of chrysotile asbestos, An sudden ban of this mineral would have an immediate impact on self-managed construction projects, as a result of the higher costs, and could even bring the roofing segment to a complete halt due to the lack of alternative fibers available in the global market to meet Brazilian demand, and demand from other countries to which SAMA currently exports this mineral.
If it is decided by Brazilian society to maintain chrysotile asbestos activity, the Company will achieve its objective of being the most diversified manufacturer of construction materials as part of a natural process.
Eternit is confident that there will be a recovery in the Brazilian economy, especially in the sector of which it is a part. Having a satisfactory capital structure, a low level of indebtedness and investments that are consistent with its Plan for Expansion and Diversification, the Company is well-positioned to capitalize on the opportunities in the sector.