Hardening sentiment against cement firms

I set out to explore the fortunes of companies in the Chemical sector after hearing about rising costs making life very difficult, see Wacker Chemie for instance. But, in the same way that Christopher Columbus discovered America by accident, I have been drawn to some spectacular short selling in the uncool Material sector instead. It seems that the cost of producing cement is depressing margins and with Buzzi Unichem’s (BIT:BZU) results this Friday, it is timely to look away from the US overdraft debacle to see rising negative sentiment at companies like Cemex (NYSE:CX), Texas Industries (NYSE:TXI), Vulcan Materials (NYSE:VMC), Holcim (VTX:HOLN) and Heidelbergcement (ETR:HEI).

Last Friday Cemex released below forecast results and analysts see this as a bad omen for its peer group. Costs are rising faster than prices. Energy costs are up 17% while cement prices are down 3% for the Mexican business. Sales in California have also struggled due to the wet weather in Q2. This comes as no surprise to short sellers whose view is represented by a short position that is 10% of the shares outstanding for the ADR, having been rising constantly since February.

Italy’s Buzzi Unichem also has significant business interests in Mexico and analysts are nervous about this week’s update. Investors correctly bet against the company when the shares rose above EUR 9 but have covered a few of their positions. Today, the shares borrowed equates to 6% of the company making it the second most shorted member of Italy’s main index, the MIB30. Long only investors are not expressing much of a view.

Cemex also reported a 5% price decline in northern Europe. Accordingly, one wonders how Switzerland’s Holcim is holding up. When you add to the mix how relatively expensive their cement must be due to the rock solid Swiss Franc you see twin forces acting against them. The share price is sliding downwards and the demand to borrow Holcim’s shares is sharply rising to 3.25% of the company – nothing alarming but noteworthy given that short sellers predicted the fall from CHF70 and covered at 60.

Heidelbergcement is not in the cross hairs for short sellers with only 1 million shares on loan which is 0.56% of the company. Of interest is that funds who lend have reduced their holdings to a one year low of 37m shares or 19% of the firm. This is down from 50m shares in May – but this was above the normal level held by this type of investor.

Finally, Texas Industries caught my eye. A big short position has just got bigger! In late June, 16% of TXI was being borrowed. It is now 21% - over 10 times the average across the S&P 500. The shares have been moving sideways. With no convertible bonds in issue it appears that this is directional shorting. With 20% of sales coming from the Californian market there appears to be a play on the heavy rains in Q2 that held up industrial development thereby interrupting sales. Vulcan Materials is another large cap Materials firm for whom California is a big segment. Vulcan could also be vulnerable to the flooding and violent weather in the mid West this past quarter. Demand to borrow Vulcan is close to a 6 month high at 17% of shares.