OREANDA-NEWS. M&A activity in the building materials sector is likely to remain brisk as the recent mega-deals between some of the sector's biggest operators add to the pressure for consolidation, Fitch Ratings says.

Acquisitions on the same scale as Holcim and Lafarge's EUR27bn merger, CRH's EUR6.5bn acquisition of some LafargeHolcim assets or HeidelbergCement's acquisition of Italcementi are less likely. This is because of potential opposition over competition concerns and because the biggest operators will be focused on integrating businesses already acquired. But M&A among the next layer is possible, as is consolidation among smaller operators in highly fragmented emerging markets.

In the United States, Martin Marietta Materials completed in July 2014 its acquisition of Texas Industries in a stock-for-stock transaction valued at USD2.7bn. We believe any M&A among large US aggregates producers such as Martin Marietta and Vulcan Materials Company will be focused primarily on bolt-on acquisitions to expand operations in their current markets.

In Europe, the recent acceleration in deal-making has been partly driven by the desire to increase geographic diversification in response to the big difference in performance between different regions in the last few years. Consolidation should help the industry address significant overcapacity. The enhanced scale and synergy potentials for deals announced so far will add to the pressure on other operators to seek deals to maintain their market position and their competitiveness on the international funding market. They could also lead to further disposals of non-core assets as the top-tier companies review their strategies and sell off operations to satisfy anti-trust authorities.

Companies are betting on a recovery in markets, which were hit hard by the post-crisis construction slow-down and are now bottoming out. The view that Southern Europe construction is at the bottom of the cycle contributed to HeidelbergCement's decision to buy Italcementi.

We affirmed HeidelbergCement's rating at 'BB+' with a Stable Outlook on Tuesday. We believe the deal will strengthen HeidelbergCement's business profile through improved scale, diversification and market position. Leverage is high for the current rating, but we expect it to decline to a level commensurate with the rating by end-2016.

Compared with deals in developed markets, emerging markets deals are more risky, offset partly by their usually smaller size. Emerging market growth is starting to slow, although the significant long-term infrastructure and housing needs and the fragmented building materials market may still motivate acquisitions. In some regions capacity expansion in anticipation of continued high growth has outpaced demand growth and if demand fails to catch up this will create significant overcapacity. This is particularly true, because emerging markets are more exposed to geo-political risks that can lead to sudden halts in construction activity.

Emerging markets are more exposed to accelerating cost inflation. Energy costs in particular are a key risk as the trend for energy deregulation and the removal of subsidies can lead to sudden input cost inflation for producers. In Indonesia, fuel prices were hiked twice in the last two years and electricity prices increased by nearly two-thirds in 2014. Emerging markets are also often exposed to structural inflation of wage, production and logistics costs.