Evolution of the Cement Sector

The latest estimates for world consumption of cement in 2006 indicate an increase of around 12%, driven by the strong growth of those economies whose progress largely depends on the prices of oil and commodities, by the implementation of major infrastructure programmes in emerging nations and by the recovery of the construction business in the non-housing segment in mature markets.

Even without China (which accounts for almost half of world consumption), the increase in demand for cement should be around 5%, with prices rising by an average of 8.5%. This increase was the most marked in the past decade, reflecting both higher production costs (especially energy costs) and increased transport costs, as well as some limitations in terms of capacity, on the supply side.

China and India, whose respective growth rates are estimated to be around 19% and 12%, respectively, strengthened their positions as the largest world markets for cement, followed by the USA, where consumption stagnation in 2006 was set off by a price rise of almost 13%.

In Western Europe, demand rose by nearly 4% (more than double the previous year), with special emphasis on Spain, which consumed nearly 56 million tonnes of cement (8% more than in 2005), and had an accumulated growth of around 20% over the last three years.

Prices, rose an average of 5% to 6% (11% in Spain).

In both Eastern Europe and the Middle East and Mediterranean Basin, consumption increased by about 10%, reaching as high as 15% in some countries (in Turkey, Poland and Bulgaria), and was accompanied by significant price rises.

In Latin America, the market trend was strongly positive (8%), especially in Argentina, where growth was close to 20%. On average, it is estimated that the selling price of cement has not change much, with rises in most countries being offset by the (almost 18%) fall in Brazil.

In Sub-Saharan Africa, the rise in both volume and price was about 9%, while in Asia (apart from China and India) the virtual stagnation in consumption contrasted with a rise in prices in most markets.

With respect to cement trading, there was little change, and international trade accounted for about 7% of global consumption. The USA, which imported about 36 million tonnes – about 30% of demand – in 2006, remained the world’s largest cement importer.

Mergers and acquisitions in the sector were not as significant as in 2005, though Holcim’s takeover of the Indian companies ACC and Gujarat Ambuja, and Lafarge's acquisition of the minority shareholdings in Lafarge North America, along with Cementos Portland’s purchase of 51% of the (also) Spanish company, Uniland, should be noted.

Also worthy of note are the two binding contracts signed by CIMPOR to purchase New Liu Garden (China) and YLOAÇ (Turkey), and the acquisitions undertaken in Turkey by Cementir (Italy) and Orascom (Egypt), and in India by Italcementi/Ciments Français.

Consolidation in the sector has also occurred through some vertical integrations, such as the bid recently made for Rinker (Australia) by the Cemex group.

2. Internationalization

In 2006 CIMPOR made important headway in developing its strategy for growth and internationalization.

2.1. China

After setting up the joint venture in Hong Kong, called Cimpor Chengtong Cement Corporation, Limited (CCCC), between the CIMPOR Group, with an 80% stake (held by CIMPOR Inversiones, S.A.) and the China Chengtong Development Group, Limited – through its subsidiary, China Chengtong Cement Group, Limited (CCCG) – with the other 20%, the new company signed a binding contract to acquire 60% of a Chinese cement company, known (in short) as New Liuyuan.

New Liuyuan, which is near the city of Zaozhuang in the south of Shandong province, currently has two clinker production lines (1.8 million tonnes/year) and a grinding capacity amounting to 1.2 million tonnes of cement. In addition to this, the company has a series of investments either in progress or under study which will, in the medium run, give it an annual production capacity of approximately 3.6 million tonnes of clinker and 4.5 million tonnes of cement. Its natural market covers the south of Shandong province and all of Jiangsu, including the Xangai region.

The conclusion of this operation awaiting the approval of the Chinese authorities, will involve payment by the CCCC of CNY 20.7 million (nearly 2 million euros), which corresponds to a valuation of New Liuyuan’s assets of about USD 31 per tonne of installed capacity (clinker production).

So as to enable both this payment and coverage of New Liuyuan's financing needs, the CCCC's share capital will be increased from the present HKD 10 thousand to approximately HKD 250 million. Of this, CIMPOR Inversiones’ part will be in cash and that of the CCCG will be through the apport of a majority financial shareholding (71%) in the Suzhou Nanda Cement Company Limited, which has a grinding plant just outside Xangai, with a cement production capacity of 600 thousand tonnes/year.

When this operation is completed, which should be in the first half of 2007, CIMPOR Inversiones will transfer its holding in the capital of CCCC to a new company, based in Macau, which will be set up by CIMPOR Inversiones itself, C+PA – Cimentos e Produtos Associados, S.A. (an associate company of the Group) and the Sociedade de Investimento Predial Estrela Nova, Limitada, a Chinese company based in Macau.

CIMPOR Inversiones will have 50% of the share capital of this new company (ensuring control of its management) and the other two partners will have 25% each.

2.2. Turkey

Close to the end of the year, CIMPOR signed another binding contract – subject to various prior conditions, among which was non-opposition from the local market regulator – for the acquisition of direct and indirect shareholdings representing about 99.7% of the capital of

the Turkish cement producer Yibitas Lafarge Orta Anadolu Çimento Sanayi ve Ticaret A.S.

(YLOAÇ).

Once the aforementioned conditions were met, the operation was concluded in February of this year, with a total investment of around 548 million euros in the purchase of several bocks of shares amounting to 99.4% of the capital of the Turkish company Yibitas Holding, A.S., which holds 49.8% of YLOAÇ, and shares representing the remaining 50.2% of the latter’s capital.

YLOAÇ's registered office is in Ankara and, in conjunction with one of its subsidiaries (Yibitas Yozgat, A.S.), it has three cement plants, three clinker grinding plants, twelve ready-mix concrete plants and two aggregate producing plants, with a clinker production capacity of 1.6 million tonnes/year and an annual grinding capacity equivalent to 3.5 million tonnes of cement. With the investments already in progress, the above capacities will rise to 2.4 and 4.8 million tonnes, respectively, by the end of 2008.

In 2007 output from YLOAÇ should reach 2.6 million tonnes of cement, 1.2 million cubic metres of concrete and 2.8 million tonnes of aggregates, amounting to a consolidated turnover of almost 175 million euros.

In a market showing strong growth (averaging 14.5%/year for the past three years), sales of cement from YLOAÇ correspond to a share of around 6%, domestically, and approach 32% at the level of its main catchment areas (parts of Central and Eastern Anatolia and the Black Sea region).

The Enterprise Value paid in this acquisition corresponds to a multiple of 9.0 on the estimated EBITDA for 2007 and, discounting the value for concrete and aggregates, to about 190 euros per tonne of cement sold in 2006.

2.3. Angola Not everything worked out in the Group’s internationalization process: in 2006, contrary to

our goals of developing the Company, improving its performance and investing in increasing its production capacity, CIMPOR was forced to sell the holding (49%) it had through Scanang, SGPS, Unipessoal, Lda (Scanang), in the Angolan company Nova Cimangola, S.A..

When it acquired all the shares of Scanang in November 2004, and thus, indirectly, the holding in Nova Cimangola, the CIMPOR Group was given guarantees and evidence by the selling companies, which belong to the international cement producing groups Holcim and HeidelbergCement, such that it was confident that they had acted legally prior to this transaction.

However, a few months later, the Angolan government’s Agency for Private Investment (ANIP), claiming that a prior transaction - the transfer of a shareholding of 24.5% in Nova Cimangola from Scancem International ANS (HeidelbergCement group) to Scanang (Holcim group) – had infringed Angolan law, applied for an injunction against these two firms with a view to annulling the deal they subsequently concluded with the CIMPOR

Despite all the ensuing dialogue, and despite CIMPOR and the Angolan government having meanwhile (July 2005) signed a Protocol that set out the basic terms of the relations between the parties in relation to Nova Cimangola – unilaterally and inexplicably cancelled four months later by the Angolan government, CIMPOR has been removed from the company's corporate bodies and put in a situation which leaves it no choice but to sell its stake to an entity named by it.