Is it really a "Golden Age of Construction"?

UBS analysts project a bearish demand outlook for European construction materials, contradicting a "golden age" narrative, but identify selective opportunities within the sector. They forecast higher organic growth for "heavyside" materials (5-7%) versus "lightside" (3%) by 2026/2027, driven by robust US aggregates demand and a new EU cement pricing regime. The impending phase-out of free EU carbon allowances in 2026 is expected to induce mid-single-digit cement price inflation, benefiting producers. Consequently, UBS upgraded Heidelberg Materials and Holcim to "buy" ratings, citing favorable pricing power and falling capital intensity for these heavyside stocks.

Analysis

UBS analysts present a nuanced outlook for the construction materials sector, forecasting a bearish demand environment for European construction while identifying selective opportunities within US construction. They project significantly higher organic growth for "heavyside" materials, at 5-7% by 2026-2027, compared to just 3% for "lightside" materials, driven by robust US aggregates demand and a new EU cement pricing regime. This differentiation highlights a structural shift in market dynamics.

A key catalyst for the positive heavyside outlook is the impending phase-out of free EU carbon allowances in 2026, which is expected to steepen the cost curve for producers. This regulatory change is anticipated to induce mid-single-digit cement price inflation as companies pass through the "carbon cost shock," thereby enhancing pricing power and potentially reducing capital intensity for heavyside stocks.

Consequently, UBS upgraded Heidelberg Materials AG (ETR:HEIG) and Holcim AG (SIX:HOLN) to "buy" ratings, positioning them as primary beneficiaries of these trends. Conversely, lightside-focused companies are noted to require clear decarbonization strategies to prosper, indicating that environmental policy will increasingly dictate competitive advantage across the industry.

Key Decisions for Investors

• Investors should consider increasing exposure to "heavyside" building materials companies, specifically those benefiting from robust US aggregates demand and EU cement pricing power, such as Heidelberg Materials and Holcim, following UBS's "buy" upgrades.
• Monitor the impact of the 2026 EU carbon allowance phase-out, which is expected to drive mid-single-digit cement price inflation and enhance producer margins for EU cement players.
• Evaluate lightside material investments carefully, prioritizing companies with clear and effective decarbonization strategies, as their future prosperity is contingent on these efforts.