Aggregates and cement are perhaps the most basic components of construction. There is little in the industry that is more low tech and less sophisticated. While there is much research into improved alternatives, they remain the foundation - both literally and figuratively - of the construction industry.
Producers of these materials also attract farmore than their fair share of attention from the competition authorities, not just in the UK, but wherever there are governments with such watchdogs ready to intervene in otherwise free markets. In 2003 the German competition authorities imposed fines on cement producers after busting open cartel agreements. In 2007 the French competition authority took similar action against anti-competitive practices in the cement market. In 2009 it was Poland’s turn. Last year India’s 11 top cement producers were hit with fines of up to £100m by regulators there after a complaint filed by the Builders’ Association of India was followed up and allegations of a cartel confirmed.
Clearly there is something about cement that makes free and open competition problematic. The most recent intervention in the UK market dates from September 2010 when the Office of Fair Trading (OFT) launched an investigation into the supply of aggregates, ready-mix concrete and cement. Given that 40% of construction expenditure is in the public sector, thus taxpayer funded, cement prices affect us all, whether in the construction industry or not. There is politics at play here. The OFT published its market study in August 2011 and in January 2012 referred the aggregates, cement and ready-mix concrete markets in Great Britain to the Competition Commission (formerly the Monopolies & Mergers Commission), setting out its concerns. The OFT had found that despite the low tech nature of the products, barriers to entry in aggregates and cement were high because of the difficulty getting planning permission and the level of investment required (cement kilns are expensive). As a result, the supply side was concentrated in the hands of a few multi-national corporations. At that stage there were five major materials producers accounting for more than 90% of the cement market, 75% of aggregates sales and 68% of ready-mix production. They were: Cemex of Mexico; Hanson, owned by Heidelberg Cement of Germany; Lafarge of France; Anglo American subsidiary Tarmac; and Aggregate Industries, owned by Holcim of Switzerland, although not producing cement in the UK. The OFT said that it had received complaints about vertically integrated firms refusing to supply or discriminating against non-integrated competitors through their pricing. It said that there was also an issue with contacts between competitors and information exchanges across the markets, with major firms supplying each other with both aggregates and cement, and engaging in joint ventures and asset swap.
This was the time – 2011 – when Anglo American and Lafarge struck a deal to combine their cement, aggregates, ready-mixed concrete, asphalt and contracting businesses in the UK. The businesses comprised Tarmac UK, Lafarge Cement UK (formerly Blue Circle), Lafarge Aggregates and Concrete UK. The deal was referred to the Competition Commission (CC), which ruled that it could not go ahead without a substantial sale of assets. This paved the way for Indian steel magnate Lakshmi Mittal to pay £285m for Tarmac and Lafarge assets including five quarries, a cement plant, 172 ready-mix (RMX) concrete plants, two asphalt plants, one marine aggregates wharf, one rail-linked aggregates depot and Tarmac’s 50% stake in Midland Quarry Products. Thus in January 2013 Hope Construction Materials was born, maintaining the pool of major players at five. Consideration of the Lafarge/Tarmac merger was a totally different process at the CC to the wider market investigation, however, with a different team handling the study. Their investigation considered only England, Scotland and Wales (Great Britain) not the entire United Kingdom as Northern Ireland was considered to be a separate market with its own players and issues, not necessarily excluding competition frailties. The CC published its provisional findings in May 2013. It found no problems with the GB markets for aggregates or ready-mix concrete and gave these markets a clean bill of health. Cement, on the other hand, was adifferent matter. The CC made no accusations of collusion between the cement producers, but said that because there are so few of them “they have an unusually high level of understanding of each other’s businesses”. In the view of the CC, “this has created conditions that allow them to coordinate their behaviour, thereby softening competition and resulting in higher prices for consumers”. Professor Martin Cave, deputy chairman ofthe commission and chairman of the inquiry group, said at the time: “In a highly concentrated market where the product doesn’t vary, the established producers know too much about each other’s businesses and have concentrated on retaining their respective market shares rather than competing to the full. Strikingly, despite low demand for cement over recent years, prices and profitability for the GB producers have still increased.”
The cost to GB consumers was estimated at £180m over the period 2007 to 2011.
The CC published its final report last month, January 2014, setting out in detail its findings, the proposed remedies and the justification for them.
The key outcomes are that Lafarge Tarmac is required to sell another cement plant (and some accompanying RMX plants if necessary) to facilitate the entry of another new producer into the market. The CC is also introducing measures to limit the flow of information and data concerning cement production and price announcements. (See below.)
The CC also identified competition problems resulting from there being only one domestic producer of ground granulated blast furnace slag (GGBS), namely Hanson, with exclusive rights to use the output of Lafarge Tarmac, the single domestic producer of granulated blast furnace slag (GBS), which is the main raw material input into GGBS. The CC is therefore requiring Hanson to sell one of its GGBS production facilities.
The final report is a heavyweight tome coming in at 468 pages. Significantly, it is clear that the investigation has failed to find any evidence of any wrong-doing on the part of any individual or corporation. Therefore wading in and telling companies like Hanson and Lafarge Tarmac that they are no longer entitled to what is legally theirs seems pretty draconian.
So what is the justification?
Evidence on market outcomes indicated that competition in the GB cement markets was not working effectively. This evidence included: (a) Profitability assessed on a comprehensive basis after impairment losses (the measure we consider to most closely reflect the firms’ economic profitability) exceeded the cost of capital averaged over the six-year period of review, despite the demand slump during this period and the fact that this period did not cover the whole of a business cycle.
(b) Variable profit margins (and, for three out of four producers, EBITDA margins) remained stable, or even in some cases increased, between 2007 and 2011, despite a 36% drop in the demand for cement between 2007 and 2009 and increasing costs. Although 2012 variable profit and EBITDA margins fell on 2011 levels, they had returned to, or were higher than, their respective levels in 2008, before the before the full impact of the market downturn was felt. In real terms, cement prices peaked in 2009, to then reduce between 2009 and 2012, but there was an overall increase in prices over the period 2007 to 2012.
(c) There had only been small changes in annual shares of sales (the most for any Major was four percentage points) over the period.
In other words, there cannot be healthy competition because the cement producers continued to make profits after the downturn in demand post-2008 and did not reduce their prices by as much as they had put them up in the previous boom. The stability of market shares is also taken to be a bad thing and must mean the producers are not really trying.
However, it also says that the creation of Hope Construction Materials has had an impact on the market, with HCM taking market share from other suppliers and having an impact on pricing.
This seems to be a contradiction that the investigators find easy to ignore, saying that this evidence was “not representative of the longer-term state of the market”.
CC deputy chairman Professor Martin Cave, who led the inquiry group, said: “We believe that the entry of a new, independent cement producer is the only way to disturb the established structure and behaviour in this market which has persisted for a number of years and led to higher prices for customers.
“Despite falling demand and increasing costs during the last few years, profitability among GB producers has been sustained and their respective markets shares have changed little. This is not what you would expect to see in a well-functioning market, under these circumstances.”
The CC estimates that higher prices resulting from this lack of competition cost customers at least £30m a year for cement, and probably more in the future without action, plus a further £15m-£20m a year for GGBS. The CC said that without its intervention, this situation would persist for many years to come.
The clear implication is that cement production is a cushy business from which it is too easy to make immorally large profits. Naturally, the producers dispute this. They have had it as tough as any sector of the construction industry, with production falling 46% between 2007 and 2012. Plants have been mothballed and people laid off, yet their input costs have continued to spiral.
Cemex, for one, has been loss-making in the UK according to country president Jesus Gonzalez, who has complained publicly and privately to ministers that their environmental policies are pushing up cement production costs and threatening the viability of Cemex’s presence in the UK.
Cemex suspended production at its Barrington cement plant in Cambridgeshire in 2008, after 80 years of operations, and began its demolition in 2012. This was directly attributed to “the very challenging economic environment”. Gonzalez said that increases in manufacturing costs due to electricity market reforms and carbon taxes had meant there was “no sound business case” for the plant.
With regard to the publication of market information, cement companies currently only publish the market data that they are required to by the government in the promotion of transparency. If the government authorities now want less transparency, the producers will doubtless be equally ready to comply.
In response to the CC’s final report, Cemex issued its corporate response: “In Cemex’s view the conclusion that there is insufficient competition in the cement market is incorrect and therefore the remedies are disproportionate to the alleged harm which is itself unproven. The allegation of excessive profit is based on a highly theoretical model that is fundamentally flawed which we do not recognise in our day-to-day dealings with the market.
“A domestic cement industry is critical to the UK economy if the government’s plans for growth are to be underpinned by increased house building and infrastructure development. Unless the domestic cement industry is profitable then the UK risks a lack of investment in this vital sector; an increasing risk of offshoring of cement manufacturing capacity and, as a consequence, an excessive reliance on imports to supply this planned growth in construction. Cement manufacturing is a capital intensive business and Cemex UK needs to make a fair return on its investments.”
Lafarge Tarmac CEO Cyrille Ragoucy was equally unhappy: “We are disappointed that the Competition Commission has asked Lafarge Tarmac to divest another cement plant only a year after it allowed the creation of the JV. This is not reasonable or proportionate and we have not been given a fair opportunity to defend our position.
“The Commission has based its remedies on a partial and historic picture of the market. Its analysis of industry profitability, which is central to its conclusion of Adverse Effect on Competition, is flawed, grossly overestimating the returns made. It has also failed to take into account the new business environment that has been established by our divestments - only 12 months ago – to create a new competitor, and the entry of new importers into the market. Regrettably, the biggest loser in this process would be the customer.”
Among the candidates to buy the cement plant that Lafarge Tarmac must sell is CRH of Ireland, which has been buying up cement operations in Spain, China, India and Ukraine in recent months and already imports cement into the UK from Ireland. CRH has already advised the CC on what sort of UK cement plant it would be interesting in buying – a nice modern one, centrally located, preferably with a ready-mix plant to go with it.
Even this may not be the end of it, however. A totally separate investigation into the cement market is being carried out by the European Commission. In November 2008 EC officials raided several cement producers across Europe. In December 2010 it launched anti-trust proceedings against a number of cement manufacturers in Austria, Belgium, the Czech Republic, France, Germany, Italy, Luxembourg, the Netherlands, Spain and the UK.
The Commission said that it would “investigate indications that the companies acted to restrict trade flows in the European Economic Area (EEA), including restrictions of imports into the EEA from countries outside the EEA, market sharing, price coordination and connected anticompetitive practices in the markets for cement and related products.”
It added: “The initiation of proceedings does not imply that the Commission has conclusive proof of an infringement. It only signifies that the Commission will conduct an in-depth investigation of the case as a matter of priority.”
We have been here before, of course. Back in the 1990s Brussels imposed heavy fines on Blue Circle, Rugby and Castle Cement for anti-competitive behaviour. Within a few years the entire industry was in foreign ownership. Blue Circle went to Lafarge, Rugby to Cemex and Castle to Hanson/Heidelberg.
A spokesperson for the European Commission has confirmed that the investigation is still live but, as there is no deadline to complete inquiries into anti-competitive conduct, there is no way of knowing what and when the next stage will be.
Caroline Wallace, inquiry director for the Competition Commission’s cement market investigation, says that the UK team has taken steps to keep Brussels informed of UK developments. “We’ve liaised with them and kept channels of communication open,” she says. “But where the European Commission goes next is a matter for them.”
What the Competition Commission demands
• Lafarge Tarmac is required to choose between divesting either its Cauldon cement plant in Staffordshire or its Tunstead plant in Derbyshire. The purchaser of the divested cement plant will be able to acquire a limited number of RMX plants from Lafarge Tarmac subject to the purchaser’s total internal cementitious requirement being capped at 15% of the acquired cement production capacity. The buyer would have to be approved by the CC and cannot be an existing GB cement producer. • Publication of data on cement production will be required to be delayed by at least three months from the time period to which it refers.
• Cement suppliers will be prohibited from sending generic price announcement letters to their customers. Instead, any future price announcement letters will have to be specific and relevant to the customers receiving them.
• Hanson will be required to divest one of its ground granulated blast furnace slag (GGBS) production facilities and Lafarge Tarmac will be required to enter into a long-term agreement to supply GBS to the new owner. This buyer will also have to be approved by the CC and cannot be a GB cement producer.
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