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Bureaucrats ignore cement leaders’ fiduciary duties in market inquiry

While not alleging collusion or other illegal behavior, the British counterpart agency to the U.S. Federal Trade Commission and Department of Justice Antitrust Division is considering steps to increase competition among three major, integrated producers following an inquiry of the U.K. portland cement, GGBF slag cement, aggregate and ready mixed concrete supply chain.

The Competition Commission (CC) has not identified any ready mixed concrete or aggregate market “problems,” but provisionally finds a combination of structural and conduct features adversely affecting competition in portland cement and GGBF slag. Officials estimate that concentration among Cemex U.K. and Hanson (three cement plants each) and Lafarge/Tarmac (seven plants), coupled with routine business dynamics, might have cost U.K. construction interests $270 million from 2007-2011, when annual powder consumption dropped from 14 million to 9.3 million tons, approaching 11 million tons since.

“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,” says CC Deputy Chairman Martin Cave, who chaired the inquiry. “Strikingly, despite low demand for cement over recent years, prices and profitability for the Great Britain producers have still increased.

‘”[Market] concentration—and the close links between the producers at many levels—along with industry practice, has for a long time given Great Britain producers detailed awareness of how their counterparts are performing.”

Possible CC actions include requiring Cemex, Hanson and Lafarge/Tarmac to divest cement plants and ready mixed operations; creation of a cement buying group; prohibiting generalized price announcement letters to customers; and, restrictions on making available other information that can aid market coordination.

The Commission appears to know much about domestic producers but little of the global market into which former British-owned heavyweights Aggregate Industries, Blue Circle Industries, Hanson Plc and RMC Group have been fully assimilated. The U.K. heavy building materials industry consists primarily of operators with foreign-owned parent companies or partners: Mexico’s Cemex entered in 2005 by acquiring RMC; Germany’s Heidelberg Cement took over homegrown Hanson in 2007; and, Paris-based Lafarge Group acquired cement market leader Blue Circle in 2001, and earlier this year consummated a CC-sanctioned 50/50 joint venture, Lafarge Tarmac, with London mining giant Anglo American. Holcim Group-owned Aggregate Industries U.K. is a key aggregate, ready mixed and asphalt player, but has no integrated cement production assets.

Lost in CC grousing is recognition that Cemex, Heidelberg and Lafarge—all contending with heavy debt incurred in their 2007 takeovers of Rinker Group, Hanson and Egypt’s Orascom Cement, respectively—operate in Great Britain and across the world to build shareholder wealth. They pursue that objective by a) investing in countries with stable governments and strong property laws; and, b) adhering to the principle that in an industry where leaders overlap around the world, business practices have consequences beyond local markets or individual countries.

Cemex, Heidelberg and Lafarge acquired Great Britain’s legacy operators anticipating they could apply their management models and exceed their cost of capital. If the CC constricts the models, maybe Cemex, Heidelberg and Lafarge can petition the U.K. government to retrieve certain gains RMC, Hanson and Blue Circle shareholders—surely a few British individuals and pensioners among them—realized when bigger suitors came knocking.