To reap efficiency or sow fragmentation
- Written by Don Marsh
Impending ownership changes of two concrete and cement businesses, one each side of the Atlantic, remind us how reasonably regulated free markets overwhelmingly trump those hamstrung by heavy-handed government agencies. Consider the investor-sanctioned Martin Marietta Materials–Texas Industries merger versus the British government-ordered creation of a portland cement, GGBF slag and ready mixed producer from the sale of existing players’ assets. The driving forces behind the transactions are the embrace or rejection of realities of a market rewarding efficiency versus fragmentation.
With few plausible Federal Trade Commission or Department of Justice Antitrust Division obstacles, Martin Marietta–TXI is poised to become a powerhouse in the top cement, aggregate and concrete market, Texas, and number one overall U.S. aggregate producer. In the Lone Star State, where cement consumption is comparable to the United Kingdom’s, Martin Marietta–TXI will have leverage accompanying raw material and ready mixed concrete shipments approaching $1 billion. Competition will nevertheless remain high in Texas, where the merged business crosses paths with such peers as Cemex, Holcim (US) and Lehigh Hanson.
Shortly before the Martin Marietta and Texas Industries boards unanimously approved an MMM-for-TXI stock exchange—a merger likely consummated in the second quarter following regulatory review— the U.K. Competition Commission (CC) issued its “Aggregates, cement and ready-mix concrete market investigation” report. The 468-page document expands on preliminary findings noted here last June (“Bureaucrats Ignore Cement Leaders’ Fiduciary Duties”).
The report tracks cement pricing and ground granulated blast furnace slag distribution characteristics among major integrated players: Aggregate Industries U.K. Ltd. (Holcim Ltd., parent company); Cemex U.K. Operations Ltd.; Hanson (HeidelbergCement AG, parent); Lafarge Aggregates and Lafarge Cement U.K. Ltd.; and Tarmac (U.K. mining giant Anglo American, parent). The latter two companies’ joint venture, Lafarge Tarmac, launched in 2012 conditional on the sale of certain cement, aggregate and ready mixed production assets, creating a fifth major operator, Hope Construction Materials.
“Structure and conduct in the cement sector restrict competition by aiding coordination between the three largest producers, which results in higher prices for all cement users,” CC contends. “[Lafarge Tarmac, Cemex and Hanson] have refrained from competing vigorously with each other by focusing on maintaining market stability and their respective shares.”
CC is ordering Lafarge Tarmac to divest one of two cement plants, whose suitor can also purchase a number of the joint venture’s ready mixed operations—tied to a threshold of 15 percent of the acquired mill’s capacity. The buyer cannot be a domestic cement operator. The Commission is also a) restricting publication of cement production data, delaying release of figures at least three months from reference time period; and, b) prohibiting mills from sending customers generic price announcement letters, requiring such communications be specific and relevant to individual recipients. Separately, lone GGBF slag processor Hanson will be required to divest a grinding facility—the buyer other than a cement-producing domestic peer.
In contrast to the FTC or DOJ Antitrust Division, which investigate mergers’ effect on competition or credible allegations of illegal anticompetitive behavior among established market participants, the CC has simply determined that Lafarge Tarmac, Cemex and Hanson did not cut cement prices in a down market. However well intentioned members might seem in their quest for cheaper powder, they continue to ignore the world around them: Lafarge, Cemex, Hanson, Holcim and other multinational producers compete in many markets. The probability of a new integrated player meaningfully impacting U.K. cement prices is about the same as Texas Governor Rick Perry fretting that his state’s strong economy has unjustly enriched contractors and suppliers.