The global cement industry, normally a sector that stays 'under-the-radar' of public perception, has seen something of a relative media 'frenzy' in the general population recently. As those familiar with the global cement industry might expect, the recent spike in cement industry interest has been due to the planned LafargeHolcim merger. The story has taken the sector out of the business sections, onto mainstream websites and into the eyeballs of more people than normal.
The extent of this unusual (and all too infrequent) diversion by the industry into the public consciousness became clear to me when my wife asked me whether or not Global Cement had heard about the deal on the evening of the Friday that the rumours of the merger first surfaced. She saw it on the BBC website. I was able to assure her that the news was already on www.GlobalCement.com.
Then, over the Easter weekend, I was even more surprised when my mum asked me how the LafargeHolcim merger would affect the UK industry. A fairly in-depth discussion developed, mainly focused around the sorts of companies that might pick up the goodies that fall from the LafargeHolcim piñata as it is inevitably whacked by the global anti-monopoly authorities.
Later, speaking to friends, I was again surprised at the level of unprompted interest in the deal. I tried to explain what it means for the industry. It is not just two large producers combining their resources, but the merging of the two largest producers. Imagine that Manchester United and FC Barcelona (or the Seattle Seahawks and the Denver Broncos) decide that their best chances for long term success are to join together to fight the remaining football teams. At this point, someone else likened the situation to Boeing and Airbus deciding that the world's third-largest commercial aircraft producer has too much market share and joining forces to shut them out.
Both analogies have their strengths and weaknesses. Lafarge and Holcim are nothing like Boeing and Airbus because neither has such a massive stake in the global industry. The deal is also unlike the football analogies because there are so many more teams than cement producers. Such deals would be unthinkable anyway, due to fan loyalty. However, this doesn't stop pundits' 'Best players of the Year' lists appearing in every newspaper and sports website at the end of the season. It is understandable that Lafarge and Holcim want to write their own 'Best plants' list in the cement industry.
The intention, of course, of the planned LafargeHolcim merger, is the creation of just that, a 'greatest hits' inventory of the biggest, most efficient and best-positioned cement plants that Lafarge and Holcim have to offer. By keeping their best bits, LafargeHolcim would be made as future-proof as possible. Future threats could take all manner of forms: Rising energy prices in mature markets; An unexpected global economic meltdown; More-and-more stringent environmental regulations; and; The rise of regional producers from outside of their traditional markets.
The first three factors have the potential to affect cement producers of any size. Experience shows us that larger producers invarably fare better against these challenges. However, the potential rise of new multinational players is a threat specific to existing multinationals. While its ongoing capacity reduction drive and increasing economic gremlins make it is easy to point to China regarding this point, recent trends suggest that it is also pertinent to look at certain Colombian, Brazilian and Nigerian producers when judging who might be the next threat to the established multinationals.
It is these smaller regional players that have the most to gain from the merger of Lafarge and Holcim. Lafarge and Holcim's cement capacity is currently around 13% of the global total. When they merge and are forced to sell some of their assets, this number can only go down. Couple this to a cement market that will grow to demand ~4.2Bnt/yr in 2014 and the amount of potential sales volumes for intrepid smaller multinationals will continue to grow. On top of all this, it is possible that LafargeHolcim may have to sell some of its prize assets due to competiton concerns if it wants the deal to go ahead. This is akin to a rival team picking Wayne Rooney from the Manchester United or Peyton Manning from the Seahawks.
Europe looks set to be an especially active region for divestments prior to the merger, as there are few markets here in which Lafarge and Holcim do not operate together. The potential for 'sub-optimal' consequences is clear. When it merged with Tarmac in the UK, Lafarge had to sell its largest and most effective cement plant. The new industry player that resulted was a major beneficiary of the merger. With so many overlapping assets in the planned LafargeHolcim deal, there is huge potential for many more beneficiaries. Who will take the advantage?