The Australian cement supply spat calmed down a little this week with the announcement that Wagners Holdings has agreed to resume the supply of cement products from its Pinkenba grinding plant in Brisbane to Boral. Legal proceedings are still on-going with a trial date set at the Supreme Court of Queensland in late November 2019.
The argument blew up publicly in March 2019, when Wagners said it had suspended its cement supply to Boral for six months. Wagners has a cement supply agreement with Boral whereby it supplies cement on an annual basis for a fixed price. However, Boral informed Wagners that it had found cheaper cement from a ‘long established’ supplier in South East Queensland. Local press speculated that this ‘long established’ supplier was Cement Australia, the joint venture between LafargeHolcim and HeidelbergCement. Wagners then had the choice to either match the lower price or suspend its supply. The disagreement took the legal route as the parties failed to reach an agreement. Wagner says that its cement supply agreement with Boral ‘remains binding on both parties’ until 2031.
Wagners later reported that it expected the suspension to cost it around US$7m in 2019. The deal with Boral constituted about 40% of its cement sales volumes. Its overall revenue grew year-on-year in its 2019 business year to the end of June 2019 but its cement sales volumes fell. Its earnings also fell. This was blamed on higher activity in lower margin areas such as contract haulage and fixed plant concrete, and delays in major infrastructure project work in South-East Queensland.
Boral, meanwhile, suffered from falling revenue and earnings from its Boral Australia subsidiary in its financial year to June 2019 due to a slowing construction market. Notably, its cement sales revenue rose by 7% due to ‘favourable’ pricing, higher volumes and cost-saving programs. It didn’t say whether the cost cutting included sourcing cement from a different supplier! All of this though was counteracted by lower contributions from its Sunstate joint venture (JV) with Adelaide Brighton and higher fuel and clinker costs.
All of this is fascinating because these kinds of disputes usually remain out of the public eye. The large size of Wagners’ cement supply deal with Boral meant that when it was threatened it likely had to tell its shareholders due to the potential financial impact. Whether Boral can wriggle out of the contract is now a matter for the courts.
The broader picture is that even though Boral Australia’s cement division seemed to be growing in its 2019 financial year it was still trying to reduce its costs in the face of a decelerating construction market. Added to this, the companies hold both a supplier and a competitor relationship. On the production side Boral operates an integrated plant at Berrima in New South Wales (NSW), a grinding plant at Maldon, NSW and another grinding plant in its Sunstate JV at Brisbane, Queensland. Wagners runs its own grinding plant at Pinkenba, Queensland. Both companies operate concrete plants. This is not unusual for a concentrated industrial sector like cement but it creates problems for the regulators. Note that, also this week, the Australian Competition and Consumer Commission was reportedly paying attention to the links between Barro Group and Adelaide Brighton. Barro owns a 43% stake in Adelaide Brighton but the authorities are concerned about a possible overlap in the two companies’ roles as suppliers of cement, concrete and aggregates. Any slowdown in construction in Australia seems likely to heighten these kinds of issues.