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LafargeHolcim and the power of the mega-merger
Written by Global Cement staff
09 April 2014
The news that Holcim and Lafarge are planning a merger should come as no great surprise to long-term observers of the industry. Such mega-mergers have been periodically mooted over the decades and have already come to pass.
Lafarge took its present form through many acquisitions, but it was the mega-merger with Blue Circle Industries that brought it to pre-eminence. That deal was hard fought, rapidly becoming a hostile takeover after the then-CEO of Blue Circle, Richard Haythornthwaite, decided that the amount that the CEO of Lafarge, Bertrand Coulomb, was offering for his company was not high enough.
A year of claims, counter-claims, offers, rebuffs and haggling ensued, leading to a higher offer that was eventually accepted by the Blue Circle board. However, as Lafarge was a Euro-denominated company and Blue Circle was resolutely British (and was thinking in UK pounds sterling) after exchange rate variations had been taken into account, Lafarge paid less after a year than it had offered in he first place. The British CEO got a big pay-off and went on to greater glory, having appeared to extract a great deal more money (in GB pounds) for his shareholders. Apparently they teach this as a case study in business schools.
Mega-mergers have also shaped other giants in the industry. For example Chichibu-Onoda and Sumitomo-Osaka came together to make Taiheiyo Cement and Ciments Français was added to Italcimenti, although in this last case they still retain their separate identities. Often the deals amount to an accretive takeover by one larger company of a smaller one, but transformative deals consisting of a 'merger' of 'equals' also happen in the cement industry, and with good reason. The merging of research efforts; the optimisation of management; the rationalisation of procurement strategies: all of these will immediately save plenty of money.
However, it's on the financial side that these larger merged companies can sometimes see the most benefit. The cost of borrowing money is inversely proportional to the size of the company (and of the sums involved); the colossal sums demanded by overpaid and greedy bankers will diminish in proportion if the sums involved are larger. So, the cost of borrowing money to be able to invest in takeovers or for capital expenditure will reduce as a proportion of overall cost.
There are other significant potential savings as well, from operational synergies, although these can be harder to quantify and - critically - harder to retain once the competition technocrats have run their slide rules over the proposed deal. They generally do not like too much of the market ending in the hands of too few players.
A good case in point is the recent mega of Tarmac and Lafarge in the UK. To allow the deal to take place the merged company was obliged to sell off one of its key assets, the Hope cement plant, which is now owned and operated by newcomer Hope Construction Materials. Even after the deal has been completed, the market regulator is considering the possibility of making the merged company sell additional facilities, something that strikes Global Cement as 'just not on.'
However, with operations in 90 countries, Lafarge and Holcim can expect to face competition scrutiny in at least 15 countries including Brazil, Canada, Ecuador, France, the UK, the US, Morocco and the Philippines. Meanwhile, in Serbia it has been reported the two companies have a combined market share of 97% across all their business lines!
Lafarge and Holcim have overlapping facilities and distribution networks in a number of countries, and any merged company will probably be required to sell some of them to its competitors. Other companies might be licking their lips at the prospect, as usual CRH is already being lined up in the Irish press, but the units will be sold at a market rate - and not a penny less. It might be that the merged company cannot control which facilities are sold, meaning that they might end up with a less than optimised system. Not so good after all.
If the deal goes through, it will create a Europe-based behemoth with a production capacity of over 200Mt, enough to retain a place on the global top 10 companies with the ever-rationalising and concatenating Chinese companies. When the news first broke we asked what might the new company called? We liked a short mash-up of the two names, like Lolcim (a humorous nod to today's 'youth-speak' perhaps) or Hafarge. However, the level of preparation backing the merger plan soon became clear from financial due-diligence right down to a new name: LafargeHolcim.
Yet for all this co-ordinated work from companies that were meant to be competitors until as recently as March 2014, we should remember what happened to the proposed BHP Billiton-Rio Tinto takeover. Valued at a high of US$170bn it shrivelled up as the global economy collapsed in 2008 amidst concerns from regulators. The idea may be out there but LafargeHolcim has a long way to go before it actually exists.
Cement industry development in Uzbekistan
Written by Global Cement staff
02 April 2014
Our spotlight is on Uzbekistan this week following an update on the Almalyk Mining and Metallurgical Combine's (AMMC) plans to build a new cement plant in the south of the country. The news emerged in the wake of the completion of the AMMC's cement grinding plant, in the Jizzakh region, which was finished in late March 2014. Meanwhile, Eurocement announced that its subsidiary in Uzbekistan, the Akhangarancement plant, had received a limestone and marl quarrying licence.
Previous to the new AMMC grinding plant, Uzbekistan had five cement plants with a total cement production capacity of nearly 6Mt/yr. Only one of these was a dry production process plant, the 2.5Mt/yr Krzylkumcement plant, in the south-western Bukhara province. Cement consumption in the country was estimated to be around the same, also at 6Mt/yr.
Back in 2011 the government of Uzbekistan planned to invest US$6.94bn to develop infrastructure, transport and communication construction from 2011 - 2015. This investment has now been followed up with a direct financial injection into the cement industry.
In late February 2014, local building materials company JSC Uzbuildmaterials announced government plans to invest US$49.1m into the local cement industry. The programme includes nine projects for the three largest cement plants in the country: the Kyzylkumcement plant, the Ahangarancement plant and the Bekabadcement plant. Kyzylkumcement will receive the majority of the investment, US$39.6m to spend over three years on a new cement mill, upgrades to the clinker production lines and construction of a 220/10kV main substation. Ahangarantcement and Bekabadcement will replace 'out-dated' equipment and will upgrade their production lines.
Mineral-rich Uzbekistan is relatively undeveloped but this is changing. Its Gross Domestic Product (GDP) was reported to be US$51bn in 2012 by the World Bank, having seen steady growth since 2002, and its population was just over 30m in 2013. Its cement consumption is 300kg/capita, a figure below the global average (estimated at 536kg/capita in a forthcoming Global Cement Magazine report on 'Cement consumption versus Gross Domestic Product'). This places Uzbekistan in a favourable position for future development on a graph of GDP per capita against cement consumption per capita. The latest investment programme suggests that the Uzbek government are hoping that this is the case.
Changing the fuels mix in North America
Written by Global Cement staff
26 March 2014
Three news stories this week cover the gamut of fuels used by the cement industry in North America.
First we had an example of the changing trends in fossil fuel usage when TruStar Energy announced a deal to supply compressed gas to Argos USA. Then we moved to an example of recycled fuels used in co-processing when chemical waste firm ChemCare trumpeted its 100 million gallon milestone (that's 379,000m3 to the rest of the world) in supplying fuel-quality waste to the Lafarge co-processing subsidiary Systech Environmental. Finally, Cemex rounded off the main fuels groups with renewables, when it released pans to build a US$600m wind farm project in north-east Mexico.
Obviously fossil fuels still dominate in kilns north of the Darian Gap, as they do almost everywhere else, and fuel buyers wouldn't be doing their job properly if they weren't searching for the next best deal. Yet the range here shows a dynamic industry.
Jan Theulen from HeidelbergCement pointed out one example in the US at the recent Global CemFuels Conference held in Vienna. Here, rising landfill prices are increasing opportunities for alternative fuels use alongside changing US Environmental Protection Agency (EPA) permitting for solid recovered fuel. Alternative fuels consultant Dirk Lechtenberg, in an interview with Global Cement Magazine in February 2014, singled out the US as one country that is developing its alternative fuels use. As he explained, "Even though the fossil fuel prices are quite low in the US, the industry is developing supply chains for alternative fuels to be more independent with their fuels sourcing."
This race between cheaper fossil fuels in the US (via shale gas) and increasing development in alternative fuels is fascinating. Specifically: why is it happening now? Gas prices have fallen and demand for cement is returning in the US. The annual mean Henry Hub natural gas spot price in the US fell from US$8.86/million BTU in 2008 to a low of US$2.75/million BTU in 2012. This compares to up to US$15/million BTU in Japan and US$9/million BTU in Europe.
Public environmental pressure made manifest by the policies of the EPA and general increased knowledge about co-processing may be factors for the surge in alternative fuels investment. Long lead times for alternative fuels schemes may be another. Planners making a decision about what fuels mix to pursue in 2008 at the start of the recession might well have bet on alternatives to spread their risk. Yet the cause could be something else, as shale gas takes over higher paying industries, such as electrical generation, and the cement industry continues to be priced out of the leftovers.
Ultimately what burns in a cement kiln comes down to price. Depending on how the shale gas market plays out in North America it would be ironic if 'frackers', the bogeymen of current environmentalists, inadvertently cleaned up the cement industry.
Cement cartel investigations – Authorities will keep looking
Written by Peter Edwards
19 March 2014
Cement cartels (or at least cases of cartel-like behaviour) have reared their ugly heads this week... again. In two different markets, Australia and Brazil, competition authorities are at various stages of taking major action against large proportions of their respective cement industries. In another, Europe, it is the cement producers that are taking on the authorities.
This week, the Australian Federal Court has found five producers guilty of agreeing anti-competitive contracts with regard to fly-ash supply contracts from power stations in the state of Victoria. Only Cement Australia Holdings was not accused. Penalties are to be determined at a later date – watch this space.
As drastic as the Australian situation may be, it is Brazil's anti-trust authority Cade that looks set to make the biggest 'splash' in a cement industry in 2014. On 13 March 2014 it was reported that a US$1.32bn fine, split over six cement producers, has been put on hold after the producers disputed a ruling that would see them lose an average 24% of their cement assets each. So big is this fine that it actually eclipses the US$1.1bn fine seen in India in 2012. In light of the amount of influence that they look set to lose, it now looks extremely likely that the producers will appeal. This sets the scene for indeterminably long waits for legal proceedings and more evidence to be collected. Whatever happens in Brazil, there will be major implications for its increasingly-concentrated cement market.
Elsewhere, in a strange inversion of the normal situation, in Europe it is the cement producers that are taking action. This week the European Court has rejected an appeal from eight major cement producers including Holcim, HeidelbergCement and Cemex subsidiaries with respect to the European Commission's handling of an anti-cartel investigation that began in 2008. That case saw anti-trust investigations start in 2010. Proceedings continue.
As stated previously in this column, cartel-like behaviour is not necessarily indicative of a formal cartel. There are innumerable factors that make every case different and, in each, proving actual collusion is very hard indeed. In the cement industry however, it appears that 'convictions' in cartel cases are easier to spot than in other sectors.
"The first thing for any new competition regulator is to go out and find the cement cartel. My experience of this subject is, it is always there, somewhere," wrote Richard Whish, a Professor of Law at King's College London in 2001. "The only countries in which I had been unable to find the cement cartel is where there is a national state-owned monopoly for cement."
The authorities will keep looking and producers, guilty or not, will continue to wait for their call.
Setting the cement standard in Nigeria
Written by Global Cement staff
12 March 2014
Dangote Cement let everybody know this week that it is now producing 52.5MPa grade cement in Nigeria. The move was a response to building pressure from professional and civil groups in the country which have reacted in recent months to the high incidence of building collapses in the country. With the 42.5MPa grade looking likely to become the new legal standard, Dangote's adoption of an even higher standard looks like canny marketing.
The background to this tussle lies in the spate of building collapses that have plagued Nigeria in recent years. A widely cited paper in the Global Journal of Researches in Engineering from 2010 reported at least 26 incidents in Nigeria between 1975 to 1995 with 226 fatalities. Later figures from 2004 to 2006 reported at least 10 incidents with 243 fatalities, a significantly higher prevalence than in the earlier period. The paper recommended adopting standards for building materials such as cement among other measures. Since the publication of this paper news reports have been hard to collate. Commentators placed the toll at 15 collapses with 30 fatalities for the first eight months of 2013 alone.
The Standards Organisation of Nigeria (SON) reacted to the latest outcry over building collapses by saying that they were caused by poor application, such as a using the wrong quality of cement for a particular task, not poor standards. According to the SON, 32.5MPa grade cement is recommended for activities such as plastering, flooring, block moulding, culvert making and building simple domestic houses. 42.5MPa grade is designed for the construction of tall buildings, bridges and load bearing columns.
Adopting a national standard of 42.5MPa grade is intended to stop misuse of lower grade cement being used for the wrong applications. One example commentators have mentioned is how to help illiterate builders select the right kind of cement for a given task. Choosing an overall higher standard is one solution to this problem. Education is another.
One fact that has emerged from the debate is that, according to Dangote Chief Executive Officer DVG Edwin, the SON imposed 42.5MPa grade as the minimum for imports before most imports were stopped in late 2012. Edwin used this as an argument for the SON enforcing the same standard for domestic cement production. Anything that can cut the number of building collapses can only be a good thing.