Competition Commission report
In its final report into the market for aggregates, cement and ready-mix concrete (RMX), the UK Competition Commission (CC) has said that it will require Lafarge Tarmac to sell a cement plant (and some accompanying RMX plants if necessary) to facilitate entry of this new producer. The CC is also introducing measures to limit the flow of information and data concerning cement production and price announcements.
Additionally, the CC is looking to increase competition in the supply chain for ground granulated blastfurnace slag (GGBS) by requiring Hanson to sell one of its GGBS production facilities.
The measures follow a two-year investigation, which has found that both structure and conduct in the cement sector restrict competition by aiding coordination between the three largest producers (Lafarge Tarmac, Cemex and Hanson), which results in higher prices for all cement users. These three producers have refrained from competing vigorously with each other by focusing on maintaining market stability and their respective shares.
The CC has also identified competition problems resulting from there being only one domestic producer of GGBS in Great Britain (Hanson) with exclusive rights to use the output of Lafarge Tarmac, the single domestic producer of granulated blastfurnace slag (GBS), which is the main raw material input into GGBS.
The CC estimates that higher prices resulting from this lack of competition cost customers at least £30 million a year and probably more in the future for cement, and a further £15 – £20 million a year for GGBS. The CC believes that without its intervention, this situation would persist for many years to come.
The CC has not identified any problems with the markets for aggregates or RMX.
Professor Martin Cave, CC Deputy Chairman and Chairman of the Inquiry Group, said: “We believe that the entry of a new, independent cement producer is the only way to disturb the established structure and behaviour in this market which has persisted for a number of years and led to higher prices for customers. Despite falling demand and increasing costs during the last few years, profitability among GB producers has been sustained and their respective markets shares have changed little. This is not what you would expect to see in a well-functioning market, under these circumstances.
“The problem in relation to GGBS stems from there being only one domestic producer (Hanson) which again leads to higher prices for customers.
“Cement is an essential product for the construction and building sectors and the amount of such work that is funded by the public purse only underlines the importance of ensuring that customers get better value for money. We believe our measures can bring about a substantial, swift and lasting increase in competition in this economically vital market.”
A summary of the remedies is as follows:
- Lafarge Tarmac will be required to choose between divesting either its Cauldon or its Tunstead cement plant. The purchaser of the divested cement plant will be able to acquire a limited number of RMX plants from Lafarge Tarmac subject to the purchaser’s total internal cementitious requirement being capped at 15% of the acquired cement production capacity. The buyer would have to be approved by the CC and cannot be one of GB’s existing cement producers.
- Restrictions on the publication of GB cement market data. Publication of data on cement production will be required to be delayed by at least three months from the time period to which it refers.
- GB cement suppliers will be prohibited from sending generic price announcement letters to their customers. Instead, any future price announcement letters will have to be specific and relevant to the customers receiving them.
- Hanson will be required to divest one of its GGBS production facilities and Lafarge Tarmac will be required to enter into a long-term agreement to supply GBS to the acquirer of the GGBS production facility. The buyer will have to be approved by the CC and cannot be a GB cement producer.
There are five major producers of heavy building materials in GB: Aggregate Industries, Cemex, Hanson, HCM and Lafarge Tarmac. HCM is a new firm established in January 2013 after it bought cement, aggregates and RMX assets which the CC had required Anglo American (the owner of Tarmac) and Lafarge to divest following an inquiry into the Anglo American/Lafarge joint venture in 2012. Aggregate Industries does not produce cement in the UK but all five have significant RMX operations.
The final report is available on the investigation home page along with all other information on the investigation.
Response statement from Lafarge Tarmac
Cyrille Ragoucy, CEO of Lafarge Tarmac said: “We are disappointed that the Competition Commission has asked Lafarge Tarmac to divest another cement plant only a year after it allowed the creation of the JV. This is not reasonable or proportionate and we have not been given a fair opportunity to defend our position."
“The Commission has based its remedies on a partial and historic picture of the market. Its analysis of industry profitability, which is central to its conclusion of Adverse Effect on Competition, is flawed, grossly overestimating the returns made. It has also failed to take into account the new business environment that has been established by our divestments - only 12 months ago - to create a new competitor, and the entry of new importers into the market."
“Regrettably, the biggest loser in this process would be the customer. We are focused on reviewing our options based on today’s CC announcement and making a decision that is in the best interests of our employees, customers and shareholders.”
Response from Cemex UK
Cemex is pleased that the CC has confirmed that there is no problem with the effective functioning of the ready-mixed concrete and aggregates markets in the UK and also that the proposed divestment remedies will not affect our own assets and operations directly.
However, in Cemex’s view the conclusion that there is insufficient competition in the cement market is incorrect and therefore the remedies are disproportionate to the alleged harm which is itself unproven. The allegation of excessive profit is based on a highly theoretical model that is fundamentally flawed which we do not recognise in our day-to-day dealings with the market.
A domestic cement industry is critical to the UK economy if the Government’s plans for growth are to be underpinned by increased house building and infrastructure development. Unless the domestic cement industry is profitable then the UK risks a lack of investment in this vital sector; an increasing risk of off-shoring of cement manufacturing capacity and, as a consequence, an excessive reliance on imports to supply this planned growth in construction. Cement manufacturing is a capital intensive business and Cemex UK needs to make a fair return on its investments.
Cemex UK will continue to provide all its customers with the best service and the best solutions for a better future.
Adapted from press releases by Rosalie Starling
Read the article online at: https://www.worldcement.com/europe-cis/14012014/cc_to_create_a_new_cement_producer_in_great_britain_588/