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Is the cement sector subject to unnecessary interference by the authorities?

World Cement,

The Saudi government introduced an export ban and the Philippines authorities are mulling over stiffer penalties for so called ‘cartel’ behaviour. In Pakistan the competition authorities levied a US$ 77 million fine onto indigenous producers for ‘cartel’ behaviour. In Nigeria, the government revoked the Certificate of Occupancy of the Nigercem plant. The Jamaican authorities are probing a ‘dumping’ case into the country, the Indian authorities stopped the mining of limestone by Lafarge which was exported to Bangladesh, whereas in China the authorities introduced a new mandate which will try to address the overcapacity situation in the country. Finally, the Venezuelan cement situation is well documented. And these are merely recent news items!

Badly behaved industry?

The question I hear many people ask is: is the cement sector such a badly behaved industry? Well, I believe the constant interference in cement may be partly attributed to the characteristics of the sector. This, of course, does not mean that cement is completely innocent of all the accusations levelled on the industry. This is for the relevant authorities to prove. Only, the nature of cement is such that it makes the industry a ‘soft’ political target.

Six reasons

We believe there are six main reasons why the cement industry is, and will continue to be, in the sights of authorities around the world. These reasons are discussed below. I did not attempt to prioritise these reasons as I believe their relative importance varies from country to country and over time.

The cement industry is a highly polluting sector. It is estimated that the sector emits 5% of global CO2 output. And this does not allow for other pollutants and more localised environmental effects (dust, noise, water, quarrying etc). The cement industry, in itself (not the whole of the construction activity), does not form a large part of any country’s GDP. Neither does it employ a large number of people. In fact, a new cement plant of, say, 1.5 million tpy capacity and revenue of ~US$ 100 million can be managed by 100 - 150 people.

Cement prices are the most apparent indicator of assessing construction costs. When cement prices are high the popular belief is that the cost of building houses is also high (irrespective of the actual percentage of cement in the overall costs of building a house). This makes the populace unhappy and annoys the politicians.

The cement industry is a lucrative sector. This is a generalised statement and of course, one sees differences in financial performance from market to market, but overall cement margins are well above necessary returns for asset replacement. It is not a coincidence that we have seen in the last five years a scramble to enter the industry by many non-traditional cement players.

Finally, the cement sector, although important to a nation, cannot be considered as strategically important as other heavily polluting sectors such as the energy sector, the transportation sector or even the steel sector.

A focused effort

In our view, these reasons make cement a ‘soft’ political target in any jurisdiction. Although, no government or other authority will openly articulate many of these reasons, they nevertheless exist. So, our advice to our clients is not to expect any positive support from governments. On the other hand, it is a waste of time trying to ‘fight’ the authorities as a sector. We believe that any successful industry will be subject to interference from politicians. It is best to spend time and effort defining and implementing a clear strategy and at all times comply with relevant competition and climate change legislation.

Author: Terry Pavlopoulos, Construction Knowledge Ltd, Advisors to the Building Materials and Construction Industries.

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