Impact of anticipated Holcim–Lafarge merger on Indian cement market

The overriding considerations for a merger of two giant-sized corporate entities are to cut costs, improve operational efficiencies by creating a common pool of best practices drawn from the merging groups and increase the market share of merged body than that of the separate two constituents, writes Kunal Bose. When in April’s first week Switzerland’s Holcim announced an all-share deal to acquire France’s Lafarge to create the world’s biggest cement group with combined sales of 32bn euros ($44bn), boards of two companies acknowledged that as weak demand persists for all construction materials from cement to steel, cement behemoths under one umbrella would be advantageously placed to fight off market miseries.

The Holcim–Lafarge merger likely to be consummated by the first half of 2015 will have major implications for India, the world’s second-largest producer and consumer of the bonding material, where both the groups have major presence. Going beyond, the two stock exchange listed Holcim subsidiaries in India, namely, ACC and Ambuja Cements and the unlisted Lafarge India are making large investments to grow capacity. ACC’s capacity is to expand to 35mt (million tonnes) in about a year from 30mt. The close to 25mt-capacity Ambuja Cements is to build 5mt greenfield capacity in Rajasthan. Lafarge India with capacity of 11mt, built largely by way of acquisitions, remains on the prowl to buy more operating units as it stays active in brownfield expansion.

The new group LafargeHolcim emerging from the merger “will offer higher growth and low risk, thus creating more value.” The union is to effect annual savings of €1.4bn. The global economic crisis resulting from the ruinous 2007/08 recession meant low demand and prices for the cement industry as it had to contend with high energy bill accounting for at least 25% of total production costs. In this global crisis lay the trigger for the world’s two largest cement groups deciding to merge their operations. The deal being of unparalleled scale in the industry, it has major implications for the market covering Europe, the US, Canada, Brazil and wherever else Holcim and Lafarge have significant presence. Incidentally, the two have operations in 90-odd countries. Therefore, the initiative will be subject to scrutiny by competition watchdogs in more than one country. In some places, antitrust laws may be invoked against Holcim and Lafarge joining hands. Anticipating such probes, the merging groups have decided to disengage themselves from some businesses worth 10% to 15% of their combined global earnings before interest, tax, depreciation and amortization (Ebitda), which are €6.5bn.

Nearly a year ahead of the path-breaking global union, Holcim started taking steps to merge ACC and Ambuja to eliminate overlapping costs in terms of brands, marketing, distribution, people and factory operations. Industry observers are wondering how Competition Commission of India will react if following the global merger of Holcim and Lafarge, their operations here too are combined under one umbrella. The two Holcim subsidiaries as they are and Lafarge India could raise concerns about their assets in India’s eastern states but not in western and northern parts of the country. Therefore, to address likely concerns of CCI, some of their eastern Indian assets will be divested. The current and potential sizes of Indian cement market remain a big attraction for major foreign groups to be here. Besides Holcim and Lafarge, Italcementi and Heidelberg Cement are steadily increasing their footprints in India. “Thanks to efforts principally by Aditya Birla Group and Holcim the Indian cement industry saw some major capacity consolidation. This, however, is a continuous process. Last month, Jaiprakash sold its 74% ownership of Bokaro Jaypee Cement (the other 24% belongs to Steel Authority of India Limited) to Dalmia Cement to pare its debts. Its other JV with SAIL Bhilai Jaypee Cement will also be on the block. India Ratings says over-leveraged conglomerates for which cement is not among foremost businesses will be found dropping the portfolio for cash. The churning that the 350mt-capacity industry in India is going through will finally leave a few national players like LafargeHolcim and Ultratech, part of Aditya Birla Group and a number of strong regional groups. At the same time, days of mini cement plants with high production costs and logistics issues are numbered. “Mini plants had their usefulness up to a point of the country’s economic development. Their production costs are high and quality not up to the mark. They are found to be polluters. In the market, they are in no position to compete with branded products from large mills. Of the country’s total cement capacity, the share of mini plants is only 11.1mt distributed among 365 units. Capacity use in the mini sector is hardly 50% and it continues to fall,” says sector expert Arun Verma.

In the past few years, the Indian cement industry grew capacity by around 90mt. But as it would happen, inordinate delays in launch of infrastructure projects in spite of the government making allocation of $1 trillion for infra development during the current plan period (2012–17), slow house starts and marked fall in GDP growth rate saw slow progress in cement use. An Ambuja Cements report says during 2011 to 2013 cement consumption in India grew at an annual average rate of “4% compared to the golden period of 2008–10 when consumption grew at a CAGR of 8%. The multiplier of cement demand growth to GDP growth not only declined below one in 2011/13 but also lost its relevance.” Industry officials say the industry’s working in coming days will depend on how quickly the new government to be installed in Delhi in mid-May will end the “policy paralysis enveloping infrastructure and construction sectors.”

Housing alone accounts for 67% of cement use in India followed by infrastructure (13%), commercial construction (11%) and industrial construction (9%).The country’s per capita cement use of 200kg will start rising rapidly once GDP growth rate returns to the earlier impressive level of 8% to 10% from less than 5% in 2013/14. After all, the world per capita cement use is 500kg and that in China is over 1,000kg.


Brazil’s monopoly commission comes down hard on cement ‘cartel’

An investigation by Brazil’s monopoly commission, CADE, has found that five cement companies have formed a cartel, writes Patrick Knight. CADE wants the companies concerned to dispose of 20mt (million tonnes) of capacity.

Brazil’s monopoly commission, the Council for Economic Defence, CADE, has found that five cement companies, between them responsible for more than 80% of the 71.6mt made in Brazil last year, formed a cartel aimed at keeping prices high, allocating market shares to members and discouraging new players from entering the industry.

CADE has said that the five companies, Votorantim, Camargo Correa, Holcim, Itambe and Itabira, which between them own more than 50 of the 124 cement factories dotted about Brazil, will have to dispose of an average 24% of their capacity, and pay an as yet undetermined fine.

The companies intend to appeal against the ruling, which refers to behaviour which CADE says peaked between 2006 and 2007, but which some analysts suggest has been in existence since 1987. The cartel meant that companies belonging to it earned at least $12 billion more than they should have done had there been no agreement and has cost consumers at least $400 millions each year.

Analysts suggest it will be extremely difficult for the companies accused of forming a cartel to dispose of such a large number of assets without greatly prejudicing the industry.

Such a drastic change would result in service and quality deteriorating, as alternative companies able to take control of plants responsible for making about 20mt of cement a year, the total CADE wants to be disposed of, do not exist.

The industry had expected to sell about 3.5–4.0% more cement in Brazil last year than the 68.8mt of 2012. But in the event just 2.4% more was sold last year. The increase was nevertheless greater than Brazil’s average growth rate, however, which was about 2%.

About 75% of the cement sold in Brazil in the past few years, has been used by the construction industry, both for building new homes or improving existing ones.

Most of the rest was used at infrastructure works. Last year saw preparations for the World Cup football competition, to be held in Brazil in June and July this year, at full swing. Three brand-new 40,000-capacity stadiums were built from scratch and another nine were upgraded. New runways and parking places for aircraft, as well as terminal buildings have been built or upgraded at most of the 13 airports which will ferry an estimated 1.6 million supporters, 600.000 of them from abroad, to and from the 12 cities where 64 matches will be held during a four-week period. Dozens of new hotels have been built in the host cities. 

In the past ten years, priority has been given by Brazil’s left-leaning government to measures aimed at rectifying Brazil’s badly skewed wealth distribution. Wages and pensions have been raised by more than the rate of inflation, while borrowing has been made easier and a large house building programme for the less well off has been set up.

But this phase has now run its course and the government aims to replace it with a substantial increase in spending on infrastructure. Roads, railways, airports, ports, and waterways are all to be upgraded, with many new ones built. Brazil’s infrastructure has lagged far behind the fast increase in output of various commodities, notably grains, led by soya, maize, and sugar cane as well as minerals, handicapping Brazil’s competitiveness in export markets.

The second half of last year saw the auction of numerous concessions to build, or duplicate up to

10,000km of highways, as well as for concessions to operate many of the country’s leading airports, now struggling to keep pace with the fast growth in passengers.

At least 30 million people have been vertically mobile in the past ten years and many have taken to the air for the first time.

Work will start on building some new roads this year, when demand for cement is expected to increase by about 5%, an extra 3mt or so. But the higher spending on infrastructure will only really get into its stride in 2015, when hundreds of kms of new rail track are to be laid, as well as thousands of kilometres of roads paved or a second carriageway laid.

At the same time, work on building several large new power stations in the north of the country will start. Demand for electricity has outstripped supply in the past couple of years, while unusually hot and dry conditions early this year have made the situation worse.

Water is in short supply as well, and new reservoirs and the pipelines needed to carry the extra water which will be needed to numerous cities, will have to be built, if water rationing, which after the dryest weather for 60 years in the past three months now threatens, is to be avoided.

There are now more than 500 large shopping centres in Brazil, with about 50 new ones completed each year. Until now, two thirds of such centres have been concentrated in the prosperous south east of the country, where 50% of the cement is used.

But numerous labour-intensive industries have moved operations to parts of the country where congestion is lower and the cost of labour less, notably the north east, north and centre west, all of which have been growing faster than the south east in the past few years, so new facilities are being built there.

How much extra cement making capacity will be needed in the next few years, is not clear. The industry now has sufficient capacity to make 85mt a year, 20mt more than existed in 2008 and about 15mt more than was consumed.

But the amount sold has doubled from 35 to more than 70mt in just the past ten years, so the present spare capacity may only be enough to last for a couple of years.

Last year, about 900,000 tonnes of cement was imported, most into the North East region, and about 100.000 tonnes was exported by road or rail to neighbouring Paraguay and Bolivia.