The world of cement making is becoming a still smaller place, particularly in terms of ownership. Multi-billion-dollar acquisitions are creating a more consolidated enterprise in which the U.S. cement industry is being directly or indirectly impacted by that change.

Meanwhile, all kinds of new records are being set within the U.S. cement industry. In 1999, domestic portland cement shipments climbed to about 105 million mt, an all-time peak for product usage. Imported volumes also set historic highs for such purchasing, up by 5 million mt in a single year's time, to almost 30 million mt.

Domestic plants generally are at full manufacturing capabilities; producer revenues and returns are likewise significantly up; modernization and especially capacity addition projects appear proliferating across the nation; and several rather expensive cement company takeovers have taken place, as a number of other operations are placed up For Sale at escalated asking prices.

After eight years of sustained growth, the cement "good times" are rolling onward into the new 21st century market place. Strong industry fundamentals remain defined as continuing to exist. Projected consumption gains are perceived counting on legislated TEA-21 (federal tranportation funding bill) spending to keep the momentum going. Yet within a cyclical-commodity arena, concern can underlie extrapolated over-optimism. In a business where the big are becoming bigger, the ill-advised over-building or over-reaction can have pronounced ill-effect on total prospects and results.

Buying cement position A global game of Pac-Man appears under way, where international players continue to buy up cement positions. The focal point of much of this involvement has been within Asian countries. Financial crisis in that area has led to weakened producer circumstances, to where strategic partnerships become an attractive option. Taking ownership shares in these organizations provides for less expensive market entry, awaiting longer-term economic recovery, while often having manufacturing surpluses on hand for the cement trade.

Billion-dollar cement acquisitions started becoming commonplace last year: Hanson bought Pioneer for $2.5 billion; Heidelberger/CBR took over Scancem for $2.5 billion; and Anglo American purchased Tarmac for $2 billion. These sales contained U.S. subsidiary positions affected by either restructuring or re-sale. Of a more direct nature to the U.S. industry was Dyckerhoff obtaining Lone Star for $1.2 billion. At the same time, Cementos Portland bought Giant Cement and its two domestic plants for $343 million.

There are certainly indications and industry rumor of yet more U.S. acquisitions to come. Lafarge is still trying, after an unsuccessful initial $5.6 billion bid, to takeover Blue Circle. Meanwhile Blue Circle itself, in an attempt to get out from under Lafarge, was said to have made a $2 billion offer for Southdown. Cemex is reported having its own acquisition agenda as well. Florida Crushed Stone, just after announcing plans to double capacity at its Brooksville, Fla. plant, has been placed on the market. Tarmac's U.S. operations are now being negotiated for sell off.

The most striking feature of all has been the escalation occurring in selling price per clinker ton of capacity. Some 12 years ago, the U.S. average for purchase price per ton stood at about $65. There were two more expensive exceptions, out of normal range, both taking place during 1988: Mitsubishi Cement buying of Kaiser's modern precalciner Lucerne Valley plant for $122 per ton, and Dyckerhoff obtaining an older preheater Glens Falls plant from Southdown for a then-record $135 per ton.

Just a couple of years ago, Blue Circle was buying St. Marys Cement for about $121 per ton, thereby obtaining a strongly vertically integrated position. Texas Industries was taking over Riverside Cement, also for about $120 per ton, in an effort to buy entry into the recovering California market.

That all began to change due first to the Southdown-Medusa merger of 1998, followed last year by Dyckerhoff's buying of Lone Star. With these, the U.S. acquisition price per ton of clinker capacity climbed to more than $300. The later purchase of Giant Cement, made by Cementos Portland, was transacted at a more modest $257 per ton.

So what are the implications of all this? The stakes have been raised considerably via hefty appreciations in prices being paid for market entry and/or purchased capacity. As such, this can represent furthering of the control factor in the industry's years ahead. As to the 'why' behind premiums for such buying, this lies in the demand umbrella expected to be held above cement pricing, earnings, and returns.

The impressive strength of 1990s' industry recovery is indicated by its numbers: a more than 50% gain in portland cement consumption, almost 36 million mt more sold. A substantial imbalance between demand and available domestic capacity that set the stage for significant improvement realized in cement maker balance sheets.

U.S. cement's quite favorable demand outlook is founded upon TEA-21, the largest ever federal public works legislation in U.S. history. In authorization of $216 billion in funding over five years, the bill has unleashed extremes of optimism. Stimulus for sustained growth in cement usage does exist within its infrastructure rebuilding objective, which can be emphasizing "cement friendly"-type programs. But much of the money commitment is for repairs, rehabilitation, and safety improvements, which are not cement intensive. Yes, construction spending will rise, but it may not be the boom or panacea that some producers have envisioned.

Further cement consumption gain is likewise to have the support of the Portland Cement Association's (PCA) enhanced and expanded promotional efforts. These are aimed at having concrete capture larger market share from other competitive materials. In quantifying total industry outcome, PCA's latest projection reveals portland cement shipments climbing 10.5 million more metric tons through 2004, which would be placing product demand at more than 115 million mt.

More capacity and imports The previous decade's recovery and increased shipments led to a widening gap versus rationalized and generally stable industry clinker capacity figures. The latter were the result of initial contention that curtailed spending, and cost containment was the only means capable of making money. But that changed as sold-out plants and price relief took effect, to again be producing profitability. Company direction turned toward capital investment schedules to be enlarging manufacturing capabilities. These have now reached such substantial proportions in certain geographic areas as to be rapidly revising market conditions and prospects.

The PCA's latest indication of U.S. cement plant expansion activity lists some 38 capacity programs known on the books. These could translate into more than 25 million mt of additional and/or new output. A number of these announcements will likely fall victim to permitting problems, environmental issues, or just not take place. Still, those remaining represent a considerable capacity effect, especially in states like Florida or Missouri.

In Florida, all four existing cement plants currently have expansion projects reported or ongoing. A totally new greenfield operation just entered into production at the end of 1999. Two additional greenfield facilities have been announced and are apparently seeking full permitting. The bottom line for the state, if all programs receive approval and come on-line, could be cement capacity conceivably more than doubling in four years. Adding another dimension to Florida's changing cement scene is that at least two of the existing production units are up for sale.

In Missouri, a similar situation appears to be developing. All five of the state's existing cement producers have indicated modernization/expansion to be under way, announced, or being explored. These include two newly reported greenfield plants, both to be located with the same county. The result could be a dramatic 150% addition to Missouri's capacity status.

The domestic supply side does have another component of consideration: blended cement. U.S. Geological Survey reports that 1.2 million mt of this output was shipped during 1999, and this volume is of growing importance. Lone Star's New Orleans slag cement production has had three-fold capacity expansion, with product now being sold through nine company locations. Holnam has initiated several slag ventures since acquisition of two Koch Mineral operations in South Chicago and Weirton. A 500,000-mt granulated slag unit was to be installed near Birmingham, Ala., and another in the Philadelphia-Camden, N.J. area. Latest reports are of Holnam's enlarging the production of the Chicago facility. Lafarge, while becoming one of North America's largest fly ash suppliers, issued a March announcement of establishing a 1 million-mt blast furnace slag production at Inland Steel's East Chicago, Ind. plant.

As U.S. industry production capacity imbalance grew, in comparison to rising cement consumption, the import variable again entered into the supply picture. This time around, its tonnage came here in a different form and function. With domestic cement makers dominating control of entry, importing has usually moved from a once disruptive presence to its current supplemental status.

During 1992, the decade's lowest point, the buying of foreign-produced cement was slightly more than 6 million mt. In only seven years, this purchasing had soared to upwards of 30 million mt. A distinctive feature of this volume for 1999 was the Asian connections. Two of the largest sourcing countries of cement were Thailand and China. Ranked a little further down the import list was Korea. Part of the reason behind changing supply surely can lay with pricing. Bureau of the Census reporting shows cost, insurance, and freight (CIF) value for Canada, still the most important import source for the United States, at about $55 per ton. The figures for the Thai and Chinese manufacture are about $42.50 per ton.

Cemex, described as the world's largest cement trader, reported that it accounted for more than 20% of the U.S. importing that occurred. The company said, "The downturn in Asia enables us to purchase low-cost cement from China for our California concrete operations." In one year's time, this bringing in of less expensive Asian cement was resulting in an approximately $15 million cost saving for the company.

Holderbank's UMAR-Union Maritima Internacional trading arm was increasing its tonnages sent to the states. This was sizably advanced with the group's ownership stake taken in Siam City Cement and a strong export drive initiative. Holnam's U.S. plants, which are now operating at full capacity, reportedly had been forced to rely on more importation. The domestic position included a silo ship stationed in Galveston, Texas, supplying that area while a doubling of capacity was in progress at Holnam's Midlothian plant. Last year saw the commissioning of the firm's 1.5 million-mt Globalplex import/export facility at Reserve, La. This was to "ensure the stable supply of cement along the Mississippi River markets," according to the company.

In addition, Heidelberger/Lehigh reported that with its plants operating at full capacity, increased sales "could only be achieved by importing 1.5 million mt, primarily sourced from the group's Canakkale production in Turkey." The acquisition of Scancem can now guarantee the use of its U.S. import terminals in New York and Florida, receiving both Swedish and Turkish product.

Blue Circle's reporting stated priority would be given "to strengthening import capabilities." During 1999, the group obtained controlling interests in two Greek cement makers. In the states, Blue Circle began construction of a 90,000-mt domed import facility in Charleston, S.C., with the objective to "increase presence in the southeastern markets."

Another Greek producer, Titan Cement, reported that its international trading of cement had "the U.S. remaining the top destination both in terms of quantity and profit margins." In part this volume helped service the higher demands of its Carolinas Cement Co. through the Norfolk, Va. import terminal. Lafarge will be expanding an import facility in Union, La., near New Orleans. North Texas Cement's Midlothian plant was reported sold out, with the company's first full year's operation of a new 70,000-mt Houston import operation, "exceeding expectations by 30%."

Last year, Southdown acquired a privately owned import terminal in Brunswick, Ga., and marketing rights to another in Mobile, Ala., providing "flexibility to meet growing demand while plant expansions are under way." At the same time, Southdown withdrew its support for continuing industry antidumping efforts, citing "the current robust financial health of the U.S. cement industry," and that "imported cement over the past several years has played a largely supplemental role in the market."

The selling price of success These industry developments all act as prologue to this new millennum's U.S. cement prospects. With that in mind, how will producers answer these three fundamental questions:

With company managements getting used to growing to meet record demand, what can the response be toward downturn?

As capacity additions come on-stream, will imports take the hint and depart?

Superimposed on both of these, in what regard is proper product pricing held within a production-oriented undertaking?

Within cyclical cement, the thought of a coming recession does not appear of immediate concern. Despite the unprecedented length of the current recovery, no correction is in sight. The latest PCA projection indicates protracted shipment levels. Merrill Lynch's recent industry analysis states that the next decline will be "still well in the future." Certainly TEA-21 funding forms the fundamental strength for such viewpoints. The thesis is that its spending can be more than compensating, should weakness develop in residential or other economic sectors.

Portland cement usage does look encouraging for the next five years. Unfortunately, no economist or soothsayer can say whether stock market gyration, high interest rates, or a presidential election could set off unanticipated readjustment. One of the cement producer's best interest investments is to ensure that those forecasted demands do come into being. Another can be to build into contingency plans the common-sense factor as to the costly example of over-reaction.

No question exists as to U.S. cement importing having returned to supplemental supply status, versus the disruptive role of the 1980s' experience. As a positive result, this contributed to improved pricing and returns, enabling a recommitment to modernization and expansion. Company reporting has given recognition to a "more orderly flow of imports" (Medusa), and that growing import levels have not been harmfully affecting domestic producers (Lone Star). Given that U.S. cement makers do dominate and control purchasing, as their capacity additions start coming on-stream this year, will record importing make room for new capacity?

A portion of the 30 million mt now being imported can be considered opportunistic buying, especially much of the inexpensive material shipped in from the Far East. However, looking at those company import connections described previously, it becomes clear that many longer-term tie-in sourcing situations are represented there. The international players have launched geographical diversification strategies, which created a favorable global stage for marketing output. Cemex describes this as enabling them to "operate in multiple regions with different business cycles," allowing the maximization of worldwide production by identifying markets for group excess capacity.

Ocean Shipping Consultants (OSC)-U.K. has just published its new Global Cement study, examining consumption and trade in this upcoming decade. As to the United States, OSC's long-term conclusion, in part, is of "imports likely to remain a key feature of the U.S. cement industry, favored by the extensive involvement of overseas cement manufacturers in U.S. plant ownership."

Today's import presence, due largely to the globalization process, has progressed much further in its linkage into-and distinct participation in-existing U.S. supply structure/purpose/diversity. Consolidation is reflected within the flexibility built into group floating tonnages, and the ability to capitalize upon local marketing schemes. How imports may be used, or abused, as U.S. capacity expansion brings its additional tonnages into manufacture-and whether reduced demand-vs.-supply imbalance may bring about a collision of interests-unfortunately is still too close a call to make.

At an International Cement Seminar program several years back, a speaker brought this industry truism to the forefront as a basic business purpose, "You don't build a cement plant to make cement. You build one to make money." Certainly, the substantial expenditures entailed in construction of those new greenfield plants, let alone the considerable capital reinvestment agendas to be modernizing and expanding production facilities, requires vindication in earnings and returns. Then add to this those multi-billion-dollar acquisitions that must hold monetary motivation to be making them. Indeed, it would appear that the pay back bar has been raised appreciably within cyclical-commodity cement manufacture for position and participation.

The industry's past has proved that unattractive pricing produced non-existent returns. When volume alone had been relied upon to generate revenues, it demonstrated flawed approach. Fundamentally, the present U.S. cement outlook does remain favorable. The crux of the matter looks to be whether coming demand will be adequate to accommodate both growing domestic capacity and the semi-permanent residual of record importing. What is made of this in the new millennium largely rests in the hands of its own members.

It was the power of pricing, on the bottom line, that paid off well. Generally, concentration and changed attitudes have fostered more sensible policy. Should some disconnect take place in this and proper pricing again be placed on the tail end of the industry food chain, then the consequences could be thrown back to a formerly less-profitable stage of cement life.