The global cement industry continues to witness the burgeoning of multinational players as they extend their geographic boundaries. Consolidation and market gains have been achieved through outright acquisition, share holding, partnership arrangements and alliances. Other players in the cement industry have established and strengthened regional positions to remain competitive. Overall, continued concentration of the means of both cement manufacture and distribution would appear to create a yet smaller cement world.

The U.S. industry has been significantly impacted by the global trend toward consolidation. Opening the new millennium, Southdown — ranked the second largest domestic supplier — was purchased by Cemex in late 2000 for $2.8 billion. Since then, another $600-plus million has been spent to buy the plants of three additional U.S. cement producers. Today, as much as 85% of total domestic clinker capacity falls under the ownership of overseas entities. The premiums paid for these purchases reflect a confidence in strong market demand to support such strategic moves.

Given increased output with improved cost efficiencies, demand growth is considered adequate to cover domestic expansions. (Recent projects have been primarily upgrades of existing facilities.) Despite two years of declining shipments, the industry projects healthy growth rates leading to a record high in cement consumption. Such optimism rests on the successful reauthorization of TEA-21 as well as reinforced promotional efforts on the part of associations and alliances to increase market share. In that scenario, local production is seen to replace much of the imported cement previously required to meet consumer needs.

According to the most benign view, then, greater cement consumption is expected to overcome any possible conflict arising due to importation. Unfortunately, international uncertainties and tensions have an unsettling effect on global business as well as the U.S. economy. Bottom-line, the reality for any cement enterprise is that staying power depends on contingency plans within a fluid market configuration.

Ownership, name changes

Multi-billion dollar acquisitions have restructured the global cement industry, altering the rankings of some of its major players. Such activity has likewise reshaped the U.S. industry, which has expanded as well through the domestic purchase of production units.

The past five years have seen Heidelberg's $2.5 billion takeover of Scancem. Another $2.5 billion purchase occurred with Hanson's acquisition of Pioneer International. Anglo-American bought Tarmac for $2.6 billion, followed by RMC's $1.5 billion purchase of Rugby. Arguably the most notable transaction was Lafarge's hard won battle to obtain Blue Circle. After rebuffing an initial offer as a hostile attempt, London-based Blue Circle launched an aggressive campaign to remain independent. To expand its cement interests, consideration was given to acquiring Southdown for $1.9 billion, noting that “for the winners consolidation offers sustained growth and success.” Nevertheless, Lafarge's bid ultimately succeeded at $3.6 billion, 10 percent more than the original offer. Blue Circle's last Annual Report declared, “It is with pride that the company becomes a major part of the undisputed world leader in the cement industry.”

A sizable divestment of assets occurred with at least three of these acquisitions. Due to regulatory concerns, Lafarge sold two Canadian cement plants, associated terminals, and numerous concrete/aggregate facilities (all previously owned by Blue Circle) to São Paulo, Brazil-based Votorantim for $714 million. Subsequently, Votorantim invested $100 million in a joint venture with Suwannee American. Meanwhile, Anglo-American disposed of U.S. operations acquired with its takeover of Tarmac: Titan Cement of Athens, Greece, purchased Tarmac America for $636 billion to include full ownership of Pennsuco-Florida as well as a Troutville, Va., plant, plus additional concrete/aggregate units. Nonstrategic quarries were then sold to Vulcan for $227 million.

In its Annual Report, Titan noted that global consolidation was creating a few multinationals “at the expense of traditional domestic producers” and initiated its own strategy of expansion within the U.S. to become “a powerful, regional cement producer.” Its domestic presence is now known as Titan America.

This year, Hanson sold its 50% interest in North Texas Cement to joint-venture partner Ash Grove. The $125 million transaction included a 900,000-ton, wet process plant in Midlothian and a major Houston terminal.

With its March 1998 purchase of Medusa for $1 billion, Southdown created what it termed “a powerhouse within the industry,” becoming the second largest domestic producer. A year later, it bought a Georgia import terminal and marketing rights to another operation in Alabama. Surprising many other producers, Southdown then announced that it was abandoning its decade-long anti-dumping program. That year's Annual Report stated that “management believes consolidation of the industry is a continuing and positive trend.”

Accordingly, the stage was set for billion-dollar-plus acquisitions in the U.S. cement industry. September 1999 saw German-producer Dyckerhoff's $1.2 billion purchase of Lone Star with payment of a 45% premium. The next year, Cemex took over Southdown for $2.8 billion, citing an “excellent fit” that promises to “mesh well with our global network.” By this time, Spain's Cementos Portland S.A. had advanced its geographic diversification through the purchase of all outstanding shares of Giant Cement. The $343 million deal netted almost 1.3 million tons of capacity at two wet process plants in Pennsylvania and South Carolina.

The current decade has seen at least three more acquisitions of U.S. properties by foreign companies. For $348 million, Australia's CSR/Rinker bought out Florida Crushed Stone, including its 590,000-tpy Brooksville preheater facility. CSR's standing as the largest cement user in the state underscored the “strategic attractiveness” of the transaction. Then, after initially considering construction of a greenfield plant in Colorado, Mexico's Chihuahua Cement instead spent $252 million to buy the 845,000-tpy Dacotah Cement facility in Rapid City, S.D. Last year, Italcementi/Essroc took over Riverton/Capitol Cement for $107 million; assets included a 750,000-tpy, wet-process Martinsburg, W.V., plant. Rounding out the acquisition boom, Cemex S.A. expanded its Caribbean presence with the purchase of Puerto Rican Cement for $250 million.

Accompanying this expansion, several producers have changed names in recognition of specific objectives. CSR America has become Rinker Materials Corporation “to build strong national brand awareness.” Heidelberg's Lehigh Portland Cement dropped “Portland” to become Lehigh Cement with combined North American activities operating under that title. Following the Blue Circle acquisition, Lafarge Corp. was renamed Lafarge North America to properly reflect the scope of the organization. In a global branding move to establish “a visual presence in a competitive market that is growing increasingly global,” Holderbank adopted the name Holcim.

Expansion vs. imports

For a dozen years, U.S. cement producers had undertaken no greenfield construction. Then, just as the decade opened, Florida Rock brought its 750,000-tpy Newberry facility on stream. At the time, different viewpoints prevailed: Florida Rock stated that “it really is a natural investment for us,” while TXI contended that “industry economics don't justify new plant construction.”

A number of greenfield initiatives have since been announced. Some have been abandoned in favor of facility acquisition, e.g., Chihuahua in South Dakota, or reinvestment at existent plants, e.g., Ash Grove at Chanute, Kan. Two greenfield programs-in-progress demonstrate the hardship and inherent cost of cement plant start-ups. When it began proceedings to locate a 750,000-tpy cement operation at Branford, Fla., Suwannee American met press assaults accusing the firm of political favoritism and destroying a pristine recreational area. Holcim's agenda to build a $500 million, 3 million- to 4 million-tpy plant in Missouri's Ste. Genevieve County became the target for environmentalist charges of pollution violations and a public outcry that children would be forced to use inhalers to play outdoors.

Predictably, the 10 million-plus clinker tons added to U.S. cement output in four years have been founded principally upon modernization and expansion at existing production sites — a trend that continues to the present. During 2001, Lehigh's Union Bridge, Md., plant saw a doubling of capacity to 2 million tpy with replacement of four old kilns. Holcim closed its Fort Collins, Colo., facility when capacity was doubled at the Florence plant, also in Colorado. Doubling production to over 2,000,000 tpy at Holly Hill, S.C., is on the Holcim agenda as well. Meanwhile, permitting progresses for a new Holcim/St. Lawrence state-of-the-art facility at Greenport, N.Y., to replace the nearby wet-process Catskill plant. Cemex/Southdown completed its $160 million expansion at Victorville, Calif., increasing production to 3,000,000 tpy as “the largest plant in the country.”

Last year, Lafarge dedicated two expansion projects. In Missouri, $200 million was invested to double capacity at the Sugar Creek facility, while the $230 million Roberta, Ala., plant upgrade saw a new kiln replacing two older units. Completing a $200 million modernization at Midlothian, Texas, TXI doubled the operation's capacity to 2.4 million tpy; current plans call for a million-ton-plus expansion of the company's Oro Grande, Calif., facility. Giant Cement has announced a $100 million project to replace four wet process units at Harleyville, S.C., with a new preheater/precalciner kiln to “make us more competitive in an increasingly global cement industry.” Dragon Cement will spend $50 million to convert its wet-process Thomaston, Maine, plant to dry production, effecting a 40% increase in output. Titan America reports that it will modernize Pennsuco Florida to “double production capacity and cut costs.”

Since an all-time high of over 29 million tons four years ago, U.S. cement imports have declined to 24 million tons in 2002. As Heidelberg contends, “Imports will fall further since additional domestic cement capacity will strengthen inland supply.” Likewise, Cemex states that the Victorville facility was upgraded to satisfy customer demand and “reduce the company's imports into California and Arizona.” Prior to doubling the capacity of its Midlothian plant, TXI had a silo ship stationed at Galveston to supply the “growing markets of the region.” Reportedly, South Korean cement was brought through the floating silo ship during the Midlothian expansion “for the specific purpose of preselling the market and then making sure that the ship floated away.”

With changes in company ownership, the business of importing cement has also evolved. Upon ceasing its antidumping initiative, Southdown noted that imports “had essentially returned to a supplemental role during the 1990s.” Giant observed that imports were brought in to satisfy unmet demand and, “for the most part, were brought in by producers already serving these markets.” Medusa concluded that this signifies “a more orderly flow of imports into the U.S.”

Though imports will go down, they continue to play a role in the positioning of particular producers and in marketplace supply as major multinationals aim to maximize system output and market share. Heidelberg points out that “imports guarantee our competitiveness and simplify full utilization of excess capacity within the group.” Cemex notes its position as the world's largest cement trader is a “distinct advantage,” allowing it to “keep plants running at or near capacity.” Holcim emphasizes that “in the cement business, market networking is becoming more and more critical.”

More regional operations as well have served expanded markets through importation. Giant is acquiring a deep water import terminal in Portsmouth, Va. Glens Falls Lehigh recently opened its new 44,000-ton domed facility in Providence, R.I. Dragon is said to be negotiating with Quebec's Port Authority for a marine terminal on the St. Lawrence River. Thus, an area concrete company or independent cement trader can initiate import activity, whether in Georgia, Alabama, or Florida. (At Pensacola, however, downtown businessmen opposed the granting of a 20-year lease to a ready mix firm for an import terminal.)

Demand to profit by

As change continues at an unprecedented pace, Italcementi's Annual Report offers a pertinent vision for cement operations: “The future is not the past.” By way of elaboration, the company notes that all parties must “recognize that competition for market share is global” and participating in the global economy “is no longer a choice, but a necessity — even for the cement business, which operates on local markets.”

Indeed, ongoing change poses a challenge to the U.S. cement industry. Strong industry fundamentals led to company consolidation and a restructured playing field as they provided financial incentives for renewed investment in expansion projects. Outsourcing for make-up product was largely kept in check via legislation and ownership policies. Yet, present uncertainties, both international and local, ensure the generation of revised supply and demand requirements.

In Cement Americas, a series of interviews with leading cement company executives provides individual insights and a range of opinions on significant industry issues. Regarding foreign acquisition, Ash Grove President George Wells in early 2001 emphasized that the company is American owned and “we're proud of that.” When queried on the possibility of becoming foreign-owned, he replied, “None at all.” Lafarge President John Piecuch observed in late 2000 that “we're not going to buy a company if we don't think it adds value to the overall organization.” TXI Executive Vice President Mel Brekhus, on the other hand, stated in late 2001 that management “will do what is in the best interest of its shareholders.”

Most executives anticipated that size and economies of scale would be significant forces in the cement industry as producers continue to consolidate. Essroc President Robert Rayner observed that single-plant operations “find it continually more difficult to survive in competition against the large multinational organizations that have emerged.” Lehigh President Helmut Erhard stressed strong market positions, noting that his organization is “a vertically integrated construction material company.” Underscoring TXI's vertical integration, Brekhus added, “We're going to take advantage of that.”

On the subject of imports, Paul Yhouse, then president of Holcim U.S., reported last year that product from outside the country is used to meet customer needs “while we are preparing in the longer term to serve them with domestic capacity.” Cemex's president of U.S. Operations, Gilberto Perez, described America a year ago as an “importer forever, even with the capacity expansions that are underway or announced.”

Ultimately, the issue must be raised of sufficiency of demand to justify industry investment and provide returns. Michael Clarke, 1999 Portland Cement Association Chairman of the Board and then president and CEO of Glens Falls Cement Co., concluded that “there's certainly enough growth to absorb significant capacity increases.” Legislation such as TEA-21 has been a boon to construction interests, and reauthorization of such producer-supportive measures would decidedly enhance earnings prospects.

By virtue of the power it wields, consolidation — at least in theory — should prompt more thoughtful conduct and greater discipline within competitive theaters of operation. Nevertheless, amid uncertain national conditions in an unsettled world, shortsighted and selfish schemes can prevail. The prosperous future of the U.S. cement industry, then, lies in the hands of the producers whose reasoned actions will demonstrate that making cement means making money.

Roy Grancher is a cement consultant based in Marietta, Ga.

FIGURE 1: CONTINUED DECLINE IN THE CEMENT TRADE

U.S. Cement and Clinker Imports - Leading Sources and Destinations 2002 vs. 2001 (thousands of metric tons)

SOURCE	2002	2001	Difference	% Change
Canada	5,181	5,110	71	+1%
Thailand	4,259	4,070	189	+4%
China	2,165	3,266	-1,101	-34%
Greece	1,785	1,552	233	+15%
Korea	1,625	1,326	299	+23%
Colombia	1,579	1,704	125	+7%
Venezuela	1,530	1,565	-35	-2%
Mexico	1,228	1,645	-417	-25%
Sweden	1,047	989	58	+6%
Turkey	684	766	-82	-11%
DESTINATION
Houston-Galveston	2,137	2,514	-377	-15%
Tampa	2,111	2,009	102	+5%
Los Angeles	1,943	2,317	-374	-16%
New Orleans	1,850	2,291	-441	-19%
Miami	1,743	1,688	55	+3%
Seattle	1,360	1,195	165	+14%
Detroit	1,343	1,269	74	+6%
Charleston	1,296	1,207	89	+7%
New York	1,192	1,220	-28	-2%
San Francisco	765	1,019	-254	-25%
Total U.S. Imports	24,169	25,861	1,692	-7%
Source: U.S. Geological Survey and Bureau of the Census