For U.S. cement producers, current business conditions are both encouraging and challenging. Projections of growing domestic shipments are supported by strong industry fundamentals due to economic recovery and expansion, stimulating increased product consumption. Despite delays in reauthorization of the $375 billion TEA-21 legislation, unmet infrastructure needs provide considerable impetus for its adoption. The Portland Cement Association's latest projection, indicating continued usage gains over the next several years, anticipates rising cement volumes to reach record levels in excess of 117 million tons by 2008. Thus portrayed is the prospect of an umbrella of demand raised over industry producers, holding potential even for spot shortages. Accordingly, questions arise as to who will prosper in such a marketplace and from what operating positions.

Characteristics and composition of the U.S. cement industry have changed dramatically — and continue to do so. Domestically owned and largely fragmented initially, its route toward globalization was sparked by production shortages of the 1970s. Overseas organizations saw opportunity in the U.S. not only for exporting material but also for direct participation. By decade's end, one-fifth of local capacity had become foreign owned. The 1980s brought over-optimistic forecasting, underfunding, rationalization, and cheap imports: as these factors engendered further acquisition, that decade saw nondomestic parentage climbing to 70% of total clinker capacity. The perception of this industry and its structure thereby evolved from that of a cyclical, capital-intensive commodity trap to one of a consolidated/concentrated business subject to more commonsense control.

The 1990s witnessed a global emphasis on “geographic diversification” as multi-billion dollar takeovers furthered the development of fewer players. These transactions often involved group tie-in cement trading arrangements and frequently impacted U.S. subsidiary operations. Meanwhile, direct purchase of domestic positions continued. Over the past five years, six single-plant companies and three half-interests have been acquired, most at high prices. Foreign ownership currently placed at 85% has been underscored by the 2004 joint-venture combination of Buzzi-Dyckerhoff entities to create the U.S.'s fourth-largest cement producer, Buzzi Unicem USA Inc.

Possessing the muscle, clout, and conceivably, the long-term perspective that generates staying power, major cement groups already in place stand to benefit from forecasted shipment gains. Similarly, producers with established regional niches face promising prospects. While the hypothesis is advanced that both producer classes create a rather “closed” market, favorable demand projections can well attract additional competitors. In view of limited acquisition opportunities, greenfield plant construction has become one facet of contemplated entry strategies. A Canadian export-oriented venture, for example, could rekindle investment interest. Meanwhile, independent offshore suppliers evaluate their approaches to gaining market share as sourcing choices are revised and restructured. This decade's reality check can include further acquisition, new entrée, and/or creative position-taking to yield a competitive mix in the U.S. cement arena.

Confident outlook supports acquisition and imports

A humorist once described forecasting as “being quite difficult, especially when it deals with the future.” When wishful thinking arises, predictions by cement producers occasionally have gone awry: the “Golden Decade” projections of the 1980s provide a classic case where great expectations and $100-per-ton pricing became the sick jokes of that era. Such miscalculation expedited the shakeout of traditional family ownership and many conglomerate divisional holdings.

Regarding projected demand increases, PCA's forecast can be considered an indication of what “could be.” In line with this outlook, the Association's newly implemented strategic plan aims to more effectively employ promotional efforts and money to positively influence product consumption. Indeed, the sustained and record-breaking levels of growth in shipment volumes during the previous decade — boasting one-third gain in cement consumption as well as increased revenues and returns — constituted a drawing card for many 1990s acquisitions at escalated prices.

Globally, the period's multi-billion dollar transactions further transformed the producer playing field into a smaller cement world of fewer and larger operators. The acquisitions included Lafarge's $3.6 billion takeover of Blue Circle, $2.5 billion purchases of Pioneer by Hanson and of Scancem by Heidelberg, as well as the $2 billion Anglo-American buy out of Tarmac. Each of these transactions involved a U.S. subsidiary that was then affected by restructuring or sell-off.

Likewise, the domestic market witnessed its own billion dollar deals that set the stage for further consolidation. Southdown merged with Medusa, creating the industry's second-largest producer, only to be acquired subsequently by Cemex for $2.8 billion. After obtaining Lone Star for $1.2 billion, Dyckerhoff recently partnered with Buzzi Unicem to form Buzzi Unicem USA Inc., thereby “supplementing each other well.”

In addition to sizable acquisitions, another feature of consolidation and control within the U.S. cement industry has been the reduction of single-plant U.S. operations and joint ventures. As Florida's largest cement producer, CSR (now Rinker Materials) had once expressed interest in a partnership to build a new greenfield plant. Instead, the decision was made to buy Florida Crushed Stone for $348 million. Chihuahua Cement was rumored to be contemplating greenfield construction in Colorado. Instead, in 2000, the Mexican group chose to buy South Dakota's only cement producer for $252 million.

Cemex has been involved in two separate single-plant purchases: a year ago, the Dixon-Marquette Illinois cement facility was acquired for $84 million; previously, the Mexican producer obtained Puerto Rican Cement at a price of $250 million. Essroc strengthened its Mid-Atlantic regional coverage by buying Riverton and its West Virginia plant for $107 million. Suwannee American brought its 750,000-ton Florida greenfield facility on stream less than two years ago. In early 2003, Votorantim paid $100 million for a partnership interest, subsequent to the Brazilian firm's $714 million purchase of Blue Circle's Canadian assets from parent Lafarge. Noting that it harbored no ambition to become a major cement producer, Hanson sold its 50% interest in North Texas Cement, obtained earlier from Pioneer, to venture partner Ash Grove for $125 million. Titan's objective to operate as a powerful regional player was advanced by its $636 million takeover of Tarmac America assets, encompassing the remaining half-interest in Roanoke's Virginia plant and a 1,000,000-ton wet process Florida facility.

Domestic capacity figures and imported tonnage to meet national requirements have followed a cyclical pattern throughout the industry's recent past. Two decades ago, purchased volume stood at a low point of just over 2.5 million. Then it increased sizably, only to drop once more. From the reduced import tonnage of six million in 1992, vigorous growth over the next seven years saw imports climb to almost 30 million tons, as the supply gap beyond local manufacturing capabilities was substantially serviced by off-shore producers. However, by 2000, the character of U.S. cement importation had become largely altered: earlier regarded as a disruptive influence, imported cement acquired the status of make-up material within global networks of inter- and intra-company transfer and/or transportation. Marking this transition was Southdown's withdrawal from leadership of an anti-dumping alliance, giving recognition to the fact that “imported cement had been playing a largely supplemental role in the market.” Further, Giant Cement elaborated that “imports were being brought in by producers already serving these markets.” The bottom line, then, was defined by control of entry and amount.

The return of importation to an auxiliary role versus the spoiler supply of the 1980s contributed to improved pricing and financial results. Thus, capital reinvestment for plant modernization and expansion became a more attractive option. Yet, U.S. capacity addition too often has followed a precarious path as overly optimistic prediction has led to over-reaction. After enthusiastic forecasts upon the heels of shortages in the latter 1970s, deep recession exposed the magnitude of an excess and/or outdated manufacturing base. Overcapacity and fragmentation both acted to undermine earnings.

The U.S. industry was then transformed by implemented reductions emphasizing cost containment as acquisition replaced facility spending. Most of the 1990s saw little change in total clinker capacity. With the opening of a new decade in 2000, gains in plant capacity were recorded. Noted for the first time in a dozen years was the opening of a greenfield operation, Florida Rock's 770,000-tpy facility at Newberry.

A listing of current industry projects indicates that capacity upgrades totalling as much as 18 million tons are on the books. Several recent announcements include Dragon's $52 million upgrade of its Maine facility from wet to dry for a 40% production gain; and, Giant's expenditure of $100 million to replace four wet-process kilns with a new preheater-precalciner unit at its South Carolina plant, an “investment to make us more competitive in an increasingly global cement industry.” Modernization and expansion of Titan's Pennsuco-Florida operation are scheduled for completion by year's end.

Nevertheless, the figure cited for U.S. cement expansion seems on the high side. Several factors, usually related to permitting, have caused company projects to be delayed, placed on the back burner, or cancelled in favor of another course for positioning. The overall effect may be a favorable force for producer profits.

Greenfield initiatives, capable of major capacity gains, stand as those units being affected. Over the years, a number of prospective plants never materialized. In Florida alone, two examples include a Florida Crushed Stone operation to be located near Arcadia and another Florida Rock plant to be built at Brooksville. Other reported greenfield plans were replaced by acquisition or modernization schemes: Chihuahua looked to Colorado for a new plant site, then bought Dacotah Cement; Ash Grove considered building a new million-ton Kansas facility before settling on reinvestment in its existing Chanute plant.

With mixed results, Holcim continues what it describes as “the complex and time-consuming approval processes requisite for construction of cement plants at new locations.” After being targeted by environmentalists, the group can finally obtain full permitting for new a 4 million-plus-ton Missouri operation. By contrast, Holcim's plan for a new 2 million-ton Greenport, N.Y., facility to replace the nearby Catskill plant may have succumbed to permitting obstacles. Continental's current proceedings for a new million-plus-ton Missouri operation face both environmental and financial challenges.

Yet, two Florida 750,000-ton greenfield plants did overcome severe and costly opposition to come on stream. Five years after the initial announcement and at great expense, Florida Rock finally won over local forces with the opening of its Newberry facility. Suwannee American's Branford operation was beset by controversy related to issues ranging from air quality to the pristine condition of the surrounding recreational area.

Also in Florida, import-related events can further reshape the character and mix of that state's cement industry. A year ago, Florida Rock bought the stock of Lafarge Florida Inc. for $124 million from Lafarge N.A. The purchase included two import terminals with grinding capacity in Tampa and Port Manatee, whose volume in movement of cement totals 1.2 million tons. Lafarge's sale was predicated on the assessment that these units as stand-alone operations were limited in scope. For Florida Rock, however, the action significantly revised its company status from mere cement producer to integrated importer. Subsequently, a report appeared that RMC Inc., a firm that consumes more than 900,000 tons of cement annually in Florida among 60-plus ready-mixed concrete operations, was considering its own construction of a cement terminal in Port of Tampa for greater sourcing flexibility. Meanwhile, Titan may initiate an engineering and permitting effort to likewise locate a new cement import terminal in Tampa.

Recent events affecting industry imports involved ready mix producers and the creation of a Texas joint venture. Lafarge completed the asset purchase of The Concrete Company, including a 66,000-ton terminal in Mobile, Ala. Ready Mix in Pensacola received unloading equipment for a new import facility slated for operation later this year. In Sacramento, a new 70,000-ton import terminal is reportedly under construction by A & A Concrete. Meanwhile, in Houston, Ash Grove and Alamo Cement have teamed up to build a major import operation scheduled for completion within two years.

Cement activity further reshapes U.S. industry

Given the projection of U.S. cement demand remaining in excess of domestic production, continued purchase of outside supplementary tonnage is the prospect. PCA anticipates a possible 3% annual increase in this “swing supply” of imported volume over the coming period, stating that “as capacity utilization rates rise, cement companies rely on imports.”

Adding complexity to outside sourcing requirements is a presently redirected cement trade. As host to the 2008 Olympics, China has launched a major construction initiative attended by expanded building material needs. PCA notes that seaborne freight flows to China have increased dramatically, resulting in declining carrier availability and increased freight rates. Since U.S. cement consumption is dependent on imports to cover the existing gap between capacity and demand, the outlook appears to include supply pressures, at the very least, with probability of price gains.

Surely the industry's dominant cement groups possessing sufficient scope to permit in-house trading have the capacity to capitalize on both aspects of the product supply equation. Stressing the importance of imports within a global marketing scheme, Cemex, the world's largest cement trader, emphasizes that “we can direct cement to places where it is most needed and thereby optimize our worldwide production capacity.” Heidelberg expresses a similar view whereby imports help to “achieve higher capacity utilization in the group.” Other producers depict importation as a temporary expedient until sufficient local manufacturing capacity is available. Both Holcim and TXI adopted such a position in taking Asian cement to meet Texas demand while their Midlothian plants underwent expansion.

Other groups have embarked upon strategies aimed at establishing strong market niches. Probably most notable among these has been Titan Cement, which defines itself as an independent multi-regional player. Building upon the initial late-1980s opening of a New Jersey import facility (Essex) followed by partnership in a Virginia plant (Roanoke), Titan's year 2000 Tarmac America acquisition dramatically advanced — and is expanding upon — a vertically integrated U.S. base with an established link to purchased volumes.

Can new takeovers, mergers, alliances, or other combination further alter the ownership of U.S. cement producers? Overseas industry consolidation continues, but whether any of these moves might affect the domestic situation is pure speculation. Regarding the direct acquisition of remaining U.S. cement entities, anything is possible “at the right price,” despite ever diminishing opportunities given the reduced number of players. TXI as a stock-held company can do what is in the shareholders' best interest. Centex Construction Products, now Eagle Materials, also a stock-owned (or joint-owned) venture, can face similar considerations. Ash Grove has emphatically stated its intention to remain American owned. Yet, single-plant producers such as Monarch, Armstrong or (currently inoperative) Royal Cement might hold value for some interested party.

In view of projected growing consumption levels and local shortfall, the U.S. cement market may well attract new players. Building greenfield plants comprises a possible approach to entry. However, newcomers, too, must face lengthy and expensive permitting procedures, without assurance of success. Interestingly, Nevada seems to hold an attraction for a such venture.

Meanwhile, cement importers can observe the changing conditions wrought by consolidation, i.e., industry ownership that often involves associated tie-in sourcing. The resultant situation places pressure on independent traders, who must reevaluate strategies for becoming or remaining active in the national market and take action accordingly. Supplying white cement continues to provide a possible avenue for involvement.

The American cement market offers opportunity for some organizations and disappointment and cost for others. Certainly attracting attention are projections of demand growth and even cement shortages, indicative of pricing gains. Underlying this potential is the need to purchase make-up supply to meet consumption. Companies with established domestic positions and trading connections logically possess the combination for distinct advantage. Yet, given the industry's scope and direction, other contenders could creatively perceive potential for participation. Competitive game plans are sure to further reshape this nation's cement business.

Roy Grancher is a cement consultant based in Marietta Ga.

Figure 1: Further decline in U.S. cement imports, but national need requires supplemental supply

U.S. CEMENT AND CLINKER IMPORTS • LEADING SOURCES AND DESTINATIONS 2003 VS. 2002 (THOUSANDS OF METRIC TONS)

SOURCE	2003	2002	Difference	% Change
Canada	5,601	5,181	420	8%
Thailand	3,344	4,259	-915	-21%
China	1,823	2,165	-342	-16%
Colombia	1,766	1,579	187	12%
Korea	1,745	1,625	120	7%
Venezuela	1,664	1,530	134	9%
Greece	1,188	1,785	-597	-33%
Turkey	1,077	684	393	57%
Sweden	924	1,047	-123	-12%
Mexico	891	1,228	-337	-27%
DESTINATION
Tampa	2,344	2,111	233	11%
Miami	2,067	1,743	324	19%
Houston-Gal	2,025	2,137	-112	-5%
Los Angeles	1,976	1,943	33	2%
Detroit	1,625	1,343	282	21%
New Orleans	1,523	1,850	-327	-18%
Seattle	1,335	1,360	-25	-2%
San Francisco	1,032	765	267	35%
New York	941	1,192	-251	-21%
Charleston	842	1,296	-454	-35%
Total U.S. Imports	23,241		24,169
928		-4%
Source: U.S. Geological Survey and Bureau of the Census

ANNOUNCED NEW CEMENT PLANTS & PLANT MODERNIZATIONS • July 21, 2004

NEW PLANTS		Capacity Increase (metric tons)
Plant Name	Location	Clinker	Grinding	Year On Stream
Ash Grove Cement	Las Vegas, NV	1,500,000		2007
GCC America	Pueblo, CO (Red Rock)	1,000,000		2006-7
Holcim (US) Inc.	St. Genevieve County, MO	4,400,000		2008
Ash Grove Texas LP	Whiteright, TX	1,000,000		2008
St. Lawrence Cement Co.	Greenport, NY (Holcim)	2,000,000		2008
Total		9,900,000
PLANT MODERNIZATION/EXPANSIONS
Lehigh SW	Tehachapi, CA	200,000	200,000	2004
Ciment Quebec	St. Basile, PQ	130,000		2004
California Portland Cement	Rillito, AZ	1,000,000		2008
Continental Cement	Hannibal, MO	600,000		2007
Dragon Products	Thomaston, ME	200,000		2004
Essroc Cement Corp.	Nazareth I, PA	200,000		2006
Florida Rock	Newberry, FL	100,000		2004
Giant Cement Co.	Harleyville, SC	450,000		2004
Lone Star Industries, Inc.	Cape Girardeau, MO	1,000,000		2004
Monarch Cement Co.	Humboldt, KS	300,000		2006
National Cement Co. of AL	Ragland, AL	1,300,000		2008-9
Buzzi Unicem	Festus, MO	600,000		2007
St. Marys	St. Marys, ON		1,300,000	2003-4
Texas Industries Inc.	Oro Grande, CA	1,000,000		2007
Total		7,080,000	1,500,000
Source: Portland Cement Association