Editor's Note: All tonnage figures mentioned in this article are in metric tons (mt).

Portland cement demand in 2006 recorded a pause in its growth gains, with shipment tonnages leveling off at 121 million tons. Interestingly, within this U.S. consumption arena, imported supplemental volume had climbed to a new all-time high. Almost 36 million tons of material came into this country during 2006. That quantity represented nearly 30 percent of all domestic product usage.

Unfortunately, current economic conditions are creating concerns as to the direction of future cement market prospects. As one economist summed it up: “Housing remains a drag on growth.” Meanwhile, major domestic cement capacity expansion projects are nearing completion with a considerable number of these scheduled to becoming online in 2008. Industry diversified positioning continued at a quite active pace. Several recent significant acquisitions, concluded at premium prices, stand generating dramatic revision within business structure and end-product involvements.

The shape and scope of cement and concrete appears undergoing fundamental change. This can be readily recognized within enlarged enterprise frames of reference, other than what has been the conventional experience. Yet as this distinctive transformation occurs, a Cement Americas interview with the new Chairman of the Portland Cement Association (November/December 2006) presented two rather surprising assertions as to this developing industry scenario.

1. Cement's Vertical Integration: The stated viewpoint was that this historically goes “through cycles,” with consideration existing for not competing with your customers. Forty years ago, the Federal Trade Commission did order cement companies to divest ready mix interests to foster industry competition. Since then, producer action plans, especially as reflected within recent hundred-million- and multi-billion-dollar acquisitions, have focused on obtaining substantial concrete positions. In this, cement makers have increasingly become their own prime cement buyers. This moving into downstream products for enhanced profitability is part of the specified Value Chain approach. Not to acknowledge this trend does not mean it isn't real.

2. PCA's Role: This was described “in terms of how to most effectively promote cement, and the NRMCA is looking at promoting ready mixed concrete.” Yet PCA has defined itself as an organization to improve and extend the uses of portland cement and concrete. Without end product concrete usage, derived demand cement does not have too much of a market. The indicated dialogue going on between organizations is commendable, but surely realized business objectives and prospects are dependent upon a much more meaningful stance than that.

Vertical integration represents a continuing potent force in blurring traditional lines between cement manufacturer and/or concrete entity. The largest cement groups are now ranked among the biggest ready mix operators. Coming years will witness corporate self interests dictating the most proficient associated configuration for achieving their optimized financial performance goals.

FOLLOW THE MONEY TRAIL

Connecting the dots within specific recent acquisition paths provides definitive stepping stones for judging where cement and concrete continue to head. This holds particularly true within the several double-digit, billion-dollar mega-transactions concluded thus far in 2007.

Without doubt, the considerations and consolidation depicted serve as indicators of further upcoming company strategic growth agendas.

HeidelbergCement's stated desire has been to “play a larger part in the development of the worldwide building materials market,” through geographical diversification and strengthened vertical integration. Rumors of the group's interest in taking over Hanson surfaced a year ago. They became reality in mid-May when Heidelberg bought Hanson PLC for almost $16 billion. The move was stated as creating one of the world's largest fully integrated materials organizations. It likewise moved the German group to ranking as the fourth-biggest maker of cement.

Interestingly, Hanson had been noting that certain aggregate producers were “integrated downstream into ready-mixed concrete and asphalt production. Our focus is on aggregates.” The company's own action schedule recently included a $300 million purchase of Material Service Corp., the 13th largest U.S. aggregate firm, along with its holdings of 1.5 billion tons of reserves.

Cemex's objective of geographically diversifying has demonstrated impressive growth, accomplished through acquisition and joint-venture positioning. The group clearly states that deepened customer relationships were realized by their focus “on more vertically integrated building solutions rather than separate products.” It's $4.2 billion purchase of RMC doubled the firm's size, while extending its business “along our industry's value chain. Ready mix concrete is our integral distribution channel for our cement and aggregates.” Then Cemex's agreement with Ready Mix USA, largest producer in the southeastern United States, created a strong regionally integrated entity. The Mexican group's aggressive campaign to take-over Rinker reached successful conclusion at mid-year, with substantial price premium paid of more than $15 billion. Cemex thus obtained particular product strengths in such growth markets as Florida and Arizona. Globally, the RMC transaction placed the firm as the world's largest ready mix producer. By buying Rinker, they now became the biggest cement manufacturer. Their intent remains to be vertically integrating operations in new and existing markets “by acquiring or developing complementary assets along the value chain.”

Growth had likewise been Rinker Materials own agenda through a series of geographic and product takeovers. As the state's largest cement user, buying Florida Crushed Stone was regarded as “significant complementary expansion opportunity.” Continued bolt-on purchasing established aggregate and concrete ownership situations across the country. Meanwhile, group structural change, via de-merger from parent CSR, placed Rinker in “better position to grow,” reportedly on the hunt for value-added situations. Rinker thus became leading Las Vegas supplier and, with acquisition of Kiewit Materials, Arizona's prime producer. The unsolicited Cemex offer led to defensive investigations of alternative merger moves and/or association with a stronger strategic partner. Apparently TXI represented one such candidate. The implication of all this is that within the industry's ongoing global Pac-Man game of gobble up, there are other interested players available and seeking the potential to becoming still bigger.

Vulcan Materials this past February “significantly enhanced strategic position” by acquiring Florida Rock for $4.6 billion. It was described as “an ideal business fit” of complementary companies. The 45% premium paid in price appeared based largely upon realizing a more than 20% increase in aggregate reserves. Similarly, the takeover greatly expanded Vulcan's presence “in attractive Florida markets.” Not only did the nation's largest construction aggregates organization obtain a leading aggregate and concrete firm, but also, via backward integration, Vulcan became a cement maker. Florida Rock's Newberry cement plant currently has in progress a project to double capacity, scheduled for completion next year. Previously, the company had broadened this material interest by purchase of Lafarge Florida, encompassing two state cement import operations.

CRH/Oldcastle Materials is another leading aggregate and ready mix producer to now be backward integrating into its own U.S. cement business. Last fall, announcement was made of the creation of the American Cement Co., a joint venture between partners Oldcastle and Trap Rock. A new 1.2 million-ton Florida greenfield plant is under construction at Sumterville. Oldcastle's development strategy has continued expanding its U.S. construction materials position through geographic and bolt-on/“value creating” purchases. These had the goal of attaining market leadership. In August 2006, they made “the largest single transaction yet completed by the group”: Ashland Paving & Construction (APCA) was acquired for $1.3 billion. Aggregate and asphalt operations in 14 southern and mid-west states were thus obtained, with recognition given to APCA's having permitted reserves of over 2 billion tons.

Titan's international expansion strategy has been to become a “powerful regional cement producer, vertically integrated and independent.” The company's recent annual report states that “expansion of our vertical integration activities strengthened our presence in the U.S.” The group's purchase of Tarmac America, particularly its Florida operations, marked a major Titan positioning move. The completed upgrading of Pennsuco cement plant doubled capacity, followed by opening of a new Port of Tampa import facility, supported the company tactic that “we like to pair plants with terminals.” During 2006, Titan spent $52 million to takeover two ready mix firms in western Florida. This action aimed at gaining further synergies of operations, in recognition of “the growing trend of cement companies moving into downstream products to leverage the construction materials supply chain.” Meanwhile, the current Titan announcement is of plan to build more than 20 new ready mix plants in eastern North Carolina, as growth initiative for existing cement/concrete interests in that region.

Holcim is certainly emphasizing the importance of vertical integration within its geographic diversification game plan. Annual report statements describe the company “as a vertically integrated group, we are able to generate added value along the entire value chain…Building materials that complement each other” enable strengthened presence and position in the market place, as well as financial performance. Holcim took a major step forward within this concept via its $3.4 billion acquisition of Aggregate Industries. Paying a 23% premium for this leading industry producer yielded a 4.4 billion-ton aggregate reserve and a cement customer consuming 3 million tons annually. It likewise returned Holcim to ready mix production in the U.S. A subsequent July 2006 purchase of Chicago-based Meyer Materials for $231 million reinforced Aggregate Industries' aggregate and related businesses. This included 24 more ready mix plants. Holcim's expectation was of significant synergies from more efficient cement logistics and product optimization. Their cement manufacturing facility to be servicing this area had overcome extraordinary environmental and activist opposition to break ground in March 2006. The new 4 million-ton Ste. Genevieve-Missouri greenfield plant, holding the world's largest single clinker production line, is expected to come on-stream in 2009.

Lafarge SA has bought out the remaining shares in its North American subsidiary for $3 billion, in part to “accelerate decision making.” Then several aggregate related purchases were completed, including entry into the Arizona market via obtaining Sun State Rock. The latest of three made in greater Chicago area in just over a year was of Feltes Sand & Gravel, selling 3 million tons of material annually. Lafarge is described as loaded, in a buying mood, and looking at “many takeover opportunities.” They too had apparently entertained thoughts of obtaining Hanson. The significant ongoing multi-billion-dollar consideration is to be acquiring the Tarmac operations from Anglo-American.

Progress of these major groups, as well as other producers, towards the large getting even larger is the characteristic of the changing cement/concrete equation. Given this trend, the answer to that fundamental managerial question of “What business are you in?” has moved far beyond the traditional and limited answer of being a cement or ready mix or aggregate maker. It has become the all-embracing nomenclature “building materials” that is the determination for capital reinvestment and acquisition funding. Now and in the future, the money trail for achieving position and clout increasingly will include forward and/or backward integration product involvements as the motivational dynamics.

CEMENT DEMAND AND THE SUPPLY SITUATION

For 10 years, the portland cement shipments growth trend has demonstrated almost consistently rising figures. Even giving consideration to 2006's stalled performance, there had been a gain of upwards to 40 million tons since mid-point of previous decade. This represents an impressive increase of almost 50%. Unfortunately, the present economic condition has been characterized as “sluggish” and in “slow down” mode. Due primarily to woes within the housing sector, a tempered enthusiasm is lowering the bar of expectation as to growth through decade's end. The U.S. demand umbrella will be raised in total, with new records set, but not to levels as once optimistically predicted.

Given this more limited perspective for the competitive playing field, the results of the industry's massive multi-billion-dollar capacity addition roster will begin to be felt within coming two years. Some 17 specific projects can be reaching completion, bringing with them 17 million tons of added production. Two factors are continually being encountered with virtually every announced plant program, especially with regard to greenfield operations. These are the lengthening of estimated construction times and their added cost experiences.

Probably the classic example of this has become the struggle and circumstances encountered by Holcim at Ste Genevieve. When this plant does finally enter into manufacture, a full 10 years will have elapsed since initial declaration of intent to build. The program underwent an extraordinary environmental scrutiny process, and met with almost hysterical local activist opposition. As result, the expense associated with this greenfield facility escalated by 20%, to be reaching a $600 million outlay.

Chihuahua's on-going project to construct a new greenfield plant in Colorado, near Pueblo, has exhibited a similar rising cost consideration. When originally proposed, the price tag was placed at $160 million. The million ton operation can be being placed into production in 2008 but at a spending element now standing at $200 million.

It will be interesting to follow progress of the following two announced new cement plants, to view their success in coping with what have obviously become the industry's true facts of construction life: environmental challenges/issues and controlling capital cost.

Ash Grove's initial reporting for its $250 million, 1.5 million-ton new facility, located on Indian land north of Las Vegas, provided this expectation: “Construction starting in early 2006, with completion in late 2007 or early 2008.” A previously issued company statement noted “that permitting a greenfield plant is an extremely complex process to work your way through.” Completion was then guessed at as “maybe 2010.” However, Ash Grove's latest reporting says the project being cancelled.

American Cement's new joint-venture Sumterville facility is being located north of Orlando and Tampa. Reportedly, it is “already permitted.” The $200 million plant is expected to be entering manufacture next year. Noting that the Florida market imports up to 40% of its annual cement requirement, the company is to be serving a “real need for the local production capacity.”

Although several domestic capacity addition programs clearly specify a purpose for reducing costly purchasing of cement (i.e. Eagle Materials' modernization/expansions being to “replace current low-margin imported cement with manufacture product”), the import variable last year once more manifested a strong staying power on the American scene. The almost 36 million tons bought was a new high, and represented 7% more material than the year before it (see Figure 1).

China as cement source showed the significant gain, up 125%, to again become ranked as leading country providing product to the U.S. Both Thailand and Taiwan were recorded with some 30% increases in their exporting. Politically interesting, the material received from Venezuela exhibited the major decline, down by 62%. The top ten destinations of importing generally remained the same. Only Houston demonstrated a notable variation, in receiving almost 30% more in tonnage.

While some domestic producers sought to reduce exposure to imports, others strengthened or enlarged their position. Specifically in Houston, a sort of omelet of ownership has emerged with one entity. Originally, Ash Grove and Alamo Cement joined forces as the Houston Cement Co., bringing a new $42 million import terminal into operation last year to combine with an existing facility. Then Texas-Lehigh, joint venture of Lehigh with Eagle Materials, bought a minority interest in the firm. The parties state that “sales from the terminals will be managed independently.”

Other recent import positioning actions, in several selective geographic areas, included the following: Titan modernizing and expanding its Newark, N.J., facility to 62,000 tons of storage capacity; Cemex buying a Pensacola terminal from a local ready mix maker; Lafarge's acquisition of The Concrete Company, “a major cement importer and producer of ready mixed concrete,” owner of two Southeast terminals; Ash Grove's obtaining a terminal in Portland, Ore., to connect with the firm's existing adjacent operation, thereby “expanding ability to supply customers in the greater North West”; and Lehigh upgrading and expanding its import terminal near Seattle “to meet local demand.”

VERTICAL INTEGRATION

The signs are clear and unmistakable: Cement/concrete is on the fast track to becoming a much different enterprise, where crossed business lines are becoming the rule. Read virtually any annual report or company release, and they will contain the new terms of reference in market place engagement: synergies gained; complementary materials; value added; extension along the industry's value chain. Fundamental to all this is that vertical integration is not a cyclical phenomenon but a definite corporate direction.

A trinity of organizational pyramid power stands represented by:

1. Increased and more efficient local production;
2. Support by supplemental/flexible import sourcing.
3. Leveraged vertically integrated posture.

Further acquisition is surely the expectation as industry players pursue their individual growth objectives. The greater number of these will include consideration of the above three forces within their routes for obtaining competitive position and profit.

Roy A. Grancher is a cement consultant based in Marietta, Ga., (+1) 770-424-6954

FIGURE 1:

Another year of record supplemental importing, that accounted for almost 30% of U.S. usage.

U.S. CEMENT AND CLINKER IMPORTS?LEADING SOURCES AND DESTINATIONS
2006 vs. 2005 (thousands of metric tons)

SOURCE	2006	2005	Difference	% Change
China	10,620	4,726	5,894	125%
Canada	5,059	5,404	-345	-6%
Thailand	3,798	2,893	905	31%
Korea	2,745	2,672	73	3%
Mexico	2,276	2,185	91	4%
Taiwan	2,180	1,759	421	24%
Greece	1,950	2,786	-836	-30%
Colombia	1,874	1,849	25	1%
Venezuela	943	2,484	-1,541	-62%
Sweden	889	1,050	-161	-15%
DESTINATION
New Orleans	4,629	4,095	534	13%
Tampa	3,499	3,476	23	1%
Los Angeles	3,422	3,053	369	12%
Houston -Gal.	3,371	2,619	752	29%
San Francisco	2,800	2,363	437	18%
Miami	2,186	2,265	-79	-3%
Seattle	1,619	1,489	130	9%
Detroit	1,214	1,317	-103	-8%
New York	1,207	1,265	-58	-5%
Nogales	1,080	1,068	12	1%
TOTAL U.S. IMPORTS	35,896	33,652	2,244	7%
Source: U.S. Geological Survey and Bureau of the Census