Editor's Note: All production figures given in this article are in metric tons and all monetary figures are in U.S. dollars.

Two words can be used to describe the international cement scene: globalization and consolidation. Both directly influence and affect the direction of the U.S. cement industry. Acquisitions of existing capacity — often at premium prices — have been restructuring domestic manufacture and marketing. Plant reinvestment, at historically record levels, is leading to substantial new production gains. Intragroup importing capabilities hold sourcing flexibility for determined positioning needs and schemes. A mix of these strategic considerations, for competitive purposes, is available to maximize company paybacks from prevailing product demands.

Multi-billion-dollar takeovers are the ongoing global cement experience. Several of these involve group actions where U.S.-owned operations form portion of the entire larger transaction. Beginning two years ago, U.K.-based Hanson PLC was buying Pioneer-Australia for $2.5 billion. Another $2.5 billion deal was seen when Heidelberger Zement/CBR obtained control of SCANCEM. Then Anglo-American U.K. took over TARMAC U.K. for $2 billion. The latest in this series of acquisitions was Lafarge's hard-fought battle to purchase Blue Circle Industries. From initial launching of hostile/rebuffed bid in early 2000 to acceptance a year later, the price moved up 10% to $3.6 billion.

Being big with optimism

During 1998, U.S. cement directly entered the billion-dollar acquisition arena. This was when Southdown merged with Medusa to create the industry's then second-largest producer. The past two years have witnessed six additional transactions, all of a distinctly domestic nature. The price tags of these purchases total $5.6 billion. Twenty-two U.S. cement plants altered their ownership status as a result. This is representative of one-fifth of all this country's production facilities changing hands.

These six domestic purchases of U.S. plants and positions were:

• Dyckerhoff AG acquiring Lone Star Industries, $1.2 billion;

• Cementos Portland S.A. buying Giant Cement Holding, $343 million;

• Titan purchasing TARMAC interests, $636 million;

• CSR Ltd. obtaining Florida Crushed Stone, $348 million;

• CEMEX taking over Southdown, $2.8 billion; and

• Cementos de Chihuahua buying Dacotah Cement, $252 million.

In terms of concentration ratio, the U.S. Big Three (ranked as Lafarge with Blue Circle; Holderbank with two St. Lawrence units; and CEMEX with Southdown) cement makers now account for 40% of clinker tonnage. The growing distance between largest producers and industry others becomes more evident when you realize that the top ten control two-thirds of total output. Excluding several joint-venture relationships, the industry's core manufacturing group has been reduced to about 35 players, as foreign ownership now represents 80% of capacity.

“The consolidations of the industry is a continuing and positive trend,” concluded Southdown's management in its final annual report before being bought by CEMEX. A Moody's Special Comment made point that consolidation can foster more rational pricing, “thus providing more stable operation environment for all cement producers.” Both of these concepts may be put to the test, at least in the short term, due to possible economic slowdown. “Oligopoly” is when sellers are few, and the actions of any one can materially affect price, thereby having a measurable impact upon competitors. In a well-defined industry like cement, the textbook notation is made that “market share objectives often are dominantly defensive.”

Many recent company capital investments, for acquisitions and plant additions, appear predicated on passage of the $220 billion TEA-21 federal highway legislation. The supposition made was that cyclical cement had become recession proof. Infrastructure spending would raise a demand umbrella above just about any perceived ill — from a residential construction decline to an overbuilding of manufacturing units. The great expectation viewed a panacea of continuously climbing shipments regularly setting new records for usage. That alone have justification for basing future revenue.

Yet the devil can lay in the details. Bottom line to the TEA-21 bill is that its funding purpose is not to build another Interstate Highway System. Although the dollar amount involved is huge, a sizeable portion of that money is slated for repairs, rehabilitation, and safety improvements, none of which is considered cement intensive. U.S. public works construction expenditures will rise; unfortunately, these may not be of the boom magnitude certain industry members are looking, hoping, or praying for.

To be sure, nine years and a 36 million-ton gain in product consumption has established an impressive track record. As this period's demand growth outstripped the ability of local plants to supply it, resultant imbalance allowed producers to obtain both price relief and respectable ROIs. That the years ahead do hold prospect for further growth receives quantification in the current Portland Cement Association forecast. Another 10 million tons can be added to the U.S. consumption volume, with more record levels ahead lifting tonnages to 115 million by mid-decade.

Capacity gains and import residual

The significant difference between the unfolding U.S. cement situation and that occurring elsewhere in the world is the magnitude of the plant spending presently under way. Given motivation and means for reinvestment, cement makers have launched their largest-ever expansion schedule. The existing indication is of 38 modernization/new plant projects on the books. These could translate into as much as 27 million tons being added to U.S. cement's decade-opening 80 million-ton capacity. Self-investment in your own operations is a recognized and commendable business virtue. Competitiveness and positioning depends, in large measure, on realizing manufacturing efficiencies with lowered unit costs. These stand as the foundation for enhancing producer profit margins.

Unfortunately, problems can arise when the end product of such positive effort similarly causes substantial reduction in the very imbalance that fostered it. During the late 1990s, the industry shortfall between growing demand and stable domestic production doubled, increasing from 12 million to 24 million tons. Given the existing portland cement shipment projection — and indicated major increase in output from local cement facilities — these two converging trend lines reveal an appreciable shrinkage of the favorable industry circumstance that brought into being producer selling price realizations and returned earnings.

The previous eight years have shown U.S. cement's domestic supply deficit being more than made up for by purchased foreign material. A five-fold increase in importing has taken place. The last two years have seen these volumes reach an approximate 29 million-ton level. In point of fact, this country's record construction activity could not have been met without such purchased amounts.

Control of entry and amount has proven to be the decisive factor. This is being assisted by the presence of common ownerships within overseas sourcing, transport, and domestic distribution operations. Successful antidumping measures and the buying up of independent terminal facilities certainly contributed to what one producer called “a more orderly flow of imports into the U.S.” Despite the large tonnages involved, they did not end up making waves in this competitive market place.

But now some concern is surfacing as to the imported cement variable's coming/continuing influence and purpose. This could become a more serious consideration as the industry's shift materializes toward much more capacity being placed on-stream, making greater amounts of locally manufactured material available to service customer usage.

Several producers have publicly stated their intent to reduce overseas sourcing as their own cement making capabilities expand. During 2000, U.S. imported tonnages registered a decline for the first time in eight years (see Figure 1). Still, imports should remain a distinct segment of this country's supply configuration. Among the prime examples of such facilities functioning to satisfy company game plans are:

• North Texas Cement's $20 million twin-domed, 80,000-ton storage facility in Houston, which after its first full year of operation was reported “exceeding expectation by 30%”;

• Holcim's Reserve in Louisiana 1.5 million-ton Globalplex entity, commissioned two years ago to ensure “a stable supply of cement for customers along the Mississippi River markets”;

• Blue Circle's recently commissioned 1.5 million-ton, double-domed Charleston, S.C. terminal, described as “world class” and as a complement to nearby Harleyville cement plant production “with greatly improved global distribution costs.”

Change, challenge, and producer prospects

Today's world cement scene increasingly appears to resemble the script of the popular T.V. show “Survivor.” The geographic diversification strategies of a handful of international contenders surely signifies their determination to be counted among the survivors and to prosper within this cement enterprise. These groups have been acquiring and building up both muscle and clout in their global production positions and distribution strengths. Within this vein, these four recent annual report quotes give a viewpoint and perspective to the above-mentioned situation:

Holcim (formerly Holderbank): In the cement business, market networking is becoming more and more critical…Our worldwide presence means we are well positioned to link larger regional markets to optimize operations between the various production units and generate additional synergies.

Cemex: [The company's] position as the world's largest trader of cement and clinker allows it to keep plants running at or near capacity…Every plant and subsidiary is seamlessly integrated into the global CEMEX network.

Heidelberger: [Imports] guarantee our competitiveness and simplify full utilization of the excess capacity within the group.

Italcementi: All companies have to recognize that competition for market share is global, and that participating in global economy is no longer a choice but a necessity even for the cement business which operates on local markets.

In U.S. cement, the organizational end product of acquisition and addition actions has been of the big getting even larger. On the supply side, both capacity expansion and the purchasing of cement reflects producer determinations relative to their servicing of imbalance. Still, despite any concerns in that latter regard, these cement makers are better able to cope whatever the developing demand situation. Built-in economies of scale and technological proficiency are calculated to provide a competitive edge.

In the short term, the industry reality check becomes the challenge to its described “strong fundamentals.” This centers upon a leveling off or decline in demand occurring and the producer response to it. Oligopoly's definition points to a ripple effect reaction. Should shipment growth stall out and trigger a defensive reflex, then market share could once more be the substituted measure of success. Price becomes the victim in this scenario. The impact may well be upon all cement makers, but certainly the manufacturing competent, having the reduced/controlled units costs, stands in the least exposed position. The big have the staying power. It will be the complacent or marginal others who could feel the brunt, finding themselves bought, falling further behind, or by the wayside.

Consolidation here and on the world stage has led to the grouping of an international few as the industry leaders. Most of the remaining producers in the field are characterized as regional participants or niche organizations. Company viability appears largely to be determined by fixed asset reinvestment determinations, ensuring lowered operating costs, expansion, and flexibility. Competitive prowess and survival can be measured against not only other industry producers, but also a climate of encroaching environmental nonpermitting.

The numbers do indicate that producers can be confronted by revised components within demand-vs.-supply matrix. Handling of this turnabout — from shipments advantage to equilibrium-plus status — may well determine continuity of a reasoned market place. Changed structure is the new industry setting. How this plays out will establish the parameters and prospects of U.S. cement membership in this decade.

Roy A. Grancher, an independent consultant, is based in Marietta, Ga. He is a regular contributor to Cement Americas.

FIGURE 1: The First Decline in Import Tonnages in Eight Years

U.S. Cement and Clinker Imports — Leading Sources and Destinations, 2000 vs. 1999 (thousands of metric tons)

Source	2000	1999	Difference	%Change
Thailand	5,694	5,140	554	11%
Canada	4,948	5,511	- 563	- 10%
China	3,451	3,836	- 385	- 10%
Venezuela	1,878	2,073	- 195	- 9%
Korea	1,823	1,529	294	19%
Colombia	1,524	1,250	274	22%
Greece	1,478	2,086	- 608	- 29%
Turkey	1,453	767	686	89%
Mexico	1,409	1,286	123	10%
Spain	1,176	1,900	- 724	- 38%
Destination
New Orleans	4,271	5,330	- 1,059	- 20%
Houston	3,043	2,928	115	4%
Tampa	2,458	2,395	63	3%
Miami	1,960	1,896	64	3%
Detroit	1,619	1,991	- 372	- 19%
Los Angeles	1,593	1,719	- 126	- 7%
Seattle	1,227	1,090	137	13%
New York	1,214	1,188	26	2%
Charleston	915	830	85	10%
San Francisco	835	777	58	7%
Total U.S. Imports	28,684	29,351	- 667	- 2%
Source: U.S. Geological Survey and Bureau of the Census