Shortage has again become the buzz-word associated with the U.S. cement industry. Media reporting and public inquiry are raising questions as to just how on earth this could have come about. Often neglected within these queries is the obvious fact that legislated policy and restriction have both worked to convert the United States into a cement-dependent nation. As much as one-quarter of all required clinker and cement tonnage — necessary to service national construction demands — has come sourced from outside our borders.

Simple, short-term solutions are offered, such as “Let's import more cement.” This becomes rather impractical given today's existing global cement trade situation. The logic of increasing local manufacture founders and falls victim to a basic business reality. Yes, the country has the proven reserves and technological proficiency available, as well as the demonstrated desire from producers to invest large sums of money in the name of greater output. What stands as the central problem is being permitted to be making more cement domestically.

Still under revision is exactly who will be part of this industry's structure and the reshaping of that participation. Ownership change continues occurring with apparent emphasis toward readjusted joint venture operations. Then, a year ago, a significant international transaction took place. Mexico's Cemex Group completed a nearly $6 billion acquisition (including debt) of the world-wide ready mixed giant RMC Group. Self-described by Cemex as a “very compelling strategic opportunity,” this deal can hold far-reaching implications as to the manner in which future cement/concrete/aggregates competitive activity will be conducted.

SHORTAGE AND SUPPLY

Shortages are certainly nothing new or unique to the industry condition. Since the post-WWII building boom, cement has cycled through periodic shortfalls, as well as oversupply. The 1990s witnessed an initial recession that then became a strong construction market, with domestic plants producing at full capacity. A widening gap between growing demand and available local manufacture could only be filled by supplemental importing. From under 10% of total American usage, purchased tonnages climbed to almost 30% of all product consumption at decade's end. Cement firms bought this material to service customer requirements as well as maintain market share.

International cement trade patterns have become altered by China's massive needs associated with the 2008 Olympic Games infrastructure programs. However, despite resultant rising ocean freight costs and product pricing, last year's U.S. make-up purchasing figure stood at 27 million tons, or 5 million tons more than the previous year, and equal to 25% of national consumption. Meanwhile, domestic plant capacity was able to add about 3 million tons to clinker output. The cement producer objective involved in expansion of local capabilities is to reduce their necessity for importing. That good intention has faced a complex, time-consuming, and expensive approval process, especially where greenfield facilities were concerned.

At one time, many industry producers and analysts had concluded that greenfield plant construction was an uneconomical and unacceptable investment. That held true for a dozen years, until a more recent development in heavily import-oriented Florida occurred. As the decade began, Florida Rock started production at its new 750,000-ton Newberry operation. It had taken five years from its initial announcement, with spending rising from $80 million to more than $100 million. The time and money had gone to fighting opposition from environmental groups, protesting possible pollution contamination and natural habitat disruption.

The state's second greenfield plant project faced a similar expensive struggle. Citing Florida's large cement importing need as its competitive opportunity, Suwannee American Cement launched it new greenfield construction in 1999. This was to have a 750,000-ton, $100 million Branford production unit under way by mid-2001. Instead, the program faced a major anti-permitting campaign that at various times accused the company of influence buying, dangerous emissions, and destruction of pristine park area. Almost four years later, at a reported $130 million price tag, the facility finally went on-stream.

Probably representing the classic on-going example of frustrating efforts to build a new cement plant can be Holcim (US) Inc.'s Missouri adventure. In 1999, the group acquired 4,000 acres in north Ste. Genevieve County for a proposed $500 million operation. An environmental coalition then launched a media campaign to focus public opposition against the project. After what is described as an extraordinary comprehensive environmental review — involving eight federal and state regulatory agencies — the now $600 million, 4 million-ton-plus program obtained its final regulatory permit (for air pollution control). Even with limitations and assurances included, further litigation is the expectation coming from plant opponents. Meanwhile, another Holcim project for a new 2 million-ton replacement plant at Greenport, N.Y., was long delayed by “a complex approvals procedure,” which ruled the project “inconsistent” with state coastal zoning policies. Accordingly, the greenfield initiative was abandoned in favor of a $10 million investment to upgrade the nearby, wet-process St. Lawrence Catskill plant.

Nevada has been mentioned frequently as a state of interest. In mid-2004, Ash Grove Cement Co. announced its intent to build a new 1.5 million-tpy plant near Las Vegas. The company stated that the current cement shortage “underscored the need for an additional cement factory.” The $250 million construction is scheduled to begin in early 2006, and be completed within two years. Yet based on other industry greenfield experiences, only time will tell whether these two expectations will prove realistic as to schedule and cost. In a national circumstance, where product shortfall is detrimental to construction health, logic seems lacking to permit red tape and road blocks to choke progress towards resolving the problem.

Possibly turned off in part by potential difficulties and price entailed in building brand new plants, cement producer consideration and choice has instead gone toward existing operations. For example, Ash Grove had contemplated the option of constructing a new 1 million-tpy greenfield operation at another Kansas site. Instead, determination was to modernize and expand its wet process Chanute facility. Cementos de Chihuahua's initial growth plant included locating a greenfield plan near Boulder, Colo. Ultimately, the company opted to acquire South Dakota's only cement maker for $252 million.

CHANGING OWNERSHIP & STRUCTURE

The definitive means for strengthening U.S. cement market position remains reinvestment in, and acquisition of, existing production. Representative of such recent modernization and expansion programs are: Dragon Cement's just completed $50 million overhaul of its Maine plant, involving the conversion from wet to dry process, adding 30% to capacity (the company is the largest ready mixed supplier in the state); Holcim's successful commissioning of a new kiln line at the group's South Carolina facility, where replacement of two wet kilns led to doubling output to more than 2 million tpy; Giant Cement's $100 million expenditure installing new preheater/precalciner at its South Carolina plant, thus retiring four wet kilns in making the operation “more competitive in an increasingly global cement industry.”

Interestingly, a series of joint venture-related actions have correspondingly worked toward revising the U.S. cement ownership status:

• Ash Grove bought out Hanson's 50% joint venture interest in North Texas Cement at an indicated price of $125 million. Hanson had obtained its share as part of a previous acquisition of Pioneer International. The firm stated the sale was based on their having “no ambitions to be a major cement producer.”

• Eagle Materials took action to obtain the remaining 50% interest in Illinois Cement Co. from joint-venture partner RAAM. The indicated price was placed at $72 million in cash. Total ownership can further commitment to more modernization spending in the LaSalle facility.

• Holcim bought out the minority partners in the Midlothian-Texas cement plant. This move brought all of its U.S. operations under full group ownership.

• Continental's Hannibal, Mo., plant was purchased eight years ago by a group of private investors for $58 million. A subsequent plan to construct a new 1 million-tpy production unit north of Ste. Genevieve failed to materialize. Now a reshaping of venture ownership has led to a modernization agenda at the existing operation.

• Votorantim obtained joint-venture position in Suwannee American's Florida cement plant for $100 million. The transaction followed the Brazilian group's $700 million purchase of St. Marys Cement from Lafarge. Votorantim has now furthered its North American presence by buying the Great Lakes assets of Cemex for $400 million. Cement plants in Michigan and Illinois were included.

• Heidelberg/Lehigh Cement took over control of Glens Falls Cement. This unit had been originally established in 1999 as a 50-50 partnership between Heidelberg and Dyckerhoff. The latter group's bundling of U.S. activities into a joint venture with Buzzi Unicem then led to the disposal of the Glens Falls position for $50 million.

Two actions on the import side also should be noted:

• Ash Grove announced joint-venture agreement with Alamo Cement to meet construction needs in the Houston area. This included construction of a new 100,000-ton-capacity import facility to be completed in early 2006. Ash Grove's existing 1 million-tpy throughput Houston terminal is to be included in this entity.

• Florida Rock completed a $124 million purchase of Lafarge Florida, which encompassed import facilities in Tampa and Port Manatee that handled volumes totaling 1.2 million tpy. The company reported that although these operations subjected them to new risks involving the international market for cement and ocean-going ships, “they complement out existing cement plant.” Five years earlier, Florida Rock had contemplated building a second state greenfield plant at Brooksville, but when prospective joint partner CSR-Rinker acquired Florida Crushed Stone and its Brooksville facility in mid-2000 for $348 million, the idea was apparently laid to rest. (Rinker is the largest cement user in Florida.)

Probably the most significant and impressive position taking on the world cement scene continues to be Cemex's climb to becoming an international cement-concrete powerhouse. Acumen, risk taking, and leverage have marked the Mexican group's move to leadership in the materials triangle of production, trading, and now end product ready mixed concrete. When Cementos Mexicano began its rise to the top, there was wonderment as to what this “third-world” outfit thought it was doing in a marketplace general dominated by large European organizations. After all, the Mexican cement industry itself was, in large part, owned by “others.”

Fast forward to earlier this year, in what was described as “the most expensive take over in the global construction materials business,” Cemex acquired the RMC Group for $4.1 billion ($5.8 billion with assumed debt). Self-defined by RMC as “the world's largest supplier of ready mixed concrete by volume,” and the 10th largest cement producer, this action provided Cemex with greater vertical integration and new markets for its products. To an often asked question of “How do they do it?” one analyst replied, “They know how to finance things!”

DEMAND VS. SUPPLY OUTLOOK

Since the year 2000, cement consumption's gain has slowed, manufacturing capacity increased, yet imported volume still stands quite high. In other words, domestic product dependency remains. Within this scenario, the notoriety of “shortage” became more public. The make-up buying that the country had come to rely upon is now a more difficult and expensive affair. Disruption of the international trade equation is the result of China's sucking up much more of the world's available excess supply.

The structure for engagement within the coming competitive cement arena continues to undergo global change. In the states, Cemex's acquisition of RMC only underscored the importance of the vertical integration component to such enterprise. Many take-overs of operations have likewise included involvements with concrete and/or aggregate assets. Examples of these include Italcementi/Essroc's purchase of Riverton Corp; Titan's buying of Tarmac America; and several previously described acquisitions, such as the Votorantim transaction. To these can be added backward integration actions involving Rinker and Florida Rock. Ready mixed concrete will undoubtedly stand as forming an ever-larger and integral part of the marketplace mix.

The latest Portland Cement Association projection regarding industry shipments portrays a continual gain in domestic cement demand. Within four years, another 13 million-plus tons might be added to national construction need, reaching some 128 million tons of consumption. Yet, the association's listing of announced new and modernized plant projects indicates a possible capacity addition “could be” about 15 million tons. That would be before full approval processes, environmental, and anti-build opponents take their toll in time and investment. The near-term scenario does not look greatly changed from the current one called “shortage.” Barring economic downturn, U.S. cement seems destined to continue experiencing imbalance between requirement and available local supply.

The prospect for high-volume buying of supplemental production remains a distinct part of the country's cement procedure. Within this, tie-in importing continues to form sizable consideration within this cement supply configuration. The multinational players possess their own trading arms, allowing for intercompany transfers and third-party sourcing. Preference is stated for optimizing the manufacture of one's own plants. However, longitudinal flexibility among strategically positioned operations does allow for applied clout in achieving determined producer objective — be it for market share, regional strength, or entry.

In like fashion, aggregates are serving as base for reinforced involvement and expanded scope. Illustrating this trend is Holcim's 2005 acquisition of UK-based Aggregate Industries for $3.4 billion, a 23% price premium. The implied purpose of the purchase was for major entry into the British market, as well as a boost for existing U.S. presence. The deal involved obtaining 142 quarries, 164 ready mixed plants, asphalt operations, and additional building product lines. Bottom-line representation is of a significant movement forward in multi-faceted vertical integration posture.

U.S. cement, now standing as 85% owned by outside organizations, is firmly plugged into global developments and strategies. Faced with its own environment of challenge, it nevertheless finds itself as one among several other construction material interests within diversified parent group portfolios. Manufactured domestically or made elsewhere, it functions in a world-wide context that features concentrated ownership, availability, and control. More and more, industry competitiveness appears resting upon synergies among inter-related product activities, inside networks of mutually supportive concerns.

U.S. CEMENT AND CLINKER IMPORTS
2004 vs. 2003 (thousands of metric tons)

Source	2004	2003	Difference	% Change
Canada	5,753	5,601	152	3
Thailand	2,808	3,344	-536	-16
Venezuela	2,505	1,665	840	51
China	2,145	1,823	322	18
Colombia	2,123	1,766	357	20
Greece	2,011	1,188	823	69
Korea	1,729	1,745	-16	-1
Mexico	1,439	891	548	62
Taiwan	1,068	395	673	170
Sweden	1,058	924	134	15
Destination
Tampa	2,596	2,344	252	11
New Orleans	2,551	1,523	1,028	68
Los Angeles	2,513	1,976	537	27
Miami	2,294	2,067	227	11
Houston-Gal.	1,969	2,026	-57	-3
San Francisco	1,729	1,032	697	67
Seattle	1,654	1,335	319	24
Detroit	1,448	1,625	-177	-11
Nogales	846	571	275	48
New York	839	941	-102	-11
Total U.S. Imports	27,305	23,241	4,064	17
Source: U.S. Geological Survey and Bureau of the Census

FIGURE 1: Suprising upsurge in U.S. Cement Importing, despite increased costs to purchase and transport product