A giant cement merger seeks to transform a struggling industry.
The announcement this month that the world’s two biggest cementmakers by revenues are planning a merger of equals has thrust a huge but unglamorous industry into an unaccustomed spotlight.
If a deal goes ahead, combining Lafarge of France and Holcim of Switzerland would create a giant firm worth $60 billion with operations in 90 countries and 20 percent of the global market outside China.
Cementmaking is a local business that needs heaps of capital to build the big plants that churn out the stuff. Chinese firms have been happy to serve a domestic economy that gobbles up 60 percent of the world’s cement.
But Western ones have suffered falling demand in mature home markets, bringing overcapacity and falling returns. To keep margins up, they have expanded in emerging markets where construction has been booming.
By teaming up, Holcim and Lafarge can tackle some of their problems and better exploit some of their advantages. The pair expect to take a jackhammer to their costs. They hope to save $1.93 billion a year after three years together (though savings from mergers often fall short of their promise).
Holcim’s strength in Asia and Latin America will complement Lafarge’s in Africa, giving the pair a wider global spread, cutting the risks from regional slowdowns.
But overcapacity, the result of reckless expansion in rich countries in the years before the financial crisis, is likely to remain. To placate competition watchdogs in the 15 countries where both are big operators — in particular France, America and Canada — the combined firm plans to sell assets to competitors.
Big, expensive and thin on the ground (there are just 11 production sites in Britain), cement works have long attracted the interest of regulators on the prowl for oligopolists. By selling rather than shutting plants, the pair hope that there is still enough competition in the market to keep antitrust authorities happy.
Since little capacity may be removed, the industry as a whole will have to rely on growth that may not materialize.
However, Holcim and Lafarge have another strategy: Together they reckon they have the firepower to make cement less like a commodity and their business more like a service. Adding Holcim’s marketing savvy to Lafarge’s technological know-how should give them an edge when it comes to developing high-margin products such as cements that dry quicker or set underwater, or even fancy decorative ones that provide a ready-made finish for architects.
If they can also sell advice to construction firms on how to use their fancy new materials, it may prove far more profitable than just selling cement by the bag.
This all sounds appealing but, besides skepticism over whether the pair can complete the merger by early next year, as planned, there is even more chin-scratching over whether an industry so set in its ways as cementmaking can be refashioned into a service.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.