Consolidation and entry: changing dynamics in the regional cement

Tatenda Zengeni and Pamela Mondliwa

This article considers the history of anticompetitive conduct and the growth in demand for cement products in Africa as a context for understanding the recent global merger between Lafarge and Holcim, two of the largest cement companies in the world, and the growth of Dangote Cement and others in the region. A merger of PPC and Afrisam has also been put on the table in South Africa.

Cement consumption in Africa is being driven by four factors namely, economic growth, a rising population, increasing urbanisation and rising infrastructure spend.1 The price and supply of cement have wider effects on economies given the link with infrastructure and housing investments. Economic growth in Sub-Saharan Africa (SSA) has been projected by the IMF to be more than 5% per year over the next six years.2 The growing population coupled with an increase in the size of the middle class has led to increasing demand for housing and associated infrastructure. There are also large construction projects linked to minerals extraction. In response to the surge in demand for cement, there has been increasing investment in the sector coupled with the expansion of companies across borders. The cement industry is also consolidating globally.3

Cement is expensive to transport due to its mass which has the effect of limiting competition especially when plants are some distance from one another, although some producers globally are able to export the product.4 The considerations around transport costs tend to lead to concentrated local or country markets. In this context, the cement industry has been prone to anticompetitive conduct, particularly collusion through the allocation of markets.5 For instance, a cartel based on the allocation of markets and price-fixing in the Southern African Customs Union (SACU) region had been in operation for several decades until around 2008 when the Competition Commission of South Africa initiated an investigation and 2009 when a leniency application was filed by PPC.6 The cartel was facilitated through the industry association. More recently, the Competition Authority of Kenya is investigating price-fixing by Lafarge and similar investigations have been considered in other countries as well.7

The changing landscape

The cement industry in Africa is largely run by major multinational companies, namely, Lafarge, Heidelberg and Holcim (Table 1). These companies have operations across a number of countries, with Lafarge being the main player with a large presence in the east and southern parts of the continent. Heidelberg has operations concentrated in west and central Africa. This has been changing somewhat with the entry of Dangote Cement of Nigeria in 2000 and its growth into fourteen other countries in the continent to become the single largest continental producer. In addition, Holcim undertook a major restructuring, divesting substantial operations in southern and east Africa to a new company called Afrisam, in which it retained a very small stake. This is significant as the divested Afrisam operations overlapped with Lafarge, with whom Holcim is now merging.

There are also numerous small producers many of which are relatively recent entrants in different countries although the largest players are Dangote, Lafarge, Heidelberg and PPC, each with operations in more than three countries.

The expansion of Dangote and entry of new firms in various countries have led to increased production and competition as firms seek to gain market share. Ethiopia provides a good example of how new investments in the cement industry have led to decreases in prices.9 The country has four cement manufacturing companies with the oldest company, National Cement, having been in operation since 1936 as the sole producer until 2001. Ethiopia has recently experienced greenfield investment in cement manufacturing by three companies; Messabo Cement, Mugher Cement and Derba Midroc Cement which entered the market in 2001, 2007 and 2012, respectively. The entry of Derba Midroc Cement in 2012 seemingly led to a drastic reduction in cement prices. The new plant sold cement at $9.36/bag which was down from about $28.00/bag at the start of 2011.

In South Africa, the entry of Sephaku Cement which is 64% owned by Dangote has also resulted in vigorous competition and lower margins.11 In Kenya there has also been entry into a country previously dominated by firms associated with Lafarge, as Mombasa Cement started operations in 2009, National Cement in 2011 and Savannah Cement in 2012. This has led to substantially lower prices being reported in 2013 and 2014.12 In Zambia, there has been entry of small producers although these appear to have had only a marginal impact on prices.13

Consolidation in the sector

In 2014, the proposed acquisition of Lafarge by Holcim significantly changed the global landscape. The transaction has been notified to competition authorities all over the world including in some African countries. The European Commission (EC) and South Africa’s Competition Commission have already approved the merger subject to the condition that Holcim divests its interests in competing firms. The merger was also approved by the COMESA Competition Commission without conditions in November 2014. The merging parties are active in several COMESA member states including Djibouti, Egypt, Eritrea, Libya, Kenya, Madagascar, Mauritius, Rwanda, Seychelles, Zambia and Zimbabwe, which meant that the merger was required to be evaluated and approved by the regional authority.

Post-merger, Holcim-Lafarge will become the largest cement producer in Africa with a production capacity of 22.5 million MT per annum followed by Dangote Cement with a production capacity of 20.7 million MT. Although this means there are two large rivals, a history of collusive conduct in this sector in African countries and globally suggests coordination may undermine competition. The extent of competition from smaller companies which have significantly increased in number may be the key determinant of whether a country has competitive prices or not. There is a lot at stake as the differences in prices between countries with vigorous competition and those without have been substantial, as much as 40% to 50% if one compares prices in South Africa after the cartel to prices in a country such as Zambia, according to the study done by the African Competition Forum. A full assessment would, however, also need to take into account cost differences.

Both the Competition Commission of South Africa and the EC were concerned with the potential for coordination due to the cross-shareholding of the merging firms in competing firms. In South Africa, the Commission found that Holcim already had cross-shareholding in its competitor, Afrisam.14 A very small shareholding had been retained after the divestiture by Holcim to Afrisam, which had substantially reduced the overlap of Holcim with Lafarge. Cross-shareholdings are likely to dampen competition through assisting firms in reaching a common strategic understanding (including through directors) on market conduct instead of making independent competitive decisions in the market.15 The Commission was concerned that the merger would enhance the platform for sharing information and collusion in the industry and this was of particular concern given the history of collusion.16 The Commission therefore approved the merger on condition that Holcim divests its shareholding in Afrisam within a period of three years after the merger is approved.17

Similarly, the EC approved the Holcim-Lafarge merger on condition that Lafarge divests its businesses in Germany, Romania and the UK and of Holcim operations in France, Hungary, Slovakia, Spain and the Czech Republic where the companies’ businesses overlap.18 Central to each of these decisions was the consideration of the likely effect on firm incentives of cross-shareholding and by divesting these interests through structural remedies it removes the direct link between firms and allows for alternative buyers to acquire the divested assets with a view to competing with the merged entity.

Interestingly, following the approval of the Lafarge Holcim merger, Afrisam and PPC are now planning to merge their operations, citing the need for scale in order to compete with new conglomerates.19 A merged entity of PPC and Afrisam would leapfrog Lafarge-Holcim to become the largest in Africa with a production capacity of 23.8 million MT per annum. Afrisam made an offer to PPC and the board is considering the offer.20

Conclusion

There have been several investments in the continent largely led by Dangote Cement. The expectation is that the new investments and entry will lead to more rivalry between the main firms and there is already some evidence of this in some countries. However, there has also been consolidation. The Holcim-Lafarge merger will impact a number of countries and a further merger between Afrisam and PPC would introduce an additional consolidated player. The effects of these trends in particular are likely to be ambiguous although a history of collusive conduct between the major players provides a useful indicator of the likely dynamics of competition in the sector going forward. Certainly, there is need for domestic and regional competition authorities to consider these developments with significant caution, including in ensuring that the gains from the entry of several independents are not undermined through coordinated arrangements.

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Notes

  1. IMARA. (2014). SSA Cement Industry Report (January 2014). 
  2. AECOM. (2014). The Blue Book: Property and Construction International Handbook.
  3. Sigh, S. P. (2013). ‘Assessment of Competition in Cement Industry in India’. Research Project Report Submitted to Competition Commission of India.
  4. See note 3.
  5. Huschelrath, K., Muller, K. & Veith, T. ‘Concrete shoes for competition: the effect of the German cement cartel on market price’ in Journal of Competition Law and Economics, Vol. 9(1) (2013): 97-123.
  6. Govinda, H., Khumalo, J. & Mkhwanazi, S. ‘On measuring the economic impact: savings to the consumer post cement cartel burst’. Competition Law, Economics and Policy Conference, 4 & 5 September 2014. 
  7. Mutegi, M. ‘Cartel firms get amnesty in new CAK regulation’ (25 August 2014). Business Daily.
  8. Ecobank. (2014). Middle Africa Insight Series: Commodities - Cement.
  9. Edwards, P. ‘Ethiopian Cement Focus’ (24 January 2013). Global Cement Magazine.
  10. See note 9.
  11. Hedley, N. ‘Imports, supply glut pressure cement sector’ (14 April 2014). Business Day.
  12. Kagai, D. ‘Cement prices in Kenya drop to 12-year low, could fall further’ (2 January 2014). Construction Business Review.  
  13. Mbongwe, T., Nyagol, O. B., Amunkete, T., Humavindu, M., Khumalo, J., Nguruse, G. & Chokwe, E. (2014). ‘Understanding competition at the regional level: an assessment of competitive dynamics in the cement industry across Botswana, Kenya, Namibia, South Africa, Tanzania and Zambia’. African Competition Forum..
  14. Competition Commission of South Africa. ‘Commission approves Holcim / Lafarge merger with conditions’ (8 October 2014).
  15. Salop, S. C. & O’Brien, D. P. ‘Competitive effects of partial ownership: Financial interest and corporate control’ in Antitrust Law Journal, Vol. 67(2000), p. 559-614.
  16. See note 14.
  17. See note 14.
  18. European Commission. ‘Commission approves acquisition of Lafarge by Holcim, subject to conditions’ (15 December 2014).
  19. Hedley, N. ‘Afrisam outlines PPC merger plan’ (12 December 2014). Business Day.
  20. See note 19.