The UK aggregates, cement and concrete market is creaking under pressure, as regulatory inquiries intensify. Is dominance by the five major players damaging competition or are there other factors causing cracks in the system? Building reports

The £50bn construction products sector is having a hard time. It fell 25% in volume between 2007 and 2010. And last week added a new worry for the five major companies that dominate the £3.4bn UK aggregates, cement and concrete market.

The market has been the subject of regulatory attention for some time, in the form of an aggressive anti-trust probe by the European Commission, and close scrutiny of the proposed merger of the UK businesses of two of the biggest players, Lafarge and Tarmac. But last week the Office of Fair Trading announced it intends to refer the market for investigation by the Competition Commission.

The OFT’s initial market study published last week concluded that the dominance of the major players in aggregates, cement and concrete - who together control more than 90% of some markets - could distort competition. This means that the rest of the industry ends up paying more than it should for basic materials, which make up 2-5% of the cost of every project. That could all change, as the commission has the power not only to fine companies, but also to force them to break up or sell parts of their businesses, as in the case of airports operator BAA.

But does all this scrutiny mean the prices the contractors have been paying for all these years is too high? Or is this inquiry, coming as it does just after appeal judges delivered excoriating verdicts on the OFT’s investigation into bid-rigging, just an unwelcome distraction for suppliers and contractors alike?

Not if you ask small, independent aggregates producers. Firms like Paul Allison’s Sherburn Stone, a medium-sized producer of concrete, asphalt and aggregates based in Durham, welcome the prospect of greater regulation of the biggest firms. Allison thinks the major five producers - named by the OFT as Lafarge, Hanson (part of HeidelbergCement), Tarmac, Aggregate Industries (part of the Holcim Group) and Cemex - benefit by cross-subsidising regional businesses in a way that makes it impossible for regional players to compete. “We feel like victims of unfair competition because we don’t have the ability to cross subsidise.”

According to Allison, the effect this has on wholesale prices means the difference between making a profit or not on a product. Richard Bird, executive officer at the British Aggregates Association, which represents 100 mainly smaller independent aggregates businesses, is more cautious about placing blame, but welcomes the move by the OFT. “When you’ve got 75%-80% of a market taken by five companies you don’t have to be a rocket scientist to see it needs investigation. What comes out will be extremely interesting.”

The OFT agrees there is cause for concern. When it launched its market study into aggregates in September last year, many at the major companies welcomed the exercise as an opportunity to examine the barriers posed by the planning system for new entrants trying to get into the market.

However, it appears that the more it looked, the more it encountered the views smaller firms that it wasn’t just the planning system making competition difficult: it was the behaviour of the major players.

In February, the OFT broadened the study to include the cement and concrete industry. Cristina Luna-Esteban, leading the study at the OFT, says it was considering a range of issues, but adds: “As we progressed, planning subsided and other issues came to the fore.”

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What’s wrong?

The OFT’s recommendation to refer the market to the Competition Commission was on the basis of a number of concerns. First, a high concentration of trade done by just a few players; secondly, barriers to entry to the market - including planning concerns and possibly also fear of retaliation by the major firms; and thirdly, a high degree of vertical integration, where the majors own the whole chain from extraction to ready-mix concrete.

These traits are exacerbated by the fact the products sold are not generally differentiated in quality, that pricing is transparent and visible in advance to main competitors, and that there is a large amount of market contact between the firms. It is well known that the materials firms have tended to raise cement prices, for example, within weeks of each other on an annual basis, often by similar amounts. Not in itself evidence of collusion, but indicative that the market may be flawed.

The clearest example the OFT gives of where it thinks things are going wrong is in the markets for cement, where the top five hold 90% of the market, and ready-mix concrete, where they hold 70%. The OFT study includes data it claims shows that the majors supply cement to each other and themselves at prices 13% lower than they sell to independent firms, even when the benefits of bulk buying are taken into account. This, it says, indicates a huge squeeze on the profit margins of the independents trying to sell ready-mix concrete from that cement. However, it cautions that without further investigation this cannot be proved.

There is evidence in the report of the sway those firms hold over the smaller players, who often rely on them to supply cement for manufacturing into ready-mix. Many are unwilling to be quoted, claiming fear of retaliation, such as one, who told the OFT: “Sorry this has to be anonymous but I would not be able to gain competitive prices from these huge firms again.”

A Competition Commission investigation may be able to requisition internal company data and executives for interview. But despite recommending this approach, the OFT’s study does not conclude there is strong evidence of collusion by any of these firms. It also does not say that any one firm has a monopoly or undue dominance, as no one firm has more than a quarter of any of the markets under investigation. Rather, the OFT suggests it is the overall working of the market that could be at fault, given its reliance on so few major players, but it is a complex and contentious area of competition law.

When you’ve got 75%-80% of a market taken by five companies you don’t have to be a rocket scientist to see it needs investigation

Richard Bird, British Aggregates Association

For these big firms there is a certain irony in all this: sources at the companies say they feel that the government is about to investigate them for problems largely caused by the government’s planning system. The OFT’s report acknowledges that the system, which determines which areas can be mined for mineral extraction, is the biggest barrier to new entrants wanting to compete. The majors also point out that study admits the number of independent ready-mix producers has actually grown in the last 10 years.

And they’re not happy. Jerry McLaughlin, chief economist at the Mineral Products Association, says any inquiry would add “significant burdens” to an industry that has already lost 8,000 of 30,000 staff since the start of the recession. He says: “We have serious concerns about the analysis and the interpretation of it given by the OFT. The companies in this market are already in a difficult position, and construction demand is predicted to go down in the next two years.”

The accused, while saying they are willing to co-operate with any inquiry, have kept fairly quiet since the OFT announcement. Cemex went the furthest saying it was “disappointed” by the decision and will study the report. But internally they are incredulous. One insider says: “While the OFT is unhappy about vertical integration, the reality is it is an incredibly challenging market to make money in, and you have to have the whole [vertically integrated] piece in order to do that.”

The price data seems to support the majors’ view. While figures from the ONS show that the price of cement has risen since 2008 - mainly due to a industry-wide rise at the start of 2009 - since then attempts to raise prices have not been supported by all firms. Ready-mix concrete prices have remained flat, and analysis of tender prices for buying concrete delivered to sites shows a fall of about 30% over the last three years.

Peter Fordham, associate at Davis Langdon, says: “The evidence does not suggest that a lack of competition has increased building costs. Either contractors have been successful in resisting price increases charged by concrete suppliers or they have absorbed the price increases to the detriment of their own bottom line. Either way it does not look like the government has been swindled out of schools and roads over the last three years.”

The OFT’s consultation on the referral lasts until the end of September. During that time, it will also report on whether it thinks the proposed £3bn merger of Tarmac and Lafarge should be allowed to go ahead. For the UK bosses of the major firms, trying to persuade their international boards to invest in the UK rather than, say, China, this is the last thing they need. But Luna-Esteban says that the tougher the economic climate the more important it is for rivals and customers that competition is fair. And it is clear there are serious questions to answer. The one conclusion you can draw is that it’s not much fun being a materials firm at the moment - however large you are.

The OFT decision

On 16 August the OFT began a legally required consultation process over its desire to refer the UK aggregates, cement and ready-mix concrete industries for investigation by the Competition Commission.

The commission can legally obligate companies to hand over data and internal information and, vitally, can force companies to break up if it deems it necessary. It can also force certain behaviour - such as stopping the sharing of certain information between companies. The decision follows the European Commission confirmation of a serious anti-trust investigation into the European cement industry in Austria, Belgium, the Czech Republic, France, Germany, Italy, Luxembourg, the Netherlands, Spain, and the UK, following a series of “unannounced inspections.”

An OFT decision on whether to allow the Lafarge and Tarmac merger is expected in September, with the OFT having the option to stop it, give it a green light, or let it go ahead with conditions.