Buyers
Buyers Cement is a commodity whose demand is determined by the business cycles in the construction industry. If construction slows, a drop in cement prices will not help boost construction. On the other hand, if cement prices rise, there is no real impact on demand. We have seen recently in a country, with a slow down economy, an increasing in price (by one competitor then followed by others) without impact on demand : demand is inelastic to price. When a buyer chooses among two cement producers, his/her decision is primarily based on price, with innovation accounting for little in the competitive process. However, differentiation between producers exist in a number of areas: (a) homogeneity of quality – quality and the color of cement should remain constant throughout the entire construction period (b) delivery delays (c) technical assistance – to choose cement suited for specific construction purposes and (d) deliveries with greater flexibility. Service quality is the only way to influence buyers when price differences are minimal (and they are in most markets). World demand for cement is about 3.5 billion tones per annum, it was only the half 10 years before, in 2002, China consumption represents the majority of this expansion : 70% exactly (1.25 mT/1.75miT) (see figure 1). At the same time, the economic growth in the triad (Europe, U.S. and Japan) has relatively slowed down.
Figure 1
http://earlywarn.blogspot.com/2012/11/cement-production-china-and-elsewhere.html
If we analyze the per capita cement consumption(see Figure 2), it will show huge differences between various regions Countries with high GDP and low growth (which called mature markets) with countries with low GDP, high growth and high consumption of cement (known as emerging markets). Within a country there is a correlation between cement consumption per capita and GDP per capita. This relationship, however, is not linear, the emerging market start with a low per capita cement consumption and when they developed, at higher GDP levels the amount of cement consumption begins to decline and flatten out. But even at higher levels of GDP there are some markets, China and Saudi Arabia, which has a huge consumption.
Figure 2
The increased investment in Infrastructure by Government and mass urbanization in emergent market will increase the consumption of cement for the future (see figure 3), and China will be followed by India (due to both consideration : increasing in per capita consumption and increasing in demography) (see figure 4)
Figure 3
Sustainable cement production (http://www.sciencedirect.com/science/article/pii/S0008884611000950)
Figure 4
Motilal Oswal Investor Conference (http://www.acclimited.com/newsite/finance/Investor_Presentation_august_12.pdf)
Suppliers Cement is a commodity produced using limestone. Since limestone is abundant in most regions of the world, cement is produced locally. Its production requires huge captive investment. The investment is written off after several decades. Cement company invests in a cement plant which has limestone reserves and capacity to run for 50 years. Fixed costs in the industry are particularly high and significant relative to variable costs. Fixed costs generally account for more than 50 % of the overall production costs. The fixed costs are usually sunk costs (once built, a cement plant can serve no other purpose). As fixed costs are high with respect to the variable costs, the break-even point is high. With automation, labor costs have decreased, but energy consumption is the most significant variable cost which conduct the companies to search for alternative : the raw materials are calcinated (heated upto 1450°C) to produce clinker. The fuel required to heat the kiln accounts for almost 50% of the operating costs. Thus profits in the industry are sensitive to the level of utilization of the production capacity. Significant cash flows are generated only when production increases beyond the break-even point, which depends on the efficiency of the plant. A small amount (5-10%) of gypsum (improves the setting time for the concrete mix) is then added to the cooled clinker and ground into a fine "cement" powder. The second most important feature that affects supply is the transportation cost. As a result the sphere of sales is within the radius of 150 -300 km from the site of production. The cost of transportation is highest when it is by road, followed by rail and is cheapest by sea.
Figure 5
http://minerals.usgs.gov/minerals/pubs/commodity/cement/mcs-2012-cemen.pdf
Potential Entrants Competition in the cement industry initially occurs at the local level due to high transportation costs. Competition cannot be based on price as price cuts are easily spotted because of the nature of the product, which is undifferentiated. Competition is hence based on head to head market confrontation focused on price rebates and sales volume, in order to expand market share. Any substantial price cut by a competitor results in a price war. Rivalry also occurs when firms want to enhance their respective competitive advantages on the basis of improved product quality or reduced production costs. Due to high barriers of entry and high consolidation in the industry, competition occurs at multi-point and multi-market level. Historically, cement firms entered different local markets as a business expansion strategy, to take advantage of growing markets, and to hedge against local economic fluctuations. At the regional and national level, this has led to greater concentration and head to head confrontation between a reduced number of large multi-plant firms. Concentration in the cement industry has frequently resulted in a small number of cement groups such as Lafarge, Holcim, Cemex, Heidelberger and Italcementi dominating their domestic markets, and then entering foreign markets where they compete with other local firms.
Substitutes Producing cement uses a great deal of energy, so finding a waste product that can substitute for cement makes good environmental sense. According to Environmental Building News (EBN), as much greenhouse gas is created producing the portland cement used in the U.S. as operating 22 million compact cars. Burning coal to make electric power creates a great deal of waste "fly ash," and a smaller amount of slag is created when producing iron in blast furnaces. Coal fly ash, blast furnace slag and other mineral admixtures can substitute for cement in concrete mixes for buildings, saving energy, disposing of a waste product, improving the quality of the concrete, and reducing cost. Cement substitutes should be distinguished from concrete additives, such as plasticizers and air entrainment agents; and from aggregate substitutes, such as ground glass or ground scrap rubber. The companies are precursor in those product by 3 ways : - For emerging market, Lobbying on standards by adding them in the cement production (controlling the distribution of those substitutes, upstream) -Integrating in the vertical distribution which is Ready Mixed concrete (and controlling the distribution of those substitutes, downstream)
Rivalry among existing firms Technology in the cement sector advances incrementally. No major innovations have been recorded in the last 20 years. The capital investment required for one ton of output is much the same as it was ten years ago. For most quoted companies, the standard valuation technique is enterprise value per ton of capacity. High transportation costs make location an important factor in the pricing policy. The best location combines three advantages: 1. the plant is set up in a quarry with large quantities of high quality and easily workable limestone 2. the plant is close to large urban areas 3. the plant is near a railway line or a river network allowing cement to be delivered to far away places. A cement plant located inland rarely sells outside 300 km radius, and would normally sell the bulk of its production within 150 to 200 km. Six multinational companies, Lafarge (France), Holcim (Switzerland), Cemex (Mexico), Heidelberger (Germany), Taiheiyo (Japan), Italcementi (Italy) have established a foundation of a worldwide network of plants which will eventually dominate the cement industry in most regions of the world (see figure 6) .
Rank
Figure 6
Company/Group
Country
Capacity (Mt/yr)
No. of plants
1
Lafarge
France
225
166
2
Holcim
Switzerland
217
149
3
CNBM
China
200
69
4
Anhui Conch
China
180
34
5
HeidelbergCement
Germany
118
71
6
Jidong
China
100
100
7
Cemex
Mexico
96
61
8
China Resources
China
89
16
9
Sinoma
China
87
24
10
Shanshui
China
84
13
11
Italcementi
Italy
74
55
Cement capacities 2011 (http://www.globalcement.com/magazine/articles/741-top-20-global-cement-companies)
1. 2. 3.
This concentration distinguishes the cement industry from other cyclical sectors because: geographical diversification smoothes out the volatility of the earnings cycle within individual markets rational competitors, who operate by the same rules across a wide range of markets, with similar targets for return on capital and the certainty of retaliation and the impossibility of knocking well-capitalized competitors out of the game means that there is little point in competing on price.
Thus, none tries. Each of the six major international competitors still have clearly identifiable national origins and control a significant share of its home market. Each group also operates production facilities in more than a dozen countries around the world.
When cement multinationals make an acquisition, they are paying for market access. The companies make their money by exploiting demand within a defined geographic territory, in competition with a limited number of other manufacturers. Regrouping the market among several large players makes for a more sustainable rise in cement prices since the main outlet for cement - ready-mixed concrete - is controlled by the cement manufacturers. Lafarge, uses its acquisitions depending on the level of economic development of the country in question, as a bridgehead to introduce the group's product such as aggregates, gypsum and roofing tiles, with the aim to create a building materials division in each country. The emerging markets still offer growth potential in terms of volume and prices and the six sisters generally seek to increase cement production capacity in each market. This generates significant cash flows, and is the main source for financing other activities.
Lafarge and Holcim are both present in emerging countries, except that Lafarge is present in Africa and China with respect to Lafarge (see Figure 7).
Figure 7
Thus, Holcim is the company that has the best positioning, with a presence in over 70 countries. In 2010, the expansion was also successful in the emerging markets of South East: Holcim is represented in all major countries including India, where for two years, with nearly 25% market share it has become the largest supplier, while Lafarge has only 3%. We must expect more closures and restructuring, although Holcim is in comparison with other materials companies, estimated as being financially healthy is geographically located globally and this has been demonstrated by the behavior stock market vis a vis Lafarge and Holcim since 2008 (Figure 8a and b)
Figure 8a -Lafarge
Figure 8b - Holcim
In China, the market share of the six largest producers is unlikely to exceed 15%. Much of Chinese production capacity is based on obsolete technologies and polluting why the government wants to close other plants producing 250 million tons by 2015.
This should make the game of Lafarge as that operate on the market with modern facilities through participation with local producers. Lafarge should also invest quickly in India, to increase its presence and take advantage in catching Lafarge must ensure a practically cash payment of its cement in markets where it is leader (especially in Africa), because the cash will allow the future development by acquisition or construction new plants
Biography 1. http://www.ashoksom.com/6Redesigning_Human_Ressources.pdfhttp://www.cimfra.fr/FR/Relations+investisseurs/ 2. http://bib.kuleuven.be/files/ebib/jaarverslagen/HOLCIM_2009.pdf 3. http://www.cimfra.fr/NR/rdonlyres/899E53BD-83B3-46E2-AA2011418F01D3A9/0/PresentationCFQ42012Final.pdf 4. Bloomberg
Figure 1
http://earlywarn.blogspot.com/2012/11/cement-production-china-and-elsewhere.html
If we analyze the per capita cement consumption(see Figure 2), it will show huge differences between various regions Countries with high GDP and low growth (which called mature markets) with countries with low GDP, high growth and high consumption of cement (known as emerging markets). Within a country there is a correlation between cement consumption per capita and GDP per capita. This relationship, however, is not linear, the emerging market start with a low per capita cement consumption and when they developed, at higher GDP levels the amount of cement consumption begins to decline and flatten out. But even at higher levels of GDP there are some markets, China and Saudi Arabia, which has a huge consumption.
Figure 2
The increased investment in Infrastructure by Government and mass urbanization in emergent market will increase the consumption of cement for the future (see figure 3), and China will be followed by India (due to both consideration : increasing in per capita consumption and increasing in demography) (see figure 4)
Figure 3
Sustainable cement production (http://www.sciencedirect.com/science/article/pii/S0008884611000950)
Figure 4
Motilal Oswal Investor Conference (http://www.acclimited.com/newsite/finance/Investor_Presentation_august_12.pdf)
Suppliers Cement is a commodity produced using limestone. Since limestone is abundant in most regions of the world, cement is produced locally. Its production requires huge captive investment. The investment is written off after several decades. Cement company invests in a cement plant which has limestone reserves and capacity to run for 50 years. Fixed costs in the industry are particularly high and significant relative to variable costs. Fixed costs generally account for more than 50 % of the overall production costs. The fixed costs are usually sunk costs (once built, a cement plant can serve no other purpose). As fixed costs are high with respect to the variable costs, the break-even point is high. With automation, labor costs have decreased, but energy consumption is the most significant variable cost which conduct the companies to search for alternative : the raw materials are calcinated (heated upto 1450°C) to produce clinker. The fuel required to heat the kiln accounts for almost 50% of the operating costs. Thus profits in the industry are sensitive to the level of utilization of the production capacity. Significant cash flows are generated only when production increases beyond the break-even point, which depends on the efficiency of the plant. A small amount (5-10%) of gypsum (improves the setting time for the concrete mix) is then added to the cooled clinker and ground into a fine "cement" powder. The second most important feature that affects supply is the transportation cost. As a result the sphere of sales is within the radius of 150 -300 km from the site of production. The cost of transportation is highest when it is by road, followed by rail and is cheapest by sea.
Figure 5
http://minerals.usgs.gov/minerals/pubs/commodity/cement/mcs-2012-cemen.pdf
Potential Entrants Competition in the cement industry initially occurs at the local level due to high transportation costs. Competition cannot be based on price as price cuts are easily spotted because of the nature of the product, which is undifferentiated. Competition is hence based on head to head market confrontation focused on price rebates and sales volume, in order to expand market share. Any substantial price cut by a competitor results in a price war. Rivalry also occurs when firms want to enhance their respective competitive advantages on the basis of improved product quality or reduced production costs. Due to high barriers of entry and high consolidation in the industry, competition occurs at multi-point and multi-market level. Historically, cement firms entered different local markets as a business expansion strategy, to take advantage of growing markets, and to hedge against local economic fluctuations. At the regional and national level, this has led to greater concentration and head to head confrontation between a reduced number of large multi-plant firms. Concentration in the cement industry has frequently resulted in a small number of cement groups such as Lafarge, Holcim, Cemex, Heidelberger and Italcementi dominating their domestic markets, and then entering foreign markets where they compete with other local firms.
Substitutes Producing cement uses a great deal of energy, so finding a waste product that can substitute for cement makes good environmental sense. According to Environmental Building News (EBN), as much greenhouse gas is created producing the portland cement used in the U.S. as operating 22 million compact cars. Burning coal to make electric power creates a great deal of waste "fly ash," and a smaller amount of slag is created when producing iron in blast furnaces. Coal fly ash, blast furnace slag and other mineral admixtures can substitute for cement in concrete mixes for buildings, saving energy, disposing of a waste product, improving the quality of the concrete, and reducing cost. Cement substitutes should be distinguished from concrete additives, such as plasticizers and air entrainment agents; and from aggregate substitutes, such as ground glass or ground scrap rubber. The companies are precursor in those product by 3 ways : - For emerging market, Lobbying on standards by adding them in the cement production (controlling the distribution of those substitutes, upstream) -Integrating in the vertical distribution which is Ready Mixed concrete (and controlling the distribution of those substitutes, downstream)
Rivalry among existing firms Technology in the cement sector advances incrementally. No major innovations have been recorded in the last 20 years. The capital investment required for one ton of output is much the same as it was ten years ago. For most quoted companies, the standard valuation technique is enterprise value per ton of capacity. High transportation costs make location an important factor in the pricing policy. The best location combines three advantages: 1. the plant is set up in a quarry with large quantities of high quality and easily workable limestone 2. the plant is close to large urban areas 3. the plant is near a railway line or a river network allowing cement to be delivered to far away places. A cement plant located inland rarely sells outside 300 km radius, and would normally sell the bulk of its production within 150 to 200 km. Six multinational companies, Lafarge (France), Holcim (Switzerland), Cemex (Mexico), Heidelberger (Germany), Taiheiyo (Japan), Italcementi (Italy) have established a foundation of a worldwide network of plants which will eventually dominate the cement industry in most regions of the world (see figure 6) .
Rank
Figure 6
Company/Group
Country
Capacity (Mt/yr)
No. of plants
1
Lafarge
France
225
166
2
Holcim
Switzerland
217
149
3
CNBM
China
200
69
4
Anhui Conch
China
180
34
5
HeidelbergCement
Germany
118
71
6
Jidong
China
100
100
7
Cemex
Mexico
96
61
8
China Resources
China
89
16
9
Sinoma
China
87
24
10
Shanshui
China
84
13
11
Italcementi
Italy
74
55
Cement capacities 2011 (http://www.globalcement.com/magazine/articles/741-top-20-global-cement-companies)
1. 2. 3.
This concentration distinguishes the cement industry from other cyclical sectors because: geographical diversification smoothes out the volatility of the earnings cycle within individual markets rational competitors, who operate by the same rules across a wide range of markets, with similar targets for return on capital and the certainty of retaliation and the impossibility of knocking well-capitalized competitors out of the game means that there is little point in competing on price.
Thus, none tries. Each of the six major international competitors still have clearly identifiable national origins and control a significant share of its home market. Each group also operates production facilities in more than a dozen countries around the world.
When cement multinationals make an acquisition, they are paying for market access. The companies make their money by exploiting demand within a defined geographic territory, in competition with a limited number of other manufacturers. Regrouping the market among several large players makes for a more sustainable rise in cement prices since the main outlet for cement - ready-mixed concrete - is controlled by the cement manufacturers. Lafarge, uses its acquisitions depending on the level of economic development of the country in question, as a bridgehead to introduce the group's product such as aggregates, gypsum and roofing tiles, with the aim to create a building materials division in each country. The emerging markets still offer growth potential in terms of volume and prices and the six sisters generally seek to increase cement production capacity in each market. This generates significant cash flows, and is the main source for financing other activities.
Lafarge and Holcim are both present in emerging countries, except that Lafarge is present in Africa and China with respect to Lafarge (see Figure 7).
Figure 7
Thus, Holcim is the company that has the best positioning, with a presence in over 70 countries. In 2010, the expansion was also successful in the emerging markets of South East: Holcim is represented in all major countries including India, where for two years, with nearly 25% market share it has become the largest supplier, while Lafarge has only 3%. We must expect more closures and restructuring, although Holcim is in comparison with other materials companies, estimated as being financially healthy is geographically located globally and this has been demonstrated by the behavior stock market vis a vis Lafarge and Holcim since 2008 (Figure 8a and b)
Figure 8a -Lafarge
Figure 8b - Holcim
In China, the market share of the six largest producers is unlikely to exceed 15%. Much of Chinese production capacity is based on obsolete technologies and polluting why the government wants to close other plants producing 250 million tons by 2015.
This should make the game of Lafarge as that operate on the market with modern facilities through participation with local producers. Lafarge should also invest quickly in India, to increase its presence and take advantage in catching Lafarge must ensure a practically cash payment of its cement in markets where it is leader (especially in Africa), because the cash will allow the future development by acquisition or construction new plants
Biography 1. http://www.ashoksom.com/6Redesigning_Human_Ressources.pdfhttp://www.cimfra.fr/FR/Relations+investisseurs/ 2. http://bib.kuleuven.be/files/ebib/jaarverslagen/HOLCIM_2009.pdf 3. http://www.cimfra.fr/NR/rdonlyres/899E53BD-83B3-46E2-AA2011418F01D3A9/0/PresentationCFQ42012Final.pdf 4. Bloomberg
