The giant cement industry merger: what will it change?

The giant cement industry merger: what will it change inTurkish cement market?

In April last year Lafarge of France and Holcim of Switzerland, the world’s two biggest cement manufacturers, announced plans to merge.

The $21 billion would see Holcim offer nine of its shares in exchange for ten of Lafarge’s. This was the second largest merger of 2014, and the biggest the building materials industry had ever seen.

The new company, ‘LafargeHolcim’, will have an annual production capacity of 380MioT, making it the world’s largest cement manufacturer. Germany’s HeidelbergCement Group will be the second biggest, with a production capacity of 110MioT.

LafargeHolcim will be headquartered in Zurich and its shares traded on both the Zurich and Paris stock exchanges. Initially it looked like Bruno Lafonte, the Lafarge CEO credited as the main architect of the merger, would be named CEO of the combined entity. However following opposition from Holcim and a disparity in performance from both companies, it has been decided that Eric Olsen, Lafarge’s COO will take on this role. Olsen has French-American dual nationality and is one of Lafarge’s younger managers. The merger is set to be finalised in July this year.

I believe that this merger needs to be evaluated on three fronts: what this means for Lafarge and Holcim, what this means for the global cement industry and what this means for Turkey’s domestic cement market and exports.

Looking first at Lafarge and Holcim, it is clear that this merger will create the world’s largest cement company in terms of production capacity. It will have operations in more than 90 countries and control a 20% share of the global market, excluding China.

It is hoped that the merged entity will be able to generate stronger cashflow and higher profits by creating efficiencies through a single management structure, shared technology, maintenance and repair centres and greater sales and negotiation leverage.

However it should be noted that the ability to achieve these efficiencies is dependent on the effective management of the merger process. History shows us that such mega-mergers are fraught with difficulties, with examples like Chrysler-Daimler providing cautionary tales. It is certainly not the case that all big mergers are doomed to failure, though in the case of LafargeHolcim the different management styles, disagreement on financials and reassignment of nominated CEO, will all prove challenging.

Looking at how this merger will affect the sector as a whole, I do not expect to see any radical change, seeing as the primary aim of the deal is to find cost efficiencies and optimise distribution channels.

On the other hand, the IMF’s latest global growth forecasts indicate that developed economies, principal among which is the US, are showing strong signs of recovery. Meanwhile developing economies are slowing down, with actual growth rates expected to come in below prior estimates.

The combined LafargeHolcim is not well positioned for this new macroeconomic environment. It does not hold a dominant position in the US, where a fast-recovering economy is forecast to boost cement consumption. PCA anticipates cement imports to the US will increase 189% between 2015 and 2019. LafargeHolcim also lacks strength in Africa, the world’s fastest growing region.

By contrast, HeidelbergCement is very well positioned to seize emerging opportunities in both the US and Africa. The Group is present in eight African countries and has 10MioT production capacity in the region.

Because LafargeHolcim only holds a truly dominant position in a handful of regions such as the Indian Ocean, Australia and New Zealand, we can conclude that the merger will not precipitate any radical change in the sector.

In the case of Turkey, the three largest cement companies, Akcansa, OYAK and Limak, were interested in the divestments Lafarge and Holcim would have to make in order to comply with competition requirements. However Ireland’s CRH acquired all divestments as a single package.

LafargeHolcim has no Turkish manufacturing capability, having sold its Eregli unit to Turkey’s Sanko Holding. The merger will therefore have no real direct effect on the Turkish domestic market, however the same cannot be said for exports.

The merged company has considerable excess capacity in Greece, Spain and Morocco, as well as existing distribution channels in the region, which will suppress Turkish exports.

It is of great importance to have a strong, international ally that will enable effective competition in the face of this new pressure. This will be a significant factor affecting future profitability. Companies like Akcansa, backed by international marketing capability of HC Trading and with access to the sustainable distribution channels of a global company, are well positioned compared to other players in the market today.