After 16 months of investigation, the Competition Commission (CC) recently published its provisional findings on the aggregate, cement and ready-mix concrete markets. The CC concluded that no significant competition concerns were raised in the aggregate and ready-mix markets. It did, however, raise concerns that competition was harmed by the structure and behaviour of the cement market.
This note starts by considering the approach adopted by the CC in proposing remedies in this investigation and considers the possible wider implications of its findings. It goes on to identify the CC's key concerns in relation to the cement market and discusses the measures which the CC is considering to remedy the perceived failure of competition.
The Competition Commission's approach
This is only the second market investigation that has resulted in the CC recommending divestitures (the first being the BAA Airports investigation in 2009) and as such may mark a move towards a more aggressive approach to market failure remedies. Although the cement market is highly concentrated, the concentrations are a far cry from the virtual monopoly position enjoyed by BAA. These concentrations are far from unique and as such this may be the first in a series of investigations which result in divestiture remedies.
The practice of pre-announced 1 January price rises which is prevalent in many industries, particularly other industries within the construction sector, may need to be reconsidered. The CC placed no significance on the fact that the practice is so widespread in concluding that it was anti-competitive.
The CC not only concluded that vertical integration was relevant in sealing off the market by creating higher barriers to entry, it also considered how information collected by downstream operations can help facilitate co-ordination in upstream markets.
It remains to be seen whether the Office of Fair Trading will investigate collusion between cement producers under the competition rules. There have been a number of cases in recent years where competition authorities across Europe have investigated the construction industry and found breaches of competition law. The European Commission continues to investigate practices in the markets for cement and related products and a line of communication established between the CC and the Commission will mean that the CC's findings cannot be ignored. Related markets, such as the market for asphalt, may also find themselves open to greater scrutiny by the UK authorities.
What features of the cement market caused concern?
The CC's report identifies a number of factors which raised concerns about competition in the cement market. The most notable of these are listed here.
Key structural concerns:
- Concentration of market share – the cement market is very highly concentrated, with four firms accounting for approximately 90 per cent of the market.
- Market characteristics – cement is a largely homogenous product supplied to a relatively small number of customers, meaning that relative market share, customer orders and pricing policies can be fairly easily ascertained. This leaves the market vulnerable to co-ordination, which can easily be monitored.
- Vertical integration – the major cement producers consume a significant proportion of the cement they produce in their own downstream operations, namely ready-mix concrete production, which could for example deter new entry.
- Limited competition from imports – the ability of UK producers to react to foreign imports by undercutting imported cement in the short run serves as a discouragement to importers and ensures that imported cement remains only a limited competitive constraint.
- Barriers to entry – the report found that the capital cost of a cement plant was likely to be in the region of £200 million (most of which is sunk) and that against the backdrop of uncertainty of demand such costs are likely to inhibit new market entry.
Key conduct concerns:
- Price announcement letters – the CC was concerned with the practice of circulating price announcement letters prior to scheduled price increases. It stressed that, although commonplace in a number of industries, this does not prevent the practice from having anti-competitive effects, particularly through increased price transparency.
- Cross-selling – the CC expressed concern about the practice of the major producers buying cement from each other, namely that it may increase price transparency and/or refusal to supply may be used as a tool to ensure discipline in co-ordination.
- Parallel pricing/price leading – the report notes a "very high correlation" in prices over the investigation period.
Key outcome concerns:
- Profitability – the CC was particularly concerned by the ability of each of the firms to maintain profits in excess of costs of capital throughout the period in spite of a slump in demand of 36 per cent from 2007 to 2009.
- Margins – the CC expressed concern that variable profit margins of UK producers had remained stable throughout the period despite (i) increases in variable costs, (ii) falls in demand and (iii) excess capacity. This is not the expected outcome in a well-functioning market given the circumstances.
What solutions is the CC proposing?
The CC has proposed various possible remedies, as follows:
- Divestiture of cement production capacity by one or more of the top three cement producers
Any divestment required would likely be from Lafarge, but the CC invited comments on divestment by Hanson and/or Cemex. By this measure, it hopes to introduce an additional player into the market, thus reducing the incentives and ability for co-ordination in the market.
- Divestiture of ready-mix concrete plants by one or more of the top three cement producers
This aims to address the concerns relating to scope for cross-sales between the major producers, thereby reducing price transparency and the ability to utilise cross-sales to rebalance market shares and discipline deviation from co-ordination. Additionally, by increasing the amount of cement that is sold to independents, this remedy aims to bolster countervailing "buyer power".
- Creation of a cement buying group(s)
The CC proposes to introduce either regional or national buying groups to represent independent concrete producers in order to strengthen their bargaining position in purchasing cement.
- Price announcement behaviour: prohibition on GB cement producers sending generalised cement price announcement letters to their customers
This remedy aims to reduce price transparency/leadership in the market to reduce the capacity for co-ordination. The restriction proposed only refers to "generalised" increase letters and not to customer-specific letters detailing specific price increases.
- Restrictions on the disclosure of cement market data by the UK Government and by GB cement producers to private sector organisations
The proposal involves BIS publishing its monthly data on cement production only after a time lag which renders the information irrelevant to the producers in calculating their current market share. To reinforce this remedy, a prohibition on supplying the information to private sector organisations is also proposed.
- Recommendations to the UK Government/European Commission on the publication of GB cement producers' verified emissions data under the EU ETS
The proposal suggests one or more of the following changes: (i) increased delay in publication, (ii) exclusion of cement plants from publication, (iii) aggregation of emissions from all UK cement plants and (iv) aggregation of emissions from cement plants with other UK ETS sectors.
The consultation on the CC's provisional findings and possible remedies has now closed. Its final report should be published on or before 17 January 2014, when the statutory two-year review period expires. It may be that the report will be published ahead of schedule in December. This will depend in part on the number and content of responses it has received on its findings to date and the final submissions of the parties under investigation.