Fall 2004 - National Ready Mixed Concrete Association

ufacturers are responsible for approximately
75 percent of U.S. production (See Table 1).
Table 1 - TOP TEN U.S.
CEMENT PRODUCERS
Lafarge North America
Texas Industries
Holcim (U.S.)
Essroc Italcementi Group
Cemex USA
Lehigh Cement
Buzzi Unicem USA
California Portland Cement
Centex
Ash Grove Cement
Cement is an effectively consolidated
market. This is not to suggest that the list of
companies found in Table 1 will remain
unchanged, but rather to suggest that the
relatively high degree of concentration of
production means the marketplace will generally
exhibit the behaviors of a consolidated
industry.
The next historic link in the vertical integration
chain occurred in the aggregates
industry. Beginning in the 1980s, several
strategic purchasers emerged and either
began or greatly enhanced their acquisition
activities in the sector. The exact level of
consolidation of the aggregates industry is
uncertain and varies significantly from market
to market. However, one barometer of
consolidation is that on a national basis, the
top 20 producers out of 5,000 total producers
control approximately 35 percent of production
at present. Furthermore, as shown
in Table 2, the top four producers control
approximately 25 percent of total production.
Based on these statistics, we believe
that additional consolidation will occur in
the aggregates industry.
Table 2 – TOP FOUR U.S.
AGGREGATE PRODUCERS
Vulcan
Martin Marietta
Hanson
Oldcastle
The next logical extensions in the vertical
integration chain downstream from aggregate
operations are hot mixed asphalt and
ready mixed concrete companies. In the
early 1990s, several asphalt companies were
purchased. Then in the mid- to late-1990s
ready mixed operations were sought. The
degree of consolidation in asphalt is similar
to aggregates in that the top 20 companies
presently control approximately 35 percent
of the market. In the ready mix industry, the
present level of consolidation is measured by
the top eight producers controlling approximately
20 percent of the total yards sold in
the United States.
Of course, there have been variations of
theme in the marketplace in that there still
exist “pure” cement producers, “pure” aggregate
producers and “pure” ready mixed concrete
operations. As a general trend, though,
it is difficult to argue that the strategy of vertical
integration has been, and still is, a driving
force in ready mixed concrete
consolidation.
Another force in the consolidation of the
ready mixed industry is the capital markets.
Once consolidation begins in a business sector,
outside capital is usually drawn toward
that sector. This phenomenon was especially
pronounced during the late 1990s when not
only were international publicly-held companies
attracted to invest in ready mix (aka,
strategic buyers), but we also witnessed the
more direct outside capital investment of
organizations who sought to create “roll-ups”
(aka, financial buyers).
With the general decline in the capital
markets from 2001 to 2003, the appetite for
investing in consolidation activities also
declined. This decline impacted the financial
buyers more than it did the strategic buyers.
Access to capital is critical to the financial
buyer, whereas, the strategic buyer was still
opportunistic to acquisitions that would further
extend their vertical integration strategies
in existing markets or in new
geographies.
In summary, the answer to “why is consolidation
occurring in the ready mix industry”
is two-fold. First, a predominant
business strategy of vertical integration is
being pursued. Second, outside capital has
been attracted to the sector. Is there any
chance that both of these factors will vanish
and consolidation will stop occurring The
answer is maybe. The strategy of vertical
integration has been deemed a “failure” in
some industry segments and has been
undone. This is what drove the significant
divestitures, spin-offs and shut downs from
major U.S. companies beginning in the mid-
1980s. It is conceivable that firms could
determine in the future that being a good
cement producer or a good aggregates producer
does not automatically mean that they
will be a good ready mixed concrete producer
as well. As for the inflow of capital, that
will continue as long as sufficient opportunities
for adequate returns are present. But,
given the recent drop in ready mixed profit
margins, this could “dry up” the capital
inflow into the industry.
Even so, if both of these factors were to
come about, it does not mean that the
industry will “de-consolidate” and go back
to what it looked like in the 1970s. Business
factors such as environmental laws, employee
issues and general business conditions are
not the same as they were 30 years ago. Furthermore,
some level of consolidation always
occurs as profitable companies generally
invest in the same industry as long as opportunities
are available.
What Happens in a
Consolidating Marketplace
We explored why consolidation is occurring.
Let us take a look at the implications of
this activity. In a consolidating marketplace,
the following activities are typically
observed:
• Mergers and acquisitions
• Difficulty generating significant
“organic” growth (i.e. – it is easier to
buy it than to build it)
• “Rationalization” of market positions of
larger players by either service offerings
and/or geographies
• Capital investment to drive down costs
and increase productivity – strong
motivation to become the low-cost producer
• Barriers to entry of new participants
rise
Each of these elements is present to some
degree in the ready mixed industry. Let us
examine each element in more detail.
Mergers and Acquisitions and Difficulty
Achieving Organic Growth: The first two
characteristics are reviewed together because
they are quite naturally tied together. If it is
easier for a firm to buy than to build, the
natural outcome will be increased acquisition
activity. Further pushing this is the
availability of motivated sellers. The ownership
of privately held companies in the United
States is experiencing a dramatic
transformation that will continue throughout
the next 10 years, primarily due to a
demographic “bubble,” which is just now
beginning to pass through our society. For
the vast majority of privately held companies,
they are almost to the end of either
CONCRETE in focus ı 41