Cement in a fix?: Insight - cement pricing

With the inner workings of the UK construction industry moving fast up the news agenda thanks to projects like Crossrail and the Olympics, there is a renewed determination to clean up its act.

Although a wide-ranging parliamentary review of the sector is about to be undertaken by the Trade and Industry Select Committee, simmering quietly under the surface is potentially a much bigger crisis waiting to happen.

Over the past two years, the Office of Fair Trading (OFT) has been investigating bid rigging by construction companies in England and has raided the premises of 57 firms. It has uncovered evidence of foul play in thousands of tenders, with a combined estimated value of almost £3bn.

The OFT recently handed out £2.3m in fines to 13 roofing contractors for collusive tendering, while the European Commission has laid formal charges against European flat glass suppliers - including Pilkington - alleging the existence of a cartel.

Now, having raised interest through the recent problems of supply shortages and rocketing prices, could cement manufacturers be next under the microscope?

The market has consolidated markedly over the past 20 years, with multi-national cement manufacturers tightening their grip on supply by purchasing smaller cement producers, concrete makers and quarries.

Some have said the multi-nationals form one of the most powerful cartels in the world, second only to OPEC (Organisation of the Petroleum Exporting Countries).

Indeed, there are numerous examples of multi-national cement manufacturers around the world using their muscle to maintain their monopoly. In a United Nations conference on trade and development in 2005 it was recognised that "cement cartels exist almost everywhere More generally, construction materials and construction services seem to be fertile ground for cartel operators."

Competitive pricing

In the UK, private cartel-buster Cartel Damage Claims (CDC) believes manu-facturers have a case to answer over the competitiveness of cement pricing. After being called in by the British Aggregates Association, it alleges there is discriminatory pricing in the UK and is actively seeking proof from independent concrete manufacturers to support its claims.

The organisation is currently helping 29 clients in Germany enforce a claim for at least £137m based on "excessive prices". The case caused a sensation in 2003 when the Federal Cartel Office imposed record-breaking fines totalling £450m on Lafarge, Cemex (formerly Readymix), HeidelburgCement, Schwenk, Dyckerhoff and Holcim. Following the prosecution, the price of delivered cement in Germany dropped to half that being paid by independent concrete suppliers in the UK.

After the ruling, the then chief executive of Lafarge, Betrand Collomb, told French financial daily Les Echos that the company had participated in "unacceptable activities" in Germany's cement market. Interestingly, just two months prior to the decision Lafarge had also been fined around £170m by the European Commission for being part of a conspiracy to fix plasterboard prices.

To date, investigations into cartel activity in European cement markets have been undertaken in France, Ukraine and Hungary. A decision is also imminent in a case in Poland, where last year offices and other premises belonging to eight cement producers were raided in the largest operation in the history of the Polish anti-monopoly office. In total, 13 locations were searched, including Cemex Polska in Warsaw, Lafarge Cement in Malogoszcz, Polish Cement and the Association of Cement Producers. The Office of Competition and Consumer Protection said that numerous signals indicated the possibility of a mechanism being in place since the 1990s where major Polish cement producers were engaged in price fixing and limiting supplies.

There are also precedents in Romania (in June 2005 £18.4m in penalties were imposed on three entrepreneurs), Argentina (in August 2005 six companies received fines totalling more than £50m) and in Taiwan (in December 2005 three companies paid £3.2m). In each of these cases, the fines imposed were record amounts.

Meanwhile, in 2004, a ship containing Russian cement was stuck at a Mexican port for more than two months and barred from unloading its cargo. Local producers, including Cemex, cited safety concerns and technicalities to keep the cement out of what some considered to be an overpriced market.

Under scrutiny

So with all this worldwide activity, should cement suppliers in the UK be awaiting the cartel prosecutor's tool of choice - the dawn raid?

Some industry insiders believe the market may already be under examination by the OFT and possibly the European Commission, while CDC continues to collect data which, it believes, will reveal discriminatory pricing.

Anecdotally the market is as tightly controlled as Iran's borders. Richard Whish, professor of law at Kings College, London, and an expert in cartels told representatives from the Competition Commission in 2001: "The first thing I say to students is, every system of Competition Law will deal with cartels and the first thing for any regulator to do is to go out and find the cement cartel... The only countries in which I have been unable to find the cement cartel is where there is a national state-owned monopoly."