Cement Demand Paves Path to Takeovers [WSJ]
Latin American Firms Buy U.S. Concrete Suppliers to Cash In on Construction Boom
By JOEL MILLMAN
May 23, 2006; Page A8
While political head winds have chilled some foreign investment in the U.S. -- Chinese and Dubai companies provided the highest profile cases -- money from Latin America is proving to be more than welcome.
Beneath the building boom that continues to reconfigure skylines across America, a wave of buyouts originating south of the U.S. border is reshaping the industry that provides infrastructure's fundamental raw material: cement. The recent settlement of a longstanding dumping complaint against Mexican producers is just one of several factors driving the deals as producers look to consolidate their hold on markets in the U.S., capitalizing on an ability to circumvent transport bottlenecks and on U.S. companies' willingness to sell out for considerable gains.
With the U.S. cement business dominated by foreign behemoths -- France's Lafarge SA, Switzerland's Holcim Ltd. and Mexico's Cemex SA -- niche players are swarming into local markets by acquiring concrete companies considered too small to attract the interest of bigger multinationals. While this lowest of low-tech goods lacks the caché or controversy that might red-flag deals in other sectors, the incursion of foreign players into the U.S. cement market could have implications for the costs of everything from houses to public-works projects.
In addition to increasing cement exports, companies such as Brazil's Votorantim Cimentos SA and Colombia's Cementos Argos SA are also buying North American assets, especially concrete pourers, whose fleets of mixing trucks deliver wet concrete to construction sites.
May 1, Mexico's Grupo Cementos de Chihuahua SA, known as GCC, began constructing a $220 million cement plant outside Pueblo, Colo. -- one of four U.S. acquisitions the company has made in the past six months. Days earlier, GCC announced the $271 million takeover of two Tulsa, Okla., companies, Mid-Continent Concrete Co. and Alliance Transportation Inc., whose combined assets include a 250-mixer fleet and 30 concrete plants. Those moves followed closely GCC purchases of concrete groups in Minnesota and South Dakota. GCC also bought a coal mine in Durango, Colo., to fuel its U.S. cement plants.
Cheap cement, most of it produced in Mexico, has given GCC a competitive edge as the company moves into concrete. "We have the lowest costs in the region," GCC Chief Executive Manuel Milan says. He expects the company to make more purchases this year.
Latin America's push to colonize the U.S. construction business is driven by several forces. Market demand is one -- all those new housing developments require roads, overpasses and shopping malls nearby. U.S. cement consumption has risen to nearly 130 million metric tons in 2005 from 110 million metric tons in 2000, with imports steady at 20% to 25% of the market. Prices have increased to about $90 a metric ton from $78.50 in that same period.
"It's a seller's market for cement right now," says Hendrik van Oss, an economic geologist for the U.S. Geological Survey.
China also plays a role, not as a competitor for cement -- it makes its own or imports it from Southeast Asia -- but for shipping fleets. Chinese demand for everything from copper ore to fish meal to soybeans ties up long-distance shipping capacity. That has created an opening for Latin American manufacturers with their own fleets, such as Colombia's Cementos Argos, which shipped 2.6 million metric tons of cement across the Caribbean to North America in 2005.
"We have our own logistics network of ports and fleets, and can source cement from different countries like Colombia, Venezuela and Panama," Argos spokesman Andrés Londoño says. That flexibility allows the company to avoid transport glitches or meet sudden spikes in demand.
In November the company decided to increase its U.S. footprint. Argos paid $245 million for Southern Star Concrete Co. of Dallas, and $12.5 million for Concrete Express of Savannah, Ga.
"We made over six times our investment in Southern Star," says Barry Twomey, partner of TGF Management of Austin, Texas, which handled the sale to Argos. TGF bought the concrete group for $77 million in 2002, paying about $15 a cubic yard of production. With cement prices rocketing, and the Colombian group itching to send more product north, TGF sold its holdings for nearly $50 a cubic yard.
Last month Ready Mixed Concrete Co., Raleigh, N.C., entered Argos's U.S. group in a $435 million transaction. All told, the cement maker has invested $710 million in the U.S., making it the U.S.'s largest investor from Colombia.
Argos recently acquired land for a cement terminal in the Houston Ship Channel to match intake terminals for its exports the company operates in North Carolina and Georgia. The imports will go directly to the concrete pourers Argos just acquired.
The South Americans' moves repeat a strategy pioneered by GCC a decade ago. Located just south of the Texas-Mexico border, GCC has been pushing up the Rio Grande corridor from El Paso since the mid-1990s. GCC in 2001 bid for the only state-owned cement works still operating in the U.S., Dacotah Cement of Rapid City, S.D. Founded in 1922 by prairie populists, Dacotah was overseen by state legislators before being privatized. GCC paid $252 million for the company, and since has invested an additional $30 million in plant modernization.
GCC's recent moves come after the resolution in March of a 16-year fight between U.S. and Mexican cement producers over allegations that Mexico was dumping cement in the U.S. to gain an unfair advantage. Since 1990, the U.S. has imposed a stiff, $26-a-ton duty on Mexican cement, a move that prompted the first purchases of assets north of the border by Mexican producers, led by Cemex. Today, Cemex is the U.S.'s largest cement manufacturer, with about 15% of the market.
This spring the U.S. agreed to drop import duties to $3 a ton, and Mexico agreed to a temporary export quota. Both regulations are to be scrapped in 2009. The deal allows GCC to add about 200,000 tons a year to its exports to the U.S., product it will feed into its new holdings in New Mexico and Colorado. The deal also reimburses about $40 million in duties deposited to U.S. Customs during the years the settlement was being negotiated. |
