AWU Submission to the ACCC on the proposed Adeliade Brighton & Boral merger

Below is the AWU's submission to the ACCC opposing the proposed merger of concrete industry companies Adeliade Brighton & Boral Limited.

The AWU is concerned that the proposed acquisition of Adelaide Brighton by Boral may result in a substantial lessening of competition within the meaning of section 50 of the Trade Practices Act 1974 ('the Act').

The AWU's concerns primarily arise from the vertically integrated structure of cement and concrete industries, and how the removal of Adelaide Brighton (as a competitor without effective vertical integration) will strengthen this structure particularly in NSW and Victorian to the detriment of existing competitors and future competition. However, the AWU also believes that if the acquisition were allowed to proceed it may have some pro-competitive effects, particularly in Western Australia.

The AWU is uncertain how this lessening of competition could be overcome. The AWU believes this lessening of competition will be difficult to resolve without significant structural concessions on the part of Boral in the eastern states of Australia. The AWU has no concern with the transaction proceeding with respect to Adelaide Brighton's Western Australian businesses and assets.

A. The Australian Workers' Union

The Australian Workers' Union, Australia's oldest general union, started in 1886 as the Amalgamated Shearers Union. Today, the AWU represents more than 130,000 members across Australia in a diverse range of industries. Our members build railways, work in underground mines, they mill paper and they asphalt roads. They also farm fish and grow tobacco. Some of the major industries in which our members work include: pastoral and agricultural, aluminium, aviation, oil and gas, mining, construction and steel.

It represents a number of workers employed in the cement and concrete industries.

B. Market Definition

The AWU believes that there are a number of markets relevant to the ACCC's assessment of this transaction. For the sake of simplicity, the AWU's analysis will focus on roughly state based markets for cement manufacturing and concrete production. Of these markets, the AWU is concerned about the impact of this acquisition on NSW and Victorian markets.

Other markets potentially relevant to this transaction include upstream concrete aggregate markets, as well as markets downstream from concrete production and distribution markets.

C. Market shares

The table below sets out the AWU's estimates of market shares in the cement distribution markets in Victoria and NSW before and after the proposed acquisition.

State Company Pre-merger market share Post-merger market share
New South Wales Boral 60 -
Cement Australia 32 32
Adelaide Brighton 8 -
Merged entity - 68

Victoria Boral 40 -
Cement Australia 30 30
Adelaide Brighton 30 -
Merged entity - 70
Source: AWU estimates

The AWU believes that similar concentration exists in markets for cement and concrete manufacturing within these states. In any case, in qualitative terms, the merger of Boral and Adelaide Brighton will effectively create a duopoly in the cement manufacturing and distribution, and concrete manufacturing and distribution industries, in NSW and Victoria.

Based on the above market share figures, the merger will result in a substantial increase in market concentration in Victoria, as well as a smaller, but still significant, increase in concentration in NSW. These post-merger concentrations exceed the Commission's thresholds for the exercise of both unilateral and collective market power.

D. Other factors

(i) Import Competition

There is little import competition in the relevant markets, and there is little potential for such competition to emerge.

The AWU notes that the importation of cement is very difficult, and that such imported product is unlikely to effectively constrain the operations of domestic concrete manufacturers post-merger. There are a number of reasons for this. In particular, the costs associated with the transport of cement from overseas are high, and the lead time associated with ordering and shipping cement can exceed two months - meaning that cement cannot be imported quickly in response to changes in downstream demand. Further, the AWU understands from industry sources that in many cases, it is difficult to ensure the quality of foreign cement imports and this further reduces the suitability of imported cement as a substitute for domestic product.

Similar arguments apply in relation to the import of the raw components of concrete, such as lime. Concrete cannot be imported due to its physical properties.

Supporting the argument that imports will not provide an effective competitive constraint on the Australian market, the AWU notes that page 26 of Adelaide Brighton's 2002 Full Year Result Broker Briefing presented by Mr Mark Chellew, Managing Director, on 5 and 6 March 2003 states:

Higher A$ expected to limit scope for price rises, but industry structure reduces threat of imports.

This theme is echoed in a similar presentation by Adelaide Brighton to the Australian Shareholders Association on 19 November 2003:

Rising Australian dollar is having no observable influence on imports at the present time, but are monitoring closely ... Evolving relationship with Global Cement to service remote markets in Australia. Global Cement is the only significant importer of cement into Australia at present besides the majors. The relationship provides access to expertise and facilities in bulk bag import market

It continues on page 16:

Despite rising A$, import competition has not yet materialised. Industry concentration in downstream markets along with rising shipping freight charges from Asia ameliorates the effect of the strong A$.

(ii) Barriers to Entry
(a) Vertical integration

Both Boral and Cement Australia operate vertically integrated businesses. This acquisition will further strengthen Boral's vertical integration within the markets outlined above. The level of vertical integration within the industry will become almost complete if Boral acquires Adelaide Brighton.

This vertically integrated structure is inherently anti-competitive, and will be strengthened by the merger. This in turn will in all likelihood reduce existing competition at all function levels in the industry downstream from the cement manufacturing industry.

In addition, this vertically integrated structure will hinder potential new entrants to the concrete industry. Entrants at any given level in the supply chain will be constrained by the fact that the majority of their potential suppliers and/or customers are controlled by vertically integrated companies.

The AWU believes that it is the strengthening of the vertically integrated nature of the industry, more than any other factor, that gives rise to the greatest potential for a substantial lessening of competition.

(b) Economies of scale and sunk costs

The cement and concrete industries are subject to high economies of scale. It is not feasible for a new entrant to incrementally build capacity, and significant investment must be made in large scale production plants.

The requirement that large scale facilities be developed for the purposes of cement and concrete manufacturing means that a new entrant will face significant sunk costs when entering the industry. These sunk costs will act as a significant deterrent to new entry when combined with the other factors outlined in this submission.

(c) Conclusions on barriers to entry

The barriers to entry in the relevant markets are high, and will be increased by allowing Boral to acquire Adelaide Brighton. In particular, the level of vertical integration in the industry will be further increased, and this combined with high economies of scale and sunk costs will deter new entry into the relevant markets.

(iii) Countervailing Power

The AWU does not believe that any acquirer of goods or services from the merged entity possesses countervailing power.

(iv) Vigorous and Effective Competitor

Adelaide Brighton is a vigorous and effective competitors in the markets in which it operates. Adelaide Brighton drives competition at the cement manufacturing level of the industry, as well as ensuring competition in downstream concrete markets. Further, its relatively recent entry into NSW, and its success at gaining market share against the incumbents, further demonstrates its importance as a vigorous and effective competitor in the industry.

Further, Adelaide Brighton's removal from the market will not only remove a vigorous and effective competitor in cement manufacturing, but may also prejudice the ability of other vigorous and effective competitors in various downstream markets to continue with their operations. Following Adelaide Brighton's removal, and given the level of vertical integration in the industry, downstream suppliers may face increased difficulties obtaining concrete product supplies from the incumbents.

(v) Prices and Profit Margins

The AWU believes that, following the acquisition, that Boral may be able to increase prices, or decrease service levels, in the relevant markets outlined above. The concentration levels in the market, coupled with high barriers to entry, mean that incumbents may seek to engage in parallel conduct, or collusion (tacit or otherwise) to increase prices.

In this respect the AWU notes that have been a number of successful prosecutions against concrete and cement companies for collusive conduct, and this highlights the likelihood that such arrangements could arise in the future should the acquisition proceed.

E. Competition Analysis

Based on the information outlined above, the AWU believes that the acquisition of Adelaide Brighton by Boral may result in a substantial lessening of competition in a variety of markets.

The merged entity will have high markets shares in the relevant markets, and these markets will be extremely concentrated - at most functional levels Boral and Cement Australia (and their associated entities) will have a duopoly. In relation to each market, the ACCC's concentration thresholds for both the potential exercise of unilateral and collective market power will be crossed.

Further, these markets are characterised by high barriers to entry, and in particular by extreme levels of vertical integration that will hinder existing and potential future competition. Further, given the relatively low incidence of imports in the industry, and the difficulties and costs associated with importing cement into Australia, it is similarly unlikely that the merged entity will be constrained by actual or potential import competition.

F. Possible solutions

The AWU believes that the structure of the cement and concrete industries are such that the acquisition of Adelaide Brighton by Boral will permanently damage competition within the industry. While it is possible that conditions could be placed on the transaction in order to relieve its likely anti-competitive impact, the AWU is uncertain what measures could be implemented to ensure the protection of competition.

At minimum, the AWU believes that, for the transaction to proceed, Boral should make structural concessions (i.e. divest certain assets or businesses) in NSW and Victoria in both the cement and concrete manufacturing and distribution markets.

Should the ACCC decide that divestment be required to allow the transaction to proceed, the AWU would appreciate the opportunity to provide further comment on possible divestiture options.

G. Conclusion

The AWU believes that the proposed acquisition of Adelaide Brighton by Boral may result in a substantial lessening of competition in various markets in the NSW and Victorian concrete and cement industry. In particular, this acquisition will substantially increase market concentration, and raise barriers to entry into the industry. This will in all likelihood hinder new entry and restrict existing competition in the industry.

Bill Shorten
National Secretary
The Australian Workers' Union