Vital deal
Expect a major change in market dynamics following the acquisition by the San Miguel Corp. (SMC) group of an 85.7 percent stake in Holcim Philippines, the local arm of Switzerland-based LafargeHolcim Ltd. and also the biggest cement producer in the Philippines.
At present, the top three domestic cement producers – LaFarge Holcim, Republic Cement and Cemex – which are all affiliated with foreign multinational companies, hold more than 70 percent of the local cement market.
To add to this, the Philippines is also the third largest cement importer in the world. In 2018, the country became the only net importer of cement among the five large countries in the ASEAN, importing some 8.4 million tons, or 25 percent of domestic capacity. Imports accounted for 35 percent of demand, while the remaining 65 percent were manufactured locally. Because of the entry of heavily subsidized imports from countries like Vietnam, cement prices have been going down, forcing the Department of Trade and Industry to impose provisional safeguard duties of P8.40 per bag of imported cement.
The purchase of a controlling stake in Holcim Phils. by SMC’s wholly owned subsidiary First Stronghold Cement Industries Inc. not only prevented a vital ingredient in the Philippines’ bid to become an infrastructure power from falling in the hands of the likes of Anhui Cement of China, Japan’s Taiheyo Cement and Thailand’s Siam City Cement. More importantly, the $2.5 billion deal could possibly bring back the cement industry in the hands of Filipinos.
The importance of cement to the economy is beyond dispute. It is the construction ingredient that binds other building materials together. It is used in the production of many structures that make up the modern world like buildings, bridges, runways, harbors, roads.
Imagine what would happen if we are left to the whims and caprices of foreign cement players and the volatility of foreign cement prices.
This is probably the reason why all around the ASEAN region, local players are reclaiming control over their respective cement industries due to its critical role in national development. In Indonesia, Vietnam, Malaysia, Thailand, the cement industry is dominated by local players.
With the Philippines clearly behind in terms of infrastructure development, one of the first acts of President Duterte was to launch the Build Build Build program which sought to accelerate infrastructure spending. Poor infrastructure drives away prospective foreign investors, who could have brought in much-needed investments that could have created new jobs for Filipinos. Even traffic congestion in Manila is caused by poor infrastructure, according to a study by the Japan International Cooperative Agency, which carries with it a daily price tag of P2.4 billion.
In an article in forbes.com published last year, it was noted that under President Duterte, the country is experiencing an infrastructure boom unseen since the time of Marcos. After all, over the next decade, the government is embarking on an ambitious $180 billion infrastructure spending program in order to transform the economy.
And because any infrastructure project requires lots and lots of cement, we have to be assured of an adequate and sustained supply of this construction material, otherwise, these projects will experience delays and cost overruns to the detriment of our government bid towards inclusive economic development.
The deal between SMC and LafargeHolcim could not have come at a better time, especially now that the Build Build Build program has entered a critical phase and with many projects already off the ground.
SMC, under Ramon Ang, is also one of the largest infrastructure firms in the country, responsible for large-scale projects such as the MRT-7, Skyway Stage 3, the Tarlac-Pangasinan-La Union Expressway, the NAIA Expressway, the SLEX TR4 extension to Quezon province, and the Southeast Metro Manila Expressway or Skyway 4 projects and soon, the New Manila International Airport.
The deal is seen to give the SMC conglomerate a head start in a bid to grow its footprint in the country’s thriving cement industry that is fueled by aggressive construction spending from both the private sector and the government. And according to LafargeHolcim, SMC not only gave the best offer, it is also the one that is in the best position to grow the business. After all, SMC has the capability and resources to take Holcim’s operations to a higher level.
Even the Department of Trade and Industry expects significant consumer benefit resulting from the deal. Trade Secretary Ramon Lopez said they expect the acquisition by SMC of a majority stake in Holcim to result in lower prices of locally produced cement due to synergies in operations and more economies of scale that could bring down cost of production.
Lopez noted that the continuing imports of cement, over which the DTI had already imposed a temporary safeguard duty, can still provide a healthy competitive environment for all the players.
So while the deal has yet to secure the go-signal from the Philippine Competition Commission since it is considered as a notifiable transaction under the Philippine Competition Act, we do not expect any problems since as no less than the DTI head has observed, competition in the cement industry is still tough due to the spate of cement imports. Even the competition law recognizes the fact that what is primordial is public interest and consumer welfare and benefit and that mergers and acquisitions can be allowed by the PCC if the gains in efficiencies are greater than the effects of any limitation on competition that will result or likely to result from the acquisition.
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