FTC Comes Down Hard on Cement Industry
On July 20, the Federal Trade Commission will finalize a consent agreement to force asset divestiture of two concrete material manufacturers, HeidelbergCement and Italcementi. This action masquerades as a protection of U.S. consumers, but it is the worst type of industrial planning that threatens to protect lower-quality firms and impair competition.
HeidelbergCement and Italcementi, two multinational cement and aggregate (gravel, slag, etc.) producers, decided to merge last year, creating the world’s second largest cement producer. HeidelbergCement claims that the merger will create huge production synergies valued at $196 million by 2018, grant significant benefits from scale, and enable access to many new markets.
The FTC found this merger unsatisfactory. It made the companies sign a consent agreement stipulating the sale of a major cement plant and quarry in West Virginia and 11 terminals in West Virginia, Maryland, Virginia, Pennsylvania, Ohio, and New York to an FTC-approved buyer. The merged companies agreed to the divestiture in order to avoid having their merger blocked by the FTC.
A FTC press release explains that the merger may “harm competition” in certain metropolitan areas by reducing the number of “competitively significant suppliers” from three to two. The FTC also claims that it would become easier for the remaining firms to conspire to raise prices. To protect consumers from potentially higher prices, the FTC argues asset divestiture is necessary.
The FTC’s façade of consumer protection is distressingly thin, as the divested assets would be more likely to decrease prices than harm consumers. According to leading industry analysis database IBISWorld, the U.S. cement industry is highly competitive. Though the market is concentrated, the homogenous nature of the product causes top firms within the United States—as well as foreign exporters—to compete intensely on price.
In the cement industry, size is vital to creating cheap products for customers. Per-unit costs dramatically decrease as operations expand, due largely to the high capital intensity and the necessity of access to quality inputs. The forced divestiture of parts of HeidelbergCement will impede its ability to expand and produce lower-cost cement. The FTC’s actions prevent HeidelbergCement and Italcementi from taking full advantage of the synergies between the companies and the economies of scale that would have reduced costs.
The FTC acted upon a rudimentary and misguided definition of competitiveness in a market as the number of significant firms competing. As firms such as Lyft and Uber have shown, a market with few competitors can still contain immense levels of competition. Competition, contrary to the FTC’s belief, is the action of attempting to surpass others by improving quality or reducing prices, thereby securing more customers, market share, or profits. The merger was an example of a competitive action that would have made customers better off. In attempting to preserve competition, the FTC crippled it.
The FTC acted partially out of a concern that after the merger, the remaining firms could conspire with each other to increase prices. While it is unclear why having two large firms poses a major risk of conspiracy, but having three does not, price fixing is a legitimate concern of antitrust enforcement. However, instead of forcing a business to divest for fear of price fixing, the FTC could have achieved its objective by observing if price fixing takes place, and then penalizing colluding firms accordingly. The FTC already responds to complaints of price fixing. This would be far less economically harmful than exerting executive control over the industry.
The regulatory intervention will damage the ability of the two merged companies to compete by cutting prices. Consequently, more inefficient, higher-cost firms will benefit from the damage to their competitors. Consumers will face higher prices than they would if the FTC had not intervened. Against all evidence, the FTC believes that they can plan the number and size of firms in an industry to achieve the best outcomes.
As usual, the FTC will have its way. Cement is not a hot topic, the interventions were moderate relative to the size of the market, and the merged firms were forced to quietly comply with the FTC’s consent agreement. Nonetheless, it is important to see the actions of the FTC for what they are: industrial planning, not consumer protection.
Nick Archer is an E21 contributor.
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