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The European Commission’s decision to investigate Duna-Dráva Cement’s (DDC) purchase of Cemex Croatia sticks out in a busy news week. There have been a few noteworthy news stories this week from the Indonesian government making preparations to fight overcapacity, LafargeHolcim retreating from Chile, Cemex restructuring its management in Colombia after investigations into a land deal and the announcement of merger plans between two of the larger refractory manufacturers. Yet the commission’s probe is a response to what may be in effect a ‘land grab’ by DDC. How on earth did HeidelbergCement and Schwenk, the joint-owners of DDC, think they were going to pass this one past the relevant competition bodies?!

As the commissions describes it, the “proposed transaction would combine Cemex Croatia, the largest producer in the area, and DDC, the largest importer.” So far, so bad. Then add the observation that Cemex Croatia and LafargeHolcim control all the cement terminals in ports along the Croatian coast. Cemex has three cement plants in the south of the country with no nearby competition. Giving the owners of DDC those assets ties up the market southern Croatia nicely. Understandably, the European Commission has concerns.

Croatia has five cement plants. LafargeHolcim runs a 0.45Mt/yr plant at Koromačno and Nasicecement run a 0.6Mt/yr plant at Nasice. Cemex’s three plants are all in the south near Split within about 10km of each other. When Global Cement visited in late 2014 Cemex Croatia told us that the plants were so close together that the company considered them as one plant. The sites also share one quarry for their raw materials. Only one of three plants, Sv Juraj the largest, has a bagging unit and Sv 10 Kolovoz was mothballed due to poor market demand. Together the plants have a cement production capacity of 1.92Mt/yr. This gives Cemex 65% of the market by production capacity.

Describing the three plants as one certainly makes sense for a company that might have been considering selling them. However, it is a fair comment given the close proximity of the plants to each other and the joint-capacity below that of some of the larger single site multi-kiln plants around the world. In this sense, the real questions for the European Commission will be how much of a dent to competition will it make to hand over the area’s main importer to the area’s main producer?

Graph 1: Cement consumption in Croatia, 2011 - 2015 (Mt). Source: Croatian Bureau of Statistics.

Looking at the national cement market since 2011 in Graph 1 using data from the Croatian Bureau of Statistics, sales volumes fell to a low in 2013 and have picked up since then, although not to the same levels. Prior to this cement sales halved from 2008 to 2013. Under these kinds of conditions Nexe Grupa, the owner of Nasicecement, filed with pre-bankruptcy settlements in 2013. HeidelbergCement expressed interest in the cement assets around this time, although nothing eventually happened. Imports of cement grew by 11% year-on-year to 312,000t in 2015 from 280,000t in 2014. This compares to a 1% increase to 2.36Mt in domestic cement sales in 2015.

As the commission suggests, combining the region’s biggest producer and its biggest importer seems like a recipe for reduced competition and inflated prices. This could be mitigated, in theory, if DDC decided to flood the region with imports from HeidelbergCement’s new assets from Italcementi once it completes its purchase of that company. Although a dominant player in a region undercutting its own prices seems far fetched. Theoreticals aside, it seems very unlikely that the European Commission will let the purchase go ahead without taking some sort of action.

Croatia: The European Commission has opened an investigation to check whether the proposed acquisition of Cemex Croatia by HeidelbergCement and Schwenk is in line with the European Union (EU) Merger Regulation. The commission has concerns that the proposed takeover may reduce competition for grey cement in Croatia. It will make its decision by 23 February 2017.

"The construction sector, like any other sector, needs competition. As cement is an essential part of the sector we need to make sure that consolidation does not lead to higher prices for construction companies and ultimately consumers in Croatia," said commissioner Margrethe Vestager.

The commission has concerns regarding the supply of grey cement in southern Croatia, including Dalmatia in particular, where Cemex Croatia operates three cement plants in Split and faces competition from DDC's imports from Bosnia and Herzegovina, which is not an EU member. The proposed transaction would combine Cemex Croatia, the largest producer in the area, and DDC, the largest importer. The commission's initial investigation indicates that the proposed transaction may remove a significant competitor from an already concentrated regional market.

The remaining actual or potential suppliers may exercise only limited competitive pressure on the merged entity because of the transport costs to reach southern Croatia. Additionally, the domestic cement suppliers Cemex Croatia and LafargeHolcim control all the cement terminals in ports along the Croatian coast. The commission has preliminary concerns that the transaction may strengthen the market power of Cemex Croatia in southern Croatia and result in price increases for grey cement.

HeidelbergCement and Schwenk plan to acquire, via their joint subsidiary DDC, assets in Croatia and Hungary that currently belonging to Cemex. The Hungarian part of the transaction as been referred to the Hungarian competition authority, so the commission's investigation will focuses on the acquisition of Cemex's Croatian assets.

Croatia: Holcim's Croatian unit has recorded an operating profit in the first quarter of the year, for the first time since 2009. Holcim Croatia said that its revenues fell by Euro463,000 in the first three months of 2015 compared to the same period of 2014. However, the revenues were 10% above its plan.

In July 2014, Holcim Croatia's board chairman Alan Sisinacki said that the ongoing 2015 Plus Turnaround Programme should get the company back to profitability in 2015. However, the company said on 8 May 2015 that it is still not certain that it will turn to profit in 2015. Holcim Croatia cut its loss to Euro1.78m in 2014 from Euro6.34m in 2013.

Europe: Holcim's cement and clinker sales fell by 10.5% in Croatia and by 5.4% in Serbia in 2014. In Croatia, sales prices rose by 0.5%, while in Serbia, they rose by 0.3%. In contrast, Holcim's cement and clinker sales rose by 7.8% in Romania and by 2.4% in Bulgaria. In Romania domestic prices fell by 1.2%, while they rose by 1.1% in Bulgaria.

Croatia: Holcim Croatia is looking to post flat revenues in 2014, while hoping to raise them by 15% in 2015, according to the company's chairman Alan Sisinacki. Holcim Croatia currently operates one cement plant, two cement terminals, two concrete plants and three aggregates quarries.

In 2014 Holcim Croatia is hoping to cut its loss to Euro2.49m under its on-going '2015 Plus' programme, which should return the company to profitability in 2015. The turnaround plan is already yielding results, with Holcim Croatia posting an operating profit in the first half of 2014, the highest result over the last five years.

Sisinacki expects Holcim Croatia's cement sales to remain unchanged in terms of volume in 2014, with sales of aggregates also flat. The company's concrete sales are set to drop in terms of volume in 2014 due to the sale, closure or leasing out of a significant chunk of its unprofitable concrete-producing assets. Sisinacki said that his expectations for Holcim Croatia's 2014 performance are based on official statistical data showing a 4.0% year-on-year decline of building construction and 10% fall in other civil construction works in the first quarter of 2014 in Croatia.

During the first six months of 2014 cement demand dropped by 6.0%, according to data from the association of cement producers in Croatia. Market conditions in Slovenia and Italy, Holcim Croatia's biggest export markets, are not looking any better. Sisinacki said that Holcim Croatia is trying to offset this growth weakness by exporting to northern Africa, taking advantage of the cement plant conveniently located in the Koromacno port.

Croatia: HeidelbergCement is interested in bidding for the Croatian cement plant Nasicecement, according to HeidelbergCement's regional director Branimir Muidza.

"We are still very interested in the acquisition and we are carefully monitoring the situation of Nasicecement's pre-bankruptcy settlement. If an opportunity arises we are ready to invest," said Muidza to SeeNews. HeidelbergCement has previously held a 8% stake in Nasicecement.

In February 2013 Nexe Grupa, who own Nasicecement, revealed that it had submitted a motion for the opening of a pre-bankruptcy settlement procedure. Its subsidiaries did likewise. Acquiring Nasicecement could compliment HeidelbergCement's strategy in the Balkans as it holds cement plants in Hungary and Bosnia & Herzegovina.

Croatia: Croatian building materials producer Nexe Grupa has submitted a motion for the opening of a pre-bankruptcy settlement procedure. The company also said in a bourse filing that its affiliates Nasicement, Dilj, Luka Tranzit, Igma and Nexe Beton have likewise filed for pre-bankruptcy settlement before the competent authorities.

By setting the bankruptcy procedure in motion, Nexe Grupa wishes to accelerate the financial and operational restructuring of the company, having in mind the large number of creditors involved, the company said in a separate statement.

Nexe Grupa comprises around 20 companies operating in Croatia, Bosnia, Serbia and Montenegro. It runs the Nasicecement cement plant in Nasice with a cement production capacity of 1Mt/yr.

Croatia: The CEO of Holcim Croatia has said that the company expects flat revenues in 2012 compared to 2011, while it expects to maintain its capacity utilisation rate of 80%. "The last three years were extremely difficult for the construction sector in Croatia," explained Mario Grassl. "Annual cement consumption in Croatia has contracted by 40% compared to 2008. The lack of investment in the construction sector and an unfavourable ratio of fixed costs compared to sales volumes are the main reasons for the loss of around Euro2.5m that Holcim Croatia posted in 2011."

To make matters worse, the overcapacity of local and international producers has depressed sale prices while input costs, mainly those related to fuels, raw materials, energy and distribution, have increased significantly. On top of that, the recent increase in Croatia's VAT rate from 23% to 25% is an additional burden for the end user.

Demand for construction materials in Croatia is still declining. Grassl said that he thinks that a full recovery to pre-crisis levels is still at least three years away. The customer base has been shrinking due to bankruptcy and liquidation procedures and although expectations for improved liquidity in the business sector are high, they will have to be underpinned by stimulus measures at government level. "Based on data from the Croatian Bureau of Statistics, the number of finished residential construction projects in 2011 was around 23% lower than in 2010. Looking ahead, there are no major projects that could be realistically expected to get underway in the next six months. Therefore we expect demand this year to stay at the 2011 level with consumption of cement flat at around 1.8Mt," Grassl said.

Despite the sharp drop in domestic demand over the last few years, Holcim has managed to maintain a share of around 20% of the Croatian market.The company's revenue grew by around 6% in 2011 and Grassl said that he expects a flat performance in that respect in 2012 in a 'best-case' scenario.

In 2011 Holcim Croatia managed to post a growth in exports to Italy and to Bosnia and Herzegovina in the low single digits and expects exports to be similar in 2012. The company exports approximately 20% of its output to Italy which is its largest export market, followed by Slovenia and Bosnia and Herzegovina. "Due to logistic bottlenecks and costs we do not plan to enter new markets," Grassl said.

On all three segments of the building materials market where Holcim Croatia is active, investment activities in 2012 will be mainly related to maintenance and better cost management. "For example, in the first quarter of the year we invested Euro1m at the Koromacno cement plant in the reconstruction of a clinker cooler. This will increase thermal energy efficiency and decrease maintenance costs," said Grassl.