Celcon/MBM Merger Inquiry: issues statement

Product market definition

1. Taking account of the differences between them in terms of cost and price, properties, function, size, ease of handling, etc, is it reasonable to view the main kinds of products for walling materials as separate markets – that is, respectively, timber and steel frame and other prefabricated products; aggregate concrete blocks (aggregate blocks); and aerated concrete blocks (aircrete)?

2. Even acknowledging that there are degrees of potential or actual substitutability between the kinds of products listed in 1 above, would it nevertheless be reasonable to assume that their applications are sufficiently distinct as to warrant each being treated as a separate market?

3. Alternatively, would factors such as the overlaps between these products and the degree of substitutability between them indicate that there is one market for all walling materials; or at least for aggregate blocks and aircrete?

4. Do the uses to which bricks are put affect the outcome of consideration of the arguments relevant to 1 to 3 above?

5. Looking at these products, from the supply side perspective, should it be taken that their technical and process characteristics mean that manufacturers could not switch between them straightforwardly in the short term?

6. Allowing for the differences between these products in manufacture, in technical characteristics and in application, could it be said that the differences between timber and steel frame and other prefabricated systems on the one hand and either aggregate blocks or aircrete on the other are greater than the differences between aggregate blocks and aircrete?

7. Would it be right to summarise the chief differences between aircrete and aggregate blocks are as follows: aircrete has a higher unit price but is typically much lighter, involves greater ease of laying and cutting and has better thermal insulation properties; while aggregate blocks have higher strength and provide better sound insulation?

8. As with consideration of walling materials above, is it reasonable to consider the main products for the construction of foundations and floors, for each of which aircrete can also be used, as separate markets?

9. Are there any reasons to believe that current aircrete prices are significantly above the competitive level so that there is more substitutability between aircrete and alternative materials than would be the case at competitive levels?

Geographical market definition

10. Is the geographical extent of the markets for aircrete and aggregate blocks the whole of the UK; or do the following considerations suggest that they might be in different geographical markets:

-a single UK market might be posited for the supply of aircrete, which is produced from a limited number of plants with a uniform delivered price, and which benefits from lower transport costs; and -a series of more local markets for the supply of aggregate blocks, which are produced from a very much larger number of widely distributed plants but where transport costs are a much more significant element of the delivered price?

11. Or are there sufficiently strong chains of substitution linking each local market for the market in aggregate blocks also to be considered to be national?

12. Are there any reasons to believe that there are distinct characteristics in Scotland, as far as concerns aircrete, such that it might be considered to be a separate market?

Substitutability

13. One approach to substitutability is to ask how far in practice can aggregate blocks be considered to be substitutable for aircrete?

14. The Commission will want to consider 13 above in the light of the evidence including the following considerations which have been put to it by other parties:

(a) generally the two to an appreciable extent have different functions and serve different needs, aircrete being employed predominately in the housebuilding sector especially to provide internal skins in the construction of cavity walls and in internal partitions frequently without the need for significant additional thermal insulation; while aggregate blocks are more commonly used for foundations, house extensions and in circumstances where there are limited requirements for thermal insulation. Their use in commercial/industrial building is more widespread due to their greater strength;

(b) on the other hand the existence of modern design tools and computer programmes indicate that a very high degree of interchangeability can be expected between the two – at least in wall construction;

(c) by contrast, while the two can be substituted in various circumstances, in others there are difficulties which would indicate practical and significant limits to substitution. For example, the lead times and costs involved in changing design and construction materials as between aircrete and aggregate blocks are significant; the pricing position and the thermal/acoustic attributes between the two are diverse; there is reduced flexibility between the two as concerns the construction of extensions to houses; and space efficiency, for example in terms of overall building space utilisation, can be different between the two in otherwise like-for-like structures; and,

(d) aircrete is more attractive to the smaller builder because current wall construction methods do not have to be altered significantly in response to changing regulatory requirements.

15. Assuming that the installed costs of alternative solutions were taken to be broadly similar, what are the circumstances, if any, in which aircrete and aggregate blocks are not substitutable?

16. Given that the significant use of timber frame construction in Scotland (over 40%) has not been mirrored in England (c.5%) or Wales (c.11%), will timber frame or other prefabricated construction techniques continue to be regarded in the latter countries as less than fully substitutable for traditional masonry construction at least for the foreseeable future?

17. In considering questions of substitutability, to what extent are house buyers’ and other end-users’ views important in assessing substitutability as between masonry and timber frame or other prefabricated construction techniques?

Impact of regulatory changes

18. There are questions whether the balance of impending or proposed regulatory changes is likely to benefit aircrete or aggregate blocks, for example:

-considering the forthcoming changes to Part L of the Building Regulations (thermal insulation) and those proposed for Part E (sound insulation), how should each be regarded in terms of increasing or decreasing the attractiveness of aircrete compared with aggregate blocks?

-looking at the forthcoming introduction of the Aggregates Levy, which could add significantly to the cost of aggregate blocks (ranges of up to 12% have been quoted), would this put the aggregate block market under pressure vis-à-vis aircrete?

-are aggregate blocks becoming less attractive overall, due to weight limits for handling purposes as well as to the need to use increased insulation and to the effects of the forthcoming Aggregates Levy?

19. How are these changes likely to affect the use of other walling systems?

20. Do the forthcoming and proposed regulatory changes suggest that there are implications for market definition?

21. What will be the impact of these changes on the scope for and extent of substitutability between aircrete and aggregate blocks?

Barriers to entry and expansion

22. It has been said that the capital costs of entry into the aircrete market are very great by comparison with entry into the aggregate block market (up to 25m has been mentioned as opposed to 5m or less). Is this barrier significant enough to prevent straightforward entry?

23. Would entry on a small scale result in a significant cost disadvantage? And would entry on a larger scale be unduly risky by virtue of the need to obtain a sizeable market share?

24. Is the availability of pulverised fuel ash (pfa) of the appropriate quality and from convenient locations (in transport costs terms) a factor, or will it be, in discouraging new suppliers of aircrete from entering the market?

25. If considerable know-how is a prerequisite for the successful production of aircrete, as has been said, would this also be a factor inhibiting entry into the aircrete market?

The proposed merger

General

26. The principal issue for the inquiry is whether the merger would significantly reduce competition and, if so, whether there would be adverse effects on the public interest as a result. Adverse effects might take the form of:

compared with the situation which could be expected in the absence of a merger.

Reduction in the number of aircrete suppliers

27. If the merger goes ahead, the number of existing firms supplying aircrete in significant volumes in the UK will decline from three, currently producing roughly equal shares of aircrete, to two - with the merged entity responsible for over 65% of the product. Does this mean that the current situation may become unbalanced leading to a significant reduction in choice and the creation of either a market leader or a firm with market power?

28. Would such a situation, in addition, increase or weaken the relative negotiating and purchasing power of the other significant remaining aircrete producer (Tarmac)?

Prices

29. The Commission will want to establish whether or not the current level of concentration in the aircrete market indicates scope to raise prices above competitive levels; and, if so, whether this indicates that a further degree of concentration might result in further increases in prices.

30. Would the merger, under which two firms would be providing a very large percentage of the supply of aircrete, result in competition on price becoming seriously weakened?

31. Would the merger make it more feasible for aircrete manufacturers to maintain price differentials between their product and aggregate blocks, for example in response to any price increase in aggregates as a result of the forthcoming Aggregates Levy?

32. Following the merger and there remaining just two significant suppliers of aircrete, would these two firms have scope and ability to discriminate in price and/or delivery between customers, for example through the use of rebates and discounts; in particular between customers who could readily switch away from aircrete and those who could not?

33. Is it reasonable to expect growth in direct contracting between aircrete suppliers and builders? And, if so, could this lead to a situation in which, following the merger, it would be more practicable than otherwise to discriminate between customers?

34. How will buyer power be affected by the merger? Could the merger limit the extent of buyers’ current ability to obtain competitive prices for aircrete purchases?

Switching suppliers

35. Are limits of capacity in aircrete production such that the scope for switching into aircrete on a large scale is limited, or is this not the case, and how would this situation be affected by the merger?

36. Given that the merged entity would control such a large proportion of total aircrete production capacity, would it reduce the ability of certain of the larger building firm and builders’ merchant customers of the present two firms to source their requirements from elsewhere, if they became dissatisfied with Celcon/MBM’s terms and conditions?

37. Given the minimal contribution of aircrete imports to the aircrete market in the UK in the last decade or more, whether due to costs of transport or other factors, can it be taken that the product is effectively not tradeable internationally; is there any realistic prospect of current trading conditions changing; and would the merger be likely to provide additional encouragement to any increase in supply from abroad; and, if so, how?

38. Were, for example, the merger to lead to increased prices for aircrete in this country, would it be reasonable to expect a surge in imports; and to what extent could such imports act as a constraint on aircrete prices?

Innovation

39. Until recently, had there been a history of product innovation in the aircrete market and is it the case that aircrete has been a relatively undifferentiated product? Would the merger be likely to promote further innovation, or would any reduced level of competition resulting from it imply less innovative activity for the future?

40. Alternatively, would the merged group be in a better position to control the market for innovative aircrete products, such as prefabricated masonry systems?

Barriers to entry

41. Would the merger make entry more difficult?

Benefits of the merger

42. Benefits of the merger have been stated to be:

(a) lower raw material costs;

(b) cost savings in staff, logistics and better capacity utilisation;

(c) reductions in potential commercial risks for the existing Celcon operation;

(d) support for investment in aircrete panel construction and reinforced flooring systems and other R&D which could help modernise the construction industry; and,

(e) the capacity for a single new entity to meet demand for aircrete from a larger number of plants, thus reducing some transport distances and costs.

Are these the expected benefits and are there any others? In addition, how significant are the expected benefits; how certain are they to materialise; and how quickly will they emerge?

Remedies

43. The Commission emphasizes that it is at an early stage of its investigation into this proposed merger and has reached no conclusions on any aspect of the issues outlined above. On the strictly hypothetical basis, however, that the Commission were eventually to find that the merger could be expected to operate against the public interest, with some or all of the possible adverse effects listed in paragraph 21 above, the Commission would welcome views on the practicability and effectiveness of the following possible measures in remedying or preventing those effects:

Press Release