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Ukraine is facing a cement crisis: Could a deal between two cement giants worsen the situation?

by Dominic Culverwell May 8, 2024 4:19 PM 11 min read
CRH cement plant in Kamianets-Podilskyi, Ukraine. (Osnova Group)
by Dominic Culverwell May 8, 2024 4:19 PM 11 min read
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As Russia’s war drags on, it’s still early days for Ukraine’s reconstruction but issues are already lurking around one crucial component: cement.

Rebuilding Ukraine after the war, which is unlikely to end any time soon and will continue to cause widespread destruction, is expected to cost $487 billion and will necessarily require a great deal of building materials.

Cement is one of the main ingredients in concrete, used to build housing, roads, bridges, schools, hospitals, dams, and ports — all of which are regular targets of Russian attacks.

Fighting in the country’s east and ongoing occupation have shuttered cement plants. Protectionist measures in place since 2019 have restricted cement imports. Declines in production and a shrinking market could skyrocket reconstruction costs, experts warn.

Ukraine will need to produce 15-16 million metric tons of cement annually over a three-year reconstruction phase, a report commissioned by USAID says. That’s around 2-3 million more than the 8 operating plants can currently handle.

Amid this looming crisis, some are sounding the alarm that a deal in Ukraine between two multinational cement giants could create a monopoly in the country.

Last summer, it was announced that CRH, one of the largest building materials companies in the world, was looking to buy two plants from Dyckerhoff, a subsidiary of Italian cement company Buzzi.

Local resident Mykola Andreiev rebuilds his house, a year after it was destroyed in the Russian invasion of Ukraine, in Posad-Pokrovske village in Kherson region, Ukraine, on Nov.4, 2023. (Roman Pilipey/AFP via Getty Images)

The Italian firm wants to offload its assets in Ukraine in favor of doing business in Russia in a rare case among international businesses exiting Russia in droves in response to the full-scale invasion.

Only three active cement producers — CRH, Ivano Frankivsk Cement, and Kryvi Rih Cement — will remain in Ukraine if the country’s antitrust regulator allows the deal to go through.

The 100-million-euro ($108 million) deal between CRH and Dyckerhoff, backed by the European Bank for Development and Reconstruction (EBRD), is hailed as a success for foreign investment in Ukraine. If successful, it will be one of the biggest mergers during the war, second only to the ongoing Lifecell aqusition.

The company stressed the importance of its investments in Ukrainian cement plants now to boost the country’s domestic production to 15 million tons, in an interview with Forbes Ukraine on May 3.

But economists warn that the acquisition would lead to further concentration in an already highly concentrated market, giving cement producers carte blanche to increase prices, and subsequently the cost of reconstruction.

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“In the short term, there is clearly the potential for prices to rise, which would be a very damaging outcome because volumes would fall,” Dr. Catherine Thomas of the Center for Economic Performance at the London School of Economics (LSE) told the Kyiv Independent.

Ukraine’s Anti-Monopoly Committee (AMCU) is currently reviewing the deal after Ukraine’s Federation of Builders (KBU), representing 80% of construction industry companies in Ukraine, flagged the merger after it was announced in June 2023 due to concerns about a constricted market.

The AMCU already returned CRH’s application once in August 2023 for not meeting “merger regulation requirements.” CRH will not be able to purchase Dyckerhoff’s assets if the committee sees the firm gaining at least a 35% market share.

Sky-high prices

With little room for innovation and variety in cement production, the industry is no stranger to concentration. But Ukraine’s war-torn situation and dwindling active producers raise greater concerns.

Russian aggression has hit the cement industry hard over the last 10 years, swallowing three plants in occupied Donbas and Crimea. More recently, Russian forces destroyed a plant belonging to Kharkiv-based company Baltsem in 2022 while the “Pushka” Kramatorsk cement plant, Donetsk Oblast, was seized by the Ukrainian government from its Russian owners and nationalized last year.

“We need more players and to diversify the market instead of making it more compact because the competition is very weak,” Serhiy Pylypenko CEO of the Ukrainian building supplies firm Kovalska, Ukraine’s largest cement user, told the Kyiv Independent.

“(Market concentration) allows uncontrolled pricing and the cost of construction and the cost of recovery to skyrocket.”

CRH, a global cement leader, entered the Ukrainian market in 1999 and currently operates three plants in Khmelnytskyi, Odesa, and Lviv oblasts with around 900 employees. The Dyckerhoff acquisition would add two more: Volyn-Cement (Rivne Oblast) and YUGcement (Mykolaiv Oblast), the largest plant in southern Ukraine.

With the five plants, it would have more than any other company in Ukraine. While the AMCU is still determining the market share of each company, Forbes Ukraine calculated that the acquisition could see CRH garner a 46% market share, higher than Ukraine’s current leader, Ivano Frankivsk, which dominates 44% of the market.

Ivano Frankivsk Cement plant. (ifcem)

For now, cement demand is low but will jump once reconstruction is in full swing. In a concentrated market, cement supply will increase to a lesser extent than in a competitive market, while prices also increase, explains economist Bruno Pellegrino, Assistant Professor of Finance at Columbia Business School.

While high prices will benefit all of Ukraine’s cement producers who will all have leeway to raise their prices, not just CRH, the negatives will be felt downstream for users of cement.

Pylypenko, whose company could feel the pressure of higher prices, says that smaller companies could also be vulnerable to takeovers amid soaring costs and without the ability to switch cement suppliers.

Cement Cartel

Ukraine’s cement industry has been marred in controversy before. The country’s  Interdepartmental Commission on International Trade imposed anti-dumping measures on cement imports from Russia, Belarus, and Moldova in 2019 after local producers said cheap foreign cement undermined their business.

The Antitrust League, a Ukrainian NGO, investigated the cement market in 2021 after prices rose on average by 35-50% over three years, connecting it to anti-dumping measures.

Their report claimed that high taxes on cement imports eliminated foreign competition allowing domestic firms to occupy 95% of the market with the remainder left to Turkish cement producers.

The Antitrust League claims that four companies, including Dyckerhoff and CRH, were part of a cement “cartel” that operated under the Ukrcement Association during this period causing Ukraine to pay more for the “Great Construction” program launched in 2020.

Volyn-Cement Affiliate of PRJSC Dyckerhoff Cement Ukraine, located near the city of Rivne. (Dyckerhoff Ukraine/Facebook)

Despite the Antitrust League presenting the case to the AMCU, the committee took little action. Investigative journalist and member of the Antitrust League Yuriy Nikolov slammed the inaction, describing the committee as “very weak.”

“There is absolutely no question of the Antimonopoly Committee's independence or capacity for a major investigation,” he told the Kyiv Independent.

“It is also weak at the legal level and is managed by the Presidential Office,” he added.

A CRH delegation met with the Head of the President’s Office Andriy Yermak on April 23.

“We seek support from major investors, like CRH, ensuring they have all the necessary conditions to work comfortably,” the office told the Kyiv Independent.

Ukrecement’s chairmen Pavlo Kachur defended the duties and said they should continue. He previously linked price hikes to increased energy costs which contribute to 52-55% of the cost structure of cement.

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“The introduction of anti-dumping measures is an equalization of competitive conditions and strengthening of competition in the market,” Kachur told the Kyiv Independent.

“Without such protection, the situation for our manufacturers can be very difficult.”

Foreign Imports

Economists see the anti-dumping duties as another sign of limited competition, particularly after Ukraine imposed measures on Turkish cement imports in 2021.

From the perspective of cement users like construction firms and building suppliers, anti-dumping restrictions are harmful, Catherine Thomas said.

A lift on the anti-dumping duties would mitigate concerns about the CRH-Dyckerhoff acquisition and rebalance the market by providing competition through imports, Thomas said.

But stressing the importance of domestic production during reconstruction, Kachur insists they should remain in place.

“For every dollar of value added created in the cement industry, three to four dollars are generated in the general economy,” he said.

Although Kyiv agreed with Chisinau to temporarily suspend the duties between October and December 2023, Kachur believes the restrictions should remain in place.

Anti-dumping measures continuing to target foreign countries raises the question of how much foreign producers can fill the inevitable increase in demand, and if they eventually do, whether more protectionist measures will be put in place, according to Pellegrino.

Builders work to repair a damaged residential building on Valerii Lobanovskyi Avenue in Kyiv, Ukraine, on Sept. 12, 2022. (Elizabeth Servatynska/Suspilne Ukraine/JSC "UA:PBC"/Global Images Ukraine via Getty Images)

He emphasizes the need for the AMCU and the International Trade Department to account for the spillovers of protectionist policies like anti-dumping duties into antitrust.

The AMCU could be too lenient in its decision if it doesn’t consider the barriers on foreign imports that impact domestic competitiveness, he says.

“The optimal policy, from an antitrust point of view, should take into account what's happening in international trade as well,” Pellegrino said.

“And international trade policy should take into account the market structure of the cement industry in Ukraine.”

Cement shortage

Import limitations also exacerbate Ukraine’s cement shortage problem, according to Pylypenko. Cement production dipped by 60% in the first year of the full-scale war and remains below pre-war levels despite a 17% year-on-year increase in 2023.

Ukraine’s production capability is 13.6 million metric tons if taking into consideration all 10 plants in government-controlled territory, including the two that are currently not operational. However, an additional 2-3 million metric tons per year is still needed under a three-year reconstruction program, according to USAID.

Kachur dismissed the report for overestimating the speed of reconstruction at three years. Citing Ukrcement’s own findings, he said the phase would likely be closer to seven or eight years at the level of 12-13 million tons per year and thus fall in line with Ukraine’s production capability.

However, Pylypenko asserts that Ukraine’s current production cannot meet a sharp growth in demand unless new factories open and the market expands.

Train carts on the territory of the Kryvi Rih Cement plant. (krcement)
Kryvi Rih Cement plant. (krcement)

This is unlikely to happen during the war due to the poor market conditions, the head of investment firm Concord Capital and the owner of Kryvyi Rih Cement Ihor Mazepa told the Kyiv Independent.

In theory, Ukraine’s reconstruction efforts are likely to attract more players to the market which will bolster competition and production, and discipline prices in the long run.

“The market during the reconstruction phase is going to be much bigger. For the role of one player it's going to be more limited,” EBRD Managing Director, Eastern Europe and the Caucasus, Matteo Patrone told the Kyiv Independent.

But the barriers to entry are high in the cement sector as the process is capital-intensive, even outside of constructing a new plant from scratch.

Kachur says the nationalized plant in Kramatorsk is available for a possible investor, but attracting new investment to front-line areas, where that plant is located, is extremely difficult.

FDI success

Despite the threat of monopolization, the 100 million euro acquisition would signal an important win for Ukraine’s languid foreign investment flows.

Even during the war, CRH has invested 80 million euros ($86 million) in Ukraine, including a 34 million euro ($37 million) cement terminal to store cement in Kyiv Oblast that opened last year. The company is a strong candidate among potential players in reconstruction, Patrone says, adding that the EBRD has had positive experiences with the firm in the past.

While details about the EBRD’s involvement are kept under wraps and CRH did not want to openly comment on the deal, proponents of mergers generally argue that they lead to efficiency gains and thus lower costs, Rocco Macchiavello Professor of Management at LSE explained.

Restructuring poorly run plants could very likely increase efficiency, Macchiavello said. Several sources in the cement industry claim that Dyckerhoff had underinvested in the facilities and the company has seen a financial fall since the start of the full-scale invasion, earning 52.9 million euros ($57.2 million) in the first half of 2019, and only 28.3 million euros ($30.5 million) in the first half of 2022.

Workers construct the first school in Ukraine using a 3D printer in Lviv, Ukraine on May 24, 2023. The organizers and initiators of the 3D school construction project are the humanitarian foundation Team4UA with the support of the Humanitarian Innovative Technologies (HIT). The 3D printer forms walls from a special mixture based on cement - it builds the walls layer by layer. (Pavlo Palamarchuk/Anadolu Agency via Getty Images)

There have also been mentions of Kovalska’s interest in purchasing the Dyckerhoff plants, sources close to the matter told the Kyiv Independent. Thomas sees this as an option to dilute the market and mitigate CRH’s market power.

Kovalska declined to comment on their interest in buying the plants.

Alternatively, the AMCU could introduce certain conditions for CRH to uphold fair competition, Thomas and Ukraine’s National Agency on Corruption Prevention (NACP) told the Kyiv Independent.

“Our anti-monopoly committee understands that this is a high-risk market when we start rebuilding,” said Agiya Zagrebelska, head of the Direction of Minimization of Corruption Risks in the Sanctions Policy of the NACP.

“(The AMCU) must monitor this market very closely.”

The Kyiv Independent's business editor Liliane Bivings contributed reporting to this story.

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