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Aggregates

Start date: 7 September 2010
Completion date: 18 January 2012


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Summary of work

In September 2010 we launched a market study into the aggregates sector. The aim was to look at competition in the market and at whether the market delivered good value for money. We also wanted to look at the planning system for aggregates and at whether high barriers to entry and Government involvement influenced competitive conditions. Our study revealed a range of concerns among stakeholders about how competition operates in this sector. While we heard views on planning and other issues, most concerns about competition related to the structure of the aggregates, cement and ready-mix concrete markets. In particular, concerns were expressed relating to the links between aggregates, cement and ready-mix concrete, and to the market strength and conduct of the five vertically-integrated 'majors'. For this reason in February 2011, we extended the scope of the market study to include cement and ready-mix concrete.

In August 2011, we published the findings of our market study and our provisional decision to refer the markets for aggregates, cement and ready-mix concrete to the Competition Commission ('the CC').  Our report found that the industry displays a number of features which may adversely affect competition including:

  • Barriers to entry: both the aggregates and the cement markets feature high barriers to entry in terms of the difficulty of obtaining planning permission and physical capital requirements. Elements of the planning system for aggregates in particular create substantial barriers to entry by favouring incumbents over new entrants. In addition, the information we have received suggests that fear of retaliation and/or predation by the major companies may be deterring entry into the cement and ready-mix concrete markets by independents looking to either self-supply or expand their operations.
  • Concentration: all three product markets are highly concentrated with five major players accounting, in Great Britain, for upwards of 90 per cent of the cement market, 75 per cent of aggregates sales and circa 70 per cent of ready-mix concrete production. There is a considerable drop in scale between the majors and the largest independent in each market - there is no comparably large independent producing any one of the three products. 
  • Vertical integration: the major firms are integrated across aggregates, ready-mix concrete and cement. We have received complaints about vertically integrated firms refusing to supply or discriminating against non-integrated competitors through their pricing, particularly in relation to cement.
  • Homogeneous products: aggregates, cement and ready-mix concrete are, to a large extent, homogeneous products with little differentiation by firm in terms of brand or quality.
  • Transparency: there is a high degree of transparency in relation to all three products. Cross-trading between the major firms means that they receive advance warning of each others' pricing intentions; industry reports contain detailed information on market shares, sales volumes and reserves; the planning system provides significant transparency regarding capacity intentions; and there are industry associations and working parties which may involve additional sharing of information.
  • Multi-market contacts: although vertically integrated, the major firms supply one another upstream and downstream (both for cement and aggregates) to serve local markets. There are also a significant number of joint-ventures and asset swaps in the three product markets.

These features have the potential to reduce competition in settings with high levels of concentration.

We also had evidence that competition may not be working well in these markets. In particular:

  • Difficulties faced by independent ready-mix concrete operators in obtaining competitive quotes for cement from alternative suppliers, and the importance independent operators place on relationships with their existing suppliers.
  • A possible 'squeeze' between the price of cement (which has risen in recent years) and the price of ready-mix concrete (which has fallen, then stabilised). We also had evidence that independents may be charged higher prices for cement than the majors charge each other.
  • Pricing letters from the major firms coming out at similar times and announcing similar price increases. Although these letters represent a starting point for negotiations between customers and suppliers and do not fix prices as such, these similarities may indicate that price rivalry is not as intense as it could be.

The OFT therefore made its provisional decision to make a reference to the CC of the supply of aggregates, cement and ready-mix concrete in the UK, under section 131 of the Enterprise Act 2002. The OFT then held a six-week public consultation.

Having carefully considered all the comments and evidence received during the public consultation, the OFT continues to be of the view that competition may not be working well in Great Britain, but has decided not to refer these markets in Northern Ireland because the features identified are not present to the same degree. Therefore the OFT has decided not to include Northern Ireland in the scope of the reference. However, we have not come to a view as to whether Northern Ireland is a competitive market and may decide to look at this geographic market in more detail in the future.

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Action

The OFT has referred the markets for aggregates, cement and ready-mix concrete in Great Britain (excluding Northern Ireland), to the Competition Commission for investigation, under section 131 of the Enterprise Act 2002.


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Related documents

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Background

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Contacts

Team leader: Cristina Luna-Esteban (0207 211 8208, cristina.luna-esteban@oft.gsi.gov.uk) 
Project director: Mary Starks (0207 211 8307, mary.starks@oft.gsi.gov.uk)
Senior responsible officer: Clive Maxwell (020 7211 8950, clive.maxwell@oft.gsi.gov.uk)

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