Boral and CSR’s proposed $230 million brick joint venture, announced in April this year, would create a duopoly in the market, the Australian Competition and Consumer Commission (ACCC) has said.
The proposed merger, initiated because both companies believe that brick demand in Australia is experiencing a sustained structural decline, would reduce the number of major clay brick suppliers in eastern Australia from three to two.
This means that the remaining two big suppliers in NSW and Queensland – the joint venture and Austral Bricks – would account for approximately 99 per cent of the supply of clay bricks.
“The ACCC is seeking further information to determine whether the proposed joint venture is likely to substantially lessen competition in the supply of clay bricks,” ACCC Chairman Rod Sims said in a statement.
“The ACCC’s preliminary view is that this would be likely to lead to an increase in the price of clay bricks as well as a reduction in the product range available to residential builders, architects and end-consumers.”
The competition regulator has so far undertaken extensive market inquiries, focusing on determining what is likely to occur in the low and multi-density residential construction markets, where clay brick supply is principally directed at, if the proposed joint venture succeeds or fails.
Will brick prices rise?
The joint venture, comprising the manufacture, marketing and supply of clay bricks, will mean that CSR and Boral will stop offering separate ranges or compete on price to customers in eastern Australia.
Both parties have stated that the proposed deal will save the companies up to $10 million per year due to improved operating efficiencies and the ability to retain manufacturing capacity in Australia in the face of weaker downstream demand.
According to Spencer Little, a senior analyst at IBISWorld, Boral and CSR would beat Brickworks to become the industry’s largest player if the joint venture proceeds.
“Although small-scale manufacturers also operate in the industry, these three major players typically benefit from massive economies of scale,” Little explains.
“This trend allows these firms to reduce marginal costs and either pass cost savings on to customers in the form of lower prices or improve profit margins. These economies of scale would likely be enhanced under the planned deal, with efficiency improvements leading to lower prices or stronger profit margins.”
The ACCC is concerned that the latter – stronger profit margins – will hold true if the venture takes place, noting that many residential builders in NSW and Queensland have already expressed that a reduction from three to two major clay brick suppliers will result in increased prices for clay bricks:
“The removal of this close competition and this significant change in market structures raises the concern that the joint venture entity would have the ability to unilaterally exercise market power, such as to increase prices for clay bricks,” said the ACCC, noting that the joint venture entity and Austral Bricks could “tacitly coordinate” to increase prices if they believe it is in their mutual interests.
“Higher prices for clay bricks would increase costs for end-consumers seeking to build new homes. For example, a new two-storey home built with 14,000 bricks would cost approximately $1,200 extra as a result of a 10% increase in clay brick prices (depending on the bricks used).
“Also, the proposed joint venture would likely result in reduced choice between brick product ranges, in terms of the variety of colours and other aesthetic characteristics offered for construction of new homes. This reduction in choice and variety would be to the detriment of builders, architects/designers and end-consumers.”
Less brick being used?
The ACCC also suggested that for many residential builders, clay bricks will continue to make up approximately 80 to 90 per cent of external cladding materials used.
“The ACCC’s review to date has found that other external cladding materials are not substitutes for clay bricks. Other materials such as pre-cast concrete wall panels are generally used in commercial construction and high-density residential construction, and may also be used to complement the use of clay bricks in residential construction,” Sims noted.
“However, market inquiries have indicated that consumers generally want their new homes built primarily out of clay bricks, especially for detached homes. Consumers are unlikely to choose fibre cement boards, concrete blocks or other materials in response to brick prices increasing.”
But Little notes that the struggling clay brick manufacturing industry is the result of a weak demand from downstream construction industries, which would impact the choice to use bricks anyway.
“Rising prevalence of multi-unit apartments and townhouses has restricted demand for clay bricks, as these properties tend to use alternative cladding materials such as concrete and steel,” says Little.
“As a result, industry revenue is estimated to decline at an annualised 3.6% over the five years through 2014-15, to reach $830.0 million.”
CIMB analyst Andrew Scott also joined the discussion earlier in October, saying that the ACCC statement will present significant hurdles to the merger.
“We believe that an ACCC decision to block the proposed JV would pave the way for further writedowns,” he said in an interview with the SMH.
“It is worth noting that the [brick] businesses are generating inadequate returns while housing starts...approach near record levels.”
The CSR-Boral joint venture was proposed in April this year, and will combine the brick operations of both parties in New South Wales, Victoria, Queensland, South Australia, Tasmania and the ACT. Sixty per cent will be owned by CSR and 40 per cent by Boral.
A final decision by the ACCC is expected to be made on 18 December 2014.