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Regulation, Industry Structure,and Competitiveness the U.S.

Portland Cement in Industry

JamesC. Mabry Department ofHistory Columbia Universi

The CementIndustryand Pre-1945 Regulation

Between 1880 and 1910,the portland cement industry underwent a periodof rapidprocess product and innovation. Duringthisperiod,cement making transformed a small, was from labor intensive, batch process industry, intoa mass production industry using large-scale continuous process technology [Hounshell, pp. 1-13]. 1984, Plants previously that producedvariable a product in amounts measured hundreds barrels weeknowturned a greafiy in of per out improved standardized and product amounts in measured tensof thousands in of barrels day.The development cheap reliable per of and portland cement facilitated revolution construction a in technology cement, the form of as in concrete,became,quite literally,the foundationof cities,transportation systems, factories. and a Cement produced burning mixture crushed is by a of limestone clay and (or similar materials) enormous, in slowly rotating and genfiy inclined, tube shaped kilns. Rawmaterials widely are available represent a small and only part of totalproduction costs. Production capital is intensive largeeconomies with of scale a highminimum and efficient scale. Cement production among is the mostenergy intensive industries using hugequantities coalto fire the kilns of and largeamounts electricity powergrinding, of to blending, pollution and control equipment. Energy makes thelargest of variable up part costs. Cement hasa highbulkto value ratioandis expensive ship, overlapping to so regional markets havedeveloped. Litfie cement shipped is morethan200-300miles. Ownership fragmentedthenational withthelargest controlling is at level firm lessthan ten percent production of capacity. Regional markets more are concentrated usually but contain to tenproducers. five Mass production technology theportland gave cement industry only not the means pushcompeting to products foreign and competitors of the out
t Concrete a mixtureof cement, is water,sand,and stonewith cementbeingthe

chemically active ingredient. Cement theintermediate is product concrete ubiquitous and a building material. Cement measured 376pound was in barrels until1970although wooden barrels notbeen had used theindustry in since turnof thecentury. the

BUSINESS AND ECONOMIC HISTORY,Volume Twenty-seven, Winter no.2, 1998.

Copyright 1998 bytheBusiness History Conference. 0894-6825. ISSN



market, alsogavethe industry abilityto overproduce. it the Since earlyin the twentiethcentury, the portlandcementindustry has had persistent trouble balancing supply demand. cement and The industry closely is connected with the volatile construction sector demand and varies regionally, seasonally, and secularly. cement The industry oftenstruggled have rightamount has to the of capacity therightplaces therighttimes. in at Bothovercapacity undercapacity costly and are conditions thecosts but are born differentially. When thereis undercapacity, prices rise,shortages occur, construction and projects be delayed all costly contractors may to and consumers. When overcapacity exists, utilization ratesdecline, competition increases, and margins,prices,and returnsfall. With demandvarying temporally spafially cement and and plants representing long-term fixedassets, balancing supply demand proven and has largely beyond sumof individual the producer's decisions. Overcapacity a condition is fraught withdangers industries high for with fixed costsand relatively variable low costs[Best,1990,pp. 49-51, 70-2]. Cement plants muchmoreefficiently highutilization run at rates marginal and production costsrise rapidlywhen plantsare run at suboptimal levels. Producers struggling maintain to output levels declining in markets knowthat because demand cement price-inelastic, the for is lowering prices will only redistribute rather thanincrease demand. Otherproducers match price will the cuts littleif anyadvantage begained. and will Price-cuttingdangerous high is in fixedcostindustries because prices falla longwaybefore can variable costs are reached. prices reduced the levelof variable If are to costs through intense competition industry quickly the will destroy capital its base. Knowing this,but facedwith volatile markets, producers highfixed-costs in industries almost always seekto avoidengaging pricecompetition in wheninevitable market

declines occur. means which The with cement producers sought limit have to pricecompetition, stabili,e volatile markets, protect and theix capital base has often drawn attention state federal the from and anti-trust regulators. The portland cement industry government and antitrust regulators have beenstruggling defineappropriate to competitive behavior mostof the for twentieth century. Difficulties mostoften began duringmarketdownturns when activities cement by producers limitprice to declines brought complaints. The firstoccurrence thiswasin 1919, of whentheJustice Deparmaent initiated a series lawsuits of against regional tradeassociations following complaints about lackof competitive the pricing. industry's The powerful northeast trade association (CementManufacturers Protective Association) disbanded after losing preliminary a courtcase the Supreme but Courteventually overturned
this decision.

The mostcelebrated against cement case the industry began theearly in years theGreat of Depression cement when producers struggling stem were to thesteep decline prices to thecollapse construction in due of markets. Follow-


ingcomplaints state by highway departments, Federal the TradeCommission wasordered theSenate investigate cement by to the industry produced and a reportin 1932thatconcluded the industry's that basing-point system price produced rigidprices and reduced competition [FTC, 1932,p. xxi]. The commission recommended producers forced quote that be to f.o.b.millprices but no further action taken thetime[FTC,1933,pp. xv-xvi]. was at In the late 1930s,federalanti-trust activityaccelerated, becoming an "anti-monopoly crusade" and the cementindustry once againfound its marketing practices under scrutiny [Brinkley, 1995, pp. 364-5].The FTC, picking where left off fiveyears up it earlier, fileda formal complaint July in 1937,directly attacking cement the industry's basing-point pricesystem. Like theJustice Department's 1920's case, FTC wentaftertheindustry the organization that collected disseminated and information prices on and freightrates. The FTC arguedthat the CementInstitute, was "with few exceptions, organized the samegroupof men, representing by substantially same the manufacturing companies" the Cement as Manufacturers' Protective Associationwhichhaddisbanded 1924[FTC, 1933,p. 98].The FTC foundthat in bothorganizations virtually same had the aims provided same and the services. Aftera longinvestigation theindustry's of marketing practices, FTC the claimed that the multiplebasing-point pricingsystem usedby the cement industry violated Federal the TradeCommission andtheRobinson-Patman Act Act [Minerale Yearbook, pp. 1245-6]. cease desist 1943, A and orderbanning the use of the basing-point price system was issued July 17, 1943, and on challenged Federalcourt elevendayslater by the cementindustry. in The
cementindustry won the casein the circuitcourtbut lost on appealto the Supreme Court. On April 28, 1948,the Supreme Court reinstated FTC's the originalCease and DesistOrder of July 1943. This annulled industry's 2 the dominant marketing practice quoting of onlyprices thatincluded delivery and freight charges. The cementindustry promptlygave up this methodof colluding prices on without apparent effects. any ill Markets werebooming in the postwarperiod and there was no reasonto seekmarket stabilization through pricefixing.

Post-1945 Regulationand Limits on Mergers In the pro-business climateof the early 1950s both the Justice Department and the FTC backed awayfrom furtherconfrontations the with cementindustry over marketing practices [Loescher, 1959,pp. 274-82].The govemment's of theindustry view does not,however, appear havechanged. to In a 1961divestiture theFTC'sviewof theindustry case came clearly out when it stated: "The historic patternin the cementindustry has been one of
2 The FTC'sCease Desist and Orderof July17, 1943,thatstruck downthe industry's basing-point price system was overturned the U.S. CircuitCourt of Appealson by September 1946. 20, The Supreme Courtagreed review case 1947and,on April28, to the in
1948, overturned CircuitCourt'sdecision reinstated FTC order. the and the



concerted activities devise to means measures do away and to with competition withinthe industry" [Rock Products, 1965,p. 88]. In theeyes the FTC, May, 3 of thecement industry needed beclosely to monitored. Conflict resumed the 1960s in whenovercapacity began trouble to the industry and producers sought waysto maintain production levelswhile avoiding price competition. wayproducers One sought maintain to production levelswas by gainingassured markets purchasing by ready-mix concrete companies. The FTC moved aggressively againstthis form of market foreclosure cement by producers who integrated vertically foundthat a but case-by-case approach taxedtheirresources. Following extensive an studyof theindustry 1966,theFTC published "Enforcement in an Policy withRespect to Vertical Mergers theCement in Industry" whichsaid commission the would oppose further any vertical integration theindustry in [FTC, 1966,1967]. The limitson vertical integration theEnforcement in Policy havebeendebated in various economic legaljournals. general and The conclusion that vertical is integration a bad move for cement was producers the FTC did thema and favorby banning [Allen, it 1971,p. 274]. The FTC notonlyrestricted vertical mergers thistimebutalso at argued for restrictions both horizontal on mergers marketextension and mergers [FTC, 1966,pp. 88-9].The commission previously had blocked mergers by companies competing thesame in market, now, a clear but in change policy, of and in opposition long-term to industry trends, FTC opposed the market extension mergers well. The FTC sawregional as 4 cement markets already as highly concentrated warned anyaction cement and that by producers reducing the numberof actual potential or competitors wouldbe considered anticompetitive. FTC labeled existing The all producers potential as competitors, thereby justifying opposition market to extension mergers. Firmscouldmove

into newmarkets building plants werewamed by new but against buying an

existing producer thatmarket. in This paperexamines waysin whichthe FTC policyrestricting six

horizontal integration affected portland the cement industry. FTCpolicy: The encouraged diversification fromcore away competencies; discouraged investment thecement in industry domestic by producers; keptolder, smaller, efficient less plants operating much longer; contributed a slowdown technological to in change; made pursuing maximum scale economies difficult; and kepttheindustry fragmented populated small and with companies had that limited managerial, technological, capital and raising abilities.
3The statement came froma case against MartinMarietta.

4 Between 1950and1965, FTC blocked of three the two proposed horizontal mergers whileallowing twenty-six market extension mergers fiveacquisitions outside and by firms
[FC,1966,pp. 8-9].


The paper argues a fragmented that industry structure numerous with competitors each in market not the bestwayto allocative productive was or efficiency the cement in industry. restrictions horizontal The on integration damaged long-term the competitivenessthe industry weakened of and the ability manycompanies compete of to effectively markets as globalized and multinational cement producers moved aggressively domestic into markets.
PostwarChanges the CementIndustry in

In theperiod before 1945, Alfred Chandler, depicted portland D. Jr. the cementindustryas "lessconcentrated" with relatively and small lawns [Chandler, 1990, 113,121].Due to hightransportation theindustry pp. costs, was dividedinto a series regional of markets each served 5-10 phnts. by Economies scale existing of with production technology been had reached and thetechnology changing was slowly. This description, however,becomes increasingly inaccurate the as postwar periodprogresses. production distribution New and technologies allowed plantsto growmuchlargerand distribute moreeffectively. s The industry remained fragmented full of smalllawns because the and not of constraints mentioned above, largely but because antitrust of enforcement. Consolidation concentration pursued producers blocked and were by but by theFTC. Antitrust policy frozethestructure the cement of industry there and waslittlechange a restructuring forced until was uponthedeclining industry in
the 1980s.

While verticalintegration was a contentious issuein the cement industry, mergers were seenas a natural way to grow.Most producers saw multiple advantages larger for companies multi-plant with operations. the 6 In mid-1960s, when the FTC movedinto actionagainst industry, the cement companies pursuing were mergers order maintain gainmarket in to or share, to participate more in markets, to increase size their and the of companies. In the 1960s, with overcapacity creating tighter margins reduced and earnings, vertical and integration blocked, cement companies sought once again to avoid the pitfallsof price competition. They engaged non-price in competition areas marketing distribution in of and whilealsoseeking mergers. Producers sought horizontal mergers obtaingreater to marketshares order in to consolidate production newerand more efficient in plantsand to take advantage risingscale of economies. Running larger, moreefficient plantsat higherutilization rateswas a way to reducemarginal costsand increase
s Electronic control technologies allowed kilnsto quickly growin sizefrom 250 to 450feet with some kilns reaching 750 feet. Pneumatic bulk loadingequipment was developed facilitated rapid and the transfer cement. of Better roadsystems larger and trucks displaced railroads brought and more timely deliveries widely to scattered customers. 6 The academic evidence economies scalefor multi-plant for of operations is inconclusive [McBride, 1981, 105-115]. pp.



operating margins. They pursued marketextension mergers because they wantedto be in more markets orderto stabilize in earnings. Construction markets volatile were regionally producers and sought reduce uncertainty to the caused demand by variability moving moremarkets. by into Theyalsosought mergers order expand companies thebelief larger in to their in that firms had greater managerial, marketing, research development, capital and and formation capabilities. FTC blocked The these avenues growth for within industry the so producers sought opportunities outside cement the industry.

Duringthe 1960s, cement companies tempted diversification were by and threatened conglomeration. by Cementfro-ns were diversifying and diversified were firms buying cement companies. lateasthemid-1950s, As less than15%of capacity owned firms was by withsignificant outside interests and mostof thiswasrepresented UnitedStates by Steel's Universal AtlasCement Company. the end of the 1960s industo/looked different, By the very with twenty-six diversified companies owning 75%of capacity. Thereremained just 18firms, mostly small, single plant operations, making cement. only Diversification a 180-degree for many thecement was turn in industry. 7 Whereveryrecently, moving ready-mix even into concrete seen beyond was as the scope "realcement of men,"now"moreandmoreproducers thatit is feel sound business policy enter to intoanyfieldwitha good profitpotential" [Pit OoQuarry, 1970,p. 87]. In an attempt movefurtherawayfrom their Jan. to rootsandremake theirimage, several companies removed "cement" fromtheir
name at this time. Lone Star Cement became Lone Star Industries and General

PortlandCementbecame General just PortlandInc [Rock Products, 1974, Dec. p. 57]. In retrospect, diversification not a good idea for U.S. cement was

producers. Very few diversification moves weresuccessful several and cost fro'ns dearly[Rock Products, 1978,p. 10]. Manyhter soldtheir outside May interests refocus cement to on production. Diversification a dixect was reaction the FTC'smerger to policy and diverted managers' attention from theircorecapabilities cement in [Aranoff, 1975,p. 92]. One gets feeling a theytooktheireyeoff the ballat thispoint, losing focus cement on making marketing. and Cement an industo/where is a long-term commitmentneeded, losing is and focus a decade for caused U.S. the industo/ fall behind whenconditions undergoing to just were rapidchange. Cement markets were beginning globalize, competitive to the structure of domestic markets undergoing was fundamental change, theEnergy and Crises necessitated production new technologies. U.S. cement The industry was
7"We don'tthinkdiversification isgoodfor thecement industry, either frominside or outside, because itshigh of degree specialization" May1959, 89]. of [RP, p.


distracted diversification when it faced a seriesof changes by just that

demanded all of its resources.

Declining Investment,SmallerPlants,and Technological Change Diversification only diverted not manager's attention, alsodiverted it available funds away frominvestment theindustry. in Capital spending off fell as cement producers turnedawayfrom cement production. Therewere fears expressed the late1960s in thatinvestment not keeping was pacewith longterm needs, that muchof the industry obsolete eS and was [Pit Quarry, Jan. 1966, p. 98, 120; RockProducts, 1968, p. 62; Minerah April Yearbook, 1970, p. 269]. These fearswere given expression the dramatic in slowing of productivity growth the 1970s.Capacity for the firsttimein the postin 8 fell war periodin 1969 and fell furtherin 1970 as old plantswere retiredand producers failedto invest newcapacity. fall in outputcontributed in The to severe shortages during nextbuilding the boomin 1972-73. The widespread shortages brought imports pouring thecountry producers into as sought alternative sources supply to theircustomers. period widespread This of shortages alerted foreign producers opportunities U.S. cement to in markets thatwould be exploited morefullyin the1980s. Domestic producers discouraged building plants their were from new by highcostand the structure the markets. of Building largemodern a plant entailed significant capital expenses highdepreciation and charges. Regional markets, most in cases, multiple had producers were and difficult expensive and to penetrate. Producers it was knew almost impossiblegain to market share by squeezing old plantout of themarket. an Olderplants remained competitive because were they fullydepreciated paidfor.Producers nowayto gain and saw enough market share allowa large to modemplantto run at utilization rates where margins would sufficient recover be to capital costs earn and acceptable profitrates. Unable profitin markets to crowded numerous with small plants, producers reluctant commit necessary were to the capital. Small producers, largely prohibited selling to existing from out producers, carried aslongas on possible. situation terminal, in theshort Their was but term, they could the ruin

The FTC had determined that regionalmarketswere already "oligopolistically structured" operated and suchthat "firmscannotestablish policies without reference thepractices specific to of competitors" [FTC,1966, p. 87].The FTC, in itsdeterminationmaintain many to as competitors each in regional market possible, as opposed mergers where producer a wouldhave morethan30 percent a market. of Thisrulewastaken froma Supreme Court case concerning banking the industry [FTC,1966,pp. 75-6].The 30 percent rulewasapplied allindustries didnottakeaccount howmany to and of other
8 Laborproductivity roseonly 3% between 1970 and 1980;between 1960-1970 the
increase was 61%.



producers therewerein a particular market.Therewas no provision 9 for differentiating industry capital by intensity scale or economies.
Technological Changeand ScaleEconomies

The low rateof investment the decline plantbuilding the and in in cement industry beginning the late 1960s in slowed introduction new the of technology. production New technologies possible made much larger more and efficient plants, producers, but unable consolidate to markets reapthe and

benefits scale of economies, notbuilding plants. were new Withslow capacity growth lowinvestment and levels, innovation production in technology lagged among equipment U.S. suppliers. production New technology increasingly was coming from overseas, domestic with equipment suppliers operating under licenses European Japanese [Colson, to and firms 1980, 195]. p. New production technologies allowed that muchlarger and efficient
plants raisedthe issueof foregoing greaterefficiency for the sake of maintaining competition. conflict The between scale economies market and concentration explored a paperby a U.S. academic was in economist 1993. in The paper acknowledged significant economies worried, theFTC, scale but tike that greaterconcentration would allow producers extractmore than to competitive returns [Rosenbaum, pp. 379-92]. 1994, The study claims that

producers ableto appropriate percent theefficiency were 30 of savings from larger plants because increased of concentration, although mechanism no is specified. Thereis, however, onlyscant recognition the largegains of that accrued consumers. to Without investmentnewplants, the in production costs andprices would havebeen significantly higher. Producers, according this to study, profited morethantheoretical models predict theyshould, there but is nomention absolute of return theindustry. of rates for Industry profits during thisperiod averaged about10%,hardly only extraordinary returns. Instead of
worrying about hypothetical the dangers increased of concentration levels, one might lookfor ways increase to investment larger in cement plants. Furthermore,industry profitlevels weremoreclosely related demand to conditions
than to concentration levels.

The concern with regional concentration levelsby the FTC and academic economists ignores growing the globalization cement of markets and

theroleof imports during 1970s 1980s. imports the and As became large a force many in markets during period, ability domestic this the of producers to influence prices declined. With the development independent of import facilities direct and importing large by customers, domestic producers the lost
9 The 30% rule camefromJustice William Brennan's J. decision the U.S. vs. in Philadelphia National Bank, June 1963. 17, Brennan stated: "Without attempting specify to
the smallest marketshare considered threaten to undue concentration, are dear that 30 we percent presents threat" that [374U.S.at 364].


potential extract to extraordinary margins, evenduringconstruction sector upswings. themid-1980s, In domestic producers operating fullcapacity were at but werestillunable stemthe dramatic, to decade-long in prices. U.S. fall As cement markets wereincreasingly integrated global into markets, ability the to

set prices based regional on market structure iignificanfly was weakened.

The Structure ForeignIndustries of

The Canadian cement industry, operating under verydifferent antitrust rules, consolidated horizontally vertically. top threeproducers is both and The are foreign-owned controlover 75% of productive and capacity. 1963 In average plantsizes were similar thosein the UnitedStates, by 1975 to but Canadian plantswere,on average, 15% larger.Plantswere newerand used moremodemtechnology the Canadian and industry quicker moveto was to more energy-efficient production technologies the 1973 energy after crises [Aranoff,1975,pp. 86-94].Canada optedfor fewercompetitors in return and gotlarge, modem, efficient plants [Nisbet Skehill, & 1986, 6]. p. A U.S. academic economist looking the Canadian at industry 1993 in sawtheforeign ownership, levels concentration, "moredisdplmed" high of and pricing a negative as situation. conclusion thatpublic His was policy theU.S. in should aimed stopping be at further concentration theyendup like the lest Canadians [Allen, 1993,pp. 697-715]. Whatis not mentioned thatCanadian is plants havesuccessfully pushed large amounts cement U.S.markets of into for years. Canadian producers, large-scale with plants located deep-water on ports
andextensive distribution networks, ableto dominatesomeU.S. markets.If are

domestic Canadian cementpriceswere significantly abovethoseof their exports, producers U.S. wouldbe shipping large quantities across northern the border filinganti-dumping neither which or suits, of happened. European cement industries evenmoreconcentrated Canada's. are than Markets highly are concentrated horizontally, in mostcases and vertically as well.Explicit pricing agreements longexisted, have although these havebeen underattack the European by Unionin recent years. Oligopolistic industry structure not meantstagnation. andlarge, has By plants Europe large, in are modem, andtechnologically advanced several with countries exporting large quantities theUnitedStates. to Europeis thehomebase thelargest for cement companies theworld. in BlueCircle, Holderbank, Lafarge global and are companies, theyaremuch and larger, with fargreater resources, anyU.S.company. have than They tremendous in-house resources plantconstruction, management, for plant marketing, R&D, andcapital formation. Consolidated integrated and markets havenot minedthecompetitiveness of Canadian European and producers bought who up much thefragmented failing industry the1980s. the1990s, of and U.S. in In
0 Canada wasthe onlymajorimporter included a wide-ranging not in anti-dumping
suit fried in 1986.



Mexico's largest producer Cemex following model, is nowa multiis this and national producer plants theUnited with in States, Europe, South and America.

The FTC's antitrust policy of actively maintaininghorizontal fragmentation not the bestway to long-term was productive allocafive or efficiency the cement in industry. Regulation focused maintaining on multiple producers competing proscribed in regional markets ignores technological possibilities, globalization cement the of markets, the advantages by and held large firms capital in intensive industries. Joseph As Schumpeter warned almost fiftyyears "perfect ago, competitionnotonly is impossible inferior, has but and no titleto beingsetup asa modelof idealefficiency. is hence mistake It a to base theou; government the of regulation industry theprinciple big of on that business should madeto work as the respective be industry wouldwork in perfect competition" [Schumpeter, p. 106]. theend, 1950, In chssical economic theou;wouldargue favorof multiple in producers greater and competition while historical comprisons favor greater concentration thecement for industry.

Allen, BruceT., "VerticalIntegration and marketForeclosure: Caseof Cementand The Concrete," Journal Lawand The of Economics, 1971 251-74. (April ), , "ForeignOwnersand American Cement: Old CartelHands,or New Kids on the Block," Review oflndusMal Organigation, 8 (1993), 697-715. Aranoff, Gerald,"The ConditionCementMarket:Expanding U.S. Market,"Pit and to ,Quarry, 1975), (July 86-94,149.

Best, Michael The H., NewCompetition.' Institutions ofIndustrial Restrnctung (Cambridge, MA,

Brinkley, Alan,The of End ReJrm: Deal New Liberam Recession (NewYork,1995). in and IVar Chandler, AlfredD. Jr.,Scale Scope: Dynamics and The ofIndustrial Capita)m (Cambridge, MA,

Colson, Thomas, "The Cement E., Industry," JohnE. Ullman,ed., TheImprovement in of Productivity: and Myths Realties, York,1980), (New 177-197. F.T.C.v.Cement Institute, U.S.683(1948). 333 Hounshell, DavidA., From American the System Mass to Production, 1800-1932, (Baltimore,

Loescher, Samuel Imper.ct M., Collusion Cement inthe Industry (Cambridge, 1959). MA,
McBride,Mark E, "The Nature and Source Economies Scale CementProduction," of of in

Southern EconomicJournal, 1981), 48 (july 105-115. Nisbet, Michael andD.L. Skehill, A. "Cement's Solid Foundation," Canaanart Banker, (Oct. 93
1986), 6-17. Pitand,Quarry, (Chicago). Rock Products, (Chicago). Rosenbaum, DavidI., "Efficiency Collusion: v. Evidence in Cement," Cast Reviev oflndustffal Ocganigation, 9 (1994), 379-392. Schumpeter, Joseph Capitasra, A., Sodam Demorafy, edn., and (3rd NewYork,1950).


U.S.Department theInterior, of Bureau Mines, of Minerah Yearbook. U.S.Federal TradeCommission, IL,port the of Federal Trade Commission Basis onPdce Inqui{y, The Basing-Point and I%rmula Cement (Washington, 1932). Pdces, DC, U.S. Federal TradeCommission, Cement Indust{7, fromtheChairman theFederal Letter of Tra& Commission, Transmitting In Rtonse Senate to Rtsolution 448,Seven-First No. Congress, A Report Rdative CorapetiOle to Conations Cement inthe Industry (Washington, 1933). DC,