What is the Impact of the Boral and CSR Brick Merger? 2

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Tuesday, January 27th, 2015
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In my view, the ACCC’s recent approval of the Boral and CSR brick business merger is a job half done.

The legal mumbo jumbo influencing the decision misses key issues and much of the argument is outdated opinion bowed to the powerful lobbying of the proponents.

What does the merger do for the construction industry, what’s in it for Boral and CSR shareholders and, most importantly, for industry-based consumers? The ACCC played down the market power of the proponents. I wonder if the ACCC considered the indirect power of the proponents politically, through industry associations and via indebted organisations who would not wish to offend.

The ACCC claims to be Australia’s competition regulator and national consumer law champion. It claims to promote competition and fair trading and regulate national infrastructure to make markets work for everyone[1]. But has that been achieved in the Boral and CSR Brick deal?

The ACCC’s decision had little to say about what future there was for bricks in Australia and if any conditions might apply should Boral and CSR eventually hive of their under performing brick assets. The ACCC observed that for many residential builders, clay bricks will continue to make up approximately 80 to 90 per cent of external cladding materials used. So what’s the plan?

Boral has warned that the local brick-making industry could die if the competition watchdog failed to approve the latest joint venture proposal. The merger was initiated because both companies believe brick demand in Australia is experiencing a sustained structural decline. They are right, but there are many other factors at work here, and it’s not just about bricks. Some of these include:

  • Bricklaying skills shortages which have driven up the cost of laying bricks to nearly twice brick retail prices, compounded by diminishing brick construction quality and waste
  • Boral and CSR being so far down the construction food chain that they have no real value proposition that allows either company to successfully reposition
  • Challenges in identifying and bringing into production new raw materials sources for bricks

The ACCC eventually approved the joint venture, saying it doesn’t believe the move will substantially lessen competition.

Building materials are part of national infrastructure. While the ACCC claims to be the competition regulator, the Boral and CSR decision is silent on how the benefits for shareholders and consumers will materialise. How did Boral and CSR demonstrate that the merger would improve each company’s long term viability or the future for bricks, and how does this decision make the brick market work for everyone?

According to Spencer Little, a senior analyst at IBIS World, 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,” he said.

My own view is that it will be the small scale manufacturers that survive by making high quality bricks for the premium end of the market. The low cost producers will eventually find that the cheap manufacturing techniques now being supplied to the market will run into huge consumer push-back.

Little claims the struggling clay brick manufacturing industry is the result of a weak demand from downstream construction industries, which impact the choice to use bricks anyway.

“The 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, and as a result, industry revenue is estimated to decline at an annualised 3.6 per cent over the five years through 2014-15, to reach $830.0 million,” he said.

Little has not commented on the alternate – and potentially disruptive to Boral and CSR – array of cladding systems now on offer. There are some very impressive systems coming into the market today that offer great choice and quality, especially from overseas. These systems will in my view eventually redefine how construction is performed in Australia. It all seems below the radar for the ACCC.

Other commentators submitted that the proposed joint venture could result in reduced choice across brick product ranges, in terms of the variety of colours and other aesthetic characteristics offered for construction of new homes. They said that reduction in choice and variety would limit builders, architects and consumers.

The reality is that most brick consumers have their choices limited by the pre-market volume purchasing deals and rebates negotiated between developers, builders and the major materials suppliers.

The ACCC noted submissions from residential builders in NSW and Queensland that claimed a reduction from three to two major clay brick suppliers will result in increased prices for clay bricks.

“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 could cost approximately $1,200 extra as a result of a 10% increase in clay brick prices (depending on the bricks used,)” they said.

But if these residential builders were overly concerned about these construction costs they may like to explain to the ACCC why thousands of bricks and tons of construction materials end up in urban land-fill as a bi-product of constructing each and every dwelling. The ACCC should be interested in this, just as Boral and CSR should be. The construction inefficiency, waste and costs exhibited on building sites across Australia would not be tolerated in any other industry.

Australia’s construction industry sits in a precarious balance. Regulators are so focused on the ideologies of cutting red tape, bowing to powerful interest groups and focusing most reform attention on workforce wages and conditions that none can identify let alone quantify what an end game may look like. There is little energy devoted to uncovering management’s contribution to poor construction productivity and unsustainable costs. If the ACCC is not asking these questions then they should at least be asked by Boral and CSR shareholders who might like to reflect on long term performance of these stocks in comparison to the performances of the ASX 200 or the DOW.

It’s all of these considerations that in my view make the ACCC’s role in approving this merger a job half done. The Boral and CSR brick deal has yet to demonstrate how it contributes to competition and fair trading and towards regulating national infrastructure to make markets work for everyone.

[1] See ACCC – https://www.accc.gov.au/
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  1. Grant M Spork

    The competition comes mainly from alternative construction. Low carbon concretes which don't require expensive firing processes, pre-cast concrete fiber cement board. At the end of the day a competition policy which allows for free trade with the US, Asia and India will mean consolidation of almost every industry participant. Medium size companies will need to merge to survive and remain competitive because foreign competitors have much greater economies of scale. This also goes for Architectural and consultant services. Those who can't collaborate or merge to get critical inertia, or form alliances with foreign competitors will become the thylacine's of the business landscape.