Wednesday, 18 July 2012

Aggregate market investigated by Competition Commission

Is now the time for DCC to be promoting a site belonging to Aggregate Industries when they and others are the subject of a Competition Commission investigation, the result of which will not be known until 2014?

In January 2012 the Office of Fair Trading referred the aggregates, cement and ready-mix concrete [rmx] markets to the Competition Commission (CC) having "concerns regarding structural features of these markets and reasonable grounds for suspecting that these are preventing, restricting or distorting competition." The confidential parts of AI's response have been removed, and whilst acknowledging that what they say to the CC in answer to their concerns might not correspond exactly with what they would say to DCC to justify the need for a brand new sand and gravel site at Straitgate Farm, from what remains there are some interesting snippets.

Firstly AI bemoan their economic situation: "2.22 This is an industry suffering from a substantial fall in demand, increasing costs and significant pressure from customers. These are not the market conditions that favour suppliers seeking to profit to the detriment of consumers."

A couple of relevant themes come out: On the subject of demand:
"1.3 A fundamental change in building techniques and preferences meant that as the UK economy improved during the 1990’s the demand for aggregates did not return to pre-recession levels. More recently a sharp downturn in demand since 2007 has resulted in an unprecedented contraction in house building and infrastructure  expenditure." "2.1 A significant contribution to the lack of recovery in the 1990s was a  change in the design of buildings. Steel, glass and timber, for example, are increasingly used as a replacement for rmx.  Improvements in the design of buildings and houses, as well as better concrete specification, have also significantly reduced the demand for aggregates and concrete." "2.6 Forecasts for the future provide little encouragement for a recovery until at least 2015: (a) the Government’s austerity measures mean that any increase in public spending on infrastructure projects in the near future is highly unlikely."  

On the subject of secondary and recycled aggregates:
"3.10 The increase in the levy on primary aggregates, new recycling technology and changes in product specifications over the last 15 years have supported the growth in sales of recycled aggregates. Whereas primary aggregates suffered a fall in demand post 1989, recycled and secondary aggregates grew throughout the period from 1989 to 2007. Secondary and recycled aggregates have, according to the [Mineral Products Association], grown from constituting 9% of all UK aggregates in 1989 to accounting for 28% in 2010." "3.11 Secondary and recycled aggregates are a substitute for primary aggregates for a significant proportion of the use of aggregates in the UK. For example: (a) secondary and recycled aggregates are entirely substitutable with primary aggregates for general construction purposes and produce a highly similar product with comparable integrity;... (c) some secondary aggregates, china clay by products from Devon and Cornwall, are used as complete substitutes for primary aggregates across all applications;" But AI complain that "6.5 As noted above AI is strongly of the view that aggregates taxes and credits distort efficient production. AI agrees that the landfill tax and latterly the aggregates levy have been a barrier to the expansion of primary aggregates and results in the favouring of secondary and recycled aggregates over primary aggregates" and "6.7 The aggregates levy has given producers of secondary and recycled aggregates, primarily independents, a significant cost advantage....(a) The 2009 BDS report found the “Introduction of the aggregates levy has changed the economics and distorted the market. It is now possible to economically supply china clay sand into the south east, and slate wastes into the midlands. […] Untaxed aggregates have a cost advantage over taxed aggregates. This distorts the market”.

So when AI themselves accept that the economic outlook for aggregates is bleak, and that secondary and recycled continues to displace primary aggregate, it is not the time for DCC to go designating new greenfield sites when there are still over 9 million tonnes and 20 years of reserves in the County.