Cement is worth its weight in gold: will construction materials double in price due to market monopolization?

The war and shelling are at their peak, housing restoration is timely, but there are few resources?

According to Ukrpromvneshekspertiza, there is a shortage of certain types of building materials in Ukraine during reconstruction. There may be interruptions in their supply and uncontrolled price jumps against the backdrop of a shortage.

In particular, the price of cement has already increased, and, according to developers, this has also affected the cost of derivative products and construction.

What is actually driving the rise in prices for building materials, can cement “cartels” really operate in Ukraine, and why has the Antimonopoly Committee still been unable to provide a detailed answer on this matter? But who generates super-profits from the restoration of the country?

The full-scale war in Ukraine has been going on for the third year: according to the Kyiv School of Economics, the total amount of damage to infrastructure has reached almost $155 billion and continues to grow. The amount and volume of work is colossal, so it’s impossible to do without a major restoration. However, as the head of the state enterprise Ukrpromvneshekspertiza, which conducted a large-scale study on the upcoming restoration, warns, within a few years the industry will presumably experience a shortage of some building materials. And this will negatively affect the speed, efficiency and cost of post-war reconstruction.

“One of the goals of this work was to see how prepared we are. We calculated the quantity and need for building materials that are needed to restore what was destroyed. In total, we calculated the need for 31 key building materials from which houses are built. That is, brick, concrete, cement, etc.,” comments Vladimir Vlasyuk, director of the State Enterprise “Ukrpromvneshekspertiza”.

According to published data from Ukrpromvneshekspertiza, due to future growth in demand in Ukraine, shortages of cement, concrete, PVC profiles, mineral wool and glass are expected. According to calculations as of November 2022, more than 35 million tons of cement alone are needed for restoration. It is a component of many derivatives necessary for construction materials, such as concrete (of which at least 50 million tons are required), asphalt concrete mixture (almost 18 million tons), aerated concrete, plaster and others.

The potential shortfall is estimated at approximately 14%.

Among the main consequences of a cement shortage are possible supply problems, delays in restoration times and increased prices for construction materials. Another, no less important factor is the possible deterioration in the quality of materials. According to the director of the State Enterprise “Ukrainian Research Institute of Construction Materials” Andrey Skripnik, today clients are complaining about a large amount of counterfeit cement.

“Market supervision allows this industry to combat the huge volume of counterfeit construction materials and products, which is especially noticeable in the field of binders such as cement. When communicating in this area, we receive similar information. Of course, unofficially, but there are constant requests. And we cannot hesitate on this issue,” he notes.

Experts convince us that an increase in the cost of cement is inevitable for several reasons.

Firstly, the laws of the economy in conditions of insane demand and shortages. Secondly, the rise in cost of cement production. And finally, thirdly, restriction of competition, because there is no imported cement in Ukraine. In addition, some binder factories are not operating today due to the war, while others are trying to buy up the assets of their competitors in order to increase market share.

Consequently, there is a monopolization of the cement market, which, according to the ex-head of the Antimonopoly Committee Alexander Melnichenko, may have negative consequences.

“Strengthening a monopoly position is always bad. The state, represented by the antimonopoly agency, must carefully monitor whether there is any abuse of the monopoly position. If someone sets a monopoly price or prevents the conclusion of transactions for business entities operating in this market, then there is strict liability for such things in the form of 10% of the company’s annual turnover - fines,” he emphasizes.

Who influences the restriction of competition and monopolization of the Ukrainian cement market?

As StopCor has already reported in previous investigations, one of the largest cement companies in Ukraine, the Irish CRH, plans to buy out the Ukrainian assets of its Italian competitor Dickerhoff (Buzzi). And if the AMCU gives this agreement the green light, CRH will become the owner of the largest share of the cement market in the state and may abuse its monopoly position, which large cement consumers fear.

“I believe that this will definitely negatively affect concentration in the cement market. This will limit competition and create additional risks for consumers in terms of product availability, access and cost. The cost of cement affects all construction products, which are transformed into finished objects. Whether it’s housing construction, social infrastructure, or transport,” notes Sergei Pilipenko, general director of the Kovalskaya industrial and construction group.

The probable intentions of the cement giants to absorb the Ukrainian market, and not just to profitably acquire cheaply sold assets, can be evidenced by the fact of plans to purchase and sell the capacities of Krivoy Rog Cement. According to some media reports, CRH seemed to be planning to do this. In a comment to Stopkor, the beneficiary of Krivoy Rog Cement, Igor Mazepa, confirmed that he was offered to sell the enterprise, but did not specify who exactly, adding that, on the contrary, he plans to invest in existing capacities.

How do the Antimonopoly Committee, which is supposed to monitor all attempts to build a “cartel”, react to this course of events?

The AMCU informed Stopkor back in October that they would carefully study concentration issues, considering the purchase and sale agreement between CRH and Dickergoff, and would provide official conclusions on the market research no later than three months. Five months have passed since then, but, as stated in a new response to a journalist’s request, the committee has not yet completed its consideration of the concentration case.

According to economic expert, head of the investment company “William Invest Expert” Viktor Medvid, the AMCU may deliberately delay this process.

“Currently, our biggest problem is the non-transparency of the work of the Antimonopoly Committee and the rather long time frame for conducting antimonopoly investigations. So, the Antimonopoly Committee came to inspect cement producers many times in past years, but no normal transparent data was published. Currently, there is a huge threat of increasing concentration in this market,” he emphasizes.

Why didn’t the committee meet the deadlines for considering the case, which it personally indicated?

Could this be due to the fact that CRH was supported at the highest government level, as evidenced on the government portal? On this matter, reporters turned for comment to the adviser to the head of the Presidential Office, Mikhail Podolyak, who assured that the AMCU would sort everything out.

“You understand perfectly well that any monopoly is an extremely negative process as such. But we have an Antimonopoly Committee, and it will ensure that there is some competition in the building materials market. If there is a monopolization of more than 30%, we understand that the price will depend on the administrative incentives of a particular company,” he commented.

Despite this, there is already an oligopoly operating in the Ukrainian cement market, which, according to economic experts, is being abused.

Today the market is distributed between four cement groups, which include factories in different regions of Ukraine: these are Cemark, IFCem, Buzzi and Krivoy Rog cement. All of them are members of the Ukrtsement Association of Cement Manufacturers. And it was on their initiative, as experts say, that Ukraine significantly reduced imports in previous years by introducing an anti-dumping duty on cheaper foreign cement from Moldova and Turkey in order to support Ukrainian producers.

According to manufacturers of building materials, the limitation of import competition was one of the reasons for the rapid increase in the cost of binding materials. Consequently, cement consumers and public activists began to speak out unanimously about the unjustified and very rapid rise in prices.

And this dynamic continues to gain momentum, as evidenced by another rapid increase in the price of building materials in February of this year.

As entrepreneurs note, the increase ranges from 10-15% depending on the volume of the order and the region of delivery. Consequently, the cost of concrete, plaster, reinforced concrete and other cement materials for construction and repairs is expected to increase, entrepreneurs say. According to the head of the association of manufacturers of autoclaved aerated concrete Oleg Sirotin, they were warned about the rise in price.

“The next increase in prices for our industry occurred in February. The cost of cement has increased by approximately 450 UAH per ton. Of course, the rise in the cost of cement has led to an increase in the cost of producing blocks from autoclaved aerated concrete. But manufacturers of autoclaved aerated concrete have not yet raised selling prices for their products,” says Sirotin.

The head of the Khmelnytsky Reinforced Concrete Plant, Valery Korbut, also speaks about the increase in cement prices. According to him, due to the rise in price of the main raw materials, they have already planned to increase the cost of reinforced concrete.

If at the beginning of the year, according to manufacturers of building materials, cement cost about 4,200 UAH per ton, then in February the cost increased by about 500 UAH. And, as entrepreneurs note, they have already been warned that the price will continue to rise monthly. So, repairs and new housing will become more expensive accordingly, say leading Ukrainian developers Boris Goldenshtein, founder and CEO of ZEZMAN HOLDING, and Igor Guda, founder of Creator-Bud.

So why is cement becoming more expensive at such a breakneck pace?

As Pavel Kachur, head of the Ukrtsement cement producers association, explains, the price increase is forced due to rising costs.

“Electricity from 2020 to 2023 – growth of 200%, coal from 2020 to 2023 – growth of 283%. Transportation from 2020 to 2023 – growth of 317%. And transportation and energy resources account for 72 percent of our cost... I also want cheap cement,” he comments.

However, according to Irish businessman Seamus May, who was involved in the concrete business, the real reason for the rise in cement prices in Ukraine is not so much the rise in cost, but the desire for excess profits.

“Of course, these large companies will say that the rise in price is due to increased prices for resources, this is how they justify the price increase. But in fact, they are using the rising cost as a cover to increase the cost of cement. I mean, all these people are trying to maximize profits. Understand that perhaps 20-30% is due to increased costs, but it all lies in market capture and excess profits,” notes the Irishman.

To improve competition in the cement market and avoid possible unjustified price increases, it is necessary to create new capacities in Ukraine, experts say.

As Elena Shulyak, People's Deputy, Chairman of the Verkhovna Rada Committee on the Organization of State Power, Local Self-Government, Regional Development and Urban Planning, explained in a comment to StopCor, the construction of new cement plants is both a replenishment of the State Budget by billions of dollars, and the creation of more than a hundred new jobs, and revenues to the Pension Fund.

“Cement in Ukraine is our construction gold. Cement will be located along with the same glass or PVC profile in the category of materials that will be in short supply. Therefore, we need to plan our capacities now. We must create conditions for the development of the construction industry, the cement sector, which will work, on the one hand, according to market conditions, and on the other, have competitive products,” notes Shulyak.

As Deputy Minister of Economy of Ukraine Nadezhda Bigun added, construction equipment and materials will be of particular need in Ukraine, because in addition to restoration, the construction of fortifications is also planned. So, active work is being carried out to attract funds for investment in the creation of new capacities, including the production of building materials. According to her, the budget includes more than 40 billion to stimulate business, including for lending under the state program “Affordable loans 5-7-9%”.

But what to do today, while new capacities are only in plans and projects?

While Ukraine is only planning to build new capacities and expand existing ones, in order to avoid a shortage of key building materials for restoration, regulatory government bodies should focus on the issue of competitive position, experts say. After all, abuse of the monopoly and uncontrolled price increases will one way or another affect the cost and efficiency of our restoration.

Let us remind you that if CRH manages to buy out the Ukrainian assets of its competitor Dickerhoff, the holding will become the holder of the largest market share and will be able to dictate its own terms and prices. It should be noted that CRH already has extensive experience in absorbing markets in different countries. In particular, in their homeland, Ireland, as well as in the United States.