It was Douglas Adams in The Hitchhiker’s Guide to the Galaxy who gave us an immortal description of alien spacecraft invading Earth, something like “they hung in the air in exactly the way that bricks don’t”.
The same description could apply to the looming ACCC decision on the future of brick-making in this country: after submissions close tomorrow, the competition regulator is expected to hand down its decision next month on a proposal between the country’s second and third largest brick-makers, CSR and Boral, to form a 60:40 joint venture (JV) and consolidate their east coast manufacturing operations.
The ACCC’s statement of issues, released a few weeks ago, was unusually hostile to the merger and analysts at CSR’s earnings results for the half year to September 30, delivered this morning, were bracing for a rejection.
The ACCC considered the merger would reduce the brick-making industry to a duopoly: the JV would compete with market-leading Austral Bricks, owned by Brickworks, and together the two players would control 99% of supply, reducing competition and increasing prices in the order of 5-10% on the back of strong price increases over the last five years. The ACCC found the JV would have unilateral pricing power in Queensland, where it would control 75% of the brick market and in NSW where it would have 50%.
The humble brick has a special place in Australia’s building industry and — this is where it gets tricky — the ACCC rejected the would-be joint venturers’ argument that “the relevant product market is the manufacture and supply of external cladding products, on the basis that there are a range of materials which are technical and functional substitutes for clay bricks”.
Among builders of detached homes clay bricks accounted for 80-90% of demand and the ACCC wrote customers preferred bricks for their insulation, energy efficiency, sound proofing, fire resistance, ease of installation and cost, finding “other external cladding materials are not close substitutes for clay bricks”.
Architects are not so sure. Sydney-based Tone Wheeler, founding partner of Environa Studio and a champion of bricks in construction, nevertheless warns there is increasing competition from a widening range of alternative products and a shift to prefab construction.
The days of making building products for a contractor to build with are numbered, says Wheeler. “Modern building techniques are all about supply and install so you supply a product and install it and give guarantees and warranties on it.”
Instead of supplying glass, manufacturers must supply and install finished windows. Instead of supplying caesarstone benches, they supply and install whole kitchen cabinets.
“Bricks and tiles are one of the last things that have specialised trades and nobody wants to take up bricklaying … you will very rarely see an apprentice 20-year-old bricklayer.” And because the work is so hard, bricklayers retire early as well — very few last beyond 55.
There are other long-run structural trends working against CSR and Boral: more people are living in high-density, multi-unit apartments with concrete walls — councils no longer approve three-story walk-up, red brick flats.
Looking at today’s earnings results, CSR appears able to withstand a “no” decision. With momentum gathering in residential construction CSR reported an 15% jump in revenues to over a billion dollars and a 48% jump in after-tax profit to $68 million. The building products division — which includes bricks, flooring and lightweight cladding products — was the largest contributor. There were double-digit volume increases year-on-year in most product categories except tiles and glass, and the Viridian glass business is turning around.
CSR shares jumped at the open, and were trading at $3.55 on deadline, still well short of pre-GFC levels above $6. The market appears not to be pricing in an ACCC green light for the bricks JV, at the pointy end of 18 months of negotiations. Asked about alternatives to the merger — such as a joint venture that included manufacturing, but excluded marketing — CSR CFO Greg Barnes who handled the deal could not say much but sounded tired of the process, joking: “I was in my 20s when we started!”. He reiterated the merits of the merger, not just in consolidating manufacturing but reducing overheads, and threw in a warning that “both businesses standalone are a little sub-scale”. Whether that means plant closures and job losses is hard to say and Boral, which holds its annual meeting tomorrow, may have its own comments to make.
CSR and Boral, remember, are up against a dominant competitor in Austral and its owner Brickworks, whose boss Lindsay Partridge donated so heavily to the Coalition ahead of the last federal election and featured famously at this year’s ICAC’s inquiries into Liberal Party fundraising.
While CSR and Boral are diversified, Brickworks is focused and, as Wheeler told Crikey, have been far more innovative:
“Austral have the best brickmaking equipment, the best range (speaking as an architect, personally), the best consultants and give the best advice. Austral have a fat brick which is two bricks high made for rendering, and a terracotta product called Terracade, which you clip on the outside which is much more weatherproof than bricks.
“CSR and Boral haven’t done as well. They make a low-end product that is good for McMansions and that market has died.”