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For Lafarge, the world's leading cement producer, integration has become a top priority in China.

 

The company entered the nation in 1994 and the first few years were slow.

 

By 2004, it had set up just four joint venture production facilities, with an annual production capacity of 3.6 million tons.

 

But last year it saw a rapid expansion through mergers and acquisitions.

 

In November, Lafarge and Shui On Construction and Materials Ltd, a top cement factory in southwest China, formed a joint venture.

 

Lafarge has a 55 percent stake, while its partner has the rest. Lafarge has taken on the management, while Vincent Lo, chairman of the Shui On Group, acts as chairman of the joint venture.

 

Later on, Lafarge Shui On bought a controlling stake in Sichuan Shuangma Cement Co Ltd.

 

Lafarge Shui On quickly became one of the top three cement producers nationwide.

 

Now, the company has 14 cement plants and seven grinding stations in China.

 

Its production capacity is 17.4 million tons a year.

 

"What we are trying to do today is to digest and integrate what we already had in the country," Cyrille Ragoucy told China Daily.

 

Ragoucy was appointed as the chief executive officer of Lafarge Shui On Cement in September.

 

Before coming to China, he was president of Lafarge, eastern Canada.

 

He led Lafarge's largest acquisition in Canada - the purchase of Warren Paving & Materials Group in 2000.

 

According to Ragoucy, the current priority is to use Lafarge's technical knowledge to improve Chinese plants and upgrade production facilities. This is aimed at increasing product value and reducing costs.

 

He said his goal was to make China the biggest region for Lafarge's cement business and also ensure it is a profitable market. He added that the country is already one of the biggest markets for Lafarge.

 

"Lafarge's industrial excellence and management systems, combined with Shui On's access to and experience in local markets in the southwest, will allow us to pursue even more growth and development in the country," he said.

 

The venture has set up a technical centre in its Beijing headquarters to share knowledge between its Chinese operations and operations in other countries.

 

Focusing on the southwest

 

Apart from Beijing, Lafarge's cement production facilities are mainly located in the country's southwest region, including Chongqing, Sichuan and Guizhou.

 

"With a population of over 200 million, the region represents a huge market,' Ragoucy said, adding: "The country's 'Go West' policy will help boost market demand for cement in the region."

 

Statistics show average per capita cement consumption in the region is around 300 to 400 kilograms a year, compared with 700 kilograms for the rest of the country.

 

Lafarge plans to pour US$150 million into the region "for business integration and facility expansion during the next two years," said Ragoucy.

 

Lafarge is now in talks to buy three cement plants in China's southwestern Yunnan Province.

 

If the deal goes smoothly, production capacity will reach 21 million tons a year, further consolidating the firm's leading position in the region.

 

However, "focusing on business integration in the southwest does not mean Lafarge will not do anything else," Ragoucy said. "We are always looking for opportunities here.”

 

He said China represents 25 percent of the world's cement market in terms of sales value, but 45 percent in sales volume.

 

The country's cement market has been growing by 8 percent a year on average.

 

Thus, "we have to grow at least 9 percent," Ragoucy said.

 

According to China Economy Statistics, China's cement output in 2005 was 1.048 billion tons, a rise of 11.72 percent year-on-year.

 

Cement sales reached 260.835 billion yuan (US$32.2 billion) last year, increasing by 16.19 percent.

 

M&As in the industry

 

The company's growth expectations will be mostly achieved through mergers and acquisitions as the industry is "not consolidated," according to Ragoucy.

 

China now has more than 5,000 cement producers, with most of them being small or middle-scale plants.

 

Meanwhile, shrinking industry profit margins offer mergers and acquisition opportunities for foreign investors like Lafarge.

 

In 2005, the profit for the country's cement industry was 8.05 billion yuan (US$1 billion), down by 38 percent on 2004.

 

M&As by foreign investors have been seen frequently in the cement market lately.

 

Heidelberg bought 45.77 percent of Jidong Fufeng Cement Co and a 40 percent stake of Jidong Jingyang Cement Co, in order to develop in Northwest China's Shaanxi Province.

 

Holcim increased its shares in Huaxin Cement to 26.11 percent and is planning to buy into Henan Tongli Cement Group.

 

Strategic investors Morgan Stanley MS and the International Finance Corporation took stakes in China's largest cement producer Anhui Conch.

 

Kong Xiangzhong, secretary-general of China Cement Industry Association, predicted small and middle-sized cement producers with an annual production capacity of less than 300,000 will be gradually forced out of the market.

 

(China Daily March 7, 2006)