Brazil and 'cement cartel' standoff may last years

January 23, 2014


By Guillermo Parra-Bernal and Alberto Alerigi

SAO PAULO, Jan 23 (Reuters) - A push by Brazil's antitrust watchdog Cade to impose unprecedented sanctions against six cement makers accused of colluding to exclude rivals from the market will likely end up in a years-long court battle, lawyers and analysts said.

The watchdog, long seen as an industry pushover, is reversing that image with a tough stance on what it calls "the cement cartel." Cade board member Alessandro Octaviani proposed on Wednesday to fine the firms a combined 3.1 billion reais ($1.3 billion) and force them to shed assets, in what may be a landmark decision if a majority of the watchdog's board agrees.

Switzerland's Holcim Ltd, Cimpor Cimentos de Portugal SGPS SA as well as Brazil's Votorantim Cimentos SA, Camargo Correa SA, Itabira Agro Industrial SA and Cia de Cimentos Itambé SA agreed to fix prices, he said.

The companies, which together dominate almost 90 percent of Brazil's cement and concrete market, will fight back. A lawyer in the case said courts could considerably ease the sanctions - a reason why Octaviani was aiming high with the fine and asset disposal proposals.

"It's a decision previously unseen in several aspects: the value of the fines and (the condition) that assets be sold. This is unheard of, that you order asset sales in a cartel decision," a second lawyer directly involved with the case said.

The proposal, which followed an eight-year inquiry, comes as allegations that cost overruns, partly triggered by a 66 percent rise in cement prices in the past decade, hampered projects across the country. Octaviani claims that customers overpaid by around 28 billion reais over two decades because of the cartel.

Cement sales more than doubled during the period in the wake of a commodities-based boom and government efforts to trim a housing deficit and expand the country's roads, ports and other infrastructure.

Although a fellow Cade member asked for a recess to better study the case, Octaviani's proposal is unlikely to be reversed. Apart from Octaviani, two of Cade's five board members already endorsed his proposal.

"If a court battle begins, this could take years," the first lawyer said. While there is no exact date for when the hearing could resume, Cade blocked any attempt for an early settlement with the firms.

Pedro Galdi, an analyst with SLW Corretora, said that companies will do the utmost to keep their assets. "I don't see them putting their assets on the block for peanuts," he said.

Holcim said in a statement that "it acts accordingly with the law and practices free competition in each and every market where it is present." Votorantim, Camargo Correa, Itabira, Itambé and Cimpor, which is controlled by Camargo Correa, did not immediately respond to requests for comment.


'PLENTY OF EVIDENCE'

The structure of Brazil's cement industry is uneven, with groups having strong market control over specific regions, which magnifies the potential for collusion. The number of producers has shrunk dramatically from almost two dozen in the early 1990s to about 10 by the start of this decade.

Prior studies by a justice ministry antitrust body showed that industry takeovers and asset swaps between cement producers were made to prevent rivals from entering the lucrative industry.

In 2010, Votorantim and Camargo Correa thwarted steelmaker Cia Siderúrgica Nacional SA's bid for full control of Cimpor - a move that could have made the latter one of the top four producers in Brazil. Votorantim is the largest producer of cement in Brazil, followed by Camargo Correa.

In what was seen as the most severe aspect of his proposal, Octaviani urged Cade to order the companies to trim their installed capacity by between 22 percent and 35 percent.

"There is plenty of evidence that the cement and concrete cartel subjugated the Brazilian economy for decades," Octaviani told fellow Cade members at a hearing, which lasted for over 10 hours.

If Cade endorses Octaviani's proposal, Votorantim would have to pay a fine of 1.5 billion reais and dispose of 35 percent of its factory capacity.

Intercement Brasil, Camargo Correa's cement unit and which also owns Cimpor, would pay a 438 million reais fine and shed 25 percent of capacity. For Holcim and Itabira, a ruling would force each of them to shed 22 percent of their capacity. Octaviani wants to fine Holcim a total of 508 million reais. Itambé would have to pay 88 million reais but would not have to cut capacity.

"The severity of the proposal make you wonder whether Cade has all the legal elements to restore equilibrium in the industry - to me this only opens room for a lengthy legal battle," a lawyer with no involvement in the case said.

The lawyers quoted in this story spoke on condition of anonymity.

In the prospectus for its planned initial public offering, Votorantim Cimentos listed the Cade probe as one of the risks hovering over the company. Votorantim scrapped the IPO last June as markets conditions soured ahead of the deal's pricing.