Cement Industry Faces Bleak Future

The state of Texas recently filed a lawsuit against Cemex (CX - Analyst Report) for $558 million in royalty payments the Mexican cement maker owed in the United States. Texas Land Commissioner Jerry Patterson alleged that the company had been mining a quarry near El Paso without paying royalties to the state's Permanent School Fund that owns the site. CX defended itself by saying that raw materials like aggregates, limestone and other rocks were not subject to royalties.

Although the suit is not legally correct and lacks merit, it is a matter of concern for the debt-ridden company. Cemex had drawn big short-term loans to buy Australia's Rinker in 2007 just before the U.S. housing crisis and the subsequent global financial disaster. It needs to repay $4.1 billion of debt by the end of the year and the remaining amount in 2010 and 2011. It is refinancing $14.5 billion in debt to stay afloat.

Currently, the whole industry faces a bleak future. Cemex, which competes with France's Lafarge and Switzerland's Holcim, is in a particularly vulnerable position after losing its profitable Venezuelan operations when socialist President Hugo Chavez ordered the nationalization of its assets in 2008.

The cement industry in U.S. on the whole is in a perilous state. Advocates of the cement industry in the country and environmentalists are facing off in hearings this week as federal regulators call for comment on new rules to limit mercury emissions from energy-intensive kilns that form core of the cement business. If approved, the restrictions would be effective from 2013.

The Portland Cement Association contends that the regulations proposed by the Environmental Protection Agency (EPA) would weaken the industry as operating costs would rise by $340 million and lead to a 10% reduction in domestic production.

The U.S. cement industry as well as many overseas firms such as Holcim, Lafarge, Germany's Heidelberg Cement, Italcementi, Cemex and Japan’s Taiheiyo Cement, which own 80% of U.S. cement plants, will have to face the consequences.