Barriers to Entry in the Cement Industry
Why do cement companies face so little new competition?
Introduction
Even after analyzing the cement industry, one question kept coming at me: if existing companies enjoy such high profitability, what’s stopping others from entering the market?
At first glance, the obvious answer seems to be the massive capital required to build a plant. But that alone doesn’t hold up—many firms can finance a $300 million project. I kept circling back to the question. For a while, I settled on economies of scale and the likely reaction from incumbents: slashing prices to drive new entrants into losses.
But that still didn’t feel like the whole story. If it were just about scale and retaliation, we’d expect more companies to enter anyway, gradually eroding margins until returns fell closer to the cost of capital.
Cement is an undifferentiated product. Buyers don’t care who they purchase from, so newcomers should, in theory, have equal access to customers. With no customer captivity, efficient players should eventually share the market, each reaching comparable scale and cost structures. Yet, in practice, the cement industry remains highly concentrated, with stable market shares and persistent profitability across most regions.
In this article, I explore why—despite offering a commoditized product with minimal brand loyalty or switching costs—the cement industry continues to have oligopolistic behavior and superior returns.
The Capital Intensity Barrier
Although by itself it is not sufficient to keep competitors away, I believe that the massive investment required to open a plant still acts as a barrier because for a company to enter they must commit around $300M from the start. Failure to successfully compete means a catastrophic loss, making potential entrants think twice before trying to compete.
The Local Marketshare Barrier
Cement’s low value-to-weight ratio creates natural local markets rather than a single competitive landscape.
Today, most markets are already occupied, have 1-3 national competitors with slight over-capacity, and are slow growing.
These characteristics present a very difficult “all-or-nothing” scenario for new entrants:
To have a competitive cost structure they must operate their plant at high capacity utilization.
A new entrant could choose to open a smaller plant, but they would be disadvantaged in terms of cost structure.
To operate at a high capacity means flooding an existing market with more product, which will drive prices and profits down
To sell this large amounts of volume means capturing a large share of the market from competitors right from the start
In the face of a new entrant, this geographic reality sets the stage for the strategic interactions that protect existing competitors.
Organized Mutual Destruction Deterrence
Existing competitors can collude to drive prices down, and with a national presence and more resources, endure losses longer and force the newcomer out.
This creates a powerful barrier because potential entrants can predict the mutually destructive outcome.
Incumbents can reinforce this natural deterrent through strategic capacity management:
Adding capacity before demand fully materializes to discourage new entrants
Maintaining extra capacity that can be activated if new entrants appear
Adding capacity in small increments that match market growth, leaving no market gap
Upgrading existing facilities rather than building new plants
These capacity dynamics force potential entrants to face a clear economic choice:
Enter a market with existing capacity (triggering mutually destructive competition), and with less resources than competitors
Choose alternative markets or not to enter at all
The Predator-Prey Dynamic
Beyond the mutual destruction deterrence, the cement industry exhibits a predator-prey dynamic that further discourages new entry.
Incumbents risk only marginal profitability in defensive actions
Entrants risk their entire investment
Incumbents have national presence and greater resources to endure low profitability periods
Entrants only have this plant
This creates a situation where incumbents have both greater incentive and greater ability to engage in defensive competition.
The Time Sequence Trap
Finally, the timeline of cement industry entry creates additional disadvantages:
Entrants announce their intentions 3-5 years in advance due to regulatory processes
Incumbents can prepare competitive responses during this preparation period, such as expanding capacity to temporarily drive prices down
By the time an entrant begins operations, incumbents have fully developed defense strategies
Entrants face immediate pressure when they are most financially
vulnerable
Conclusion
My exploration leaves me with this final conclusion: existing cement companies maintain their positions and profitability thanks to economies of scale in local markets with slow growth.
Because demand is no longer expanding significantly, a new entrant must capture a large share of the existing market right from the start to reach a competitive cost structure.
This is difficult, as most markets are already served by strong players. Flooding a market with excess capacity would only worsen the situation—likely leading to a price war where the incumbent, often with a national or international presence, can endure losses longer and force the newcomer out.
Considering the massive upfront investment, the risks involved, and the fact that returns would fall once new capacity comes online, most potential entrants choose to stay away.
Interesting how geography plays a roll, didn’t know anything about cement market and this quick to read article has quality information
Really insightful read!