Macrosty on APCM

The Associated Portland Cement Manufacturers, Limited, was formed in July, 1900, to purchase the undertakings of twenty-seven firms and companies (Note 1). “With the exception of three (Note 2), all the works are situated on the Thames and Medway, and possess such advantages in the quantity and quality of raw material that the neighbourhood of these two rivers, from being the cradle of the Portland cement industry, has now become the chief seat of the manufacture. It is believed that upwards of 80 per cent of the entire output of the Portland cement is produced on the Thames and Medway, where the supplies of chalk and clay are of the finest quality for the manufacture. The total production of cement on these rivers in 1899 has been estimated at 1,700,000 tons, whereas the estimate of production in 1895 was only 1,350,000 tons. This difference is due to the largely increasing demand for Portland cement” (Prospectus). The production of the firms taken over averaged for the three years 1897–9, 1,321,359 tons, and in 1899 was 1,404,569 tons; in addition Messrs. John Bazley White & Brothers, the largest combining firm, were erecting new plant with a capacity of 160,000 tons for making cement on the rotary kiln system (Note 3) on royalty. Working arrangements were also made with four other firms (Note 4); altogether the undertakings acquired and those four firms possessed about 89 per cent, of the total capacity of the Thames and Medway districts. In addition to cement, several of the businesses manufactured lime, whiting, bricks, Keene’s cement, Roman cement, etc., and several possessed engineering works, enabling the association to carry out a great part of its own renewals and repairs. In one of the four firms with which arrangements were made, the Wouldham Cement Co., which was established by S. Pearson & Son, the large contractors, mainly to supply themselves with cement, the association had a holding of £50,000.

The firms in the cement industry had always “kept themselves to themselves” until a few years before the formation of the association, when some of them formed an alliance which chiefly dealt with the purchase of fuel. The cement industry, being based on the possession of a local monopoly of raw materials, seemed well fitted for consolidation, but proposals for amalgamation though often made met with no favour until the present occasion, when the negotiations were undertaken by an outside company of promoters whose independent position commanded respect. The sale price to the association was £6,325,000, out of which the promoters had to meet the expenses of formation, but not cost of conveyance, etc. Against this sum there were land, works, buildings, plant, machinery, etc., valued at £4,522,000, and the difference £1,803,000 — or 3.2 years’ purchase of the last three years’ average gross profits (£561,103) before charging interest, depreciation, directors’ fees, and income tax — stood against goodwill, brands, and trade marks; the gross profits for the last year of account were £658,356. An additional sum of £1,050,000 was required for purchase of the new rotary plant, stock, raw materials, etc., and for working capital. The total capital offered for issue was £7,375,000 — £2,475,000 in 4¼ debentures, £2,450,000 in 5½ per cent cumulative preference shares, and £2,450,000 in ordinary shares, the vendors taking one-third of each class.

Unluckily for the association flotation took place at a most unfortunate time when the money market was in a semi-panic owing to the disasters in Africa and bad news from Pekin (Note 5). Although there was a large subscription, particularly from agents, distributors, and customers, the total was not taken up by the public, and consequently the vendors, feeling absolute confidence in the undertaking, substituted a considerable further amount of stock, especially ordinary shares, for the cash to which they were entitled. The directors alone held £1,400,000 of the capital, and with their connections their total holding amounted to half of the ordinary shares, one-third of the preference shares, and one-fourth of the debentures, or £2,660,000 in all. A further severe blow was caused by the sudden refusal of three firms to fulfil their contract of amalgamation; they represented a production of 140,000 tons on the Thames and Medway, and 50,000 tons on the Tyne (Note 6). Prolonged negotiations followed by litigation ensued, and the difficulty was not settled for five years when the contracts were rescinded on the three firms paying the expenses incurred (Note 7).

The state of trade proved the most serious obstacle to success. First of all the association drew its supplies of coke from the London gas companies, who, having a monopoly, exploited the coal boom of 1900 by forcing up the price of coke from the normal figure of 10s. to 22s. per ton. This item alone raised their expenditure £200,000 above the level of 1899. On the other hand the market for cement was bad. In Germany the trade had been most unsatisfactory owing to over-production, underselling, and the tariff policy of the other European countries; in 1895 and the years following there had been a great extension of production, chiefly in expectation of the construction of the Great Midland Canal, so that the capacity of the German works was 29,000,000 casks (Note 8), or double the home consumption. German exports rose from 600,386 metric tons in 1900 to 742,381 in 1903, of which Britain’s shares were 12,500 tons and 36,700 tons, respectively. Belgium also produced large quantities of cheap “natural” cement, which though not so good as Portland cement was good enough for the cheap builder. Our imports of cement from all sources have risen as follows: —

Lastly there has been some competition by slag cement (Note 9), a by-product of the blast furnaces at Middlesbrough, good for subaqueous works. And to make matters worse, there was progressive depression in the building trade at home and stagnation in the South African market. These hard facts not only affected profits disagreeably but had an important influence on the price policy of the association.

The prospectus stated that “an agreement has been entered into with George E. Wragge, on behalf of the principal London cement merchants, which provides, inter alia, for all merchants joining them taking their whole requirements of cement from this association for the term of seven years.” These merchants, of course, had the power of diverting a considerable portion of the trade, and towards them the policy was conciliation. “We are daily impressing upon our customers,” said the chairman at the first statutory meeting of the company, “that the object of this company is not to injure the merchant, or to squeeze out the middleman. We know the advantages of working hand in hand with the distributors, but in return for the hand we hold out to the distributors we ask for a ‘tied trade.’” This agreement antagonised some of the merchants, and when the high price of coke compelled a revision of cement prices the ill-will was increased and some trade was lost. The anticipations that this agreement would be profitable were not realised; “chiefly,” said the chairman at the annual meeting (Note 10), 27th November, 1901, “on account of certain restrictive clauses, which, in the changed circumstances, worked against the parties to them, including this company, without conferring on any of us the contemplated advantages of the arrangement. There seemed, then, nothing for it but for these agreements to become inoperative.” A letter to the press from Mr. Wragge, of date 1st February, 1901, gives a less detached view of the occurrence: “The agreement was duly sealed and exchanged, and for six months has been acted upon by both the manufacturers and the merchants. At the beginning of January the associated manufacturers gave the merchants notice that they were advised the agreement was not enforceable. The merchants thereupon took the opinion of eminent counsel, and were advised that the agreement was enforceable, and were prepared to enforce it but for the fact that the action taken would take considerable time and accentuate the present critical and disorganised state of the cement trade in London. Under these circumstances the merchants under protest agreed to the agreement being cancelled, and have now arranged to supply their customers’ requirements from elsewhere.” Such disputes always favour foreign producers, but in this case the association owned all the best brands. “We are sufficiently powerful,” said the chairman at the same meeting, “to make it clear that where we do not get our products actively handled and distributed by merchants, there we shall organise our own agencies, so as to secure what we have a right to claim — not a monopoly, but our fair proportion of the trade.” The merchants, in fact, were strong enough to injure the manufacturers, but the latter could in the long run, though at a loss, do without the merchants. This fact explains the submission of the middlemen.

The rise in the price of cement attracted considerable foreign competition. At first, the directors confessed, they were tempted to drive the foreigner out of the market by quoting prices too low for him to undercut, but fear of their shareholders withheld them. The middle course was adopted of letting the foreigner have all the market where cheapness was preferred to quality. Prices were reduced below the level of 1899 indeed but a moderate profit was aimed at, even at the cost of a diminished output. Slackness of demand caused a further restriction of output by about 7 per cent, in 1901. The ordinary expedient of making for stock is only possible to a limited extent in the cement industry, because cement is a bulky article to store and requires a considerable superficial storage area to allow aeration (Note 11). Not till the spring of 1906 were the directors able to put up prices, thanks to improvements in the building trade and to the San Francisco earthquake. On the accounts for 1905–6 the chairman said that “if the company had been getting the price which ruled six years ago they would have had in the year under review a profit of nearly £500,000 more to deal with, less any extra cost of materials that might have been due to the circumstances which had given them greater prosperity.” For all their millions the Associated Manufacturers could not maintain prices, and even in 1905 had to complain of serious depression. The only alternative open to them was to reduce costs. At the time of the amalgamation there were differences in the cost of production at the different works amounting to 25 per cent. In the first four years about £550,000 was spent in additions to plant, buildings, and machinery, besides what was spent on repairs and renewals. The new rotary kiln process proved a success and brought about an economy of coke, though it cost more than was anticipated; an exclusive licence was therefore purchased, and the process was introduced into more of the association’s works. Labour-saving machinery was introduced, causing a re-arrangement of staff and some reduction. The opportunity was taken to re-model works which were temporarily closed on account of the state of trade, and ultimately the business of those which manufactured under disadvantageous conditions was transferred to others better situated. The directors were disinclined to close works permanently on account of the dislocation of local labour and trade which followed on such a policy, but the compulsion of necessity was too severe for them; it is to be reckoned to their credit that in 1904–5 they undertook a lot of special clearing of chalk quarries in order to find work for the unemployed, and owing to the less efficiency of the labour had to charge their accounts with £989, the sum expended beyond the normal cost. The subsidiary industries of lime, whiting, bricks, etc., proved profitable and added an element of stability to the business.

The results of the trading are shown by the following table, profits being taken after providing for repairs and renewals, but not for depreciation, directors’ fees, and income tax (Note 12): —

The prospectus forecast a 10 per cent dividend on the ordinary shares; nothing has been paid (Note 13). The capital issued is now £6,571,504.

The management of the association is entrusted to nineteen directors in addition to fourteen managing directors who give their whole time to the business. The managing committee meets weekly and reports in full to the monthly meetings of the whole Board. Directorial and other official appointments under a combination always represent a compromise. “In the negotiations” — to quote a reminiscent passage (Note 14) from one of the chairman’s annual addresses — “there were many individual interests that had to be considered. It was most important to retain the services of all those who had been most instrumental in conducting the businesses. On the other hand, there were many who had posts in them who stipulated for employment in the new company. Nearly all these arrangements are favourable to this company’s interests; where there are exceptions time will enable the requisite changes to be made, but definite agreements have to be adhered to while they last”. (Note 15). After five years it was found possible, as these contracts lapsed, to make rearrangements producing a saving of about £10,000 a year. The first task after amalgamation was the substitution of one central office for many scattered offices and the adoption of one system of accounts. The latter was a lengthy and complicated undertaking — involving as one single item the transfer of 6,000 customers’ accounts — but without it there could not be obtained that ready access to statistics and that facility of comparison which are necessary in the control of a large business with many branches. Not less important is the organisation of sales. “Our selling operations,” said the chairman on 24th October, 1902, (Note 16) “are managed by a sales committee. The members of it are those who, before they joined us, sold the cement of their respective firms. Their work is, however, only to a small extent carried on in committee. They meet together to determine the larger matters of policy, but each takes charge of a definite department, and keeps touch, by personal interview as well as by correspondence, with the customers of his own section. We realise how important the personal element is.... But, in addition to what I may call the daily routine of the business of selling our large tonnage, there is cast upon the sales directors the responsibility for watchfulness concerning new channels and new methods; for initiating, in fact, a policy of distribution. The directors felt at an early stage that many of the firms whose businesses had been purchased had localised their trade, and had to some extent neglected the great markets of the world. Business had come to them in good times, and they had formed the habit of waiting for it to come. With such large quantities to sell this company could not follow that example. The sales directors felt the importance of seeking business wherever it is to be found, and have been prepared to face the fact that it may be necessary to go to the other side of the world to obtain personal acquaintance with facts, conditions, and, above all, persons.” The essential features of modern business could hardly be put more clearly than in Mr. F. A. White’s speech, and he gave it further weight by adding that special visits had been paid in the past year by directors to South Africa, Australia, British Columbia, and California.

The organisation of the manufacturing side of the business was described by the chairman in his 1903 address (Note 17): “I told you on a former occasion that the works were managed by a small executive committee of two of your managing directors, responsible to the works committee” (of managing directors), “and through them to the managing directors’ committee and the Board. The works committee sits once a week in London, and it was found that time did not allow of all that deliberation in concert with the executive committee that is demanded by the importance of what has to be done, especially in the way of work that involves capital expenditure. The executive committee work early and late; their duties embrace the daily supervision of the works, with whose managers they are in constant contact; and although from this fact they are the persons most likely to be struck with the necessity of construction and reconstruction of all sorts, and are in a position to initiate improvements, the decision as to these ought not to rest with them nor to be recommended to the Board without the fullest examination by them, jointly with some of their colleagues; and so it was found desirable to form a small subcommittee of the works committee, consisting of those most conversant with the different works. This sub-committee meets for a day’s work at the company’s office at Gravesend once a week. The result has been very satisfactory.”

By way of comparison with the Associated Portland Cement Manufacturers we append the results of some independent cement manufacturers, bearing in mind that some of them by their geographical position may have entire command over a local trade. Thus the Sussex Portland Cement Co. was the only concern having works on the London, Brighton, and South Coast Railway until the opening of Hall & Co.’s works at Beddington in 1905.

It must be added also that these firms have profited by the efforts of the Association to maintain prices; direct arrangements also exist between it and Martin, Earle, & Co. and the Wouldham Cement Co. The Association sold out its interest in the last-named company in 1903–4.

In May, 1905, a conference was held of English, French, Belgian, and German cement producers which arranged the conditions of export to the Dutch market until 1914. Further arrangements were contemplated but do not appear to have been concluded.