(Photo courtesy of British Gypsum)

Europe's dominant gypsum wallboard makers are preparing to fight some of the most severe penalties ever imposed by the European Commission for allegedly operating a cartel. After a four-year probe, EC handed out fines totalling $480 million to four companies, claiming they rigged the market covering 80% of European Union buyers between 1992 and 1998.

Paris-based Société Lafarge S.A. was fined $250 million; BPB plc, Slough, England, $140 million; Germany's Gebrüder Knauf Westdeutsche Gipswerke K.G., Inhofen, $85 million; and Gyproc Benelux SA/NV, Wijnegen, Belgium, $4 million.

The cartel allegedly began in 1992 when BPB, Knauf and Lafarge met to secretly exchange price information to avoid "over-aggressive" competition in Benelux countries, France, Germany and the United Kingdom. Gyproc joined the cartel four years later, the commission alleges.

Two of the firms, BPB and LaFarge, say they will appeal. With two levels of judicial review, the process could take six years, says Bob Heard, a BPB director. The firm says its alleged involvement is based on "supposition and contrived explanations." Lafarge says it "vigorously challenges" the ruling. Details of EC's ruling are still confidential.

GORMLY (Photo courtesy of British Gypsum)

BPB officials concede that the companies exchanged sales volume data. "There is a paucity of industry information and that's one of the problems," says Heard. But real prices in the U.K fell 15% over the decade, proving the strength of competition, he adds. "The European plasterboard industry has always been and continues to be characterized by vigorous price competition," says BPB Chairman Allan Gormly.

At least one wallboard buyer, who declines to be identified, noticed that something was awry but says he did not feel exploited. "Price lists were so closely tied that you would have thought [the suppliers] were colluding," says the bidding manager of a leading drywall contractor in London. "But when it comes to doing the job, [suppliers] fight to the last penny and we only pay about 50% of the list price."

If there was collusion, it took the form of a peace treaty, suspects Ken Rumph, an analyst at Merrill Lynch International, London. Europe's wallboard business is dominated by BPB, Knauf and Lafarge. To win market share, they waged a painful price war, he says. The alleged cartel's start in 1992 marked the end of hostilities, Rumph adds.

But as the penalties show, the commission believes more sinister motives were at play. As the "the pulse of the economy," the building industry is a key anti-cartel target, says Mario Monti, EU's competition commissioner. "The substantial amount of the fine reflects the size of the market, the impact of the illicit agreement on the consumer and the repeated infringement of the competition rules by two of the companies."

Lafarge and BPB had additional penalties for having been previously fined for other, separate, cartels in 1994. BPB's and Gyproc's fines were cut by 30% and 40%, respectively, for their cooperation in the investigation.

BPB's fine would virtually eliminate its net income this year, according to Merrill Lynch. Heard says the company could absorb the loss "fairly easily [but] we are very unhappy indeed." BPB is among the world's biggest players in the sector, with wallboard being the main contributor to last year's $2.6 billion in sales.

Lafarge's fine, although larger, is smaller compared to sales. Newer to the business, wallboard accounts for under 10% of Lafarge's annual sales, which exceed $13.5 billion. The fine would amount to about 25% of 2003's projected income, say industry analysts. Knauf operates 100 plants globally, generating annual sales of around $2.5 billion.

Gyproc is about to be absorbed in the industry's continuing consolidation. BPB recently agreed to take over that firm's Dutch and Belgian operations, while Lafarge will buy its German and Polish assets. BPB helped set up Gyproc in the 1950s and currently holds nearly half its stock.

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