Boral Cements Trump Bet

Fly ash comes from a very specific source: coal power plants.
At Closing, April 20th
7.58 AUD
At Closing, April 20st
100.29 USD

The U.S. president-elect just got his first big, beautiful inbound M&A deal.

Australian cement maker Boral Ltd. is offering $1.8 billion to take over Headwaters Inc., a building-materials business with a particularly strong position in fly ash cement -- the gray, lightweight material used to make construction blocks.

The transaction is best understood as a bet on Trump policy priorities. The most obvious one is the factor Boral explained in a presentation Monday. The acquisition:

...significantly increases Boral's exposure to large addressable U.S. markets, at an attractive point in the cycle including improved market diversification across non-residential, repair & remodel and infrastructure segments...

It's a bit of an overstatement to make out this deal is all about government building work, though.

For a start, infrastructure will only be 11 percent of Boral U.S.'s total revenue once the transaction is complete, with new residential and remodeling building work comprising a much more significant 65 percent. In addition, Donald Trump's $1 trillion infrastructure plan may amount to considerably less than meets the eye, and risks displacing labor from the residential projects where Boral and Headwaters make the bulk of their money.

The more important Trump benefit shows up in Headwaters' form 10-K. The fly ash for all that cement comes from a very specific source: coal power plants.

Keep Digging

U.S. coal consumption for power generation has slumped, but may be bottoming out

Source: Energy Information Administration, Gadfly calculations

Note: Trailing 12-month figures.

Between a twentieth and one-third of commercial coal grades by weight is typically made up of ash -- an unburnable product that's regulated by the U.S. Environmental Protection Agency because of its residues of toxic chemicals such as mercury, cadmium and arsenic.

Headwaters argues that it's helping to deal with this problem by taking the ash out of landfills and berms, and locking the higher-quality bits of it inside a cement matrix. But dealing in potentially hazardous materials is never simple. The company is fighting several lawsuits over fly-ash waste at a power station in Ohio and a golf course in Virginia, and may find itself on the hook due to new regulations on the management of coal-ash dumps.

Closing Down Sale

Retirements of coal-fired power stations have surged under the Obama administration

Source: Energy Information Administration

Note: Figures from 2016 onward include forecast closures. Final figures may exceed forecast retirement numbers.

Headwaters will also face challenges if the decline of the U.S. coal industry continues at its current pace.

Each time a coal plant closes, the supply of new fly ash declines, and Headwaters has to spend more money sourcing it from other parts of the country. That's a significant risk: Even the International Energy Agency, whose forecasts have tended to overestimate coal consumption in recent years, expects coal demand in the U.S. to fall 40 percent by 2040. Headwaters has already been exploring ways of extracting ash from existing waste dumps as a way around any supply crunch.

While all that sounds troublesome, more lenient legislation and lax regulation could work wonders. Myron Ebell, the think-tank scholar who's heading Trump's transition team for the EPA, wants to unwind the Clean Power Plan, a major factor pushing the economics of existing coal plants into the red. Regulatory battles can be drawn-out, but his chances of succeeding and reversing restrictions around coal mining on federal lands look high, according to Bloomberg Intelligence analysts Rob Barnett and Andrew Cosgrove.

As Gadfly's Chris Bryant has written, in the long term and on a global scale, the march of renewables should continue to displace fossil fuels. But on a national level, the U.S. industry is looking healthier than it has in some time. Shares in Arch Coal Inc. are up 15 percent since it emerged from Chapter 11 bankruptcy protection last month, and in the last week of October, total national coal production climbed above 17 million short tons for the first time in a year -- a 66 percent increase since it bottomed out in April.

Waste Money

Headwaters' operating return on invested capital has tended to outstrip Boral's

Source: Bloomberg

Cement is always going to be a dirty, energy-intensive business, and Headwaters has shown itself quite capable of making money in spite of the Obama administration's regulatory risks. But Boral investors looking at this deal shouldn't ignore the risks: If the Trump administration's attempts to unpick Obama's power-plant regulations fall over, this ash will struggle to fly.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling in Sydney at

    To contact the editor responsible for this story:
    Katrina Nicholas at

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