Between a Rock and a Hard Place: Quarry Industry Denies It’s Monopolistic

As state committee examines the country’s natural resource policy, industry tries to head off hike in government royalties.

Israel’s quarrying industry, which provides gravel and other raw materials to the construction industry and for infrastructure projects such as roads, is in the hands of a relatively small number of companies, enabling them to hike their prices, argue some of the consumers of the product. The industry itself pleads its innocence, though, saying it is a diverse industry with low profit margins.

The issue is presented in a number of position papers submitted to a panel looking into government policy on the exploitation of the country's natural resources. The committee is headed by Prof. Eytan Sheshinski, who also chaired a previous panel that explored government policy on oil and natural gas royalties.

Between 2006 and 2012, the price of materials produced at the quarries soared by nearly 70%. Because they are used in the production of asphalt, construction blocks and materials used to build bridges and other structures, the increased cost also bumped the cost of building and road construction, at least to some extent. However, the Manufacturers Association - which lists the quarry owners among its members - says that 18 companies operate 36 gravel mines across the country.

Quarry industry representatives are eager to appear before the committee out of concern that it will embrace a proposal to hike the government royalties the quarries pay from the current NIS 4.39 per ton. They say the government fee, which includes 36 agorot per ton that goes into a fund for the rehabilitation of the quarries, constitutes 14% of the price they get for the final product, and the price barely exceeds the cost of production. The association is proposing actually lowering the royalty component to 4% of the average price to the end user.

The Sheshinski committee, which initially convened about two months ago and will resume its sessions this week, is due to recommend government royalty policy for the extraction and sale by the private sector of the country's natural resources more generally, but including quarry production.

For its part, the Manufacturers Association claims an increase in state royalties would only strengthen economic concentration in the sector into the hands of a small number of players and further bump prices, in turn pushing up construction costs.

Over the past 20 years, only five government tenders were issued for new gravel and chalk mines, and none of those five are still in operation today. At the same time, the sector here has undergone consolidation. Shapir Engineering acquired the Roichman quarries in 2005 and Readimix bought a full interest in Lime & Stone in 2008. As a result, three companies — Hanson, Shapir and Readimix—not only control 17 of the country's quarries, but also supply 65.6% of their production, including the West Bank. And their share of production from quarries within Israel proper, excluding the West Bank, is 83%, according to industry sources.

The prices that mines have been getting for quarry material have been particularly volatile over the past 15 years. Compared to 1998 prices, they have actually declined somewhat, sources say, but between 2006-2012, shot up by almost 70%. Although some sources involved in the purchase of the gravel attribute that 70% increase to a relative lack of competition, they also acknowledge that factors such as an increase in trucking costs, due to increased fuel expenses, have also had a major affect on what the end user pays.

Plans for the sector are largely based on a national master plan from 2010, which notes that quarry production of raw materials such as gravel and marble is a minor component in the cost of homes, meaning that a 10% drop in gravel prices would only result in a 0.5% drop in the cost of residential construction. On the other hand, the weight that such raw materials have in the paving cost index issued by the Central Bureau of Statistics is considerably higher — 21.7%.

A 10% increase in the price of gravel and other quarry products would generally translate into an increase of 2.2% in the cost of building a highway. And as noted in the master plan: "If we take into consideration the fact that annual expenditure on roads alone came to more than NIS 5 billion in 2008, a price increase of 10% would require additional annual funding of a quarter of a billion shekels or a similar cut in investment in infrastructure."

The Antitrust Authority, which has examined competition in the sector in the past, launched a new inquiry about a year ago, which is currently underway.

Yesh Din.