As per a leading daily, the world's two largest cement manufacturers, Lafarge SA and Holcim SA, are set for the biggest merger in the cement industry. If the merger goes through, the merged entity would have a market capitalisation of about US$ 55 billion. Does this merger make sense? Let us explain. There are broadly two ways in which a firm can enjoy an economic moat or competitive advantage. One is through pricing power and the other is through cost competitiveness. For commodity companies, there isn't much product differentiation to be able to give them much pricing power. So for such companies, the economic moat arises mainly on the cost front. In other words, to be a successful commodity player you have to be a low cost producer. And one way to be a low cost producer is to have huge economies of scale. In this context, the merger of Lafarge and Holcim would certainly help the two companies rationalize costs. The combined entity would be in a better position to deal with rising energy costs and poor demand that has severely impacted the sector since the 2008 financial crisis.