UPDATE 2-UK watchdog to force cement industry sell-offs to boost competition

(Adds Hanson, Lafarge Tarmac response)

By Costas Pitas

LONDON, Jan 14 (Reuters) - Britain's competition regulator is to force two of the country's biggest cement producers to sell off production plants following a two-year investigation which found a lack of competition that had pushed up prices.

The Competition Commission, in its final report on the case on Tuesday, said it would require HeidelbergCement's Hanson

HEIG.DE to sell off one of three plants to increase competition in ground granulated blast furnace slag (GGBS), a substitute for, and ingredient for cement.

In October, the watchdog had told rival Lafarge Tarmac

LAFP.PA AAL.L to sell one of its cement plants in Britain in a bid to introduce a fifth player to that market.

The watchdog criticised current cement market conditions in the country, where Lafarge Tarmac, Cemex CMXCPO.MX and Hanson rank as the three largest producers. The cement industry globally suffered from the economic downturn that followed the 2008 financial crisis which led to a slowdown in construction.

"Despite falling demand and increasing costs during the last few years, profitability among GB (British) producers has been sustained and their respective markets shares have changed little," Professor Martin Cave, Deputy Chairman of the Competition Commission, said.

"This is not what you would expect to see in a well-functioning market, under these circumstances."

The regulator said it believed a lack of competition in the industry has cost customers 30 million pounds ($49 million) a year, prompting it to rule that greater choice was the only way to bring down prices.

The watchdog aims to increase competition in both cement production and the supply chain for GGBS.

The Commission will have to approve the buyer for the GGBS plant that Hanson decides to sell and it cannot be a British cement producer.

Hanson said it was pleased the watchdog had not gone ahead with plans to force the company to sell off several sites but was disappointed about the way the process was carried out and was mulling further action.

"The Commission did not consult us properly on its findings in relation to GGBS and we found many errors in its analysis," Ed Gretton, UK head of legal at Hanson, said.

"We will now consider our position before making a decision with regard to the appeal we filed before Christmas."

In October, the regulator said Lafarge Tarmac would have to choose between divesting either its Cauldon or its Tunstead cement plants in central England. The buyer would have to be approved by the Commission and cannot be one of the country's existing cement producers.

Lafarge Tarmac Chief Executive Cyrille Ragoucy said on Tuesday he was disappointed with the regulator's decision in its final report.

"This is not reasonable or proportionate and we have not been given a fair opportunity to defend our position." ($1 = 0.6104 British pounds)

(Reporting By Costas Pitas; editing by Kate Holton and Jane Merriman)

((Costas.Pitas@thomsonreuters.com)(+44 207 542 8024)(Reuters Messaging: costas.pitas.thomsonreuters@reuters.net and @Cpitas on Twitter))

Keywords: HEIDELBERGCEMENT/