COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 30/LM/May02
In the large merger between:
HFSA Investment BV
and
Hernic Ferrochrome (Pty) Ltd
Reasons for Decision
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Approval
1. On 2 July 2002 the Competition Tribunal issued a Merger Clearance
Certificate approving the merger between HFSA Investment BV and Hernic
Ferrochrome (Pty) Ltd in terms of section 16(2)(a). The reasons for the
approval of the merger appear below.
The Merger Transaction
2. Mitsubishi Corporation (“MC”) will, through its subsidiary, HFSA
Investments BV (“HFSA”), acquire the majority shareholding, 53.5%, in
Hernic Ferrochrome (Pty) Ltd (“Hernic”). The shareholders of the merged
entity will be HFSA with a shareholding of 53.5%, IDC with 25%, ELG
Haniel with 14% and management with 7.5%.
Background information on the Parties
3. MC is a conglomerate investment holding company registered in Japan with
interests in various industries and economic sectors such as IT and
electronics, energy, metals and chemicals. MC wholly owns HFSA, a
company registered in the Netherlands. HFSA does not have any business
operations in South Africa.
4. Hernic is a South African company involved in the mining of chrome and the
production of charge chromeferrochrome. Most of the world’s ferrochrome
production is used in the production of stainless steel. Hernic (Pty) Ltd
wholly owns Hernic Ferrochrome (Pty) Ltd. The major shareholder in Hernic
(Pty) Ltd is Terret Holdings Limited in Jersey.
5. Premerger, the relationship between MC and Hernic was one of principal
and agent. MC acted as Hernic’s distribution agent for its ferrochrome in
East Asia (Japan, Korea and Taiwan).
Rationale for the Transaction
6. Mitsubishi and Hernic plan to expand their supply of ferrochrome to Japan.
In order to achieve this they needs to expand capacity by building a fourth
furnace, which should provide Hernic with an additional 120 000 tons of
ferrochrome. Hernic’s, present shareholders do not have the necessary
capital to build the furnace and by merging with Mitsubishi the necessary
funding for the project will be provided.
The relevant product market
7. There is no product overlap between the products offered by HFSA or any
other company in the MC group and Hernic. This is a vertical merger where
the agent is acquiring the majority shareholding in its principal.
8. The Commission and the parties have defined the upstream market as the
market for the distribution of ferrochrome and the downstream market as
the production and supply of ferrochrome. We will follow the same
methodology.
The upstream market
9. According to the parties it is industry practice for ferrochrome producers to
appoint one or more distribution agents to market and sell their ferrochrome
product throughout the world. Hernic uses Mitsubishi Corporation 1 to
distribute its ferrochrome to Japan, Korea and Taiwan and ELG Haniel to
distribute to the rest of the world.
distribute to the rest of the world.
1 MC is also a distribution agent for only one other ferrochrome producer in India, which is a very
small producer.
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10. We agree with the Commission’s definition of the relevant product market,
which they define as the market for the provision of distribution services to
ferrochrome manufacturers.
11. The geographic market can be defined narrowly, as the market for East
Asia or it could be defined broadly as a global market. However, since on a
very narrow definition of the geographic market, the merger does not raise
any competition concerns we do not have to decide whether the geographic
market should be defined narrowly or broadly.
12. Nissho, Mitsui, Glencor, Mitsubishi, Marubeni and Kinsho operate as
distribution agents for ferrochrome in East Asia. Mitsubishi, for instance, is
the third largest distribution agent in Japan with a market share of 13%.
Mitsui, the largest player in Japan, has a market share of 28% and Nissho,
the second largest 17%. Other players such as Glencore (Zug), Xstrata
PLC (Zug) and T.K. Met (part of the Krupp/Thyssen group) operate as
distribution agents worldwide.
The downstream market
13. There are three different grades of chrome ore namely a Metallurgical
grade, which is used in the ferrochrome industry, a chemical grade used in
the chemical industry and a foundry grade used in the foundry industry.
Hernic only mines the Metallurgical grade.
14. Ferrochrome, a product used in the production of stainless steel, is
produced from Metallurgical chrome. In South African ferrochrome is known
as charged chrome ferrochrome because of the technology used in
producing it. Hernic uses 94% of its chrome production to produce
ferrochrome inhouse, and only sells 6% of its chrome ore to other
ferrochrome producers.
15. Ferrochrome is not traded on a metals exchange due to the different grades
and qualities available throughout the world. Charge chrome ferrochrome
and qualities available throughout the world. Charge chrome ferrochrome
is priced on a quarterly basis with approximately 85% of production being
sold in terms of “longterm” (35 years) supply agreements. The rest is
supplied on a spot basis.
16. Based on the information supplied to us we agree with the relevant market
definition advanced by the Commission and the parties, namely that the
relevant market, downstream, is the market for the production and supply of
ferrochrome globally.
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xvii.Hernic’s market share of the total world production of
ferrochrome is 6% while other South African charged
chromeferrochrome producers such as Xstrata and
Samancor have market shares of 23% and 20%
respectively.
Impact on competition
18. Within the upstream market we find that there are alternative distributors in
the market and that the transaction will not enable the merged entity to
foreclose ferrochrome producers in the downstream market from
distribution services in the upstream market.
19. Furthermore, Hernic uses ELG as sole distribution agent to distribute its
ferrochrome to countries excluding Japan, Korea and Taiwan. According to
the parties ELG participates in a highly competitive market and provides
Hernic access to an established client base. The merged firm will have no
incentive to foreclose ELG from providing distribution services for its output
and has insisted that ELG remain its agent for Europe and North America
post the merger.
20. Since MC and ELG service different geographic regions in the upstream
market the possibility of collusion is also diminished.
21. The downstream market is, in our view, competitive with large players such
as Xstrata, Samancor and AKSU producing ferrochrome.
Conclusion
22. The Tribunal, therefore, endorses the Commission’s finding that this
transaction will not substantially lessen or prevent competition in any
market. The Tribunal therefore approves the transaction unconditionally.
There are no public interest concerns, which would alter this conclusion.
_____________ 5 July 2002
N. Manoim Date
Concurring: D. H. Lewis, M. Holden
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