COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no.: 32/LM/Apr04
In the large merger between:
Xstrata SA (Pty) Ltd
and
South African Chrome & Alloys Ltd
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Reasons
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Introduction
The Competition Tribunal approved the merger between Xstrata SA (Pty) Ltd
(“Xstrata SA”) and South African Chrome & Alloys Ltd (“SA Chrome’) on 22 June
2004. The reasons are set out below.
The transaction
In terms of a pooling and sharing agreement Xstrata SA and SA Chrome have
agreed to pool the assets that constitute their respective chrome businesses by
placing them under the control of a joint Board, which will be controlled by
Xstrata SA.
The assets comprise the ferrochrome and chrome mining assets, infrastructure,
contracts, arrangements, operations and chrome businesses of both of the
merging parties. Included in this arrangement are the merging parties’ chrome
mining rights, land, certain ferrochrome assets and mining authorisations and
rights belonging to the Royal Bafokeng Nation, one of the shareholders in SA
Chrome.
Neither Xstrata SA nor SA Chrome will pay any monetary consideration for their
respective participation interests. Instead, the proportion of their respective
interests reflects the value each of them will be contributing to the venture. Each
party will retain ownership of its assets for the duration, as well as after the
termination, of the joint venture. Each party will have an equal number of
representatives on the joint Board.
The parties
The primary target firm is SA Chrome, which was established in South Africa in
1987 and is listed on the JSE Securities Exchange. The major shareholders are:
The Royal Bafokeng Nation (33.2%)
Industrial Development Corporation of South Africa (25.2%)
Bateman Project Holdings Limited (4.6%)
ThyssenKrupp Metallurgie GHBM (1.9%)
SA Chrome’s principal asset is a ferrochrome smelter in the North West
Province. It also owns Horizon Chrome Mine and a UG2 concentrator plant.
The primary acquiring firm, Xstrata SA, is an indirectly wholly owned subsidiary
of Xstrata plc, a company incorporated and registered under the laws of the
United Kingdom, by virtue of the fact that Xstrata plc owns all the issued shares
in Xstrata (Sweiz) AG, a company registered in Switzerland, which owns all the
issued shares in Xstrata SA.
Xstrata SA is a vertically integrated ferrochrome producer, which owns five
chrome ore mines as well as three metallurgical plants used to convert chrome
ore into ferrochrome. Xstrata SA also has an unincorporated joint venture with
Samancor Limited relating to the production only of ferrochrome at a production
facility that was set up at Xstrata SA’s Wonderkop site to manufacture
ferrochrome using chrome ore from Samancor and Xstrata SA mines.
Reasons for the transaction
According to the parties the transaction will lead to the optimal utilization of
resources, synergies and production flexibility. Moreover, both parties will gain
from the crosspollination of technology and expertise, which should lead to
from the crosspollination of technology and expertise, which should lead to
substantial improvements in production throughout the combined Xstrata SA and
SA Chrome businesses.
2
For Xstrata SA, a very important aspect of the transaction is the shareholding in
SA Chrome by the Royal Bafokeng Nation, which will gives Xstrata SA the
opportunity to conclude a partnership with a BEE partner already involved in the
same business as it.
Effect on competition
Xstrata SA and SA Chrome are both vertically integrated into the mining of
chrome ore and the production of ferrochrome.
Chrome ore is mined in both opencast and underground mines in the Rustenburg
area. The chrome ore then undergoes a beneficiation process, which yields three
basic products, namely lumps, pebbles and fines. The fines are further
processed and concentrated into metallurgical grade sand, chemical grade sand
or various grades of foundry sand. The metallurgical grade sand is mainly used
in the production of ferrochrome. 1 Approximately 90% of the world’s ferrochrome
production is used in the production of stainless steel and South Africa is
responsible for about 60% of total world production of ferrochrome.
Ferrochrome is not traded on a metals exchange, as is the case with other
metals, mainly because of the different grades and qualities available.
Ferrochrome is priced on a quarterly basis with approximately 85% of production
being sold in terms of longterm supply agreements. The rest is supplied on a
spot basis. 2
Xstrata SA exports ferrochrome globally via its marketing agent Glencore and
also sells ferrochrome locally. SA Chrome’s ferrochrome is currently sold
internationally through an exclusive fiveyear offtake agreement with TK Met. 3
SA Chrome does not sell ferrochrome locally although it did once sell
ferrochrome to Columbus.
1 The Competition Commission is currently investigating a restrictive practices complaint by Nuco
Chrome against Xstrata SA, who also complained against the proposed merger by alleging that there are
only three suppliers of chrome sand in South Africa, namely Xstrata SA, Samancor and and SA Chrome.
The Commission found that there are more suppliers than these three and that since there is currently a high
demand for steel most of the chrome sand is used for the production of ferrochrome, thus leaving a
shortage in supply of chrome sand. However all the suppliers said that they would supply Nuco Chrome
should they have excess stock available. SA Chrome uses all its chrome sand inhouse. Nuco Chrome was
invited by the Tribunal to make submissions in respect of the merger, but did not respond.
2 As one of the major suppliers in the industry Xstrata, and for that matter Samancor, would play an
important role in influencing the base prices for ferrochrome.
3 TK Met is part of the ThyssenKrupp group. TK Met has agreed to relinquish, with effect from the
commencement date of this transaction its exclusive rights under the offtake agreement with SA Chrome.
3
The Competition Commission defined the relevant market as the production and
supply of ferrochrome and the distribution of ferrochrome in a global market. 4
The merging parties do not agree with this definition claiming that the merging
parties are not distributors, but use distribution agents to sell their ferrochrome.
However, we do not have to decide which definition is correct since it does not
affect the outcome of our decision in any way.
The international market shares of the merging parties and their largest
competitors in Ferrochrome, based on estimated output for 2003, are:
Competitor by Country % Market Share
South Africa :
Xstrata SA 22.10
Samancor 20.06
Hernic 4.81
Ore and Metal 4.41
SA Chrome 3.81
Kazakhstan 13.03
Finland 5.29
Zimbabwe Zimasco 4.01
China 4.01
Post the merger Xstrata’s market share for the global market would increase to
25.91%. In South Africa Samancor is the largest supplier and supplies
approximately 70% of the ferrochrome market with its main customer being
Columbus Steel with whom it has a longterm contract. Xstrata supplies
approximately 30% of the South African ferrochrome market and its local
customers are, inter alia, Columbus to whom it sells on an ad hoc basis, Scaw
4 The Tribunal defined the market as such in the vertical merger between HFSA Investment BV and Hernic
Ferrochrome (Pty) Ltd, see Tribunal Case No: 30/LM/May02.
4
Metals and Iscor with whom it has a longterm supply contract. 5 SA Chrome
does not sell to the local market.
South Africa’s total production of ferrochrome is approximately 300 million tonnes
and the local demand only approximately 300 000 tonnes. We are satisfied that
local ferrochrome users will be able to furnish ferrochrome locally post the
merger. There are alternative suppliers of ferrochrome in the market who told the
Commission that they would rather supply local buyers as there are less hassle
from a logistics perspective and no currency risk. We were also informed by the
Commission that a new entrant from India is currently undertaking a due
diligence investigation in the Richards Bay area. Hernic Ferrochrome and ASA
Metals, two local producers of ferrochrome are also currently increasing their
ferrochrome production.
The proposed transaction will also result in vertical integration because SA
Chrome is a customer of Chartech, Xstrata SA’s subsidiary that supplies
electrode paste.6 Chartech also sells to Xstrata’s competitors such as Hernic
Ferrochrome, ASA Metals and Zimasco in Zimbabwe. However, Xstrata’s
competitiors can source their electrode paste locally from Ferroveld and Rand
Carbide, as well as import from various countries.
We therefore agree with the Competition Commission’s recommendation that the
merger would not substantially prevent or lessen competition.
Public interest
The transaction will not have an adverse impact on any public interest issues.
____________ 13 August 2004
N Manoim Date
Concurring: P Maponya, T Orleyn
5 Most of the supply contracts in the ferrochrome industry, close to 85%, are longterm contracts.
6 Electrode paste is used as an electrode in energy intensive furnaces in the Aluminium industry, the Ferro
alloy industry and the Calsium Carbide industry.
5