1.1 COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 100/LM/Dec04
In the large merger between:
Chemical Services Limited Acquiring Firm
1.1.1.1 and
Chemiphos S.A (Pty) Ltd Target Firm
___________________________________________________________________________
1.2 REASONS FOR DECISION
___________________________________________________________________________
1 CONDITIONAL APPROVAL
1. The Competition Tribunal issued a Merger Clearance Certificate on 26 April 2005
approving with conditions the proposed large merger between Chemical Services Limited
(“Chemserve”) and Chemiphos S.A (Pty) Ltd (“ Chemiphos”).
2. The reasons for our conditional approval follow and the condition is appended.
The Transaction
3. In terms of this transaction, Chemserve acquired 100% of the issued share capital in
Chemiphos from a number of individuals and a trust. 1
The Merging Parties
4. The primary acquiring firm is Chemserve, a wholly owned subsidiary of AECI Limited
(“AECI”), a listed chemicals company. None of AECI’s shareholders controls (directly or
indirectly) AECI. AECI owns a number of subsidiaries. 2 Below is a diagram setting out the
1 Parkway Trust (60%), Ian Frans Marinus Van Schalkwyk (23.53%), Paul
Guiseppe DianaOliaro (7.06%) and Dean Keith Murray (9.41%). See pages 2425 of the record.
2 Its wholly owned subsidiaries are: African Explosives Ltd (“AEL”); DetNet Solutions (Pty) Ltd
(“DetNet”); SANS Fibres (Pty) Ltd (“SANS Fibres”); Chemserve; Dulux (Pty) Ltd (“Dulux”); Heartland
Properties (Pty) Ltd (“Heartland”); and AECI Coatings (Pty) Ltd (“AECI Coatings”) (80%).
Chemserve subsidiaries.
100% 100% 100% 100% 100% 100%
100% 100% 100% 50% 100% 100%
100% 100% 100% 100% 100%
• %.
5. The primary target firm is Chemiphos, a private company owned and controlled by four
shareholders consisting of individuals and a trust, who all manage the business of
Chemiphos and are also responsible for chemical sales, product management and
supplier contracts. 3 Chemiphos has no subsidiaries.
3 See footnote 1 supra.
Chemical
Services Ltd
Akulu
Marchon (Pty)
Ltd
Atlas Consol
idated
Industries
Chemical
Initiatives
(Pty) Ltd
Chemoleo
(Pty) Ltd
Chemserve
Perlite (Pty) Ltd
Chemserve
Polymer
Sciences
Chemserve
Systems (Pty)
Ltd
Lake International
Technologies
(Pty) Ltd
Chemserve Trio
(Pty) Ltd
Crest
Chemicals
(Pty) Ltd
Industrial
Oleochemicals
Products
Pelichem
(Pty) Ltd
Plaaskem
(Pty) Ltd
Plastamid
(Pty) Ltd
SA Paper
Chemicals (Pty)
Ltd
Senmin
(Pty) Ltd
Improchem
(Pty) Ltd
2
Rationale for the transaction
6. According to the parties, two of the four shareholders owning 80% of the shares in
Chemiphos wish to exit the business and cash in their investment. Chemserve considers
this an opportunity to expand its product applications and offerings, particularly through the
acquisition of a polyphosphoric and phosphoric acid manufacturing facility. Chemserve
anticipates that the acquisition would enhance shareholder value as it is expected that
there would be a growing demand in the market for polyphosphoric and phosphoric acid. 4
The hearing of the present merger
7. The hearing was held on 25 April 2005. The Tribunal called Mr Jack Chiang (“ Mr Chiang ”)
of Soyo Chemicals as a witness to the hearing. The merging parties called three
representatives of the merging parties.
The parties’ activities
8. AECI’s main interests lie in the chemical industry through its various subsidiaries. It
provides mining solutions, speciality chemicals, speciality fibres and decorative coatings to
both the global and regional markets. It also has interests in surplus land, managed by
Heartland, which they offer for commercial, residential, industrial development and leasing.
The only relevant subsidiary for the Commission’s investigation is SANS Fibres (Pty) Ltd
(‘SANS Fibres”). SANS Fibres produces nylon and polyester yarn, 5 and supplies filament
yarn to local and export markets. It also produces highgrade polyester polymers for its
own yarn processes and for diverse packaging applications.
9. Chemserve is involved in the manufacturing, marketing, distribution and sale of chemicals
to customers in a number of South African industries. It conducts its business through
approximately 17 subsidiaries listed above and through joint ventures (“JV’s”).
Chemserve’s website describes it as the largest specialty chemicals operation in Southern
Chemserve’s website describes it as the largest specialty chemicals operation in Southern
Africa.6 The Chemserve group supplies, markets and distributes a diverse range of
speciality chemicals, 7 raw materials and related services to a broad spectrum of
industries.
10. During its investigation, the Commission focussed on the following Chemserve
subsidiaries: (1) Crest Chemicals; (2) Chemserve Systems; (3) Improchem; and (4)
Plaaschem. This is in addition to SANS Fibres, a wholly owned subsidiary of AECI. We
agree with the Commission that these are the subsidiaries relevant for the purposes of a
competition assessment. The activities of these subsidiaries briefly are:
4 See page 106, para. 3 of the record.
5 According to the Commission, nylon and polyester yarn are used in various apparel, household and
industrial products.
6 See Chemserve’s website.
7 The parties defined the speciality chemicals as invisible products or additives used to enhance the
process efficiencies of almost all manufacturing industries. The Commission contended that very few
products or processes could function effectively without them.
3
10.1. Crest Chemicals is a 50% owned distributor, which includes First Chemicals. It is a
distributor and supply chain management partner for global and local chemical raw
material manufacturers. It also supplies industrial and fine chemicals and raw
materials.
10.2. Chemserve Systems, a 100% subsidiary of Chemserve, is active in the markets
for industrial cleaning and maintenance as well as in the market for the provision
of metal surface treatment.
10.3. Improchem, also a Chemserve wholly owned subsidiary, used to be the former
Ondeo Nalco South Africa. It focuses on water treatment solutions, and competes
with Banchem in the downstream market. It also competes with Chemitor and
Henkel.
10.4. Plaaschem supplies a complete range of complementary products to the farming
community, foundry, water treatment and other related industries.
11. Chemiphos is primarily involved in the business of manufacturing phosphoric and
polyphosphoric acid. It is also active in the importing, marketing and distribution of
speciality chemicals within South Africa on behalf of local and international manufacturers.
A detailed analysis of each of the relevant activities of Chemserve and Chemiphos is
provided below.
Relevant market
12. As can be seen from above, Chemserve and Chemiphos are both active in the market for
the manufacturing and distribution of chemical products in South Africa. In addition,
Chemiphos currently supplies a number of Chemserve subsidiaries with various chemical
products. Chemiphos further supplies SANS Fibres, a subsidiary of AECI Limited, with
some of its chemical requirements. Therefore, the proposed merger entails both a vertical
and horizontal dimension.
13. We now turn to consider the horizontal product overlap in the markets for the manufacture
and distribution of chemical products.
and distribution of chemical products.
The chemical manufacturing market
14. As mentioned earlier, the horizontal effects arise from product overlaps between the
merged entity as they are both active in the manufacturing and distribution markets of
chemical products. From a broad market perspective, a product overlap exists.
15. On the upstream manufacturing side, both Chemserve and Chemiphos manufacture
chemicals. However, the only chemicals manufactured by Chemiphos are phosphoric and
polyphosphoric acid. No subsidiary of Chemserve or AECI manufactures phosphoric and
polyphosphoric acid. According to the Commission, there would be no product overlap on
a narrow market definition based on the application of each chemical. There would be a
product overlap if a broader market definition is used, but the market shares of the merged
entity would be negligible irrespective of whether a national or international market is
adopted. The Commission’s investigation revealed that the merged entity’s postmerger
market shares would not be in excess of 2% in the broad national market for chemical
4
manufacturing. Given the low market share of the merged entity we are persuaded that the
transaction would not lead to a substantial prevention or lessening of competition in the
upstream market.
Chemical distribution market
16. We found that an overlap exists in the downstream distribution side of the market as both
Chemserve and Chemiphos are active in the distribution of chemical products on behalf of
national and international chemical manufacturers. The Commission found that most
manufacturers distribute or supply their own products. The Commission also found that
third party distributors account for only 15% of the chemicals distributed in South Africa. 8
17. The Commission proffered three possible chemical distribution market definitions. Firstly,
on the broadest possible definition, the market may be the one for the provision of
distribution services within South Africa. Secondly, the market can be narrowed to include
the market for distribution of chemicals only within South Africa. Thirdly, a further
narrowing of the market could result in a market for the distribution of speciality chemicals
or commodity chemicals or for each specific chemical.
18. Both the Commission and the merging parties contended that there is probably a high
level of substitutability in the market for the distribution of chemical products and that the
delineation should not necessarily be based on the application of that chemical, but rather
on the characteristics of that chemical.
19. The Commission argued that “if the chemical is suitable to be transported or distributed
with any other chemical, it should therefore form part of that distribution market” . Hence
the delineation should be on the characteristics of that product that impacts on its
distribution rather than on its application. 9 According to the parties, chemical
manufacturers do not require unique distribution services to distribute chemical products.
Further to this, the parties were of the view that the relevant downstream market could
under certain conditions be defined as broadly as the market for the provision of
distribution services within South Africa. 10 The Commission’s market enquiry revealed
that the distribution requirements of chemicals differ from one chemical to another, 11 and
that for the distribution of speciality chemicals the distribution mechanism remains the
same. As a result, the Commission contended that the distribution of each and every
chemical constitutes a separate market on its own. The parties submitted that this is not
an appropriate delineation of the market, but provided the Commission with market share
8 See the transcript of 25 April 2005, page 5.
9 Ibid, page 6.
10 See the record, pages 109110.
11 According to the Commission, distribution can take one or more of the following forms: (1) those
chemicals that are imported and sent directly to customers on an indent basis; (2) those that are
purchased in bulk and transported to customers in bulk tankers; (3) those that are packaged in various
warehouses where they are stored and distributed to consumers on demand; and (4) certain chemicals
are purchased in bulk form, transported to a particular company’s sites and packed into a range of
smaller packages to cater for customers’ needs.
5
figures with respect to the distribution of specific chemical product categories.
Evaluating the merger
Market shares for distribution of chemical products
20. The parties’ overlapping product categories are found in the supply of industrial chemicals,
food and nutriceutical chemicals, plastics, performance chemicals and pigments. Below is a
table which reflects the market shares of the parties together with those of their competitors.
Industrial chemicals
Product Company Market share
(Percent)
Dyhard 100 S (Degussa)/ Chemiphos 5
First Chemicals 16
BASF South Africa 25
Air products 40
Other 14
Total 100
Hydroquinone (Clariant)/ 1.4 Chemiphos 10
First Chemicals 1
CJ Petrow 30
Protea Chemicals 40
Other 29
Total 100
Food and neutriceutical
Potassium Sorbate Chemiphos 7
Crest Chemicals 11
CJ Petrow 50
Protea Chemicals 25
Savannah Fine Chemicals 7
Total 100
Plastics
Terluran GP (BASF) Chemiphos 3
Plastamid 4
Protea Chemicals 17
6
Affirm Marketing 44
Bayer 2
Rawmac 17
Plastomark/Dow 10
CHC Polymers 2
Other 1
Total 100
Ultraform (BASF) Chemiphos <1
Plastamid 1
Affirm Marketing 10
Plastomark 9
Rawmac 25
Protea Polymers 8
Advanced Polymers 25
Other 21
Total 100
Ultramid (BASF) Chemiphos 2
Plastamid 3
Chemimpo 3
Rawmac 15
CHC Polymers 5
Cast and Walker 15
Protea Polymers 20
Affirm Marketing 2
Bayer 8
BASF 5
Other 2
Total 100
Ellan (BASF) Chemiphos <1
Industrial Urethanes <1
Huntsman Polyurethanes 40
Protea Chemicals 20
Bayer 30
CHC Polymerworld 5
Other >3
Total 100
Performance chemicals
Protectol9 (BASF) Chemiphos 5
Akulu Marchon 20
CJ Petrow 30
Chinese Manufacturers 45
Total 100
Trilon (BASF) Chemiphos 2
Crest Chemicals 14
Chemimpo 15
Protea Chemicals 10
CJ Petrow 10
Dow 15
7
Kirsch Pharma SA 10
Chinese Manufacturers 5
Others 19
Total 100
Pigments
Heliogen Blue Blue 7080 (BASF) Chemiphos 3
First Chemicals 1
Clariant 16
CIBA Specialities 30
BASF 30
Indian and Chinese imports 20
Total 100
Heliogen Blue D 7086 (BASF) Chemiphos 20
First Chemicals 5
Clariant 5
CIBA 40
BASF 30
Total 100
Heliogen Blue K6902 (BASF) Chemiphos 3
First Chemicals 10
CIBA 30
JLM – Avecia 12
BASF 40
Clariant 5
Total 100
Heliogen Green L 8605 (BASF) Chemiphos 3
First Chemicals 5
BASF 25
JLM Industries 6
CIBA 60
Rolfes Colour Pigments 1
Total 100
Titanium Oxide
Tronox CR 828 (BASF) Chemiphos 3
First Chemicals 5
Lake International <1
Servochem (Huntsman Tioxide) 70 – 75
Chempro 10
Rolfes Colour Pigments 2
Solvadis SA (Pty) Ltd (Sachtleben
Chemie)
<1
Other <1
Tronox CR 834 (BASF) Chemiphos 15
First Chemicals 5
Servochem (Huntsman Tioxide) 70 75
8
Chempro 5
21. Within the five product categories there exist 15 products, viz., Dyhard 100 S (Degussa);
and Hydroquinne (Clariant) (within the Industrial chemicals ); potassium sorbate (nutrinova)
under food and nutriceutical ; Terluran GP (BASF), Ultraform (BASF), Ultramid (BASF),
and Ellan (BASF) all under plastics; Protecol (BASF) and Trilon (BASF) in the
performance chemicals ; Heliogen Blue Blue 7080 (BASF), Heliogen Blue D 7088 (BASF),
Heliogen Blue K6902 (BASF), and Heliogen Green L8605 (BASF) all under pigments; and
Tronox CR 828 (BASF), and Tronox CR 834 (BASF) in titanium dioxide .
22. The market share figures provided by the parties on the distribution of each and every
separate chemical revealed that the merging parties would have a combined market share
varying between 1% and 25%. Out of the 15 product markets, the merging parties will
have a postmerger market share of 15% or more in six of the product markets. 12 In four
of the six product categories, the merging parties will still be competing with large
competitors such as BASF South Africa, Air Products, CJ Petrow, Protea Chemicals, CIBA
and Servochem. Again, in four of these instances the merged entity would be the third
largest competitor competing with wellestablished distributors. In the trilon market, the
merged entity would have a postmerger market share of about 16%. However, it appears
that the merged entity would still face fierce competition from other market participants
which have either a similar or slightly lower market share. In the tronox market, the
merging parties would have a 20% market share, competing with Savochem which enjoys
a 70% to 75% market share. In light of the aforegoing, we agree that competition even in
the narrower distribution market for specific chemicals is not substantially lessened or
prevented by the merger.
prevented by the merger.
23. We will now examine certain vertical issues arising from the merger.
Vertical analysis
Upstream market of manufacture and supply of polyphosphoric acid and phosphoric acid and
other chemicals.
24. As noted above, the proposed merger raises vertical concerns at two levels. Firstly, by
virtue of Chemiphos being a manufacturer/distributor of polyphosphoric acid and
phosphoric acid which supplies these products to AECI as well as to the subsidiaries of
Chemserve. Secondly, Chemiphos as an importer (agent)/distributor of various other
chemical products supplied to AECI and Chemserve subsidiaries. There is cause for
concern in certain of the affected markets and it is these which the attached conditions are
intended to ameliorate.
25. We accept for purposes of the vertical assessment that the upstream market is the market
for the manufacturing of polyphosphoric acid and phosphoric acid. As already noted, the
12 This is with respect to the following product category: dyhard 100 S (degussa); protectol (BASF);
trilon (BASF); heliogen blue D 7086 (BASF); and tronox CR 834 (BASF). See the Commission’s report
(pages 2326) and the record (pages 114117).
9
Commission focussed on those Chemserve subsidiaries who utilise phosphoric and
polyphosphoric acid as well as other chemical products supplied by Chemiphos and who
are, therefore, vertically related to the monopoly supplier, Chemiphos. These are: Crest
Chemicals; Chemserve Systems; Improchem and Plaaschem with SANS Fibres the only
AECI subsidiary relevant for analysis. The nature of their businesses has already been
described above.
26. In its investigation, the Commission identified ten (10) chemical products which
Chemiphos supplies to the various subsidiaries of AECI and Chemserve. The most
significant are clearly polyphosphoric and phosphoric acid which are produced by
Chemiphos. The remaining eight products that are supplied by Chemiphos to, inter alia,
subsidiaries of Chemserve and AECI are Melmet F10, 13 methylene chloride, 14 sodium
nitrite,15 acesulfame K, 16 taurine, 17 luran, 18 styrolux, 19 and golpanol boz. 20
27. Phosphoric acid is a thick, colourless and odourless liquid or a thick, colourless crystalline
solid. Phosphoric acid is incompatible with strong caustics and most metals. It is primarily
used for the manufacture of phosphate salts, which are in turn used for detergents and
fertilisers. We were told that there are two methods of production that can be used in its
manufacture, i.e., the thermal and the wet processes. The former is used to produce acid
from elementary phosphorus. The acid produced is extremely pure and of a high quality
and it is used in food as well as other sophisticated manufacturing processes. It appears
that the latter process is used to manufacture the majority of phosphoric acid.
13 Melmet F10 is a high range water reducer used in construction and industrial products based on
Portland and other types of hydraulic cement. It is used as an additive in all types of grouts, mortars,
coatings and is a component of concrete admixtures and emulsions. Melmet F10 is a spray dried
powder with free flowing characteristics ideal for dry blending and water dissolution.
14 The parties describe methylene chloride (alternatively termed dichloromethane) as a colourless
liquid with a mild, sweet odour. It is used as an industrial solvent and a paint stripper. It may also be
found in some aerosol and pesticide products and is used in the manufacture of photographic film.
15 This product is used in the manufacture of nitracompounds and azo and fabric dyes and bleaching
agents. It is also used in the poretreatment of cement and metals and as an antifreeze, as well as in
the pharmaceutical industry.
16 According to the parties, acesulfame K is a caloriefree sweetener used in beverages, food, oral
hygiene and pharmaceutical products. Food containing this product includes for example tabletop
sweeteners, desserts, gum, breathmints, puddings, baked food, soft drinks, candies and canned foods.
17 Taurine is a product incorporated into numerous food and diet supplements and is used mainly to
control anxiety, hyperactivity, poor brain function, hypoglycaemia, hypertension and seizures. It is an
amino acid found throughout the body chiefly in nerve tissue and muscle.
18 This is a trade name for styrene / acrylonitrile copolymers that are active in the area of household
goods and tableware, cosmetic packaging, sanitary and toiletry applications as well as for writing
materials and office supplies.
19 Styrolux is the trade name for the BASF range of thermoplastic styrene butadiene copolymers. It is
used in the areas of food packaging such as thermoformed cups and lids and also in applications such
as shrink film and transparent coat hangers.
20 We were told that golpanol boz is utilised as a component for brightening nickel and nickeliron alloy
electroplating baths and as a brightener for copper plating. It is used as a raw material for the
electroplating industry. In nickel electrolytes, it improves deformity and throwing power. It also has the
ability to improve the tolerance for metal impurities in electroplating paths. According to the parties, the
types of products that can be electroplated include automotive parts, shop fittings, bathroom fittings and
building products (mainly fasteners).
10
Polyphosphoric acid (“PPA”) is a mixture of polymeric acids that have been polymerised at
different extents. It is a colourless viscous liquid with high affinity for water and slightly
corrosive. It turns into phosphoric acid when dissolved into water. PPA is formed by
condensing orthophosphoric acid to eliminate water between two or more molecules. It is
formed when two molecules of phosphoric acid are heated to remove one molecule of
water. The manufacturing process follows the wellknown thermal route, whereby molten
yellow phosphorus is atomised and burnt with compressed air in a vertical combustion
tower. PPA is used in making organic catalysts, synthetic resins, acidic water dehydration
agents, high grade feed supplements, fire retardants and anti static electricity agents. 21
28. According to the Commission, polyphosphoric acid is basically a concentrated form of
phosphoric acid whilst phosphoric acid has a concentration of between 65% and 85%. The
Commission further pointed out that there are two types of phosphoric acid, i.e., white and
green phosphoric acid. It appears that there are differences between the production
process of these two kinds of phosphoric acid as well as in their applications. White
phosphoric acid is formed during the thermal process and is used for sophisticated
technical manufacturing and it is suitable as an input product in the manufacturing of
human consumption products such as in food, soft drinks, etc. Green phosphoric acid is
formed through the wet acid method and is used in the manufacturing of fertiliser and
animal feed. In brief, white phosphoric acid is utilised for human consumption whereas the
green one is suitable for the agricultural industry. The Commission contended that whilst
green one is suitable for the agricultural industry. The Commission contended that whilst
white phosphoric acid can be substituted for green phosphoric acid, the reverse does not
apply. White phosphoric acid is purer and more expensive than the green one. In light of
this, the Commission contended that each should constitute a separate product market.
Market shares
29. The Commission’s investigation revealed that the parties would have a negligible market
share of about 1% in the manufacturing of green phosphoric acid. 22 However, the market
for the manufacturing of white phosphoric acid and polyphosphoric acid is a cause for
concern as Chemiphos’ premerger market share is estimated at 85%. Postmerger, this
will remain the same because Chemserve would simply replace Chemiphos in this market.
Customer foreclosure and / or input foreclosure
30. Our concern is with the possibility of customer or input foreclosure. The former refers to a
situation where a vertically integrated firm denies or limits access by upstream rivals to
downstream customers. The latter – input foreclosure – arises where a vertically
integrated firm denies or raises the cost of inputs to its downstream rivals.
31. The merging parties contended that the high national market shares should not
necessarily give rise to prohibition of the merger. They pointed out that vertical integration
may give rise to procompetitive benefits. In support of their contention, they argued,
21 For a detailed nature of these two products, refer to the record, pages 131133.
22 See the transcript, page 10.
11
firstly, that it would not be rational for the merged entity to refuse supplying Chemiphos’
products to customers because Chemserve / AECI subsidiaries only account for about
10.6% of Chemiphos’ total phosphoric and polyphosphoric acid sales. Secondly, they
argued that most of the chemicals supplied by Chemiphos, other, than phosphoric and
polyphosphoric acid, could be sourced from a number of alternative suppliers. Lastly, they
argued that the merged entity would not be able to exercise market power because it
supplies its products to powerful customers that possess very significant countervailing
powers.23
Downstream markets that use phosphoric and polyphosphoric acid as input
32. During the course of its investigations, the Commission was alerted to the prospect of anti
competitive consequences in markets downstream of the merged entity. As already
elaborated these concerns were based on the merging parties presence in a number of
markets that utilised phosphoric and polyphosphoric acid as inputs in their production
processes. After a thorough investigation the Commission narrowed its concerns to three
markets. That is, in the markets for the provision of water treatment solutions, the
manufacturing of industrial chemicals and the market for metal surface treatment
solutions.
33. There are clearly no effective or suitable substitutes for white phosphoric acid or
polyphosphoric acid and several downstream users of these essential products feared that
in the event of shortages or disruptions in supply, AECI / Chemserve subsidiaries might
get preferential treatment. The effect of this could be to compromise the competitors’
ability to provide a reliable service to customers.
34. As explained above, the national market share of Chemiphos in the production of white
34. As explained above, the national market share of Chemiphos in the production of white
phosphoric acid and polyphosphoric acid is approximately 85%. On the one hand, certain
market participants and customers of the merging parties raised concerns that both
phosphoric and polyphosphoric acid are not easily available through importation due to a
number of constraints. The merging parties contended, on the other hand, that imports are
available in consistent and reliable supply and that they are directly substitutable with
products produced locally. However this was not confirmed by the Commission’s
investigation. Factors such as currency fluctuations make forward budget planning very
difficult. It appears that an importer of these products has to pay customs, clearing and
freight charges. Furthermore, some importers seem to lack the capacity to dilute the
respective products to their required concentration. We were told that it was not cost
effective to import as the exchange rate and custom duties make the product more
expensive and that overseas pricing structures are higher than sourcing locally.
Furthermore, it seems that importers are required to import in huge volumes so as to meet
local cheaper prices. We were also told that imports are impractical because of the
hazardous nature of the polyphosphoric acid resulting in importers being required to
increase their insurance coverage of the relevant product. Importers also seem to
experience logistical problems with delays occurring between the placing of orders and
receiving them. The other market participants estimate that importers have to wait for
23 See the record, pages 129130.
12
approximately 6 weeks to get the imported product. However, a local product takes
between 3 to 5 days. 24
35. Amongst other concerns raised in the downstream manufacturing market was the fact that
the customers of the players in the metal surface treatment industry are major customers,
i.e. the motor vehicle manufacturers, who are required to comply with the local content
requirements of the motor industry development plan and are therefore penalised for using
imported materials. We were told that the motor manufacturers prefer to use local content
as much as possible because they, in turn, get rebates and tax relief. The Commission
contended that this leaves the Chemserve Systems’ competitors at a disadvantage if they
are not able to import at such higher prices or if they do not secure a reliable supply. In
addition to the above, there were rumours at the time of the hearing of the present matter
that Chemserve intend to acquire Orlik & Associates, which is another player in the
downstream production market. The Commission contended that there were no valid
reasons to disregard these concerns as being illfounded, particularly having regard to the
merged entity’s high market shares of approximately 85%, the nonsubstitutability of white
phosphoric and polyphosphoric acid and the high barriers to entry in this market as
outlined below.
36. However, the merging parties argued that there is already a fairly high level of imports
coming into the country – imports accounted for approximately 30% of sales in the year
2004. Indeed Chemiphos itself had, on occasion, imported acid into SA and there were
other firms that continued to do so. China is the major source of imports and Israel is
offering a reliable product at competitive prices. They pointed out that no import tariffs
exist for phosphoric acid. According to the parties, insurance is certainly not a problem as
exist for phosphoric acid. According to the parties, insurance is certainly not a problem as
the general insurance policy adequately covers the importation of phosphoric acid. In
addition, the merging parties do not regard logistical issues as a fundamental barrier to
importing the product into South Africa. 25 However, while the evidence suggests that the
importation of phosphoric acid is possible, this is only viable for the smaller users of the
product.
37. The merging parties sought to allay fears of foreclosure by pointing out that there are
certain companies within the Chemserve stable who support Soyo Chemicals, the only
other South African producer of phosphoric and polyphosphoric acid. Mr Trevor Street, a
representative of the merging parties, testified that there would not be any changes post
merger as each of Chemserve companies would make their own purchasing decisions.
He reiterated that they would certainly encourage any company within Chemserve to buy
from the best possible source. 26 We were further told that that Chemiphos has no
exclusive distribution agreements with respect to the products in question. 27
Barriers to entry
24 See the transcript, page 14.
25 See the testimony of Mr Ian van Schalkwyk (Managing Director of Chemserve), page 38 of the
transcript.
26 See his testimony, page 52 of the transcript.
27 See the transcript, page 21.
13
38. The Commission’s view is that entry into the market for the manufacture of white
phosphoric and polyphosphoric acid is unlikely. The Commission’s investigation revealed
that R20 million would be required in order to start a plant that produces 600 metric tons
per month production capacity for phosphoric and polyphosphoric acid. According to the
Commission, the latter plant would take a year to bring on stream. The merging parties
estimated that it would require approximately R150 million to set up an effective
manufacturing plant of white phosphoric acid and polyphosphoric acid – from which we
can only infer that the plant concerned would produce approximately 4500 metric tons of
phosphoric and polyphosphoric acid per month. This in itself suggests that barriers to entry
in this market are high. Save for Soyo Chemicals, a 1996 entrant that enjoys a market
share of between 5% to 10%, there have not been any new entrant into this market.
39. The merging parties conceded that the main barrier to entry in this market is the capital
required to establish a plant capable of processing the relevant materials for production.
However, the capital required would vary depending on the size of the operation
concerned. The parties also contended that it would be relatively inexpensive for the three
firms currently involved in the manufacturing of green phosphoric acid to convert their
existing facilities for the production of white phosphoric acid. The Commission followed up
with these entities to obtain their views. One of the producers did not respond to the
Commission’s enquiries. One of the remaining two entities indicated that it had previously
tried to penetrate the market, but costs and barriers to entry prevented it doing so whilst
the other reiterated that it is not contemplating entering the market at all.
Public Interest Issues
Public Interest Issues
40. According to the parties, the transaction would not result in a negative effect on
employment and no retrenchments were envisaged.
The proposed conditions
41. It is evident from above that there is a likelihood of a substantial lessening of competition
because of the vertical links in certain of the markets implicated in this transaction.
Accordingly, the Commission recommended the imposition of several conditions. These
conditions were primarily aimed at, inter alia , ensuring continued supply to all of
Chemiphos’ current customers at the current prices for a period of 3 years.
42. At the hearing we asked the Commission whether it had considered compelling the
merging parties to divest from some of the downstream markets as part of its conditions.
We accepted the Commission’s view that the conditions would suffice to ensure that the
threat to competition would be eliminated. In their submission against divestiture, the
merging parties contended, firstly, that there is ample evidence that imports are feasible
viable alternative into the market and that imports can readily come into this market. Mr
Chiang’s evidence also suggested that imports are able to satisfy the requirements of the
smaller purchasers of phosphoric acid. Secondly, the merging parties have negotiated
fairly extensive undertakings with the major customers, who, on the basis of those
undertakings, have indicated that they do not have an objection to the transaction. Thirdly,
the merging parties argued that certain of Chemserve companies that purchase inputs
14
from Chemiphos are not direct competitors with other independent Chemiphos customers.
43. In brief, the attached conditions are designed to ensure that the merged entity continues to
supply all Chemiphos’ customers sourcing white phosphoric and polyphoshoric acid on a
nondiscriminatory basis and on the same terms and conditions, which existed prior to the
merger. This would ensure that those downstream users of Chemiphos products would not
be advantaged relative to their competitors.
44. It is the Tribunal’s view that the attached conditions would alleviate potential competitive
concerns that may arise pursuant to the merger. Our order is reproduced below.
_____________ 7 July 2005
David Lewis Date
Concurring: Yasmin Carrim and Thandi Orleyn
For the merging parties: Anthony Norton ( Webber Wentzel Bowens ).
For the Commission: Rudolph Labuschagne ( Legal Services ) assisted by Hardin
Ratshisusu and Asogren Chetty ( Mergers & Acquisitions )
1.3
15
1.4
1.5 COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 100/LM/Dec04
In the large merger between:
Chemical Services Limited Acquiring Firm
1.5.1.1 and
Chemiphos S.A (Pty) Ltd Target Firm
___________________________________________________________________________
1.6 ORDER
___________________________________________________________________________
2
3 A. The merger is approved in terms of section 16(2)(b) of the Act subject to the condition
that:
4 1. The merged entity shall continue to supply all Chemiphos’ customers sourcing white
phosphoric and polyphosphoric acid at the price and volumes at which Chemiphos was
supplying its customers sourcing white phosphoric and polyphosphoric acid at the date of
the merger notification, being 26 November 2004, subject to the provisions below and
compliance by customers with their contractual and commercial obligations to
Chemiphos.
5 2. In the event of production stoppages, such that Chemiphos is unable to meet the full
contractual requirements of all its customers and its internal requirements, Chemiphos
shall, to the extent that it reduces the supply of Polyphosphoric acid, reschedule its
supply of Polyphosphoric Acid on a nondiscriminatory, prorata basis and to the extent
that it reduces the supply of Phosphoric Acid, Chemiphos shall reschedule its supply of
Phosphoric Acid on a nondiscriminatory, pro rata basis.
16
6 3. The merged entity shall be entitled to increase the prices charged to Chemiphos’
customers, as at 26 November 2004, in terms of the formula attached hereto marked A
(in respect of phosphoric Acid) and B (in respect of polyphosphoric Acid). For the sake of
clarity it is recorded that the merged entity is not obliged to increase its prices to the full
extent permitted by the formula, but that the formula will constitute the maximum amount
by which the pricing may be increased.
7 4. The conditions set out herein shall apply for a period of 3 years from the date of the
Tribunal’s order in relation to this transaction.
8 5. If any independent purchaser of white phosphoric and polyphosphoric acid wishes to
verify compliance with these conditions, the merged entity shall procure such verification
from its auditors in the form of an audit certificate at such independent purchaser’s cost,
within 30 days of such independent purchaser’s request for verification.
Monitoring of the conditions
9 6. The merged entity shall provide the Commission with an audit certificate issued by the
merged entity's auditors, on an annual basis, verifying compliance with the above
mentioned conditions. The merged entity's financial year end is 31 December and the
Audit certificate shall be provided to the Commission within 8 weeks of the merged
entities financial year end. An employee of the merged entity will provide the Commission
with an affidavit at six monthly intervals from the date of approval of the merger
confirming compliance with these conditions.
10 7. The reporting obligations are applicable for the duration of the period of these
conditions. For the sake of clarity it is recorded that the final audit report and affidavit will
be furnished to the Commission after the period set out in paragraph 4 has elapsed.
be furnished to the Commission after the period set out in paragraph 4 has elapsed.
11 8. Were the Chemserve Group to seek to acquire another firm in the metal surface
treatment market, including Orlik and Associates, the Commission would require
notification of this transaction irrespective of whether it meets the necessary thresholds.
B. Chemiphos is required to forward a copy of this Order to all its customers for phosphoric
and polyphosphoric acid.
17
C. A Merger Clearance Certificate be issued in terms of Competition Tribunal rule 35(5)(a).
18
12 PHOSPHORIC ACID PRICE ADJUSTMENT FORMULA
13 9. The merging parties shall be entitled to increase the individual prices of Phosphoric
Acid charged to each of Chemiphos' customers, as at 26 November 2004, according to
the following principles:
13.1 9.1 Price increases will take into account fluctuations in the US$ acquisition cost of
yellow phosphorous (CFR Durban), including fluctuations in the Rand/US$
exchange rate as well as fluctuations in the PPI 28 over the previous quarter.
9.2 The prices for 26 November 2004, from which price adjustments will be determined are ex
Chemiphos' works and are based on:
9.2.1 a CFR Durban Price of US$2 340.00 per metric tonne with payment terms of cash
against documents;
9.2.2 all associate clearing and forwarding charges 29; and
9.2.3 an exchange rate of R6.30 to USD1.00
9.3 Any such price increase will occur on a quarterly basis 30 or when the Rand/US$
exchange rate 31 has increased by more than 5% from the exchange rate that
prevailed at the commencement of the relevant quarter and where the increase
persists for a minimum period of one month 32.
9.4 For the purpose of calculating quarterly price adjustments, the percentage of the
product price which is attributable to the US$ acquisition cost of yellow phosphorous shall
be deemed to be 78%. Accordingly, changes to the Rand/US$ exchange rate and the
US$ acquisition cost of yellow phosphorous (CFR Durban) utilised to calculate the price
28 The PPI is the Production Price Index output of South African Industry Groups for South African
consumption, chemicals and chemical products, as recorded in the Statistical News Release, table 3.1
group 2.11 ("other chemical products") published monthly by the Central Statistics Service.
29 These include, landing and clearing fees as determined by Portnet and Safcor, Marine Insurance,
hazardous goods insurance, transit insurance and public liability insurance
30 In other words January, April, July and October
31 Rand/US$ Bank Selling Price as quoted by Standard Bank
32 One Calendar Month
A
19
for the previous quarter, shall be applied to 78% of the price for the previous quarter. The
remaining 22% of the price for the previous quarter shall be adjusted in accordance with
changes in the PPI.
9.5 The price adjustment, according to the weighting set out above, will occur in advance of
any quarter, utilising:
9.5.1 the average Rand/US$ bank selling rate for the first two months of the current quarter;
9.5.2 the average US$ price at which yellow phosphorous was acquired CFR Durban, for
the first two months of the current quarter ; and
9.5.3 the 22% referred to in the preceding paragraph will be adjusted by a factor equivalent
to the published percentage increase in the PPI, calculated on the last month of the
preceding quarter. In other words a price increase/decrease to come into effect on 1
April 2005 will be based on the increase/decrease in the PPI for December 2004 as
against that for September 2004.
9.6 Transport and packaging charges for the delivery of product to the purchaser will be
reflected seperately on the invoice and will be the actual cost incurred by Chemiphos for
such packaging and transportation.
14 10. By way of an example:
Assuming the Following:
BASE EXWORKS PRICE 3.770 R/KG
BASE R/$ EXCHANGE RATE 10.0 R/US$
BASE PPI 113.7
BASE YELLOW PHOSPHORUS PRICE CFR DURBAN (AVE
PRICE FOR PERIOD)
980 US$/MT
20
Then, if the exchange rate where to change to R6.30/US$; and
the price of Yellow Phosphorous were to change to R2340/Metric Tonne; and
the PPI were to change to 124.3
the following Phosphoric Acid price would result
PHOSPHORIC ACID PRICE FOR THE FOLLOWING QUARTER
1) YELLOW PHOSPHORUS CONTENT :
AVE. R/$ EXCHANGE RATE FOR RELEVANT TWO
MONTH PERIOD:
6.30
AVE. YELLOW PHOSPHORUS PRICE RELEVANT TWO
MONTH PERIOD
2340 $/MT
BASE PHOS ACID PRICE YELLOW PHOS. CONTENT = 0.78 x
3.770 = 2.941
NEW PHOS ACID PRICE YELLOW PHOS. CONTENT =
2.941 x (NEW R/$/10.0) x (NEW YP
PRICE/980) =
4.424 R/KG
2) LOCAL CONTENT :
PPI FOR RELEVANT
MONTH:
124.3
BASE PHOS ACID PRICE LOCAL PPI CONTENT = 0.22 x 3.770 =
0.829
NEW PHOS ACID PRICE LOCAL PPI CONTENT = 0.829 x
(NEW CPI/113.7) =
0.907 R/KG
NEW PHOSPHORIC ACID EXWORKS PRICE
FOR RELEVANT QUARTER
5.33 R/KG
21
15 POLYPHOSPHORIC ACID PRICE ADJUSTMENT FORMULA
16 11. The merging parties shall be entitled to increase the individual prices of
Polyphosphoric Acid charged to each of Chemiphos' customers, as at 26 November
2004, according to the following principles:
11.1 Price increases will take into account fluctuations in the US$ acquisition cost of yellow
phosphorous (CFR Durban), including fluctuations in the Rand/US$ exchange rate as
well as fluctuations in the PPI 33 over the previous quarter.
11.2 The prices for 26 November 2004, from which price adjustments will be determined
are ex Chemiphos' works and are based on:
11.2.1 RAW MATERIAL:
Raw Material: Imported Yellow Phosphorous with
actual cost based on:
• A CFR Durban Price of USD2 340 per metric tonne
with payment terms of cash against documents;
• all associated clearing and forwarding charges 34;
• an exchange rate of R6.30 to USD1.00; and
• a phosphorous efficiency factor of 90% and a
conversion factor as determined by the
concentration of the product as shown in paragraph
15.
TOTAL RAW MATERIAL COST
R6 582.00 / Metric Tonne
11.2.2 UTILITIES, PRODUCTION OVERHEADS AND PROFIT
Utilities, production overheads and profit element.
TOTAL UTILITIES,
PRODUCTION OVERHEADS
AND PROFIT
R6 749.00 / Metric Tonne
TOTAL BASE PRICE R13 331 / Metric Tonne
33 The PPI is the Production Price Index output of South African Industry Groups for South
African consumption, chemicals and chemical products, as recorded in the Statistical
News Release, table 3.1 group 2.11 ("other chemical products") published monthly by
the Central Statistics Service.
34 These include, landing and clearing fees as determined by Portnet and Safcor, Marine Insurance,
hazardous goods insurance, transit insurance and public liability insurance
B
22
12. Any such price increase will occur on a quarterly basis 35 or when the Rand/US$
exchange rate 36 has increased by more than 5% from the exchange rate that
prevailed at the commencement of the relevant quarter and where the increase
persists for a minimum period of one month 37.
17 13. The base price will be adjusted in advance of every quarter:
13.1 by an amount equivalent to the change in the cost of any raw materials described in
paragraph 12.1 over the preceding quarter; and
13.2 the amount reflected in paragraph 12.2 (as adjusted in terms of this paragraph) will be
adjusted by a factor equivalent to the published percentage increase in the PPI,
calculated on the last month of the preceding quarter. In other words a price increase/
decrease to come into effect on 1 April 2005 will be based on the increase/decrease in
the PPI for December 2004 as against that for September 2004.
18 14. Transport and packaging charges for the delivery of product to the purchaser will be
reflected seperately on the invoice and will be the actual cost incurred by Chemiphos for
such packaging and transportation.
19 15. Example: Production Raw Material Cost Calculation :
15.1 115.5% Polyphosphoric Acid
= (variable in store yellow phosphorous cost x fixed conversion factor) / 90%
= (USD 2340 38 x 6.3 39 x 1.1 40 x 0.3654 41) / 90% 42
= R6582 / Metric Ton
15.2 112.7% Polyphosphoric Acid
= (variable in store yellow phosphorous cost x fixed conversion factor) / 90%
35 In other words January, April, July and October
36 Rand/US$ Bank Selling Price as quoted by Standard Bank
37 One Calendar Month
38 Yellow Phosphorous Price: US$/metric tonne CFR Durban
39 Rand/US$ Exchange Rate
40 10% Landing, clearing and delivery cost
41 Kilograms of yellow phosphorous in 1 Kilogram of Polyphosphoric Acid for a particular Grade
(Theoretical)
(Theoretical)
42 Yield factor of Yellow phosphorous used in the manufacturing process.
23
= (USD 2340 x 6.3 x 1.1 x 0.3565) / 90%
= R6420 / Metric Ton
___________ 26 April 2005
David Lewis Date
Concurring: Yasmin Carrim and Thandi Orleyn
For the merging parties: Anthony Norton ( Webber Wentzel Bowens ).
For the Commission: Rudolph Labuschagne ( Legal Services ) assisted by Hardin
Ratshisusu and Asogren Chetty ( Mergers & Acquisitions )
24