COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no.: 109/LM/Nov05
In the large merger between:
Chemical Services Limited
and
Leochem (Pty) Ltd
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Reasons
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Introduction
1. On 17 February 2006 the Competition Tribunal approved the merger
between Chemical Services Ltd and Leochem (Pty) Ltd. The reasons
are set out below.
The transaction
2. Chemical Services Ltd (“Chemserve”) intends to acquire Leochem
(Pty) Ltd (”Leochem”) as a going concern. Leochem will be merged
with Chemserve subsidiary Akulu Marchon (Pty) Ltd. Its food
phosphate division will be absorbed by Lake International Technologies
(Pty) Ltd, a subsidiary of Chemserve.
3. Chemserve is controlled by AECI Ltd, a public limited company listed
on the JSE. No one shareholder directly or indirectly controls AECI. Its
five largest shareholders are:
Coronation Asset Management 18.9%
RMB Asset Management 17.1%
Old Mutual Asset Management 10.3%
Stanlib Ltd 9.8%
Bernstein Investment Research Management 6.1%
4. Two shareholders control Leochem, namely:
Sandy Rae Family Trust 50%
Ashley McNabb Family Trust 50%
5. Leochem, which owns depots in Cape Town, Durban and
Johannesburg, does not directly or indirectly control any other firm.
Rationale for the transaction
6. Chemserve views the acquisition of Leochem, whose current
shareholders wish to exit the business, as an opportunity to expand
and complement its current product offerings.
Relevant Market
7. The merger has horizontal as well as vertical effects. Both Leochem
and Chemserve manufacture and distribute chemical products and also
act as third party distributors of imported chemical products.
8. The horizontal overlap concerns two chemical products which are
manufactured and distributed by a subsidiary of Chemserve, IOP, and
which is also imported and distributed by Leochem, namely distilled tall
oil and gum rosin. The vertical effect pertains to products that Leochem
manufactures and which are sold as input products to two Chemserve
subsidiaries, Plaaskem and Crest, namely petroleum jelly and light
white oils.
9. According to the parties the size of the market for independent or third
party chemical distribution is estimated to be approximately R4 billion,
which represents approximately 15% of all chemicals distributed in
South Africa. Most manufacturers, approximately 85%, distribute their
own product.
Horizontal product markets
10. As indicated above Chemserve and Leochem do not manufacture the
same chemical products. They do however distribute the same
chemicals, two of which concern us because of high market shares
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post the transaction namely distilled tall oil and gum rosin. 1
11. IOP is the only manufacturer in South Africa that produces a range of
distilled tall oil products, which are used as a base product in the
production of certain lubricants. The particular distilled tall oil that IOP
manufactures, called R305, has a 30% rosin content and overlaps with
a similar product imported and distributed by Leochem, known as
PC300. Leochem sources its product on the international market from
Akzo Nobel. An import duty of 10% is imposed on imports. The parties
estimate that this product constitutes between 4% and 15% of the total
input costs of downstream customers.
12. IOP also taps crude gum from living pine trees in South Africa and then
refines the gum rosin at its plant in Durban. Gum rosin is used in the
adhesive industry and is also used as a base building block for various
resins. Leochem currently imports all its gum rosin. There are no import
duties on this product.
Vertical product markets
13. Leochem manufactures petroleum jelly, blends white oils and also
imports certain chemical products, all of which are supplied to various
AECI subsidiaries and other customers. Approximately 50% of
Leochem’s turnover is derived from the manufacture and distribution of
petroleum jelly, while 25% of turnover is derived from the blending and/
or distribution of imported white oils at its Durban plant. The remaining
25% of revenue is derived from the import, supply and distribution of
other chemical products.
14. Petroleum jelly is a byproduct of the refining of petroleum and is used
in the pharmaceutical, cosmetic, printing ink, leather and rubber
industries. Leochem sells petroleum jelly to Chemserve Systems,
which uses it in the production of waterless hand cleaner.
15. Leochem imports all its white oils of which approximately 60% are then
15. Leochem imports all its white oils of which approximately 60% are then
blended according to customer specification at its blending facilities
while the balance of 40% is sold asis. White oils are produced as a by
product in the distillation of gasoline from crude oils and are used as a
blending base in the manufacturing of personal care and
pharmaceutical products, plastics and in food applications. 2 Leochem
does not have any exclusive supply agreements with any of its international
1 The other products are: tall oil fatty acids, rubber tackifier, pinerez, cetostearyl alcohol, polysorbate,
glyseryl monostearate, phosphates, glycerine and potassium hydroxide.
2White oil is also known as White Mineral Oil, Mineral Oil, Liquid paraffin, Paraffin Oil, Vaseline
Oil, liquid petrolatum or wax oil.
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suppliers.
16. Plaaskem, a subsidiary of AECI, uses liquid paraffin and light white oil
in the production of antiparasitic products used in the veterinary
industry. Plaaskem itself does not compete in the market for veterinary
products but is merely contracted to produces the products on behalf of
Intervet (Pty) Ltd.
17. We will thus consider the vertical effects of the transaction on:
1) The upstream market for the manufacture of petroleum jelly and
the downstream market for the manufacture of industrial hand
cleaners, and
2) the upstream market for the manufacture of light white oils
and/or liquid paraffin and the downstream market for the
manufacture of antiparasitic products.
18. The geographic markets identified in the horizontal and vertical product
markets are all national.
19. We will first analyse the horizontal effect of the transaction on
competition and then the vertical effects.
Effect on competition
Horizontal effect on competition in the Distilled Tall Oil product market
20. Post the transaction the merged entity’s market share will increase with
33% to approximately 83% in the market for the distribution of distilled
tall oil. It should, however, be noted that IOP’s market share of 50%
premerger includes all the distilled tall oil produced by IOP and not
only the product R305 that overlaps with PC300 which is imported by
Leochem. The postmerger market share of 83% is thus not a true
reflection of IOP’s market share in the narrow relevant product market.
21. Import barriers are low, the import duty is 10%, and the product can be
imported from large international competitors such as Akzo Nobel
(Netherlands), Arizona Chemicals (USA), Harima (Japan) to name but
a few. According to the parties imports currently constrain the pricing of
IOP in South Africa. This is illustrated by the fact that Leochem, IOP’s
IOP in South Africa. This is illustrated by the fact that Leochem, IOP’s
largest competitor of distilled tall oil, managed to import the product
and compete successfully with it.
22. IOP does not only sell R305 directly to its own customers but also
sells a large quantity of this product, on a nonexclusive basis, to
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independent chemical traders/wholesalers such as Chemical Industrial
Marketing (“CIM”) and Protea Chemicals. During April to December
2005, 22.9% of IOP’s total sales of distilled tall oil were sold to CIM and
9.4% to Protea. Approximately 64% of sales were direct sales to end
customers.
23. As stated above Leochem imports all its distilled tall oil from Akzo
Nobel. Distilled tall oil represents 0.7% of its total turnover and it does
not have any formal supply agreement with Akzo Nobel or with any
downstream customers. It imports it on an ad hoc basis as and when
the need arises.
24. According to the Commission’s market inquiry it appears that by virtue
of IOP being the sole manufacturer of distilled tall oil in the country it is
inevitable that IOP would have high market shares in the distribution of
the product. To some extent, imports, especially those by Leochem,
appear to have disciplined IOP’s pricing policy. Therefore, it is the
contention of market participants who use distilled tall oil that the
transaction will result in the removal of an effective competitor from this
market.
25. In our view the merger does not result in a substantial lessenin of
competition in the narrow product market of R305/PC300. In the first
instance Leochem is an importer not a manufacturer. The merger will
not relax the current constraint on IOP’s pricing, which is the global
price of the product. Moreover, other distributors of chemical products,
such as Chemimpo, CJH Petrow and Protea Chemicals have
confirmed to the Commission that they could import distilled tall oil
should there be a need in the local market thus suggesting that entry
barriers are low.
Horizontal effect on competition in the Gum Rosin product market
26. The market shares of IOP, which manufactures gum rosin, and
26. The market shares of IOP, which manufactures gum rosin, and
Leochem, an importer, for the distribution of gum rosin are 30% and
10% respectively. Post the transaction the merged entity will have a
market share of 40%.
27. The Commission found in its investigation that gum rosin is imported
duty free and with relative ease. The largest producer of gum rosin is
China with other large producers being Indonesia, Thailand and Brazil.
The product is freely available on the world market and there are
numerous traders selling the product locally. There have also been
imports of gum rosin by direct users such as Pekay Chemicals,
Plascon Paints and Quialichem. Another company indicated to the
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Commission that it imports the majority of its gum rosin requirements
from its sister company based overseas. Local distributors such as
Protea Chemicals, C.J. Petrow Chemicals, Carst and Walker and
Daytona Chemicals also supply gum rosin.
28. IOP’s production has decreased from approximately 300 tonnes per
month in 2002 to 40 tonnes per month currently. The reason for this,
according to the parties, is that the South African trees are drying up.
This has resulted in an increase of imports in gum rosin to supplement
local production.
29. Leochem currently imports all its gum rosin from Akzo Nobel.
30. In light of the fact that imports are increasing, various alternative
importers of the product exist and entry barriers are low, we agree with
the Commission that the merger would not substantially prevent or
lessen competition in this relevant market.
Vertical effect on the upstream market for the manufacture of
petroleum jelly and the downstream market for the manufacture of
industrial hand cleaners
1) As indicated above Leochem is a manufacturer of petroleum
jelly. Chemserve sources its total supply of petroleum jelly
from Leochem, and uses it as an input product in the
manufacturing of waterless hand cleaner. Chemserve
consumes less than 1% of the total production of petroleum
jelly.
2) Leochem’s market share in the upstream market is 55%. Its
main rivals in the upstream market are H&R Wasag and a
new entrant PFP with 30% and 10% market share
respectively. PFP entered the market approximately 6 years
ago. Wasag has been in the market for 20 years.
3) Chemserve’s market share in the downstream market is
approximately 1%. In light of the insignificant volume of
petroleum jelly consumed by Chemserve as well as the
petroleum jelly consumed by Chemserve as well as the
presence of other manufacturers we agree with the
Commission that customer foreclosure is unlikely.
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Vertical effect on the upstream market for the manufacture of light
white oils and/or liquid paraffin and the downstream market for the
manufacture of antiparasitic products
4) There are no local producers of light white oils and liquid
paraffin in South Africa. Leochem imports all of its white oils
and blends 60% of it according to customer specifications.
The white oils, liquid paraffin and light white oil, are imported
by Leochem and sold to Chemserve’s subsidiaries,
Plaaskem and Crest, as is. Plaaskem and Crest sourced all
of its requirements from Leochem.
31. In the first upstream market of liquid paraffin, Leochem is the second
largest player with a market share of 30%. Its largest rival, Engen, has
a market share of 40%. There are two other players, OCC/PFP and
Orbichem each with a market share of 10%.
32. In the second upstream market, the market for light white oils,
Leochem has a market share of 60% and Engen, the second largest
player a market share of 20%. The remaining player, OCC/PFP has a
market share of 10%. In the downstream market Crest is a third party
trader in chemical products. It buys and sells a large range of products
and is unable to determine its market share on a product basis. Its
market share, in the broad market for the distribution of chemical
products, is approximately 10%.
33. In the downstream market Plaaskem uses the light white oil and liquid
paraffin to produce antiparasitics used in the veterinary industry. It
sells the products to Intervet (Pty) Ltd whose market share varies
between 14%23% depending on the product.
34. Plaaskem is not Leochem’s largest customer. Bayer, an international
company with a longstanding relationship with Engen, bought 24 times
more liquid paraffin than Plaaskem. Bayer confirmed to the
more liquid paraffin than Plaaskem. Bayer confirmed to the
Commission that there are alternative sources locally as well as
overseas from which it can feasibly source paraffin and/or light white
oils. According to the Commission it is not economical to start a
manufacturing plant for light white oils in South Africa. The domestic
market would thus continue to import because barriers to entry for
importing and blending are relatively low. 3
35. We therefore find that input and customer foreclosure are unlikely in
any of the vertical markets. We accordingly find that the transaction will
not substantially prevent or lessen competition.
3 It would cost approximately R500 000 to set up an entry level blending facility
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Public interest issues
36. Three employees, all of them directors of Leochem, face the risk of
being retrenched. Since they are highly skilled persons the likelihood of
them finding alternative employment is high in the event of them being
retrenched.
37. The merger is approved unconditionally.
22 February 2006
Y Carrim
Date
Concurring: U Bhoola and M Mokuena
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