Brief Summary

Competition — Merger — Approval of merger between International Mineral Resources AG and Kermas South Africa (Pty) Ltd — International Mineral Resources AG acquiring 32.5% of Kermas South Africa, facilitating joint control over Kermas SA and Samancor Chrome — No business plan presented by merging parties — Tribunal assessed market shares and competitive effects in the chrome ore and ferrochrome markets — Unconditional approval granted despite concerns regarding market concentration, as existing competitors could expand production in response to price increases.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were large merger proceedings before the Competition Tribunal of South Africa, in which the Tribunal was required to determine whether a proposed transaction should be approved in terms of the Competition Act 89 of 1998.

The acquiring firm was International Mineral Resources AG (IMR), a company whose principal business is in Switzerland and which controls Eurasian Natural Resources Corporation (ENRC), the latter owning TNC KazChrome JSC (KazChrome). The target firm was Kermas South Africa (Pty) Ltd (Kermas SA), a wholly owned subsidiary of Kermas Ltd (Kermas) incorporated in the British Virgin Islands, with Kermas SA controlling Samancor Chrome (Samancor).

On 20 April 2006, the Tribunal unconditionally approved the merger. The reasons for that approval were subsequently set out in writing and are reflected in the present judgment, dated 13 June 2006 (with concurrence by additional Tribunal members).

The general subject-matter of the dispute concerned whether the transaction—resulting in joint control of Kermas SA (and consequently Samancor) by IMR and Kermas—was likely to substantially prevent or lessen competition, particularly in the global market for ferrochrome, and whether any vertical or public interest concerns arose.

2. Material Facts

IMR acquired 32.5% of the issued shares in Kermas SA, together with certain rights enabling IMR and Kermas to jointly control Kermas SA and therefore Samancor Chrome. The Tribunal recorded that the parties also indicated that certain shares would later be transferred to a BEE shareholder to facilitate compliance with the BEE Mining Charter, and that they would notify that further transaction if it effected a change in control for purposes of the Competition Act.

IMR controlled ENRC, which owned KazChrome. KazChrome was active in the mining of ferroalloys and owned two mines in Kazakhstan, and it did not own any mines in South Africa. Kermas SA controlled Samancor, which owned chrome mines located in Mpumalanga, Limpopo, and the North West Province.

Both IMR (through KazChrome) and Samancor were described as vertically integrated ferrochrome producers, with operations spanning the upstream extraction of chrome ore and downstream production and supply of ferrochrome. A key feature of the factual matrix was that South African ferrochrome production was predominantly exported, with approximately 10% used locally and approximately 90% exported. The Tribunal also noted that there was only one ferrochrome customer located in South Africa, namely Columbus Stainless (Pty) Ltd.

The Competition Commission identified two relevant markets for assessment purposes. The upstream market was defined as the national market for the mining of chrome ore. The downstream market was defined as the global market for the production and supply of ferrochrome. The Tribunal recorded that chrome ore is processed into different grades, with metallurgical grade chrome being the principal input into ferrochrome, which is a key ingredient in stainless steel production. The Tribunal further recorded that different grades of ferrochrome were identified (including charge chrome, high carbon ferrochrome, and intermediate/low carbon ferrochrome), and that these were considered by the parties to be substitutable.

As to market shares, the Tribunal recorded that in the national market for mining chrome ore (2005), Samancor held 37%, Xstrata 30%, Ore and Metal 12%, ASA 4%, and others 17%. The Tribunal treated it as material that there would be no change in Samancor’s share in the South African upstream market because KazChrome did not own chrome mines in South Africa.

In the global market for production and supply of ferrochrome (2004), the Tribunal recorded market shares including Xstrata 21.6%, KazChrome 13.6%, and Samancor 11.7%. On these figures, the merged entity would have a combined share of 28%, exceeding Xstrata’s share (recorded at 21% post-transaction). The Commission calculated a post-merger HHI of 1803.80 with a delta of 318, which the Tribunal recorded as indicating a highly concentrated market that could raise competition concerns.

The Tribunal’s assessment relied on evidence regarding (among other matters) the existence of idle capacity among competitors such as Xstrata and Hernic, the claimed capacity expansion possibilities, the nature of entry and re-entry (including “greenfield” and “brownfield” entry), the manner in which ferrochrome prices are negotiated and published, and the presence of confidential discounts. It also relied on evidence about purchasing arrangements, including that Columbus Stainless had a long-term supply arrangement with Samancor and also purchased annual spot tonnages on the open market.

3. Legal Issues

The central legal question was whether the merger was likely to substantially prevent or lessen competition, with the Tribunal’s focus falling on the horizontal effects in the global ferrochrome market given the high combined market share and concentration indicators, as well as the possibility of coordinated or unilateral effects.

A further legal issue was whether the transaction would raise vertical foreclosure concerns, given that the parties were vertically integrated producers, and whether the transaction would have any adverse implications for public interest considerations.

The dispute primarily concerned the application of competition-law principles to the economic and market facts placed before the Tribunal. It involved evaluative judgments concerning competitive constraints, including entry conditions, capacity expansion, price formation and transparency, and the presence of countervailing power.

4. Court’s Reasoning

The Tribunal approached the competitive assessment by recognising that the downstream ferrochrome market was highly concentrated on the HHI measures presented, and that concentration metrics could indicate potential competition concerns. The Tribunal nevertheless emphasised that concentration was not dispositive, and it framed the inquiry around whether, in the circumstances of the market, the merged entity was likely to behave anti-competitively (unilaterally or in a coordinated way), taking into account the dynamics that would facilitate or inhibit such conduct.

In addressing potential coordinated or non-competitive outcomes, the Tribunal considered whether competitors and fringe producers could expand output in response to any attempted price increase by the merged firm. It accepted evidence that competitors, including Xstrata and Hernic, had sufficient idle capacity and could increase production “quite quickly.” The Tribunal treated this as a factor making coordination less likely, because the ability of rivals to expand output could undermine attempts to sustain supra-competitive pricing.

The Tribunal also addressed the theoretical concern that excess capacity can facilitate punishment mechanisms within a cartel. It noted, however, that this risk was regarded as less likely in an expanding market, and it accepted the proposition that in a growing market (linked in the evidence to growing steel demand), deviations from coordinated outcomes may be harder to detect and punish. On this basis, it treated prevailing market growth conditions as reducing the likelihood of stable collusion.

The Tribunal then evaluated barriers to entry and re-entry, distinguishing between higher barriers for “greenfield” entry due to regulatory issues and lower barriers for “brownfield” entry. It accepted evidence that firms regularly enter and exit the market, and that production facilities can be opened or shut depending on price levels. The Tribunal further accepted that under favourable market conditions, certain producers (including toll producers, and facilities capable of switching between manganese, silica, and chrome) could shift into ferrochrome production relatively quickly. Evidence of capacity expansion by producers in China and India in response to price increases was treated as illustrating the responsiveness of supply and the competitive constraint posed by potential entrants or switchers.

In assessing the risk of coordinated conduct, the Tribunal considered price transparency and information exchange. It accepted evidence that while ferrochrome prices are negotiated internationally on a quarterly basis and published in industry sources, published prices were only rough estimates because confidential volume discounts were negotiated bilaterally. The Tribunal treated this lack of full price transparency as reducing the feasibility of collusion, since secret discounts could frustrate monitoring and coordination.

The Tribunal also considered the role of countervailing power, focusing on the influence of large stainless steel producers (particularly in Europe) and the ability of customers to switch suppliers, and in Europe to substitute towards stainless steel scrap where abundant. It accepted evidence that large buyers could constrain pricing, and it treated the existence of negotiated discounts and buyer alternatives as factors making non-competitive pricing less likely.

Although the Tribunal noted that stainless steel scrap was not regarded as a viable substitute in South Africa due to limited availability and import cost, it still treated international market pricing mechanisms as relevant, including the way in which Columbus Stainless’ pricing could be linked to European reference prices via contractual arrangements. The Tribunal’s reasoning on this aspect was directed to showing that the relevant competitive constraints operated at an international level in the downstream market, and that local purchasing arrangements did not isolate the South African customer from global pricing dynamics.

On the vertical dimension, the Tribunal reasoned that local producers of ferrochrome were all vertically integrated and, on that basis, the merger was unlikely to raise foreclosure concerns. The analysis proceeded from the premise that vertical integration was common in the industry and that the transaction did not introduce a materially different ability or incentive to foreclose.

Finally, the Tribunal considered public interest issues and found that the transaction would have no effect on public interest factors.

5. Outcome and Relief

The Tribunal unconditionally approved the merger between IMR and Kermas SA.

No conditions were imposed, and the Tribunal recorded that public interest issues were not adversely affected.

The judgment, as provided, did not record any separate costs order.

Cases Cited

International Mineral Resources AG and Kermas South Africa (Pty) Ltd (Competition Tribunal Case No 22/LM/Mar05)

Legislation Cited

Competition Act 89 of 1998

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The Tribunal held that, notwithstanding the high level of concentration indicated by the post-merger market shares and HHI calculations in the global ferrochrome market, the merger was unlikely to lead to anti-competitive outcomes because key competitive constraints remained effective.

In particular, the Tribunal found that entry or switching could occur relatively quickly when prices rise, that surplus capacity existed among competitors, that effective coordination was impeded by the lack of full price transparency due to confidential discounts, and that large buyers possessed countervailing power. It further held that the merger was unlikely to raise vertical foreclosure concerns and that there were no public interest effects warranting intervention.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger assessment does not depend solely on market concentration measures; even in a highly concentrated market, the decisive question is whether the merger is likely to substantially prevent or lessen competition when evaluated against actual competitive constraints reflected in the record.

The Tribunal applied the principle that the likelihood of anti-competitive effects may be reduced where competitors can expand output due to idle or excess capacity, and where market conditions (including growth and responsiveness of supply) make coordinated outcomes difficult to sustain.

The Tribunal applied the principle that low barriers to entry or re-entry, including the ability of firms to switch production in response to price changes, can constrain market power and deter sustained price increases.

The Tribunal applied the principle that limited price transparency—including the existence of confidential discounts negotiated bilaterally—can undermine the ability of firms to coordinate and monitor collusive arrangements, reducing the likelihood of coordinated effects.

The Tribunal applied the principle that the presence of large, sophisticated buyers with the ability to switch suppliers (and, in some markets, to use substitute inputs) can constitute countervailing power that constrains supplier market power.

The Tribunal applied the principle that where an industry is characteristically vertically integrated, and the transaction does not materially enhance the merged firm’s ability or incentive to foreclose rivals, vertical foreclosure concerns may be less likely to arise on the facts presented.

International Mineral Resources AG and Kermas South Africa (Pty) Ltd (03/LM/Jan06) [2006] ZACT 50; [2006] 2 CPLR 594 (CT) (13 June 2006)