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COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 34/LM/Apr09
In the matter between:
CHLOR-ALKALI HOLDINGS (PTY) LTD Acquiring Firm
and
BOTSWANA ASH (PTY) LTD Target Firm
Panel : Y Carrim (Presiding Member)
M Holden (Tribunal Member)
A Wessels (Tribunal Member)
Heard on : 25 February 2010
Order issued on : 26 February 2010
Reasons issued on : 14 May 2010
Reasons for Decision
CONDITIONAL APPROVAL
[1] On 26 February 2010, the Competition Tribunal (“Tribunal”) approved the
acquisition by Chlor-Alkali Holdings (Pty) Ltd (“CAH”) of Botswana Ash (Pty) Ltd
(“Botash”) in terms of section 16(2)(b) of the Competition Act, 1998 (Act No. 89
of 1998, as amended) (“the Act”) subject to certain conditions.
[2] The reasons for the conditional approval of the proposed acquisition follow
below.
THE PARTIES
[3] CAH, a limited liability company incorporated in South Africa, is the primary
acquiring firm. CAH is controlled by Investec Bank Ltd (“Investec”), a public
company listed on the JSE Ltd. Investec controls various entities. CAH also
controls various entities based in South Africa and Namibia. For the purposes of
the competition assessment of this transaction two CAH subsidiaries are
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relevant, namely (i) NCP Chlorchem (Pty) Ltd (“NCP”), a South African
registered company; and (ii) Walvis Bay Salt Holdings (Pty) Ltd (“WBSH”), a
Namibian registered company.
[4] Botash, a limited liability company incorporated in Botswana, is the primary
target firm. The Government of the Republic of Botswana holds 50% of the
shares in Botash; the remaining 50% of the shares is held by the following
companies - collectively referred to hereinafter as the “selling shareholders”:
• Anglo American South Africa Capital (Pty) Ltd 14%
• De Beers Botswana (Pty) Ltd 14%
• AECI Ltd 14%
• FirstRand Bank Ltd 3.96%
• Standard Bank Group Ltd 2.47%
• Nedbank Ltd 1.57%
THE TRANSACTION
[5] In terms of t he proposed transaction CAH will acquire 50% of the issued share
capital of Botash from the selling shareholders. Post-merger Botash will be
jointly controlled by CAH and the Botswana Government with each party holding
50% of the shares in Botash. T he proposed transaction thus constitutes a
merger in terms of section 12(1) of the Act.
BACKGROUND TO THE HEARING
Competition Commission’s recommendation
[6] The Competition Commission (“Commission”) upon referral of this merger to the
Tribunal in November 2009 recommended that the proposed transaction should
be prohibited. However post the Commission’s referral of this matter to the
Tribunal, Botash and Sasol Polymers 1 (“Sasol”) in December 2009 concluded a
long-term supply agreement for chemical grade salt. Sasol currently is the only
inland customer of the merging parties of chemical grade salt (see paragraphs
to below for the delineation of the relevant product market and paragraphs to
1 A division of Sasol Chemical Industries Limited.
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for the delineation of the relevant geographic market). This said commercial
agreement for chemical grade salt supply makes provision inter alia for a fixed
volume-based price with a yearly escalation factor. Furthermore following this
supply agreement with Botash, Botrail 2 committed to making adequate rail
infrastructure capacity available to Sasol to service this salt supply on the basis
of certain tonnage commitments by Sasol. Sasol informed the Commission that
these developments alleviated its commercial concerns by insulating Sasol from
the (horizontal and vertical) effects of the proposed deal for the duration of the
said commercial contract period with Botash. The Commission consequently
changed its recommendation from a prohibition of the proposed deal to a
conditional approval since it was of the view that certain behavioural conditions
addressed the competition concerns in relation to Sasol as the only shared
customer between the merging parties as well as in relation to potential new
inland chemical grade salt customers. The Commission’s proposed behavioural
conditions relate to issues such as the obligation to supply and the price and
logistics of supply.
Sasol
[7] Sasol pre the conclusion of the said commercial supply agreement with Botash
submitted that the proposed acquisition may compromise the long-term
sustainability of its chlor-vinyls business. According to Sasol, WBSH is its only
viable chemical grade salt supplier other than Botash and post-merger chemical
grade salt price increases by the merged entity would make it’s chlor-vinyls
business commercially unsustainable. This would allegedly have an adverse
impact on the downstream companies that utilise Sasol’s products as inputs in
their respective production processes. For example, any negative impact in
respect of Sasol’s polyvinyl chloride (“PVC”) resins business will also adversely
respect of Sasol’s polyvinyl chloride (“PVC”) resins business will also adversely
affect the following industries: water and sewage pipes, conduit, cable,
packaging materials, footwear and film. Sasol further submitted that these anti-
competitive effects would be most harmful in the caustic soda market (see
paragraphs to and paragraphs to below) given that this product is a primary
input in industries such as mining, pulp and paper, soaps and detergents and
textiles. Sasol also submitted that this might result in job losses in the affected
downstream industries.
RATIONALE FOR THE TRANSACTION
2 Botrail is owned by the Government of Botswana which, as stated
above, is also a shareholder in Botash (see paragraph above).
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[8] The acquiring parties submit that the primary objective of CAH in the proposed
deal is to expand its product range with the addition of soda ash - an important
and profitable additional product to NCP’s current chemicals product line (also
see paragraph below). The sellers’ rationale for the proposed deal is that the
business of Botash does not fit with their core businesses.
THE RELEVANT MARKET(S)
Horizontal overlap of activities
[9] WBSH3 manufactures mainly chemical grade salt, as well as limited amounts of
food grade salt and fine food salt4. On the target side, Botash’s primary business
is the manufacturing of soda ash 5 (sodium carbonate) and as a by-product of
this process it manufactures (mainly) chemical grade salt, sold in bulk, as well as
a limited amount of food grade salt.6
[10] Therefore, the re is a horizontal overlap between the activities of the merging
parties in respect of the manufacturing and sale of salt, in particular chemical
grade salt. This will be referred to in these reasons as the upstream activities or
upstream market(s).
Vertical dimension
[11] Chemical grade salt is used as an input in the production of certain chlor-alkali
products and derivatives, for example in the production of chlorine and caustic
soda. The proposed deal also has a vertical dimension since NCP 7 is active in
the manufacture and distribution of these products. Botash however is not active
3 A CAH subsidiary, see paragraph above.
4 Fine food salt is produced by further processing of coarse salt of a
food grade quality.
5 Soda ash is mainly used in glass manufacture, metallurgical
applications, the detergent industry and chemical manufacture. The
product is extracted from alkali-rich brine. First soda ash is
converted to sodium bicarbonate, which is relatively insoluble. The
sodium bicarbonate crystals are then separated from the brine and
purified by washing. This purified sodium bicarbonate is converted
purified by washing. This purified sodium bicarbonate is converted
back to sodium carbonate by heating and the ash is finally compacted
into dense granules so that it is easy to transport and handle. The
soda ash is exported by rail and road to customers in South Africa,
Zimbabwe, Zambia and Central Africa.
6 Salt is a by-product from the production of trona brine which is the
feedstock to the soda ash production plant; salt deposits out in the
solar pond crystallisers as the brine concentrates with evaporation.
Then, a salt washing plant upgrades the quality of the harvested salt
and separates the salt into fine and coarse products. The stages in
the production of salt are harvesting, washing and screening, and
fine salt drying and milling.
7 Also a CAH subsidiary, see paragraph above.
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in the latter areas. The activities relating to the production and sale of various
chlor-alkali products will be referred to in these reasons as the downstream
activities or downstream markets.
[12] Figure 1 below depicts the chemical grade salt value chain and provides a
broad overview of the (downstream) uses thereof – the main products being
chlorine and caustic soda.
Figure 1: Chemical grade salt value chain
CHEMICAL GRADE SALT
CHLORINE CAUSTIC SODA HYDROGEN
(Sodium hydroxide)
• PVC • Chemicals • Hydrochloric acid
• Water treatment • Soap and cleaning agents • Hydrogen peroxide
• Disinfectant
• Paper bleaching
• Pulp and paper
• Water treatment
• Waste gas
• Pollution control
• Mining
[13] A limited number of South African firms use chemical grade salt in downstream
production processes, namely:
In Gauteng:
(i) NCP
As stated in paragraph above, NCP uses salt in the manufacturing of
certain chlor-alkali products and derivatives, i.e. chlorine and caustic soda
products. NCP’s chlorine products are used in the treatment of our national
water supply to keep it clean of diseases such as cholera; NCP has thus
been declared a national “key point” installation under the National Key
Points Act 102 of 1980.
(ii) Sasol
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Sasol also uses salt in the production of chlor-alkali products 8: it produces
caustic soda both for internal use 9 and for sale to third parties and produces
chlorine exclusively for internal use in the production of inter alia PVC resin.
Commercial supply relationships exist between Sasol and NCP for certain
products. Sasol is for example the sole producer in South Africa of
specialised paraffin which it supplies to NCP for the production of
chlorinated paraffin. Sasol in turn purchases certain volumes of caustic soda
and hydrochloric acid from NCP during certain periods, and vice versa.
In KwaZulu-Natal:
(iii) Mondi
Mondi uses salt in its chlor-alkali plant for the production of caustic soda,
which is used as an input into its wood chip cooking liquor circuit and
bleaching circuits.10
(iv) Zetachem11
Zetachem uses (relatively small quantities of) salt as input into its sodium
hypochlorite production processes.
(v) Sappi Manufacturing12
Sappi Manufacturing uses (relatively small quantities of) salt for brine
solution which is used for water softening as part of its chemical cellulose
production line.
Relevant product markets
Upstream: manufacturing and supply of salt
[14] Of relevance in the instant case to market delineation from a demand- and
supply-side perspective are the various produced grades of salt, i.e. various salt
purity levels. The main grades of salt produced are: (i) pharmaceutical grade
salt; (ii) chemical grade salt; and (iii) food grade salt.
8 First the salt is dissolved in water to produce brine and then
treated to remove impurities. The brine solution is then introduced
to an electrolytic cell where, by passing an electric current through
the salt solution, caustic soda, chlorine and hydrogen are produced.9 Sasol Polymers supplies caustic soda to its mining reagents business
where it is used as an input in the production of sodium cyanide
where it is used as an input in the production of sodium cyanide
solution.10 It also uses soda ash for the addition of sodium to its cooking
liquor circuit.
11 Part of the Omnia Group.
12 A subsidiary of Sappi Limited.
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[15] Table 1 below states the purity levels of these main salt grades. The factors that
determine the level of purity in the salt include (i) the source of the raw material;
(ii) the crystallization process; and (iii) the salt washing process. The level of
purity refers to the percentage of sodium chloride (NaCl) in the salt product:
Table 1 Purity levels of various salt grades
Salt grade Purity level (%)
Pharmaceutical grade 99.9+
Chemical grade 98.75+
Food grade 97+
[16] Each of these salt grades is described in more detail below:
(i) Pharmaceutical grade salt
As the name suggests this high quality salt is mainly used as an input into
the production of pharmaceutical products. However, neither of the
merging parties produces pharmaceutical grade salt. The only current
South African producer of this salt is Cerebos (at Coega) by means of a
vacuum crystallisation process, i.e. vacuum evaporation of brine in
specialist machinery, followed by chemical treatment of the salt to remove
impurities. Water desalination techniques are an alternative production
method – a technique that Straits Chemicals, a hopeful entrant into the
South African salt market, intends to use. If this comes to fruition, the
production of salt from desalination and crystallization will be a first in
South Africa (also see paragraph below).
(ii) Chemical grade salt
As shown in Figure 1 above, this salt is used as an input into chemical
products such as chlorine and caustic soda. As stated in paragraphs and
above, both WBSH and Botash are active in the production and sale of
chemical grade salt: Botash produces this by the solar evaporation of
underground brine; WBSH produces its salt by way of the solar
evaporation of sea water13.
(iii) Food grade salt
13 There are two main parts to this production process: being salt
fields and washing plants to remove impurities such as sand and
magnesium.
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This salt is used in food products14 and industries such as agriculture. Food
grade salt, which itself has a number of grades, is produced in South Africa
using both the above-mentioned production methods. As stated in
paragraph above, Botash and WBSH produce relatively small quantities of
food grade salt. Local South African producers dominate this market and
Botash has an estimated market share in South Africa of less than 0.1%.
Since the merging parties, specifically Botash, export limited amounts of
food grade salt into South Africa, we will not consider this possible relevant
market any further in these reasons.
[17] The Commission through its market investigation identified certain pertinent salt
demand and supply dynamics. Its investigation indicates that the larger salt
consumers, i.e. the downstream chlor-alkali product manufacturers, require a
constant supply of high quality salt - at least of chemical grade – as the main
input into their production processes. From a demand-side perspective
customers consider the following salient factors when choosing between
alternative salt suppliers:
(i) price
Sasol (as the merging parties’ said only current shared salt customer)
indicated that the above-mentioned various salt grades are not
interchangeable owing to significant price differences between these grades,
as well as the quantity and quality of salt required for downstream chlor-
alkali manufacturing processes. Sasol estimates the cost of switching from
chemical grade salt to higher quality pharmaceutical grade salt at 7.5 times
the price of chemical grade salt. This large price differential is due primarily
to the costs associated with the energy required during the treatment
processes of pharmaceutical grade salt.
Furthermore, t he cost of salt is significantly influenced by packaging and
transportation (transport costs will be discussed in more detail below, see
transportation (transport costs will be discussed in more detail below, see
paragraphs to below). Food grade salt is demanded in much smaller
quantities than chemical grade salt and requires an additional washing
process, heating and further milling and packaging. In addition there are
other safety and health standards which increase the production cost of food
grade salt. According to the merging parties, bagging processes can
14 Fine food salt is used for direct human consumption. This requires
further processing of food grade salt at a fine salt plant.
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increase the production costs of food grade salt by more than three times.
The price of food grade salt is therefore significantly higher than the price of
chemical grade salt.
(ii) volume
Sasol and other chlor-alkali product producers consume vast quantities of
salt in their downstream production processes and require dependable
supply sources – volumes that Cerebos as the only current South African
producer of pharmaceutical grade salt (see paragraph above) cannot
sufficiently supply. Participants in the downstream industries, including
Straits Chemicals as a hopeful entrant, supported Sasol’s view that a high
grade salt producer such as Cerebos (although it produces the best quality
salt) would not be able to supply a chlor-alkali plant given Cerebos’ limited
production capacity. Saltcor15 and Sasol were of the same mind that security
of supply is a major concern for these salt customers. 16 In practice chemical
grade salt sales normally take place in terms of long-term contracts and the
producers usually are required by customers to commit to supplying
specified volumes (as well as a committed salt quality, see (iii) below).
(iii) purity level
The Commission’s market investigation confirms that, from a requisite purity
level perspective, there is no substitute for chemical grade salt in customers’
downstream production processes. The concentration of impurities in salt is
dependent upon the method of production (also see paragraph below) and
in general the less pure the salt the more costly it is for a downstream chlor-
alkali producer to utilise it. Chlor-alkali producers confirmed that they face
significant cost implications when salt purity levels are even slightly
compromised. Sasol and Zetachem for example confirmed that switching
between different salt grades are associated with a high risk of damage to
plant membranes owing to the different impurities contained in the various
plant membranes owing to the different impurities contained in the various
salt grades. Straits Chemicals also supported the notion that salt impurities
could damage plant membranes. Therefore, given the considerable variation
15 Saltcor is part of the Donald Brown Group which is involved in the
production and refining of salt.
16 Letter from Saltcor to the Commission dated 21 May 2009.
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in the concentration and distribution of impurities in the various salt grades
and the cost implications thereof for downstream users, we conclude that
the different salt grades are not interchangeable from a commercial and
market delineation perspective.
[18] From a supply-side perspective, the Commission’s market enquiries reveal that
salt producers’ manufacturing processes constrain the grade of salt that they
can produce. This investigation indicates that although switching to the
production of a lower salt grade may be a possibility, different salt grade
manufacturing processes require different capital outlays and as such salt
manufacturers cannot switch to producing a higher grade of salt without
incurring significant additional capital costs. The production process for
pharmaceutical grade salt is much more expensive than other methods since it
requires specialist vacuum machinery and fuel for the evaporation (also see
paragraph above). The latter production process is too expensive to justify
selling salt of a pharmaceutical grade as chemical grade.
[19] In summary: (i) from a purity point of view chemical and food grade salt are not
substitutable in downstream chlor-alkali manufacturing processes owing to the
aforementioned damage that higher levels of impurities can cause to plant
membranes; and (ii) chemical grade salt cannot be substituted with
pharmaceutical grade salt owing to the latter salt’s relatively high costs and
relatively low production volumes which would be unable to sustain chlor-alkali
customers.
[20] Based on the above we define the production and sale of chemical grade salt as
a separate relevant product market.
Downstream: markets for various chlor-alkali products
[21] As stated in paragraph above, the relevant downstream chlor-alkali
manufacturing processes that use chemical grade salt as input are (i) chlorine,
manufacturing processes that use chemical grade salt as input are (i) chlorine,
(ii) caustic soda and (iii) hydrogen production, as discussed in more detail below:
Chlorine
[22] Although Sasol and Mondi produce chlorine as a “co-product” of caustic soda
production, NCP is the only commercial producer of chlorine in its bulk or
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packed form in South Africa. 17 Furthermore, due to the unstable and highly toxic
nature of this chemical, import competition is not relevant. NCP’s chlorine
customers include municipalities, Sasol and other chemical manufacturers. The
main use of chlorine in South Africa is water purification – no substitutes exist for
chlorine in this application. Sasol also confirmed that chlorine cannot be
substituted for any other product in its PVC production processes.
[23] We concur with the Commission ’s finding that the production and sale of
chlorine constitutes a separate relevant product market.
Caustic soda
[24] According to the Commission’s investigation, caustic soda can be sold in two
forms, namely either as lye or flakes, and these forms are largely
interchangeable from a demand- and supply-side perspective.
[25] The Commission furthermore investigated the potential substitutability between
caustic soda and soda ash 18 and concluded that these products are not
interchangeable in most applications. Caustic soda is predominately supplied as
a solution and soda ash as a solid which means that they cannot be readily
substituted without the necessary investment in storage and handling systems.
As stated in footnote Error: Reference source not found above, the primary use
of soda ash is glass manufacturing where caustic soda is not at all a substitute
for soda ash. Zetachem and Mondi Manufacturing 19 also confirmed that these
products are not substitutable in their production processes. The Commission’s
market investigation shows that in a select number of processes 20 soda ash
could be substituted with caustic soda, for example in Mondi’s cooking liquor
circuit. However, Mondi has not quantified the cost implications, if any, of
switching between these two products. We therefore concur with the
Commission’s finding that the production and sale of caustic soda and soda ash
Commission’s finding that the production and sale of caustic soda and soda ash
respectively constitute separate relevant product markets.
17 Sasol and Mondi do so mainly for in-house use and do not supply
third parties. 18 Produced by Botash, see paragraph above.
19 The soda ash would have to be converted in a kiln to sodium oxide
and dissolved in water to make caustic soda before being used in the
bleach process.
20 A Chemical Market Association Inc (“CMAI”) report states that “there
are certain markets where customers have the flexibility of switching between soda ash
and caustic soda. This is mostly within the soaps and detergent applications”. See “An
Overview of Soda Ash”; CMAI, June 2008.
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[26] We shall examine the potential vertical effects of the proposed acquisition in the
market for the production and sale of caustic soda.
Hydrogen
[27] Hydrogen, a by-product of the production of caustic soda, chlorine and oil
refining, is mainly used in the production of hydrochloric acid. However, owing to
the difficulties associated with handling this gas, hydrogen is often vented by
companies in the chlor-alkali industry. For example, Sasol uses its hydrogen
internally as alternative fuel for heating and in the production of hydrochloric acid
and does not supply it to the market. Furthermore, according to the
Commission’s market investigation there are other alternatives to hydrogen as a
fuel in heating processes and certain other applications. 21 Since the
Commission’s market investigation shows that the proposed deal was not likely
to substantially affect the South African supply of hydrogen, we shall focus our
assessment of the vertical aspects of the proposed deal on the above-
mentioned chlorine and caustic soda markets.
Relevant geographic markets
Upstream: manufacturing and supply of chemical grade salt
[28] WBSH’s salt production facility is located at Walvis Bay in Namibia and that of
Botash at Sau Pan 22 in Botswana. WBSH utilises shipping to transport its salt
from Walvis Bay to the KwaZulu-Natal coast and from there by road transport to
Sasol in the inland region: the relevant delivered costs therefore include the ex
works salt price, the sea freight rate from Walvis Bay to Richards Bay and port
charges (offloading, handling and temporary storage). Botash’s salt is
transported via rail to Sasol: by Botrail from Sua Pan to Ramatlabama and by
Transnet from Ramatlabama to Sasolburg.23
[29] From a customer perspective the users of chemical grade salt are located in two
distinct geographical locations in South Africa, i.e. either in:
distinct geographical locations in South Africa, i.e. either in:
(i) the inland region, namely Sasol located at Sasolburg in the Free State and
NCP located at Chloorkop in Gauteng; or
21 Teleconference between the Commission and Mr Worthington and Ms
Pillay of Sasol held on 01 July 2009.22 Part of the Makgadigadi pan, North-West of Francistown, Botswana.23 No import duties apply given that both Botswana and Namibia are
part of SACU.
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(ii) the coastal areas , namely Mondi, Sappi and Zetachem, all located on the
KwaZulu-Natal coast respectively at Richards Bay, Durban and
Umkomaas.
[30] However, r egardless of these customers’ geographic location, all market
participants highlighted transport costs, whether sea or land transportation or
both, as a critical factor in the selection of a chemical grade salt supplier. Given
the low value of salt relative to the cost of transportation, the determining factors
in the economics of salt supply is typically the proximity of the source of supply
to the point of use and the mode and availability of transport. The major impact
of transport costs on the delivered costs implies that the competitive effects on
each customer grouping in a specific geographic area must be analysed
separately.
[31] Furthermore, in a geographic market delineation context the relevant price
indicator is not the ex-factory salt price, but the delivered price to the customer
inclusive of all relevant transport and related supply chain costs. We shall
therefore assess relative price differences between (actual and potential)
chemical grade salt suppliers on the latter basis.
[32] Given these significant transportation costs and their effect on the competitive
landscape for chemical grade salt supply, the Tribunal concurs with the
Commission’s finding that chemical grade salt supply to (i) the coastal areas of
South Africa and (ii) the inland areas of South Africa respectively constitute
separate relevant geographic markets. We shall first consider the effect of the
proposed transaction on customers located in the coastal areas and thereafter
turn our attention to the inland customers.
Coastal regions
[33] The evidence from coastal customers is unequivocal regarding the fact that
Botash does not provide any competitive constraint to WBSH in the coastal
Botash does not provide any competitive constraint to WBSH in the coastal
regions. Zetachem, Mondi and Sappi all confirmed that they do not regard
Botash and WBSH as competitors since the transport costs of importing
chemical grade salt from Botash to their coastal locations are commercially
prohibitive. Botash for its part confirmed that it has never supplied salt to any of
the South African coastal customers. These coastal customers have indicated
that Dampier (located in Western Australia) would be a more feasible alternative
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supplier than Botash. Straits Chemicals (with its planned location in Port
Elizabeth) also indicated that from its perspective Botash cannot be considered
an alternative salt supplier (also see paragraph below).
[34] Furthermore, a comparison by Genesis24 of delivered price estimates 25 for 2006
to 2009 at which Botash and Dampier respectively could supply the coastal
customers indicate that Botash, despite an import duty advantage over
Dampier26, is not the next best alternative to WBSH. This quantitative information
suggests that Dampier is a far superior rival in the coastal regions given that it
enjoys approximately a [0-30]% delivered salt price advantage over Botash
throughout the period considered 27. The proposed deal therefore does not relax
a notional potential entrant constraint.
[35] Given the above quantitative and customer evidence, we conclude that the
proposed transaction is unlikely to substantially prevent or lessen competition in
the market for chemical grade salt supply to the coastal areas of South Africa.
The same conclusion applies to the vertical aspects of the proposed deal as far
as they relate to the coastal customers. In the remaining part of these reasons
we shall therefore focus on the potential effects of the proposed deal on the only
existing customer (i.e. Sasol) and potential future customers in the inland
regions of South Africa.
Inland regions
[36] Premerger both Botash and WBSH supply chemical grade salt to Sasol in inland
South Africa, whilst NCP (also located inland) imports chemical grade salt from
WBSH. These two firms are currently the only inland users of chemical grade
salt.
[37] As indicated in paragraph above, the delivered price of chemical grade salt
inevitably will be influenced by inter alia the mode of transport, more specifically
the terms and conditions negotiated with a particular transport service provider.
the terms and conditions negotiated with a particular transport service provider.
These terms and conditions will in turn inter alia depend on the salt volumes to
be transported and a customer’s willingness to commit to these volumes over
24 The merging parties engaged Genesis Analytics to produce a
competitiveness report.
25 The pricing analysis takes into account both ex-works prices and
transport costs to Richards Bay.26 Since Botswana is part of SACU no import tariff is applicable.27 Other than when the 2008 spike in shipping rates occurred, see
footnote Error: Reference source not found below.
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the contract period (also see paragraph above). The available quantitative data
in the instant case clearly indicate that the (freight and other) costs of
transporting large quantities of chemical grade salt over long distances, for
example from Australia to South Africa, and over land from the relevant port to
inland destinations, are significant. The submitted data furthermore show that
Botash is the most favourable supplier in terms of delivered costs which is
largely attributable to more advantageous rail transport costs from Botswana to
inland South Africa compared to imports from countries such as Namibia and
Australia. We shall elaborate on these transport dynamics below in our
assessment of the competitive effects of the proposed transaction on the market
for the supply of chemical grade salt to the inland areas of South Africa.
Downstream: markets for chlor-alkali products
Chlorine
[38] Given that NCP is currently the only supplier of chlorine in South Africa, as well
as the logistical difficulties associated with transporting a hazardous chemical
such as chlorine, we shall assess the vertical aspects of this transaction relating
to the chlorine market on a national basis.
Caustic soda
[39] The Commission concluded that the relevant geographic market for the
production and supply of caustic soda is national in scope with limited import
competition. The Commission found that South African caustic soda suppliers
are more effective than their international counterparts owing largely to their
value offering and ability to service the domestic market in a timely fashion. This
view is supported by Sasol who indicated that although some caustic soda is
imported, this is largely done when domestic supply is insufficient to cover
domestic demand and that customers tend to prefer a domestic supplier who
can offer more immediate supply, post-sale services and the likes.
can offer more immediate supply, post-sale services and the likes.
[40] For the purposes of assessing the vertical aspects of the proposed deal we shall
consider a national caustic soda market taking imports into South Africa into
account.
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COMPETITION ANALYSIS
Upstream: manufacturing and supply of chemical grade salt to inland South
Africa
Botash’s production volumes
[41] An important issue in the context of the competitive assessment and the
imposed behavioural remedies (also see paragraph below) is the fact that
Botash’s salt production volumes are dependent on its soda ash production, i.e.
it cannot reduce its salt output without concurrently reducing its soda ash
production. The volume of salt that is produced and not sold is stockpiled and
these volumes are very significant - Botash submits that it currently has a
stockpile approaching [0-10] million tonnes of unsold coarse salt.
Market shares and levels of concentration
[42] Notwithstanding the delivered chemical grade salt price differences between
Botash and WBSH, Sasol has sourced significant quantities of salt from WBSH
in the past three years. According to Sasol it entered into a supply agreement
with WBSH as recently as March 2009; Sasol also submitted figures confirming
the supply of chemical grade salt by WBSH to it as recently as October 2009 28,
and submitted a letter and email from WBSH requesting Sasol’s chemical grade
salt requirements for October 2009 and January/February 2010 respectively.29
[43] Botash has in recent years increased its market share year-on-year in the supply
of chemical grade salt to inland South Africa (i.e. to Sasol): its market share in
this relevant market increased from approximately [60-70]% in the financial year
ending August 2008 to approximately [80-90]% in the year ending August 2009 30
- WBSH makes up the balance of supply.
[44] From the above it is evident that p remerger WBSH and Botash are the only
chemical grade salt manufacturers who actually supply into inland South Africa.
Premerger concentration levels in the relevant market are thus already
extremely high and since this is a merger to pure monopoly the proposed deal
extremely high and since this is a merger to pure monopoly the proposed deal
28 Sasol letters to the Commission dated 29 May 2009 and 22 October
2009 respectively.
29 Letter from WBSH to Sasol dated 13 October 2009 and email sent from
WBSH to Sasol on 21 October 2009.30 Source: Genesis’ competitiveness report on the proposed
transaction; March 2009.
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results in the ultimate level of concentration i.e. a Herfindahl-Hirschman Index
(HHI) of 10,000 points.
High entry barriers and lack of new entry
[45] We find that there are high barriers to entry in the market for the production and
sale of chemical grade salt to inland South Africa. First, on the production side
mining rights must be in place and market participants point to a lack of or
dwindling economically viable salt reserves. Furthermore, environmental
legislation represents an entry barrier as well as significant capital investment,
for example a washing plant to separate the salt into fine and coarse products.
[46] As stated in paragraph above, Straits Chemicals has been identified as a
hopeful entrant in the manufacturing of chlor-alkali products and salt. The
available evidence however suggests that if it indeed enters the salt market, that
in the early years of entry it will focus on supplying its in-house chlor-alkali
business while building capacity to supply external customers. Furthermore
Sasol alleges, based on a SRK Consulting report 31, that Straits Chemicals has
abandoned its former plans to in future produce salt. 32 Be that as it may, the
available information also suggests that should it start producing chemical grade
salt for internal use it would not do so before 2014. Any potential entry by Straits
Chemicals is therefore unlikely to have a disciplining effect on the merged entity
within a reasonable period of time.
Closeness of competition
[47] One of the central economic questions in a unilateral effects context is the extent
to which the merging firms can be regarded as close competitors. Sasol submits
that WBSH is Botash’s closest competitor premerger. Sasol further informs us
that it assessed the viability of importing chemical grade salt from Dampier in
Australia and from other countries such as India, but that the transportation
Australia and from other countries such as India, but that the transportation
costs in terms of the delivered salt price are prohibitive. Sasol further avers that
logistical issues make sourcing from an overseas firm (like Dampier) more
difficult than sourcing from suppliers in the SACU 33 region, given that its
chemical grade salt demand can fluctuate significantly on a monthly basis. Sasol
submits that it takes between three to four months from the date of order to land
31 Report prepared on behalf of Straits Chemicals, dated April 2008.
32 Letter from Sasol to the Commission dated 12 June 2009.
33 Namibia and Botswana are part of SACU.
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the chemical grade salt supply from for example Australia, while it takes a
maximum of one week to order the same from Botash. Furthermore, it avers that
a cancellation in respect of a Botash order can be done in a couple of days while
an overseas cancellation is not flexible and could result in unforeseen costs and
penalties.
[48] As part of its market investigation t he Commission contacted Dampier to
establish whether or not it is a potential chemical grade salt supplier to inland
South Africa. Dampier confirmed that it has not supplied chemical grade salt into
South Africa for approximately eight years and that it has ceased supply to Sasol
because of the lower delivered prices of Botash and WBSH. More specifically,
high sea freight levels from 2003 have made it difficult for Dampier to be
competitive. Moreover, Dampier indicated that from its more global perspective
Sasol is a relatively small chemical grade salt customer 34; Sasol is therefore
unlikely to have any form of negotiating or countervailing power in regard to
imports from Dampier.
[49] Notwithstanding Sasol’s logistical concerns, chemical grade salt appears to be a
product that can be easily stored and Sasol submitted no evidence of a lack of
or high storage costs. While we accept that salt supply from different
geographically located sources may vary significantly in respect of flexibility 35,
the extent to which Sasol’s averred additional risks, logistical costs and
inconvenience associated with an overseas supplier such as Dampier could be
mitigated through proper planning is not addressed in its submissions. Sasol
submits that a proper risk assessment was unwarranted since based solely on
price considerations overseas suppliers such as Dampier and BS International
were not commercially viable supply sources.36 We will therefore focus our
were not commercially viable supply sources.36 We will therefore focus our
analysis below on the quantitative evidence in relation to relative differences in
delivered costs between the potential alternative suppliers.
[50] From a delivered cost of salt perspective, Genesis on behalf of the merging
parties submitted comparative pricing information on the delivered chemical
grade salt price to an inland customer such as Sasol from (i) Botash in
34 According to the merging parties, Dampier claims to be the world’s
largest salt exporter and supplies the majority of its salt into
Asian countries.
35 The customer advises when shipments are required and usually is
required to give 40-days notice for each shipment during the contract
term.
36Sasol letter to the Commission dated 02 July 2009.
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Botswana, (ii) WBSH in Walvis Bay and (iii) Dampier in Australia. 37 According to
the quantitative evidence submitted by the merging parties the delivered cost of
chemical grade salt would significantly increase should an inland customer
source its requirements from suppliers other than WBSH or Botash, for example
from Dampier in Australia. Firstly, the submitted data for the period 2006 to
200938 consistently show Botash as the lowest cost supplier to Sasol on a
delivered cost basis 39 and secondly show WBSH as the next best alternative.
This shows that Botash’s delivered prices to Sasol have consistently been
significantly lower than that of WBSH, i.e. at minimum [0-20]% lower in the
period 2006 to 2009 40, and further suggests that much of Botash’s advantage in
pricing is derived from its favourable location and the associated lower logistical
costs of transporting salt via rail to Sasolburg. According to the merging parties,
the transport costs from WBSH to Sasol constitute over [50-100]% of the final
delivered price to Sasol; from Botash to Sasol the comparable statistic is [50-
100]% to [50-100]%.41
[51] Genesis further quantifies the cost differences in the delivered price of WBSH
(as the second lowest cost supplier) and Dampier (as the most expensive
supplier of the three firms) over this period as ranging from [0-20]% to [0-20]%.
By comparison: the corresponding figure provided by Sasol for 2009 is [0-
20]%.42
[52] In conclusion: the quantitative price data submitted by the merging parties and
Sasol clearly indicate that WBSH is Botash’s closest competitor fr om a pricing
perspective.
37 Importation from Botswana implies rail transportation and
importation from Namibia and Australia implies both sea freight costs
and transport over land.38 Historical data were used for 2006 and 2007. The year 2008 was
divided into two distinct periods: a ‘pre-spike’ and ‘spike’ period
divided into two distinct periods: a ‘pre-spike’ and ‘spike’ period
given a spike in global shipping rates in July 2008. The recent
global economic downturn had a significant effect on global shipping
rates and brought them more into line with the longer term trend. 39 For WBSH and Dampier this involves the ex works salt price, sea
freight to Richards Bay and rail transport to Sasolburg. Imports from
Dampier in Australia attract a 10% import duty (as opposed to 0% from
SACU countries, also see footnotes Error: Reference source not found,
Error: Reference source not found and Error: Reference source not
found above). For Botash it involves the ex works salt price and rail
the entire route; transport by Botrail for the Botswana leg and by
Transnet for the South African leg from Ramatlabama to Sasolburg.
40 See page 34 of Genesis report.
41 Page 17 of Genesis report.
42 Sasol letter to the Commission dated 12 June 2009.
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Information asymmetry and likely price effects
[53] One of the key aspects of the evaluation of the competitive effects of this merger
is a comparison of the situation in which the current single buyer (and potential
future salt customers) can negotiate with two suppliers vs. only one supplier, i.e.
the implications of the proposed deal for customers’ ability to negotiate lower
prices or, put differently, the effect on customers’ countervailing power.
According to Genesis, Botash is not able to price closer to WBSH in the
premerger context because of information asymmetries between these two
suppliers. Genesis furthermore contends that historically the price point of
chemical grade salt agreed between Botash and Sasol was a function of each
party’s negotiating power. Premerger the prices that Sasol receives from WBSH
are unknown to Botash during price negotiations and as such Botash prices
independently from its rival - it is stressed that the negotiated price is not
dependent on the precise price offered by WBSH as the next best alternative
since this is unknown to Botash.
[54] Premerger WBSH provides effective competitive discipline to Botash - it
provides Sasol with a credible and effective threat of switching sources of supply
and as such bolsters Sasol’s countervailing power. This is a bona fide threat:
Sasol has not just threatened to source salt from WBSH but has in fact done so
over a considerable period of time (see paragraphs and above). The
effectiveness of this threat is further evident from the available historic pricing
data since Botash would likely be charging Sasol a higher price if it were
indifferent to its rival WBSH.
[55] The above findings are consistent with economic theory that robustly predicts
that efficiency is more likely if a buyer can negotiate with more than just one
that efficiency is more likely if a buyer can negotiate with more than just one
supplier. A merger to monopoly unquestionably weakens the bargaining power
of the buyer – to the advantage of the merged entity – since it eliminates the
customer’s primary negotiating tactic: playing one supplier off against another.
[56] In summary: t he proposed merger will remove the significant competitive
discipline of WBSH as a potential alternative supplier of chemical grade salt to
Sasol, albeit an imperfect alternative, and hence would likely lead to higher post-
merger prices or other poorer supply conditions. Put differently, the proposed
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deal alters the balance of bargaining power (between the power of Botash and
any countervailing power of Sasol) which is likely to adversely affect post-merger
prices. Customers’ countervailing power will decrease substantially owing to the
removal of the only effective competitor to Botash and the only credible threat in
terms of switching suppliers. This clearly would negate inland customers’
opportunities for price and volume negotiations.
Removal of an effective competitor
[57] The merging parties’ claim that Botash and WBSH are not effective competitors
because of qualitative differences in the salt supplied 43 is totally unsubstantiated
and has in fact been discredited by Sasol. Based on the actual supply evidence
there is no reason to doubt Sasol’s contention that the salt supply of Botash and
WBSH to its chlor-alkali plant is interchangeable: Sasol in fact combines the salt
from the two supply sources and uses it simultaneously in its plant.
[58] Based on the above we conclude that WBSH is an effective competitor to
Botash in the South Africa inland market for chemical grade salt. From a
customer perspective, whether existing or potential, the proposed deal will not
only remove an effective competitor but in fact will remove the only existing
competitor to Botash in the relevant market.
Conclusion
[59] The proposed transaction results in a merger to monopoly 44 in the market for
chemical grade salt supply to inland South Africa; it removes WBSH as the only
effective competitor to Botash. Sasol and any potential future inland salt
customer would therefore not be able to use the threat of switching to an
alternative supplier in order to negotiate more competitive prices or other
advantageous supply conditions. This merger therefore removes the very
element that underpins customer bargaining power since no amount of
element that underpins customer bargaining power since no amount of
bargaining power is as valuable to a buyer as adding one extra bona fide
supplier to which it can turn. Furthermore and importantly, the quantitative
pricing evidence clearly shows that WBSH is Botash’s closest competitor in the
43 Botash’s salt is relatively high in carbonates; while WBSH’s salt
is relatively high in magnesium and calcium.44 There is no need for us to elaborate on the anti-competitive
effects of mergers to monopoly. It is well established that
monopolies are associated with many disadvantages for society and
consumers, which disadvantages may include: (i) higher prices than in
competitive markets; (ii) a decline in consumer surplus; (iii) less
incentives to be efficient; and (iv) possible diseconomies of scale.
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relevant market. Any alternative supply source available to Sasol or a potential
future inland customer, for example salt supply by Dampier in Australia, would
not bolster the customers’ negotiation power in the manner that WBSH does. In
addition, Botash would post-merger gain an alternative and vertically integrated
chemical grade salt customer in NCP which is likely to further adversely impact
the relative balance of power and post-merger pricing outcomes.
Downstream: markets for chlorine and caustic soda
[60] As stated in paragraph above, Sasol uses salt to produce (i) chlorine which in
turn is used in-house to produce PVC and (ii) commercially traded caustic soda.
Thus, if the merged entity increases its salt price post-merger Sasol may be
incentivised to procure its chlorine requirements from NCP rather than producing
same in-house. Potential future inland entrants in the markets for the production
and sale of chlorine and caustic soda could hypothetically also be vertically
affected should Botash institute post-merger salt price increases.
[61] As stated in paragraph above NCP is currently the only supplier of chlorine in
South Africa and thus has a 100% market share in a national chlorine production
and supply market. 45 In the caustic soda market NCP and Sasol are the only
suppliers to third parties in South Africa apart from imports. 46 Table 2 below
depicts the national market shares of NCP and Sasol, based on production
capacities, for caustic soda supply and imports of caustic soda into South Africa:
Table 2 Commission’s estimated national market shares for the supply of
caustic soda
Player/Imports Market share (%)
NCP [40-50]
Sasol [40-50]
Imports 13
Source: Production capacities of NCP and Sasol as sourced by the Commission.
[62] As is evident from the above , NCP is a monopolist in the supply of chlorine in
South Africa and has a significant market share of more than 40% in a highly
South Africa and has a significant market share of more than 40% in a highly
concentrated national market for the supply of caustic soda.
45 Sasol and Mondi produce chlorine for internal use only, see
paragraph above.46 Mondi confirmed that it does not sell caustic soda into the market.
See letter to the Commission dated 09 June 2009.
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[63] NCP claims that there is an oversupply of chlorine in South Africa, low local
prices and a lack of viable export options. This is suggestive of high entry
barriers and unlikely potential future entry. In regard to caustic soda, the
Commission’s market investigation suggests that caustic soda is in excess
demand in South Africa.
Barriers to entry and potential new entry
[64] As stated in paragraph above the Commission’s market investigation has
identified Straits Chemicals as a hopeful new entrant in the manufacturing of
chlor-alkali products. Straits Chemicals intends to produce chlorine for the
international market and caustic soda for the South African market.
[65] Straits Chemicals submissions point to high barriers to entry into the markets for
the production and sale of chlorine and caustic soda. It submits that there are
prohibitive government regulatory requirements that a new entrant in the chlor-
alkali markets must adhere to, which processes include application with the
Department of Environmental Affairs and Tourism (“DEAT”), the (former)
Department of Minerals and Energy (“DME”) and the National Ports Authority
(“NPA”). Straits Chemicals furthermore states that it would take approximately
three years to finalise the regulatory obligations. Straits Chemicals estimates
these latter costs at approximately R[20-30] million and the total cost of
establishing a salt plant together with a chlor-alkali plant at approximately R[1-5]
billion. Straits Chemicals also added that a chlor-alkali business requires
specialised labour skills. The Commission furthermore informs us that Straits
Chemicals has been trying to enter the chlor-alkali markets for the past five to
seven years and anticipates that its chlor-alkali business will become operational
only by 2012. The merging parties are sceptical of Straits Chemicals’ potential
only by 2012. The merging parties are sceptical of Straits Chemicals’ potential
entry and highlighted potential electricity shortages and the general global
economic downturn as threats to the viability of Straits Chemicals’ intended salt
and chlor-alkali plants.
[66] In conclusion: at present there is too much uncertainty 47 in regard to Straits
Chemicals to conclude that its entry is likely. However, even if it does occur,
given the above-mentioned anticipated time horizons timely entry by Straits
47 The Tribunal invited Straits Chemicals to give factual evidence at
the hearing of this matter. However its representative in South
Africa could, unfortunately, not attend due to personal reasons.
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Chemicals to offset any potential adverse competition effects arising from this
merger is highly unlikely.
Foreclosure concerns
[67] Post-merger Sasol and any potential future inland chemical grade salt
customers entering the chlor-alkali markets will compete with NCP in these
downstream markets. This theoretically gives the merged entity post-merger the
incentive to increase salt prices to Sasol (and potential new inland entrants) to
benefit NCP. The relevant theory of competitive harm in the context of the
vertical assessment of this proposed transaction is therefore the likelihood of the
merged entity foreclosing downstream rivals, more specifically input foreclosure
or raising rivals’ input costs. 48 We shall thus focus our analysis on this aspect,
specifically the ability and incentive of the merged entity to post-merger increase
salt prices.
[68] Given that this is a merger from duopoly to monopoly in the upstream chemical
grade salt market the merged entity clearly will have the ability to extract
monopoly rents from its inland customers and such a strategy will raise
downstream competitors’ input costs. Quantitative evidence provided by the
merging parties and Sasol confirms that the cost of salt is a significant element
in the downstream production costs: Sasol indicated that chemical grade salt
constitutes more than [20-30]% of the total cost of the production of both
chlorine and caustic soda; the merging parties estimate same at above [20-
30]%.
[69] As concluded in paragraph above, the instant merger removes the premerger
competitive threat of WBSH as an alternative supplier to Botash in the inland
chemical grade salt market which weakens customers’ post-merger price
negotiation ability. Furthermore, the merging parties’ own evidence suggests
significant price differences between the prices of WBSH and Dampier as the
significant price differences between the prices of WBSH and Dampier as the
next best alternative supply source in the post-merger context.
[70] Price however is not the only consideration in this vertical context. As concluded
in paragraphs and above, logistics significantly affect the delivered cost of salt
48 In the instant case total input foreclosure by the merged entity of
downstream rivals is implausible since chemical grade salt is
available from other international sources, for example Dampier in
Australia – albeit at a significantly higher price.
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and ultimately the competitive landscape. In the instant case potential self-
dealing, specifically in the context of supply chain constraints, i.e. limited Botrail
rail transportation capacity, 49 raises concerns. Should Botash post-merger
supply NCP with salt, the available Botrail rail capacity for salt transportation
could be used to prioritise NCP’s salt requirements at the expense of Sasol (or
potential future inland salt customers). The available Botrail capacity would,
even if averred levels of expansion are achieved, be insufficient to service the
demand of both Sasol and NCP, especially also considering alleged NCP
expansions.
[71] On the other hand, the merging parties submit that Botrail could be persuaded to
acquire additional wagons and containers should a customer be willing to enter
into a long-term rail transport contract (also see paragraph above). They also
aver that Botrail could significantly increase capacity if turnaround times were to
improve. However, given that the imposed conditions also relate to the logistics
of supply we shall not deal with these issues in any further detail.
[72] The most common incentive to raise downstream rivals’ costs is the ultimate
profitability for the merged entity of such a strategy. We accept that the merged
entity must hold a degree of market power in the downstream markets to make
such a strategy viable: in the instant case NCP as monopolist in a national
chlorine market presumptively has such market power and likely has such power
with a market share exceeding 40% in a national caustic soda market. By
foreclosing Sasol and potential future inland salt customers, the merged entity
would sacrifice relatively small margins in the upstream sale of chemical grade
salt to ensure larger sales and profits of caustic soda downstream. The merged
entity furthermore may also be able to increase prices in the downstream
entity furthermore may also be able to increase prices in the downstream
markets post-merger to recuperate any potential small losses in the sale of
chemical grade salt.
[73] The market structure s of the relevant upstream and downstream markets, the
clear incentive of the merged entity to post-merger engage in a foreclosure
strategy, as well as the complete lack of substantiation by the merging parties of
any potential efficiency gains resulting from the proposed deal from a vertical
perspective, persuade us to conclude that the proposed deal has significant
potential anti-competitive vertical effects since it could enable the vertically
49 Transportation by Transnet from Ramatlabama to Sasolburg does not
appear to be a concern from Sasol’s perspective.
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integrated merged entity to, by raising its downstream rivals’ costs, constrain
Sasol’s and potential new inland salt customers’ ability to compete in the
downstream chlorine and caustic soda markets.
[74] However, given the likely horizontal anti-competitive effects of this merger (as
concluded in paragraph above) and the imposed behavioural conditions which
in our view address these horizontal concerns as well as any vertical competition
concerns in this case, we shall not elaborate any further on these vertical issues
in these reasons.
Conclusion
[75] There can be no doubt that this merger to monopoly in the supply of chemical
grade salt to inland South Africa presents a very significant threat to competition
from a horizontal perspective. The proposed merger will remove WBSH as the
only effective alternative supplier to Botash in this relevant market. The threat to
competition includes the institution by the merged entity of monopoly pricing, i.e.
anti-competitive pricing, in the inland supply of chemical grade salt and potential
foreclosure of rivals in the downstream markets for chlorine and caustic soda.
The merged entity has the incentive to raise prices or manipulate the supply of
chemical grade salt in order to profit in these downstream markets. This will
directly impact downstream rivals’, i.e. Sasol and potential future inland salt
customers, ability to compete with NCP in the markets for chlor-alkali products.
PUBLIC INTEREST
[76] The merging parties confirmed that there will be no job losses in South Africa as
a result of the proposed transaction. 50 No other public interest issues arise as a
result of the proposed deal.
CONCLUSION
[77] The proposed transaction raises significant competition concerns horizontally
since it is a merger to pure monopoly in the supply of chemical grade salt to the
inland areas of South Africa. On this basis alone we therefore conclude that the
inland areas of South Africa. On this basis alone we therefore conclude that the
proposed deal is likely to substantially prevent or lessen competition.
50 The primary target firm does not have employees in South Africa.
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Furthermore, vertically t he proposed merger raises significant potential
foreclosure concerns.
[78] However, as stated in paragraph above, the Commission changed its initial
recommendation of a prohibition of the proposed deal to a conditional approval
after the conclusion of a long-term commercial supply agreement between
Botash and Sasol as the current only inland customer of chemical grade salt.
The Tribunal considered the Commission’s proposed behavioural conditions
and, with some required changes thereto, concluded that the competition
concerns in the instant matter can be adequately remedied by appropriate
conditions.
[79] In reaching this conclusion the Tribunal considered a number of factors
particular to this case that collectively mitigate 51 the said competition concerns,
these factors include: (i) the fact that Botash’s salt mine operations have a
limited remaining life; 52 (ii) the existence at present of a single inland chemical
grade salt customer namely Sasol, 53 who has secured a favourable long-term
commercial supply agreement with Botash, as well as a transport agreement
with Botrail; (iii) the fact that at present there is no indication of potential future
inland customers who would require the supply of chemical grade salt, and
furthermore to the extent that there are new entrants in future, the imposed
conditions provide for non-discriminatory supply obligations; (iv) Botash has
significant excess chemical grade salt volumes 54 which mitigate against
concerns of either an outright refusal to supply or refusal to supply (potential)
customers’ required quantities; (v) innovation is not an important element of
competition in the production of chemical grade salt; 55 and (vi) t he said finite
51 Remedies are merger-specific and must be assessed on a case-by-case
basis. 52 The imposed conditions extend to the full (remaining) life of mine
basis. 52 The imposed conditions extend to the full (remaining) life of mine
including expansions to the existing operations.
53 As stated above, this is only one of a number of factors that were
considered in justification of this conditional approval. We are by
no means suggesting that a merger to monopoly of suppliers that serve
a single buyer in general does not raise competition concerns and are
per se justifiable. Neither modern economic theory nor empirical
evidence suggests that bilateral monopolies are per se reliably
efficient. Major impediments arise from the pervasive presence of
private information and incomplete contracts. Each individual case
must be assessed on its own merits.
54 The market is a limiting factor: Botash sells far less chemical
grade salt than its maximum production capacity; according to the
parties’ due diligence report Botash’s salt washing plant is
currently operating at only [0-100]% capacity.55 The harm to competition from mergers to monopoly is particularly
prevalent in markets where innovation is an important element of
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duration of Botash’s salt mining operations and thus of the imposed conditions,
as well as the fact that there currently is only one affected customer, contribute
to the administrability of (i.e. ability to both monitor and enforce) the requisite
behavioural remedies.
[80] We cannot speculate on the (longer-term) competitive dynamics once these
conditions have been imposed, but note that a number of factors in relation to
Sasol would impact on the bargaining dynamics 56, including (i) the fact that
Sasol commercially is a very significant customer of Botash in terms of volumes,
i.e. it accounts for approximately [0-50]% of Botash’s total chemical grade salt
sales57; (ii) Botash’s significant excess salt volumes due to its production of soda
ash; and (iii) the commercial relationships between Sasol and NCP, including
the fact that Sasol is the sole supplier of specialist paraffin to NCP 58 (also see
paragraph above).
[81] We approve the proposed acquisition in term of section 16(2)(b) of the Act
subject to the following conditions:
“Chlor-Alkali Holdings (Proprietary) Limited (“CAH”) will commit to ensure that,
for as long as CAH exercises control (for the purposes of the Competition Act,
1998, as amended) over the salt operations of both Botswana Ash (Proprietary)
Limited (“Botash”) and the operations at Walvis Bay Salt Holdings (Proprietary)
Limited (“WBSH”), or for the life of the Botash mine (including any expansions to
the existing mine), whichever is shorter:
a) Botash will supply any inland South African-based purchaser of un-bagged
and railed chemical grade salt for use in South Africa, salt of the same or
similar quality as set out in Annexure A to this condition, at the following
maximum price:
competition.
56 In the context of inter alia potential lower prices than the imposed
maximum prices.57 Based on the year ending August 2008.58 Since NCP has no supply relationship with Botash premerger, this
phenomenon was not relevant in the premerger scenario. According to
NCP, Sasol is the sole supplier of its specialist paraffin
requirements.
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i. The gross price for salt shall be based on the following pricing matrix:
Volume p.a. (metric tonnes) Gross Price
181 000 + $20.00
161 000 – 180 000 $23.00
141 000 – 160 000 $25.00
121 000 – 140 000 $30.00
101 000 – 120 000 $35.00
Below 100 000 $40.00
ii. Botash shall be entitled to increase the gross price annually. The
annual increase in respect of the gross price for salt will be calculated
and implemented based on an escalation of not more than 50% of the
Botswana Consumer Price Index (CPI) average for the 12 months
from 01 July to 30 June for each preceding year. The price increases
will come into effect on 01 July each year. However, should the gross
price of salt for volumes of 181 000+ metric tonnes per annum be
more than 10% higher than the West Europe published price upon
commencement of the annual increase, Botash shall reduce the price
increase applicable to volumes of 181 000+ metric tonnes per annum
so that such price is within 10% of the West Europe published price;
the resulting percentage price change in respect of this volume
bracket will then be applied to each of the prices in each and every
other volume bracket.
iii. All taxes, levies and/or additional costs, levied in Botswana for the
export of the salt, shall be for the cost of Botash.
iv. The gross price shall include all of Botash’s costs, expenses and
liabilities to fully comply with the terms of the sale.
v. The gross price shall include import duties, taxes and charges
(including customs duties) to import the salt into South Africa,
excluding VAT, which shall be paid by the customer.
vi. The gross price excludes transportation fees.
b) Botash’s obligation to supply will be excused if any of the following
circumstances are present or arise:
i. CAH nor Botash shall not be deemed to be in breach of the
conditions by reason of any delay in performing, or failure to perform,
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any of its obligations under these conditions if the delay or failure was
beyond Botash’s reasonable control (including, without limitation, fire,
flood, explosion, breakdown of equipment or machinery, epidemic,
riot, civil commotion, any strike, lockout or other industrial action, act
of God, war or warlike hostilities or threat of war, terrorist activities,
accidental or malicious damage, or any prohibition by any
governments or other legal authority which is not in force on the date
of the drafting of these conditions); and
ii. Botash’s obligation to supply under the terms of these conditions will
be subject to its existing supply commitments concluded in the
ordinary course of business.
c) Botash shall be responsible for the transportation of each consignment of
salt using the rail infrastructure and rail trucks from Sua Pan to
Ramatlabama, subject to all rail service providers’ performance and having
the necessary rolling stock and equipment, and subject to the necessary
agreements being concluded between the customer and such service
providers. Delivery of each consignment of salt will be taken by the
customer at Ramatlabama. Botash shall only be responsible for the rail
logistics in Botswana and the customer shall manage the rail logistics in
South Africa.
d) Botash will facilitate negotiations between new customers and Botswana
Railways (“Botrail”). To the extent that Botash receives any logistical
advantage that it gives to Sasol or that Sasol would be entitled to claim
with Botrail, Botash will pass on that advantage to any new customers.
e) WBSH will not discriminate in prices between its existing inland customers
of chemical grade salt and any new inland South African-based purchaser
of chemical grade salt.
f) Botash will provide the Commission annually, within one month of the
anniversary of the Tribunal order, with an affidavit setting out the
anniversary of the Tribunal order, with an affidavit setting out the
calculation of the increase in the gross price of chemical grade salt for
each volume category (in accordance with conditions a)i and a)ii) and
provide for the previous year (i) a list of any requests for supply received
from new inland South African-based purchasers of chemical grade salt;
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Non-Confidential version
(ii) the actual volume of chemical grade salt supplied to each customer;
and (iii) the actual price charged to each customer for chemical grade salt.
g) The Tribunal may, on good cause shown, and on notice given to the
Commission and to the merged entities’ existing customers of chemical
grade salt, lift, revise or amend these conditions upon being approached
by the merging parties.”
[82] In our view, t ransparency of these imposed conditions should provide potential
entrants in the downstream chlor-alkali markets with certainty regarding the
maximum prices that Botash may charge for various volumes of chemical grade
salt as well as other relevant conditions of supply for the life of the Botash salt
mine. This should in turn, if entry occurs, permit direct verification of the imposed
conditions which should ease the Commission’s monitoring function of the
imposed behavioural conditions.
[83] No public interest issues arise from the proposed acquisition.
____________________ 14 May 2010
A Wessels Date
Y Carrim and M Holden concurring
Tribunal Researcher: Romeo Kariga
For the merging parties: David Unterhalter (SC) and Jerome Wilson, instructed
by White & Case LLP
For the Commission: Mark Wesley, instructed by the State Attorney in
Pretoria
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