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COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No:27/LM/MAR12
(014712)
In the matter between:
Rio Tinto International Holdings Ltd Acquiring Firm
And
Richards Bay Titanium Holdings (Pty) Ltd and Target Firm
Richards Bay Mining Holdings (Pty) Ltd
Panel : Norman Manoim (Presiding Member),
Andreas Wessels (Tribunal Member)
Yasmin Carrim (Tribunal Member)
Heard on : 19 June 2012
Order issued on : 19 June 2012
Reasons issued on : 19 July 2012
Reasons for Decision
Approval
[1] On 19 June 2012 the Competition Tribunal (“Tribunal”) unconditionally
approved the large merger between Rio Tinto International Holdings Ltd,
and Richards Bay Titanium Holdings (Pty) Ltd and Richards Bay Mining
Holdings (Pty) Ltd. The reasons for approving the proposed transaction
follow below.
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Parties to transaction
[2] The primary acquiring firm is Rio Tinto International Holdings Ltd (“RTIH”).
RTIH is a wholly owned subsidiary of Rio Tinto Group (“Rio Tinto”). Rio
Tinto combines Rio Tinto plc, listed on the London Stock Exchange, and
Rio Tinto Limited, listed on the Australian Stock Exchange, in a dual listed
companies structure to form a single economic entity. Rio Tinto is not
directly or indirectly owned or controlled by another entity.
[3] The primary target firms are Richards Bay Titanium Holdings (Pty) Ltd
(“RB Titanium Holdings”) and Richards Bay Mining Holdings (Pty) Ltd (“RB
Mining Holdings”), both private companies incorporated in terms of the
company laws of the Republic of South Africa. RB Titanium Holdings and
RB Mining Holdings are jointly owned by Rio Tinto and BHP Billiton in a
shareholding ratio of 51:49 and 49:51 respectively. These two holding
companies jointly control Richard Bay Minerals (“RBM”).
[4] RBM is a joint venture between Rio Tinto and BHP Billiton, and is
comprised of two operating companies: Richards Bay Mining (“RB Mining”)
and Richards Bay Titanium (“RB Titanium”). RB Mining Holdings and RB
Titanium Holdings hold 74% in RB Mining and RB Titanium respectively.
The remaining 26% in both RB Mining and RB Titanium is owned by Blue
Horizon Investments (24%) and RBM Employees Share Participation Trust
(2%).
Activities of merging parties
[5] Rio Tinto is a global mining group and comprises of five principal product
groups, namely Aluminium, Copper, Diamonds and Minerals, Energy and
Iron Ore. For the purposes of this transaction, its relevant activity is as a
global producer of titanium dioxide (TiO2) feedstocks, zircon and high
purity pig iron (HPPI) from mined mineral sands. This activity falls under its
Iron and Titanium division which is within the Diamond and Minerals
product group. Rio Tinto has three mineral sands operations:
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a. Rio Tinto, Fer et Titane (“RTFT”) owns and operates an open pit
mine located in Canada. RTFT produces TiO 2 feedstocks, HPPI,
steel and metal powders.
b. QIT Madagascar Minerals SA (“QMM”) owns and operates a
mineral sands mining and separation operation which produces
ilmenite (contains TiO2 and iron) and zirsill (a zircon-rich mineral).
c. RBM, the target firm.
[6] Rio Tinto does not sell TiO2 feedstocks, zircon or HPPI from RTFT or QMM
in South Africa.
[7] RBM is a mineral sands producer situated north of Richards Bay in South
Africa. RBM mines, separates, beneficiates and smelts mineral sands
products including ilmenite, rutile (contains TiO 2) and zircon. RBM’s two
operating companies function as a single business managed by Rio Tinto
under a single management agreement concluded in 2008.In that 2008
transaction, Rio Tinto was also engaged as the exclusive worldwide sales
and marketing agent for all RBM products. The agreement was notified
and unconditionally approved by the Tribunal in 2009.1
Proposed transaction and rationale for transaction
[8] The proposed transaction entails Rio Tinto acquiring sole control of RBM
through the acquisition of all of BHP Billiton’s interests in RBM. This will
give Rio Tinto 100% ownership of both RB Mining Holdings and RB
Titanium Holdings, and indirectly increase its interest in both RB Mining
and RB Titanium from 37% to 74%.
[9] According to Rio Tinto the transaction will enable it to increase its
economic exposure to titanium dioxide feedstock and zircon. Rio Tinto
believes these products have strong long term growth potential with China2
and the Asia-Pacific driving global demand, and have the capacity to
1Rio Tinto Plc/Rio Tinto Ltd/BHP Billiton South Africa Holdings BV and Richards Bay Mining (Pty)
Ltd and Richards Bay Titanium (Pty) Ltd, case number: 05/LM/Jan092 See pages 322 and 691 of the Record
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generate a positive return on a risk-adjusted basis, especially given the
global supply deficit which is forecast to continue and the relatively
inelastic demand.
[10] From BHP Billiton’s perspective, it wishes to exit the titanium minerals
industry.
Relevant markets and impact on competition
Horizontal Analysis
[11] The Commission found that there is no overlap in the activities of the
merging parties within South Africa because RBM is Rio Tinto’s sole
mineral sands interest in South Africa, and Rio Tinto does not sell mineral
sands products from its Canadian or Madagascan operations in South
Africa. There is, however, a horizontal overlap in the activities of the
merging parties with regard to the mining and production of TiO 2
feedstocks, zircon and HPPI at a global level. The Commission thus
determined that the relevant product markets were the markets for TiO 2
feedstocks, zircon and HPPI, but did not define the exact parameters of
the three markets.
[12] The Commission adopted a similar approach to that of the European
Commission and the Tribunal in the Anglo American/Kumba Resources
merger,3 and that of the Tribunal in the 2008 Rio Tinto/BHP Billiton and
RBM restructuring 4 where the product and geographic market definitions
were left open because there were no competition concerns. In this case,
the merger does not change the structure of the market, either at the
national or global level, because it is a move from joint to sole control in
circumstances where the acquiring firm already exercises managerial
control over RBM’s operations and markets RBM’s products with its own.
There is thus no loss of an independent sales channel, and no market
3COMP/M.3276, Anglo American/Kumba Resources; Anglo American/Kumba Resources, case number
46/LM/Jun024Rio Tinto Plc/Rio Tinto Ltd/BHP Billiton South Africa Holdings BV and Richards Bay Mining (Pty)
Ltd and Richards Bay Titanium (Pty) Ltd, case number: 05/LM/Jan09
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power accrues to Rio Tinto that it does not already enjoy by virtue of the
2008 management and marketing agreements. Moreover, in the post-
merger world, although the merged entity will hold a substantial global
market share of [...] in the TiO 2 market, it will continue to face competition
from other large global suppliers such as Iluka and Exxaro, with respective
market shares of 15-20% and 5-10%. In the global Zircon market where
the merged entity will have a global market share of [...], it will likewise
face competition from Iluka (30-35%) and Exxaro (10-15%). Equally,
although the merged entity is the single largest producer in the global
HPPI market [... market share], it will face competition from a large number
of other producers, notably the Commonwealth of Independent States
(CIS) producers (15-20%) and Other (Chinese) producers (45-50%). The
Commission thus concluded that the merger was unlikely to lead to a
substantial lessening or prevention of competition in the three markets.
Accordingly, the Commission decided that it was not necessary to take a
definitive view on whether different grades of zircon, and TiO 2 and HPPI
produced using different processing methods constituted narrower, distinct
markets within the broader markets for zircon, TiO2 and HPPI.
[13] In the course of its investigation, the Commission contacted RBM’s local
customers regarding the merger. With the exception of Foskor Zirconia
(Pty) Ltd (“Foskor”), they all indicated that they had no concerns with the
merger. In their view Rio Tinto will not change RBM’s supply and pricing
structure as it already controls RBM’s marketing activities, and its
incentives will thus not change post-merger.
[14] Foskor, however, opposed the merger on the grounds that it would
exacerbate the recent significant price escalations and supply restrictions.
Foskor indicated an intention to intervene in the matter, and a pre-hearing
Foskor indicated an intention to intervene in the matter, and a pre-hearing
was held on 12 June 2012. No representatives from Foskor attended the
pre-hearing and they communicated at 9 a.m. on the day of the pre-
hearing that they no longer wished to formally intervene in the matter.
Foskor was accordingly given notice of the hearing, and advised to submit
any further representations that they wished to make in writing by 15 June
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2012, and also to indicate whether they would be attending the hearing.
Foskor indicated to the Commission that they would not be participating in
the hearing.
[15] The Commission assessed Foskor’s complaint and concluded that it did
not differ in substance from the complaint Foskor had laid against RBM
and Exxaro alleging excessive pricing and exclusionary conduct with
respect to zircon. Furthermore, the supply restrictions and price escalation
were due to international supply and demand dynamics following the
global financial crisis, 5 and in part, due to the closure of one of Exxaro’s
mines in Kwa-Zulu Natal. 6 These market dynamics will prevail irrespective
of the merger and prices will continue to be determined, as highlighted by
Zirtille Milling, by global market forces. 7 The merger will not exacerbate
Foskor’s concerns because the market structure and Rio Tinto’s incentives
do not change. The Commission thus concluded that Foskor’s concerns
were not merger specific. Moreover, after the pre-hearing, the Commission
completed its investigation into the enforcement complaint and determined
that RBM and Exxaro had not abused their dominant positions.
[16] The merging parties addressed Foskor’s concerns both in their
submissions and at the hearing. They submitted that the supply
restrictions are a result of the current zircon supply deficit which is forcing
large producers to ration their supply among all their respective
customers.8 Demand for zircon reached its lowest level in a decade in
2009, and zircon customers “reduced their inventories to the bare
minimum.”9 In response, zircon producers decreased their production. 10 As
Mr Derek Folmer (the general manager of sales and marketing for zircon
and rutile products for Rio Tinto) indicated in his evidence at the hearing
this combination eliminated any surplus capacity that would have been in
this combination eliminated any surplus capacity that would have been in
the system. 11 Consequently when zircon demand recovered rapidly from
5 See pages 310-311, 323, and 691-692 of the Record6 The Commission’s Report, page 277 ibid, pages 23, 278 See page 691 of the Record; Transcript, page 319 Transcript, page 1110 ibid11 ibid
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2010 onwards it outstripped supply.12 Although zircon producers increased
their production, and some producers also expanded their operations, 13
the merging parties do not expect global production to exceed [...] 14 over
the period 2012-2016. 15 This accords with TZ Mineral International Pty
Ltd’s view that zircon supply from existing operations will peak in 2011 as
Iluka’s Eucla Basin operation will reach full capacity and there are only two
new sources of zircon globally where the plans for mining operations have
been government approved. 16 As demand is forecast to continue to
increase, the supply deficit is also expected to grow.17
[17] The merging parties submitted that the massive price increases since
201018 are primarily a consequence of this supply shortage. 19 [...] 20 In
addition, although he has not attended RBM’s board or [...] 21 meetings, he
did confirm that to the best of his knowledge BHP Billiton has not objected
to any of Rio Tinto’s pricing recommendations for RBM, and had not
exercised any constraint on RBM’s pricing decisions since 2009.22 [...]23
[18] Finally, Gill Winkler (a director of RBM and Vice President of Strategy and
Development for BHP Billiton commodity group) and Haydn Hillestad (a
senior manager of BHP Billiton Legal) confirmed that there is no legal
restraint of trade on BHP Billiton re-entering the mineral sands market
post-merger.24
[19] It is evident that Foskor’s concerns are not merger specific. The supply
restrictions and price increases are prevalent throughout the global
market, and arise from the growing global demand fuelled by urbanisation
12 Transcript, page 1113 See pages 310 and 323 of the Record14 Redacted due to confidentiality15 See page 323 of the Record16 See TZ Mineral International Pty Ltd’s Mineral Sands Annual Review, June 2011, page 691 of the
Record17 See pages 691-692 of the Record; Transcript, page 2118 See pages 310 and 692 of the Record; Commission Competition Report, page 2119 Transcript, page 1120 Redacted due to confidentiality21 ibid22 Transcript, pages 23-2623 Redacted due to confidentiality24 Transcript, page 37
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in emerging economies 25 and the global supply shortage. We thus agree
with the Commission that the proposed transaction is unlikely to
substantially lessen or prevent competition in the relevant markets.
Public Interest
[20] The merging parties submitted that the proposed transaction will have no
adverse effects on employment since they do not foresee any
retrenchments as a result of the merger. 26 No other public interest issues
arise due to this transaction.
Conclusion
[21] Having regard to the facts above, we find that the proposed merger is
unlikely to substantially lessen or prevent competition in any relevant
markets. Furthermore, the proposed transaction raises no public interest
concerns. Accordingly, we approve the merger unconditionally.
____________________ 19 July 2012
Norman Manoim DATE
A Wessels and Y Carrim concurring
Tribunal Researcher: Elizabeth Preston-Whyte
For the merging parties: Anthony Crane of Norton Rose and Justin Balkin
of Edward Nathan Sonnenbergs
For the Commission: Rakgole Mokolo and Grace Mohammed
25 Transcript, page 2826See page 517 of the Record
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