Brief Summary

Competition — Merger approval — Conditional approval of merger between Industrial Development Corporation and Rio Tinto South Africa — Competition Commission identifying public interest concerns regarding supply of Dense Medium Separation magnetite iron ore — Merging parties addressing concerns through conditions — Tribunal accepting enhanced conditions and approving merger — No horizontal or vertical competition concerns identified.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned merger proceedings before the Competition Tribunal of South Africa in which the Tribunal was required to decide whether to approve a proposed merger, and if so, whether approval should be subject to conditions.

The acquiring firms were Industrial Development Corporation of South Africa Limited (IDC), Hebei Iron & Steel Group Co Limited (Hebei), and a Mauritius special purpose vehicle (Mauritius SPV) to be established for purposes of the transaction (together with the firms that would jointly control it, referred to in the reasons as part of the Chinese Consortium). The target firm was Rio Tinto South Africa Limited (RTSA), whose primary asset was an effective controlling interest in Palabora Mining Company Limited (PMC).

The Competition Commission investigated the transaction and found no horizontal or vertical competition concerns. However, it identified a public interest concern under section 12A(3)(a) of the Competition Act 89 of 1998 relating to the merger’s potential effect on a particular industrial sector, namely the downstream reliance of the domestic coal sector (and, consequentially, electricity generation) on the supply of dense medium separation (DMS) magnetite iron ore used for coal washing. During the Commission’s investigation the merging parties tendered conditions aimed at addressing this concern; the Commission accepted those conditions and referred the merger to the Tribunal on that basis.

The matter was heard on 3 July 2013, on which date the Tribunal issued an order conditionally approving the merger. The Tribunal’s reasons were issued on 31 July 2013. The dispute in substance concerned whether the merger, despite not raising competition concerns, required public interest conditions to prevent harm to domestic industry dependent on DMS iron ore supply.

2. Material Facts

The IDC is a state-owned development finance institution. For purposes of the merger analysis, its ownership interests in Foskor (Pty) Ltd (Foskor) and Scaw Metals South Africa (Pty) Ltd (Scaw) were relevant. Foskor, a vertically integrated phosphate producer, had over time accumulated a stockpile of magnetite iron ore as a by-product of mining activities and sold magnetite locally and in certain export markets. The Commission’s findings recorded that Foskor’s magnetite reserves had reduced substantially and that it was not currently able to mine ore containing magnetite, although it continued to sell from stockpiles. Scaw was an integrated steel maker and had supplied grinding media (grinding balls) to PMC on a non-exclusive basis.

Hebei was described as a Chinese state-owned company focused primarily on steel production in China and not conducting business activities in South Africa at the time. Mauritius SPV was to be created solely to conclude the transaction and would be owned through another special purpose vehicle in Hong Kong, with shareholding interests held by Hebei and other entities. The reasons treated Mauritius SPV and the entities that would control it collectively as part of the Chinese Consortium.

RTSA was a holding company; its primary asset was an effective controlling interest in PMC, a JSE-listed company. PMC operated a large copper mine and smelter complex in Limpopo, adjacent to the Foskor mine, and was South Africa’s only producer of refined copper. In addition to copper, PMC produced sulphuric acid as a by-product of copper smelting and produced magnetite iron ore (in the form of magnetite) as part of its copper mining process. The parties’ version recorded that PMC exported the bulk of its iron ore; the Commission’s investigation found that PMC continued to produce magnetite iron ore as part of its operations.

The transaction was structured as a series of interrelated and cross-conditional steps culminating in the acquisition of control of RTSA and PMC. In broad terms, Mauritius SPV would acquire 100% of RTSA (and thereby indirect control of PMC). The IDC would subscribe for 20% of RTSA, and, together with minority protections, this would confer de facto control over RTSA (and indirect control over PMC). Separately, Hebei would acquire control over PMC in terms of section 12(2)(g) of the Competition Act.

The principal factual overlap relevant to competition analysis arose because Foskor (IDC-controlled) and PMC (RTSA-controlled) both had activities relating to magnetite iron ore and sulphuric acid. With regard to magnetite, the Commission found that local steel mills were configured to use hematite rather than magnetite, and that almost all magnetite iron ore sold locally was used for coal washing as DMS iron ore. Coal washing depended on magnetite’s magnetic properties and specified quality requirements (including iron oxide levels, Fe content, particle size distribution, and the ability to create a dense medium separation within specified density ranges).

A significant factual premise accepted in the reasons was that there were no alternative suppliers of DMS iron ore locally and no viable alternative sources of magnetite that could be used as DMS iron ore for coal washing. The Commission found that PMC and Foskor were the only South African firms with magnetite iron ore that could be upgraded to DMS iron ore for local coal mines. It also found that imports were not economically viable even compared to export parity prices. The Tribunal recorded that it was not necessary in the case to take a definitive view on the exact geographic scope of the market because this did not affect the ultimate conclusion.

A further factual finding accepted was that neither PMC nor Foskor could supply their stockpiled magnetite directly for coal washing without beneficiation, because the material did not meet required Fe content and sizing specifications. Foskor’s beneficiation was carried out by an independent entity, Idwala Industrial Holdings (Pty) Ltd, operating a plant at Foskor’s premises, while PMC was able to beneficiate magnetite internally.

Although the Commission considered DMS iron ore supply agreements and potential customer switching, it found material differences between the parties’ magnetite and beneficiation capability and concluded they did not currently compete for DMS customers, and that this was unlikely to change post-merger. The Commission therefore found no unilateral competitive concern in DMS iron ore.

The Commission nonetheless identified a public interest concern: post-merger, the IDC and the Chinese Consortium had projects and interests requiring magnetite as an input, creating a risk that locally produced DMS iron ore volumes would be diverted to the merging parties or entities in which they had an interest, to the detriment of domestic DMS customers. The reasons recorded that DMS iron ore was crucial for coal beneficiation for both domestic and export coal markets, and that an inability to access secured DMS supply could detrimentally affect coal production levels, the ability to supply domestic customers (including Eskom), and coal exports, with potential viability implications for certain coal producers. Eskom indicated reliance of certain power stations on washed coal and noted that the Medupi plant would use mainly washed coal due to environmental concerns.

The Tribunal recorded that it had regard to the parties’ internal documents and the Consortium Agreement addressing post-merger magnetite requirements, which underscored an incentive to self-supply. The Commission’s analysis further indicated that PMC’s beneficiation capacity was insufficient to meet the demands of the IDC, the Chinese Consortium, and local customers from about the relevant future period identified in the Commission’s investigation. On this basis, the Tribunal accepted that in circumstances of shortage the merging parties would have an incentive to supply their own related interests first, risking insufficient supply to domestic DMS customers.

3. Legal Issues

The Tribunal was required to determine whether the proposed merger was likely to substantially prevent or lessen competition in any relevant market, and, independently, whether the merger raised public interest concerns requiring conditions under the Competition Act.

The central legal question ultimately decided in the reasons was whether, notwithstanding the absence of competition harm, the transaction created a significant public interest concern under section 12A(3)(a) relating to the effect of the merger on a particular industrial sector, and whether the tendered conditions (as enhanced following the Tribunal’s queries) were adequate and proportionate to address that concern.

The dispute primarily involved the application of law to fact and an associated evaluative judgment about risk, incentives, and proportionality of conditions. It did not turn on resolving sharp factual disputes between competing versions; rather, it turned on the Tribunal’s acceptance of the Commission’s market investigation and the inference drawn from the transaction structure and internal documents about incentives to self-supply in conditions of scarcity.

4. Court’s Reasoning

The Tribunal approached the matter within the statutory framework governing merger control, which requires a competition assessment and a separate public interest assessment. On the competition dimension, it accepted the Commission’s findings that the merger was unlikely to raise significant horizontal concerns in sulphuric acid because the parties were unlikely to compete for the same customers given production locations and transport costs, and that the vertical overlaps identified (including sulphuric acid as an input for Foskor and Scaw’s past supply of grinding media to PMC) did not create the ability or incentive for foreclosure. The Tribunal stated it had no reason to doubt these findings and therefore did not engage those issues in further detail.

The Tribunal’s reasoning focused on the public interest concern related to DMS iron ore supply. It accepted the factual premise that DMS iron ore is a critical input in coal washing, which affects both domestic coal supply (including supply to Eskom) and export coal. It also accepted that domestic coal producers cannot substitute hematite for magnetite for coal washing due to hematite’s non-magnetic character, and that market participants reported no alternative suppliers or viable alternative sources of DMS iron ore.

In considering whether the merger raised a section 12A(3)(a) concern, the Tribunal assessed the likely post-merger incentives and constraints. It considered internal documents and the Consortium Agreement dealing with post-merger magnetite requirements, which it understood to support the conclusion that the acquiring firms would have an incentive to self-supply. It also accepted the Commission’s conclusion that PMC’s existing beneficiation capacity would be insufficient to meet the combined requirements of the acquiring parties’ related interests and domestic customers within the relevant future period. On that basis, the Tribunal found that, where shortages occurred, the acquiring firms would have an incentive to prioritise supply to firms in which they had an interest, which would likely reduce access for existing domestic customers.

The Tribunal treated the consequences of reduced DMS supply as extending beyond individual customers to a broader industrial effect: reduced coal washing capability would affect the domestic coal industry, and in turn could affect electricity supply in South Africa. This chain of effects was regarded as engaging the statutory public interest consideration concerning the effect on a particular industrial sector.

Having found a significant public interest concern, the Tribunal then considered whether conditions were warranted and proportionate. It recorded that the Commission engaged with the parties during the investigation, that conditions were tendered and accepted by the Commission, and that the Tribunal sought clarification and suggested enhancements during the hearing. One enhancement recorded was the expansion of the definition of “acquiring firms” in the conditions to include the IDC, Mauritius SPV, Hebei, and any other firm that may jointly control Mauritius SPV, ensuring the scope of the obligation tracked control and potential related-party influence.

The Tribunal concluded that the final tendered conditions were proportionate to the public interest concern because they were directed at maintaining access by South African firms (as defined to exclude the merging parties and firms in which they had a shareholding interest) to sufficient DMS iron ore to satisfy annual demand, subject to the customers’ contractual and commercial compliance. It also accepted monitoring and enforcement mechanisms, including customer notification, periodic affidavits, provision of contracts to the Commission, and dealing with complaints or apparent breaches under the Commission’s procedural rules.

5. Outcome and Relief

The Tribunal approved the merger subject to conditions designed to address the identified public interest concern regarding DMS iron ore supply to domestic customers.

The conditions required PMC, after the date of the Tribunal’s order, to make available to South African firms sufficient DMS iron ore to satisfy their annual demand, subject to demand and to those firms’ compliance with contractual and commercial obligations to PMC. The conditions provided for excusal of PMC’s supply obligation where non-performance was beyond its control and could not have been avoided or overcome, and included defined force majeure-type events.

Monitoring obligations included written notification to existing customers within two weeks of the order; an affidavit by a senior official confirming notification and providing the notice to the Commission within one month; annual anniversary-date affidavits by a senior official attesting compliance for the duration of the conditions; and an obligation to provide the Commission with copies of any relevant supply contracts concluded after the order within 30 days of conclusion. Apparent breaches or complaints were to be addressed under Rule 39 of the Competition Commission Rules. The conditions were to remain in place for as long as any of the acquiring firms controlled RTSA and/or PMC, with “control” as defined in section 12(2) of the Competition Act.

The Tribunal recorded that the merging parties submitted the transaction would not have a negative effect on employment, and it identified no other public interest concerns. The reasons as provided did not record a costs order.

Cases Cited

No reported cases were cited in the Tribunal’s reasons.

Legislation Cited

Competition Act 89 of 1998 (as amended), including section 12A(3)(a), section 12(2)(g), and section 12(2).

Rules of Court Cited

Competition Commission Rules, Rule 39.

Held

The Tribunal held that the proposed merger was unlikely to substantially prevent or lessen competition in any relevant market, accepting the Commission’s assessment that the identified horizontal and vertical overlaps did not give rise to significant competition concerns.

The Tribunal further held that the merger raised a significant public interest concern under section 12A(3)(a) because of the likelihood that, in conditions of DMS iron ore scarcity and limited beneficiation capacity, the acquiring firms would have an incentive to prioritise supply to their own projects or related entities, thereby reducing availability of DMS iron ore to domestic coal customers and potentially affecting the coal sector and electricity supply.

The Tribunal held that the final tendered conditions (as enhanced following the Tribunal’s queries) were proportionate and adequate to address the identified public interest concern and therefore conditionally approved the merger on those terms.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger control under the Competition Act involves both an assessment of whether a merger is likely to substantially prevent or lessen competition and a distinct assessment of whether the merger raises public interest considerations listed in section 12A, including effects on a particular industrial sector or sectors.

The reasons reflect that even where a merger does not raise competition concerns, the Tribunal may impose conditions where necessary to address a public interest risk supported by the evidentiary and analytical record, including an assessment of incentives, capacity constraints, and downstream industrial effects.

The Tribunal applied a proportionality approach to merger conditions, requiring that conditions be targeted to the identified concern, include appropriate scope definitions (including control-based definitions of the obligated parties), and provide for practical monitoring and enforcement mechanisms, including reporting obligations and referral of non-compliance processes under the relevant procedural rules.

Industrial Development Corporation of South Africa Ltd and Another v Rio Tinto South Africa Ltd (016329) [2013] ZACT 83; [2013] 2 CPLR 538 (CT) (31 July 2013)