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COMPETITION TRIBUNAL OF SOUTH AFRICA
In the matter between
Hesteel International Holding Co., Limited
Hesteel Group Co., Limited
Xuanhua Construction Machinery Co., Limited
And
Smart Union Resources (Hong Kong) Co., Limited
Case No: LM233Mar17
Primary Acquiring Firms
Primary Target Firm
Panel : Mrs Medi Mokuena (Presiding Member)
: Ms Andiswa Ndoni (Tribunal Member)
: Prof Fiona Tregenna (Tribunal Member)
Heard on : 1 O May 2017
Order Issued on : 10 May 2017
Reasons Issued on : 25 May 2017
REASONS FOR DECISION
Approval
[1] On 1 O May 2017, the Competition Tribunal ("the Tribunal") unconditionally
approved the large merger between Hesteel International Holding Co., Limited
("Hesteel International"), Hesteel Group Co., Limited ("Hesteel Group"),
Xuanhua Construction Machinery Co., Limited ("Xuanhua") and Smart Union
Resources (Hong Kong) Co., Limited ("SUHK").
[2] The reasons for the approval are as follows.
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Parties to the transaction
Primary Acquiring Firm
[3] Hesteel International, Hesteel Group and Xuanhua, hereinafter referred to the
Acquiring Group, are incorporated in accordance with the laws of the People's
Republic of China ("China"). Hesteel International and Xuanhua are controlled
by the Hesteel Group which in turn is controlled by the State-Owned Assets
Supervision and Administration Commission of Hebei Provincial People's
Government ("Heibei SASAC").
[4] In South Africa, the Hesteel Group has indirect control over two companies,
namely Duferco Distribution Services South Africa Proprietary Limited
("Duferco Distribution") and Duferco Steel Processing Proprietary Limited
("Duferco Steel") through its subsidiary Duferco International Trading Holding.
Furthermore, Hesteel Group possesses joint control with SUHK over
Phalaborwa Mining Company Limited ("PMC") in terms of section 12(2)(g) of
the Competition Act 89 of 1998 ("the Act"). PMC in turn controls Phalaborwa
Copper Proprietary Limited ("Phalaborwa Copper").
(5] The Acquiring group primarily engages in the business of steel production in
China. Its additional business activities include mining, mineral resources
development, equipment manufacturing, financial services and logistics.
Xuanhua is active in the manufacture and supply of various types of
construction and mining equipment which includes bulldozers and excavators.
Xuanhua, however, does not conduct any business in South Africa.
Primary Target Firm
[6] SUHK is an investment holding company which is incorporated in accordance
with the laws of China. SUHK indirectly controls Smart Union Resources South
Africa (
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SURSA") and is not controlled by any other firm.
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[7] SUHK does not engage in any activities in South Africa, however, it possesses
joint control with Hesteel Group over PMC. PMC is a South African based
investment holding company which holds a controlling stake in Phalaborwa
Copper. Phalaborwa Copper is situated in the Limpopo Province and operates
a large block copper mine and a smelter complex. Its copper operations also
give rise to other metal by-products including iron ore.
Proposed transaction and rational
[8] In terms of the Share Transfer Agreement, the Acquiring group seeks to acquire
shares in SUHK through interrelated phases and conditional steps. Upon
implementation of this transaction, Hesteel Group will gain control of Xuanhua
and Xuanhua will control SUHK.1
[9] The Commission was of the view that the proposed transaction illustrates an
interdependent and indivisible transaction which can be assessed under a
single merger notification.
[1 O] The Acquiring group submitted that the proposed transaction served to provide
additional development opportunities for the Hesteel Group in South Africa, as
well as, opportunities to raise funding for Phalaborwa Copper's construction
project, Project Lift JI.
[11] SUHK submitted that the proposed transaction will allow it, together with its
subsidiaries, to raise money for Phalaborwa Copper's Project Lift II.
Relevant market and impact on competition
[12] The Commission considered the activities of the merging parties and found that
the proposed transaction presents a horizontal overlap in the production and
sale of iron ore. The Commission also found the existence of a vertical
relationship between the activities of the merging parties as Phalaborwa
1 Details of the transaction remain confidential.
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Copper supplies Hesteel Singapore Co. Limited, a member of the Hesteel
Group, with magnetite iron ore which it uses in its steel production operations.
As such, the Commission considered the proposed transaction within the
market for the production and sale of iron ore.
(13] In assessing the horizontal overlap, the Commission found that while the
Acquiring group and Phalaborwa Copper produce and supply iron ore, the
Acquiring group only produces iron ore for its own internal use and does not
supply it to the open market. Only 1 % of Phalaborwa Copper's iron ore
production is consumed in the domestic market by two local customers whilst
the remaining 99% is exported. Accordingly, the Commission found that the
proposed transaction is unlikely to raise any competition concerns in this
regard.
[14] In analysing the vertical relationship, the Commission considered foreclosure
effects, in other words, whether Phalaborwa Copper would have the ability to
only supply the Acquiring group by restricting or ceasing its supply of iron ore
in the domestic market. In its assessment, the Commission found that
Phalaborwa Copper exports 99% of its iron ore production and its market share
in the sale of iron is less than 1 % in comparison to its larger counterparts such
as BHP Billiton, Rio Tinto Limited and Anglo American Pie. In addition,
Phalaborwa Copper's two domestic customers did not raise any concerns
regarding the proposed transaction.
[15] Accordingly, the Commission concluded that it is unlikely for the merging parties
to implement a foreclosure strategy.
[16] In view of the above, we concur with the Commission's conclusion that the
proposed transaction is unlikely to result in any foreclosure and that the
proposed transaction is unlikely to substantially prevent or lessen competition
in any relevant market.
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Public interest
[17] The merging parties submitted that the proposed transaction will have no
negative effect on the employees of SUHK's indirect subsidiaries in South
Africa as the proposed transaction involves the restructuring and reorganisation
of SUHK.
[18] Based on the above, the Commission was of the view that the proposed
transaction does not have an effect on employment and does not raise any
other public interest concerns.
Conclusion
[19] In light of the above, we conclude that the proposed transaction is unlikely to
substantially prevent or lessen competition in any market in South Africa or
raise any adverse public interest issues. Accordingly, we approve the proposed
transaction unconditionally.
25 May 2017
Mrs Madi Mokuena Date
Ms Andiswa Ndoni and Prof Fiona Tregenna concurring
Tribunal Researcher: Ndumiso Ndlovu
For the merging parties: Derushka Chetty and Tyron Willey of ENSafrica
For the Commission: Zintle Siyo and Xolela Nokele
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