Large Mergers

Large Mergers

33/LM/Mar12 (014795)

TitleGlencore and Xstrata
Case No33/LM/Mar12 (014795)
PartiesGlencore International Plc and Xstrata Plc
StatusConditions
Rating3
Date06/03/2013
TimeNo time available
Summary

Competition Tribunal approves Glencore / Xstrata merger but raises broader non-merger specific public interest concern

 

The Competition Tribunal has highlighted a number of trends in coal supply in and from South Africa which will no doubt have an impact on Eskom’s ability to ... produce competitively priced electricity” in its reasons for conditionally approving the merger between Glencore International PLC and Xstrata PLC. The Tribunal found that although the increasing prices of thermal coal supply to the domestic market was a very serious concern, given its effect on electricity prices, and indeed on the entire economy, the Glencore / Xstrata merger was unlikely to make the situation worse. Instead, the Tribunal said, these concerns “could be addressed by other policy instruments, if government deems it appropriate, and if Government wants to ensure that the strategic importance of South Africa’s coal reserves to domestic industries is protected.” The Tribunal also urged the Competition Commission to use its advocacy role to engage all the relevant stakeholders, including policy makers, to advise them on these concerns and their causes.

 

The Tribunal’s reasons follow its decision, on 22 January 2013, to approve the merger subject to a set of employment-related conditions. The decision came after a hearing that took place on 18 January 2013 in which the Tribunal called a factual witness from Eskom, Ms Kiren Maharaj, the Divisional Executive for the Primary Energy Division of Eskom, to testify. She was questioned on the potential impact of the proposed merger on Eskom’s procurement of coal for specific coal-fired power stations, namely the Majuba, Komati and Hendrina power stations.

 

Before the hearing Eskom, which generates approximately 95% of the electricity used in South Africa and relies on coal-fired power stations to produce approximately 90% of its electricity, raised several concerns about the security and prices of thermal coal supply after the merger. Eskom had been granted the right to intervene in the merger. However, on the morning of the hearing, Eskom and the merging parties announced that they had reached a private settlement agreement and therefore Eskom was withdrawing from the proceedings. Notwithstanding, the Tribunal still wished to hear from Eskom’s factual witness as the Tribunal was not bound by private agreements and still had “a statutory duty to consider whether the proposed merger may lead to anti-competitive effects or raise substantial public interest concerns”.

 

The Tribunal focused its competition assessment on those Eskom power stations where one of the merging parties was the current main coal supplier (i.e. the so-called feeder mine) and the other merging party was the next best alternative. This was the best way of uncovering the potential competition effects of the merger given the historic features of the “tied domestic” market, that is the sale of thermal coal through long-term contracts, and how Eskom would go about sourcing additional coal supplies.

 

Based on the available evidence, there was no reason to believe that there were any Eskom power stations where one of the merging parties was a current supplier and was significantly constrained by the alternative supply from the other merging party. Thus the acquisition of Xstrata by Glencore presented no opportunity for the merged entity to unilaterally raise prices of coal supply at any of Eskom's power stations.

 

Having considered Eskom’s testimony the Tribunal concluded that Eskom’s coal supply concerns, although legitimate, were not caused by the merger. However the Tribunal identified a number of sector-wide trends, as broader public interest concerns, around future coal prices in the domestic market and the impact of these on South Africa’s electricity prices. These trends include (i) the impending ending of certain of Eskom’s long-term coal contracts; (ii) the anticipated increased coal demand from Eskom and its increased buying on short term contracts; (iii) the incentives of coal miners to export coal given higher coal export prices and revenues; (iv) increases in the export of coal and meaningful changes in the composition of these exports, specifically the increased demand from countries that use lower quality coal (RB3 coal) and thus increases in the exports of this coal from South Africa; and (v) the trending of prices on the short-term market towards international export prices. The Tribunal noted that these developments did not favour local coal customers such as Eskom, but were occurring separate from the merger. Hence they could not be remedied through the merger.

 

Prior to the 18 January 2013 hearing, the merging parties also reached an agreement with the National Union of Mineworkers (NUM) on a set of conditions that satisfied the employment related concerns NUM had raised earlier in the proceedings. The conditions, amongst other things, limited the number of employees that may retrenched as a result of the merger to 80, from the class of skilled employees, and 100, from the class of semi-skilled and unskilled employees, after a review to analyse whether retrenchments from this class of employees were required. The Tribunal included the terms of this agreement in its order as conditions to the approval of the merger.

 

The full judgment of the Tribunal is available on its website: www.comptrib.co.za

 

Background

 

Glencore provides services relating to natural resources. It has worldwide activities in the mining, smelting, refining, processing, marketing and trading of metals and minerals, energy products and agricultural products. It operates on a global scale, marketing physical commodities that it either produces itself using its own industrial assets or purchases from third parties for onward sale to industrial consumers, such as those in the automotive, steel, power generation, oil and food processing industries. Glencore is a public company listed on the London and Hong Kong Security Exchanges.

 

Xstrata is involved in the production of coal, ferrochrome, vanadium, copper, nickel, cobalt and zinc. It has interests in operating thermal and coking coal mines in South Africa, Australia and Colombia, as well as an exploration project in Canada. Xstrata is a public company listed on both the London and Swiss Security Exchanges.

 

Issued By:      

Nandi Mokoena                                                    

PR Consultant: Competition Tribunal                                          

Cell: +27 (0) 82 399 1328                                            

E-mail: NandisileM@live.co.za

 

On Behalf Of:

Lerato Motaung                                                   

Registrar: Competition Tribunal                                        

Tel: (012) 394 3355                                             

Cell: +27 (0) 82 556 3221                                              

E-Mail: LeratoM@comptrib.co.za

Keywordslarge merger, employment conditions; mining; thermal coal in the domestic market, export market and tied domestic market; national and international; global transaction; conditional approval; possible retrenchments; intervention applications; Eskom; thermal coal; pre-merger partial shareholding; horizontal overlap; vertical relationship due to international activity; high barriers to entry; low countervailing power; unlikely unilateral effects in tied market; various competitors; competition concerns from third parties; expert witness statements; factual witness statements; Small business concerns; employment concerns; trade unions;
SourceCompetition Tribunal
Reasons and Orders33LMMar12 014795   33LMMar12 014795 order3           
Date Posted06/03/2013 12:30pm
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