The Competition Commission (Commission) has recommended that the merger between Ferro Industrial Products and Arkema Resins be prohibited. The Commission argues that the merger will remove the only competitor to Ferro in the provision of composite resin to the mining sector. Even in other sectors, the Commission contends that the combined market share of the parties will be around 64%, with only a small local supplier and some imports as a constraint. In recommending outright prohibition, the Commission was unwilling to consider alternative remedies, such as divestiture of Arkema's composite business or imposing a pricing formula.
Large mergers are ultimately decided by the Competition Tribunal (Tribunal) as a matter of course, and the merging parties will have the opportunity to contest the Commission's findings. A lot may turn on, firstly, the barriers to expansion for the rest of the market (ie can the small local player and imports expand capacity to counter any price increases) and secondly, whether in the mining segment (where the Commission alleges a merger to monopoly) the countervailing powers of the large mines (in terms of price and the ability to facilitate entry) is sufficient to keep pricing at competitive levels.
The authorities have not always been so conservative. In 2004, the Tribunal unconditionally approved Murray and Roberts' acquisition of The Cementation Company, where substantial concerns about the effect of the merger on mining customers gave way to the realisation that as the mines are price takers in their own product market, they could not pass on any increases and moreover had an incentive to resist price increases, and the countervailing power to do so (being sophisticated purchasers making large purchases).
In 2006, in deciding the ferrochrome merger involving International Mineral Resources AG and Kermas South Africa, the Tribunal endorsed the view that the likelihood of non-competitive pricing is curtailed when sophisticated large buyers, making large purchases, are present. Admittedly, while both gave rise to substantial consolidation of important competitors, neither of these deals involved mergers to monopoly. In 2010 when Chlor-Alkali sought to acquire Botash, the Tribunal allowed the merger subject to conditions regarding maximum pricing and long term contracts
The lawyers for the merging parties will no doubt hearken to these decisions, but it may be that the authorities are no longer willing to play pricing regulator, or perhaps the downturn in the mining industry has made the regulator less bullish on the industry's ability to counter the pricing demands of suppliers.
With the mining industry in decline, one might welcome consolidation at the supplier level to cope with muted and uncertain demand and the merger is clearly an important one for the parties concerned. However, a balance needs to be drawn between the interests of suppliers and customers and in this instance and as usual, the Commission appears to be in the customers' corner.