This briefing examines the Chinese Ministry of Commerce (MOFCOM)’s remedy decisions in two recent merger review cases, namely Glencore’s acquisition of Xstrata and Marubeni’s acquisition of Gavilon, and analyzes how the Chinese merger review process will likely impact future global M&A transactions involving commodities that are strategically important to China.
Glencore’s Acquisition of Xstrata
This transaction concerns the acquisition of Xstrata, the fifth largest diversified mining group and metals company in the world, by Glencore, the world’s largest supplier of non-ferrous metals and mineral products.
The transaction was notified to MOFCOM on 1 April 2012. During the course of the review process, MOFCOM raised competition concerns relating to the markets for copper concentrate, zinc concentrate and lead concentrate. At the end of the statutory review period of the notification, which had lasted for over seven months, MOFCOM decided that the two rounds of remedy proposals submitted by Glencore had not sufficiently addressed its concerns. Glencore had to withdraw and re-file the notification on 23 November. MOFCOM finally cleared the case with conditions on 16 April 2013, twelve and a half months after the transaction had first been notified.
MOFCOM found that Glencore and Xstrata have horizontal overlaps or vertical relations in relation to various mineral products such as zinc, lead, copper, nickel, cobalt and coal, and determined that the geographic scope of the supply and trade of these products was global. MOFCOM focused its competition analysis on the markets for copper concentrate, lead concentrate and zinc concentrate, in which the parties’ combined market shares are relatively high and in which China is largely dependant on imports to meet domestic demand. The combined shares of Glencore and Xstrata in the global markets for the production and supply of copper concentrate, zinc concentrate and lead concentrate are as follows:
Click here to view table.
MOFCOM found that the transaction would restrict or eliminate competition in the markets for these three products for the following reasons:
The transaction would increase Glencore’s shares in the three relevant markets;
The transaction would reinforce Glencore’s ability to vertically integrate its supply chains of copper, zinc and lead;
Entry into the markets for copper concentrate, zinc concentrate and lead concentrate is difficult due to: limited access to upstream resources, the high levels of investment required to develop projects, the difficulty of building a marketing network and the strict regulatory environment; and
Downstream Chinese smelters are generally small companies with weak buyer power and their interests might be injured by the transaction.
In addition, specifically with regard to copper concentrate, MOFCOM was concerned that the transaction would significantly increase the copper resources controlled by Glencore which would further increase the difficulty of market entry, and would potentially change supply conditions as they currently stand under the existing competitive landscape.
To address these concerns, MOFCOM imposed the following remedies on the transaction:
- In relation to copper concentrate:
- Structural remedies: the merged entity must divest the Las Bambas copper mine project, under development by Xstrata in Peru, prior to 30 June 2015, approximately two years after the MOFCOM decision, and must sign a binding purchase agreement with the buyer before 30 September 2014, approximately one and a half years after the MOFCOM decision. If the merged entity fails to meet either of the two deadlines above, it shall be obligated to entrust a divestiture trustee to sell all its interests in one of four overseas mining projects with no minimum price within three months of the relevant deadline.
- Behavioural remedies: for the eight years from 2013 until the end of 2020, Glencore must offer to supply Chinese customers with minimum volumes of copper concentrate under long-term contracts. Such offers shall be made in accordance with the applicable annual benchmark price as agreed between major miners and major smelters during annual supply negotiations or with reference to that benchmark price.
- In relation to zinc concentrate and lead concentrate, for the eight years from 2013 until the end of 2020, Glencore must continue to offer to supply Chinese customers with the two products under fair and reasonable terms that are consistent with terms on the international market.
Marubeni’s Acquisition of Gavilon
This transaction concerns the acquisition of Gavilon, a privately held US commodities trading company, by Marubeni, an international commodities trader headquartered in Tokyo.
The parties notified the transaction to MOFCOM on 19 June 2012. At the end of the statutory review period of the notification, which lasted for over seven months, MOFCOM decided that the remedies proposed by the parties had not addressed its competition concerns. As a result, the parties had to withdraw the notification and re-file on 31 January 2013. MOFCOM conditionally approved the transaction on 22 April 2013, concluding the 10-month review process.
MOFCOM found, based on the parties’ scope of operations and product features, the relevant product markets to be the imported soya bean, corn, soya bean meal and dried distillers’ grains markets. Also, on the basis of the trade, consumption, transportation and relevant tariffs of these products, MOFCOM defined the relevant geographic market as the Chinese market.
MOFCOM concluded that the transaction might give rise to anticompetitive effects on the imported soya bean market in China based on the following findings:
As the largest exporter to the Chinese imported soya bean market, Marubeni has a market share of approximately 18%, significantly higher than any other exporter. Armed with Gavilon’s well-established network in North America, Marubeni could rapidly expand its procurement of soya beans, increase its exports to China and subsequently reinforce its position in the relevant market.
The trading of soya beans requires access to soya bean resources and a complete logistics and distribution network which create high barriers for new entrants. The increased soya bean resources controlled by Marubeni following the transaction would further increase the difficulty of market entry.
Downstream Chinese soya bean crushers are generally small with weak buyer power, and the transaction may further weaken their position vis-à-vis commodities traders and injure their interests.
To address these concerns, MOFCOM imposed the following ‘hold-separate’ remedies on the merged entity: (1) it shall establish two separate soya bean trading subsidiaries to handle the respective soya bean exports to China of Marubeni and Gavilon; (2) these subsidiaries must operate independently of one another; (3) they must not exchange competitive information between each other; and (4) Marubeni’s soya bean trading subsidiary shall not buy soya beans from Gavilon’s US assets unless such purchases are conducted on an arm’s length basis.
Global transactions involving commodities which are strategically important to China will be subject to close scrutiny by MOFCOM, and MOFCOM seems confident in taking a different approach as compared to those taken by other major antitrust agencies, in its interventions.
In both of the above cases, the parties did not enjoy a significant combined market share. Glencore and Xstrata’s combined market shares in 2011 in each of the relevant markets were lower than 15% (except the supply of zinc concentrate for which the parties’ combined share is 17.9%), and Xstrata did not supply any zinc concentrate or lead concentrate into China in 2011. Marubeni’s market share in the imported soya bean market in China was approximately 18% and Gavilon’s share, although not disclosed by MOFCOM in its decision, is in any case less than 9%1.
Despite these low market shares, each transaction was subject to a long review process and remedies. This is possibly due to the Chinese competition authorities’ sensitivity regarding transactions involving strategically important industrial and agricultural raw materials, the import of which China relies heavily on. In both decisions, MOFCOM referred to China’s dependence on the import of the relevant products. In Glencore/Xstrata, imported copper concentrate, zinc concentrate and lead concentrate accounted for 68.5%, 28.7% and 27.3% of the total supply of the three products in China in 2011 respectively. In Marubeni/Gavilon, 80% of soya beans sold in China were imported in 2012 and MOFCOM even defined the imported soya bean market as a distinct product market. Although MOFCOM did not explicitly present China’s reliance on imports as a concern, its decisions are nonetheless indicative that transactions involving these types of products may be subject to stricter scrutiny by MOFCOM.
It is also noteworthy that the Marubeni/Gavilon deal was unconditionally cleared in every other jurisdiction while the Glencore/Xstrata deal was cleared in Europe with behavioral remedies and the divestiture of Glencore’s minority shareholding (7.79%) in Nyrstar, the world's largest zinc metal producer. The conditions imposed by MOFCOM indicate its confidence in taking a different, if not stricter, approach to remedies as compared to those taken by other major jurisdictions.
Concerns over the high barriers to entry and the power of commodities trading companies over downstream Chinese customers
It is interesting to note that MOFCOM raised very similar competition concerns and reasoning in both of the above cases and that these are of common relevance to global-scale commodities trading companies. In both cases, MOFCOM noted the high barriers that exist with regard to entry into the commodities trading business. MOFCOM identified the main barriers to be the establishment of sufficient marketing and distribution networks and sufficient access to upstream resources. MOFCOM also noted that market entry would become more difficult due to the increase in the upstream resources to be controlled by the acquirers, post-transaction. The second common factor identified by MOFCOM is the weak bargaining power of downstream Chinese buyers vis-à-vis global trading companies. MOFCOM expressed concerns that the merged entities’ reinforced market power would further weaken the market position of Chinese downstream customers and would injure their interests. Both of the above findings are potentially applicable to other deals in the commodities trading sector and should serve as a warning to other parties who are planning to engage in notifiable mergers in this sector.
MOFCOM continues to be flexible as regards the types of remedies that it is willing to accept
While competition authorities in Europe and the US prefer to impose structural remedies in merger control cases, MOFCOM continues to demonstrate a willingness to accept various types of remedies. In Glencore/Xstrata, MOFCOM imposed both structural (divestiture) and behavioral (guaranteed minimum amount of offer with a benchmark price) remedies while in Marubeni/Gavilon it imposed a complex hold-separate behavioral remedy for the third time, requiring the parties to establish two separate and independent soya bean trading subsidiaries to handle their respective soya bean exports to China. In requiring the divestiture of the Las Bambas copper mine project, in Glencore/Xstrata MOFCOM also for the second time adopted the ‘crown jewels’ approach, a mechanism that requires the parties to dispose of an alternative set of assets in case they fail to divest of the original asset package on time. These remedies indicate MOFCOM’s increasing confidence in applying various types of remedies according to the specific circumstances arising in each individual case.
Long review process still the norm for complex deals in China
Glencore/Xstrata and Marubeni/Gavilon respectively recorded the first and third longest review timelines among MOFCOM’s 18 conditional clearance cases to date. The two cases took approximately 13 and 10 months to review, respectively, and both involved the withdrawal and re-filing of the respective notifications. These two decisions should alert notifying parties in the commodities trading and other industries to the fact that the Chinese merger review regime can be time-consuming, particularly where the notification concerns a transaction that involves commodities that are strategically important to China. The notification, as well as subsequent communications with MOFCOM, should therefore be planned and prepared with the utmost care and sophistication at the earliest opportunity so as to minimize undue delay to the extent possible.