On April 16, 2013, the Ministry of Commerce (“MOFCOM“) cleared the proposed acquisition of Xstrata plc (“Xstrata“) by Glencore International plc (“Glencore“) with conditions.  Both structural and behavioral remedies are involved in the conditions.

The over 8,000-word decision issued by MOFCOM contains the most detailed competition analysis that has ever been published.  In addition, for the very first time, the full text of the parties’ final commitment proposals were published together with the clearance decision, providing more insights regarding the implementation of the remedies. 

Review Timeline

According to MOFCOM’s announcement, the first submission was made on April 1, 2012, and was officially accepted on May 17, 2012.  MOFCOM raised competition concerns during the Phase II period, and upon agreement by the parties, MOFCOM decided to extend the Phase II period, which would expire on November 13, 2012.  Two rounds of remedy proposals were submitted by the parties during the extended Phase II.  Nevertheless, MOFCOM found the proposals insufficient to remove its concerns.  The parties withdrew the filing on November 6 and re-filed the case on November 23.  The case was officially accepted again on November 29 and clearance was obtained half a month into the second round of extended Phase II period.

Relevant Markets

MOFCOM found that the transaction involves various horizontal overlaps and vertical relationships, including the production, supply, trade and third-party trade of the following products: chrome ore, zinc concentrate, zinc, lead concentrate, lead, copper concentrate, renewable copper, refined copper, nickel fine, intermediate cobalt product, refined cobalt, seaborne thermal coal, seaborne coking coal.

MOFCOM determined that the above-mentioned businesses were conducted on a global basis, but mentioned that the transaction will impact China market significantly, because China is the largest target market for Glencore’s mining products and an important target market for Xstrata’s mining products. 

Competitive Assessment

MOFCOM provided detailed competition analysis regarding the production and supply of copper concentrate, zinc concentrate and lead concentrate, because China’s demand for these products largely depends on import; and the parties’ combined market shares in these markets are relatively high.

MOFCOM found that the transaction will eliminate and restrict competition in the China markets for copper concentrate, zinc concentrate and lead concentrate due to:(1) the increase of the resource quantity controlled by Glencore; (2) the increase of the market shares of Glencore in the sales and production markets; (3) Glencore’s ability to further integrate vertically the production, supply and trade business of the relevant products after the transaction; (4) the possibility that Glencore will change the terms of Xstrata’s previous supply contracts from long term contract to spot contract; (5) high market entry barriers of the relevant markets; and (6) Chinese downstream market players’ lack of negotiation power.

Remedies

MOFCOM imposed both structural and behavioral remedies in this deal.  Glencore is requested to:

  • divest all the equity it holds in Las Bambas copper mine located in Peru within the specified time limit;
  • auction with no minimum price all the equity it holds in either one of the four other Xstrata projects, Tampakan, Frieda River, El Pachon or Alumbrera chosen by MOFCOM, if it fails to fulfill the undertaking to divest the Las Bambas project;
  • provide long term contract offer of copper concentrate products to China customers for no less than the provided quantity, based on annual benchmark price;
  • provide long term contract offer and spot contract offer of zinc concentrate and lead concentrate products to China customers with fair market terms consistent with the practice in the global markets.

Comments

By providing more detailed competition analysis contained in the decision, and the full disclosure of the parties’ undertakings, MOFCOM showed its efforts to increase the transparency of its merger review process. 

In addition, this is the second time MOFCOM used “crown jewels”, a mechanism requesting the merging parties to dispose of an alternative set of assets in case the parties fail to divest the original asset package on time.  This type of remedy is used when the regulator is concerned about the parties’ ability to find a suitable buyer for the primary asset.  The first time MOFCOM adopted the “crown jewels” mechanism was in the 2009 Mitsubishi Rayon/Lucite case, where the merging parties were requested to divest 50% of Lucite China’s annual production capacity for five years, or otherwise divest Lucite China entirely to a third party.  The “crown jewel” provision is also included in the draft Rules Regarding Imposition of Restrictive Conditions on Concentrations of Undertakings recently published by MOFCOM for public comments.