Archived — Proposed Acquisition of Arcelor by Mittal
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This technical backgrounder is intended to summarize the main findings of the Competition Bureau's (the“Bureau”) review of the acquisition of Arcelor SA (“Arcelor”) by Mittal Steel Company NV (“Mittal”).
Readers are advised to exercise caution in interpreting the Bureau's assessment of this transaction. Enforcement decisions are made on a case-by-case basis, and the conclusions discussed in this backgrounder are specific to this merger and are not binding on the Commissioner of Competition (the “Commissioner”). The legal requirements of section 29 of the Competition Act (the “Act”) and the Bureau's policies and practices regarding the treatment of confidential information, limit the Bureau's ability to disclose certain information obtained during the course of a merger review.
In January 2006, Mittal announced its intention to acquire Arcelor and competition authorities in Canada, the US and Europe were notified. The Bureau commenced its review at that time, and classified the transaction as “complex,” triggering a service standard to complete its review within 10 weeks.1 As a key part of its examination of the proposed transaction, the Bureau conducted interviews with industry stakeholders including automakers, packagers, construction firms and steel distributors. The parties themselves provided additional information, as did various competitors in the industry. The Bureau carefully analysed data going back three years as part of its review.
In early June 2006, the Bureau completed its review of the transaction and advised the parties that grounds did not exist at that time to challenge the proposed transaction before the Competition Tribunal.
Mittal, a Dutch company, is the world's largest steel company, with annual steel shipments of 49.2 million tons, accounting for approximately 4.0 per cent of world steel production (estimated to be 1,219 million tons in 2005) and revenues of over CAD$32.6 billion in 2005. It has steel operations in 16 countries throughout four continents and sales and marketing offices in 11 other countries. Mittal's operations are located principally in North America (including Mexico), Central and Eastern Europe, Africa, and Kazakhstan.
Mittal was formed from the combination of Ispat International NV and LNM Holdings Group. This was followed by the 2005 merger between Mittal and the International Steel Group Inc. (“ISG”) in the United States. Following the ISG merger, Mittal shipped approximately 19.7 million tons of steel (including inter-company shipments) in North America in 2005. This amount represents approximately 14 per cent of the 138.3 million tons of North American steel production. Mittal generated sales of USD$12.5 billion in North America in 2005 (approximately CAD$14.3 billion 2).
Arcelor is the largest steel producer in Europe and Latin America, and the second largest steel producer worldwide, with carbon and stainless steel shipments of 46.8 million tons and revenues of over 32.6 billion Euros, approximately CAD$46 billion, in 2005. Arcelor was created in February 2002 through the merger of three European steelmakers: Aceralia from Spain, Arbed from Luxembourg and Usinor from France. Control of Dofasco Inc., a Canadian-based integrated steel producer, was acquired by Arcelor in February 2006. Dofasco represents Arcelor's steelmaking facilities in North America.
The Bureau focused its review on flat carbon steel, the principal area of overlap between the parties. Flat carbon steel consists of hot and cold-rolled products. Hot-rolled sheets and plates are used mostly by steel producers in the production of other value-added products, but they are also sold directly to the construction, appliance and other sectors. Cold-rolled products are flat products for which the final thickness has been obtained by rolling at room temperature, and can either be coated or uncoated. Uncoated cold-rolled steel is used in applications such as unexposed automotive and appliance parts. Coated cold-rolled steel is generally used to produce exposed automotive steel and packaging made from tin mill products (“TMP”). Owing to the substantial post-merger market shares in coated cold-rolled steel, the Bureau focused on these products. The Bureau determined that the merging parties did not sufficiently overlap in their production of the other forms of carbon steel to warrant a detailed competitive assessment.
Tin Mill Products (TMP)
TMP are used to create packaging for, among other things, food products, aerosol cans and paint cans. There are two main types of TMP: electrolytic tinplate and tin-free steel, which are substitutes for one another in most applications. Mittal and Arcelor produce both varieties of TMP. Accordingly, the Bureau defined the relevant product market as TMP generally, and did not define separate sub-markets for each TMP category. TMP, in total, represent approximately 2 to 3 per cent of overall steel production in North America.
Automotive Exposed Steel
Automotive exposed steel is the galvanized flat steel used to produce auto parts that will be exposed to the elements. This type of steel can be divided into three categories: electrogalvanized, hot-dip galvanized, and galvannealed. The differences lie in the chemical composition of the coating and the process used to galvanize (coat) the steel. Automakers tend to favour hot-dip galvanized and galvannealed steels over electrogalvanized, although two North American automakers still use electrogalvanized steel. The Bureau determined that it would not be difficult for automakers to switch between hot-dip galvanized and galvannealed steel, should they be faced with a hypothetical price increase. From a steelmaker's perspective, these products are close substitutes. In other words, if one type is being produced, it is relatively straightforward to produce the other, since they may both be developed on the same production line. While the switching costs for electrogalvanized steel are more significant, automakers who still use this form of steel have informed the Bureau that they are interested in eventually switching to either hot-dip galvanized or galvannealed steel, due to performance and quality considerations.
The Bureau identified North America as the relevant geographic market for TMP. While quantities of TMP are imported each year from overseas and exert some competitive pressure on North American producers, foreign TMP suppliers are at a disadvantage when selling into the NAFTA region. This is due to, among other things, longer delivery times and the inability to offer equal flexibility to customers to amend their orders. In the case of automotive exposed steel, auto manufacturers indicated that they prefer domestic steel producers, due in large part to their just-in-time delivery requirements. The negligible amount of imported automotive exposed steel into North America from overseas further confirms that the relevant geographic market is continental rather than global.
In markets where the merging parties' shares were found to be well under the 35 per cent threshold specified in the Merger Enforcement Guidelines (the “MEGs”), the Bureau conducted no further analysis 3. For those markets where the 35 per cent threshold was exceeded, the Bureau undertook a detailed analysis to determine if the proposed merger would lead to a substantial lessening of competition. As indicated above, the Bureau focused on TMP and automotive exposed steel markets.
Barriers to Entry
The cyclical characteristics of the steel industry, coupled with the high initial capital requirements, make for high barriers to entry. According to reliable estimates, the cost for a new mini-mill 4 can be USD$900 million (approximately CAD$1billion) or more, depending on the capacity of the new plant. Estimates of a greenfield construction of an integrated steel production facility 5 are at least USD$2 billion (approximately CAD$2.3billion), a significant amount of which would be sunk costs. The cost of a new galvanizing line is between USD$150 million and USD$200 million (approximately between CAD$175 and 230 million). The Bureau concluded that TMP consumption is in decline, owing primarily to the increasing use of alternative forms of packaging composed of glass, aluminum or plastic. This declining trend makes new entry into TMP production very unlikely. 6
Buyer Concentration and Countervailing Power
In the automotive sector, sophisticated buyers with significant buying power substantially inhibit the ability of steelmakers to raise prices above competitive levels.
At the North American level, the four largest buyers of TMP represent approximately 80 per cent of all purchased volume. Smaller buyers consolidate their purchasing power through buying associations and thus are also able to wield countervailing power. In such circumstances, the Bureau found no evidence that TMP customers are price takers.
The bid market characteristics of the steel industry, coupled with steelmakers' asymmetric cost-structures and varying levels of vertical integration, make it unlikely that steel producing competitors could successfully coordinate their behaviour. Additionally, steel supply agreements are negotiated individually with each customer, and their terms are not transparent. Transactions are also infrequent, further complicating efforts to coordinate. Finally, in the case of TMP, producers have the incentive to undercut their rivals' prices to utilize excess capacity that would otherwise remain idle.
Post-transaction, there will remain four North American suppliers with substantial excess capacity in the TMP segment. 7
The Bureau concluded that there exists sufficient remaining competition for all three forms of automotive exposed steel. The remaining competition for automotive exposed steel includes five North American suppliers of exposed electrogalvanized steel post-merger and four North American suppliers of exposed hot-dip galvannealed and galvanized steel.
1 Complex mergers involve transactions between direct competitors where there are indications that the transactions may create or enhance market power. The proposed merger between Mittal and Arcelor involved several analytical challenges such as defining the relevant product and geographic markets, evaluating the effectiveness of remaining competition, and assessing the degree of countervailing power possessed by steel purchasers.
2 Conversions are made according to the exchange rate of the Bank of Canada at the transaction announcement date (January 27, 2006).
3 The Commissioner will not generally challenge a merger on the basis of a concern related to a unilateral exercise of market power when the post-merger market share of the merged entity would be less than 35 per cent. Merger Enforcement Guidelines (September 2004) at paragraph 4.12.
4 A mini-mill is a steel producer that uses scrap steel as its primary input.
5 An integrated steel producer produces steel using primary inputs such as iron ore, coke, coal and limestone.
6 The Bureau learned from market contacts that it would cost between USD$ 50-200 million (approximately between CAD$57 and 230 million) to enter the TMP market, depending on capital equipment requirements.
7 In addition, import competition in TMP from Asia and Europe will continue to exert pressure on North American producers; import market shares represented roughly 16 per cent of total TMP purchases in North America in 2005.
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