Archived — Merger between Abitibi-Consolidated Inc. and Bowater Incorporated
October 30, 2007
This Technical Backgrounder summarizes the main findings of the Competition Bureau's (“Bureau”) review of the merger between Abitibi-Consolidated Inc. (“Abitibi”) and Bowater Incorporated (“Bowater”) (“proposed transaction”).
Readers should 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 (“Commissioner”). The legal requirements of section 29 of the Competition Act (“Act”) and the Bureau's policies and practices regarding the treatment of confidential information limit its ability to disclose certain information obtained during the course of a merger review.
In late January 2007, Abitibi and Bowater contacted the Bureau regarding the proposed transaction. Pursuant to a formal inquiry, documents and written returns of information were required from the parties under section 11 of the Act. In addition, the Bureau conducted over 60 interviews with market participants, including customers, suppliers, competitors and provincial government officials. The Bureau also retained external experts and communicated extensively with the US Department of Justice, which was conducting a parallel review.
Abitibi, a global forest products company headquartered in Montreal, Quebec, is involved in the production and sale of newsprint, commercial printing papers (uncoated groundwood paper) as well as the production and sale of lumber, woodchips, market pulp, remanufactured wood products and engineered wood products. Abitibi has ownership interests in 19 paper mills: 14 in Canada, 4 in the US, and 1 in the United Kingdom. In Canada, Abitibi owns 8 paper mills in Quebec, 4 in Ontario, 1 in Newfoundland and 1 in British Columbia. Abitibi also owns or is a partner in 19 sawmills, 4 wood remanufacturing facilities and 2 engineered wood facilities in Canada. In 2006, Abitibi generated total sales of approximately C$4.9 billion.
Bowater is a forest products company headquartered in Greenville, South Carolina, whose principal businesses include the production and sale of newsprint and commercial printing papers (uncoated and coated groundwood paper). Bowater also produces market pulp, lumber products and woodchips from its sawmill operations. Bowater owns and operates 13 paper mills: 6 in Canada, 6 in the US1 and 1 in South Korea. In Canada, Bowater owns 3 mills in Quebec, 1 in Ontario, 1 in New Brunswick and 1 in Nova Scotia. In 2006, Bowater generated total sales of approximately US$3.53 billion.
The Bureau examined the impact of the proposed transaction on six main areas of business where the parties’ activities overlapped: (i) softwood lumber; (ii) market pulp; (iii) wood chips; (iv) roundwood/logs; (v) uncoated groundwood (“UGW”) papers; and (vi) newsprint.
Both Abitibi and Bowater manufacture a variety of softwood lumber products through their sawmill operations. Consistent with previous merger reviews, the Bureau defined the relevant product market as softwood lumber and the relevant geographic market as North America. The parties’ combined share of the North American softwood lumber market would be less than 10 per cent; the Bureau concluded that the proposed transaction was not likely to raise any significant competition concerns with respect to softwood lumber.
Pulp is a fibrous material which is the key ingredient required for paper production. Pulp can be produced by mechanically or chemically reducing wood. Both parties produce pulp in order to satisfy their paper mill requirements, and sell the excess pulp on the open market (“market pulp”). Consistent with previous merger reviews, the Bureau defined the relevant product market as market pulp and the relevant geographic market as at least North America. The parties’ combined share of North American market pulp would be less than 10 per cent; the Bureau concluded that the proposed transaction was not likely to raise any significant competition concerns with respect to market pulp.
Pulp and paper companies require a consistent supply of wood chips2 to produce pulp. Abitibi and Bowater compete in both the upstream and downstream business segments for wood chips in Canada. Both parties retain a significant amount of their wood chip production from their respective sawmill operations for internal use at their paper mills. While the parties sell wood chips to third parties, both are net purchasers.
Owing to transportation costs, the relevant geographic market for wood chips was considered to be local, or at the most, regional. Wood chip pricing varies depending on the distance from the supplied paper mill and the quality of the wood chips. For various reasons, mills tend to source their supply from the closest sawmills, generally within a 100 km radius.
Abitibi and Bowater overlap in the purchase and sale of wood chips in the Saguenay-Lac-St-Jean area of Quebec, and the Thunder Bay area of Ontario. Among other considerations, the Bureau found that the existence of long-term formal contracts for wood chip sales and interdependence among certain sellers and purchasers would significantly constrain the ability of the merged entity to exercise any market power. The Bureau concluded that the proposed transaction was unlikely to result in a substantial lessening or prevention of competition in the purchase or sale of wood chips.
In Ontario and Quebec, logs may be purchased from Crown land or private woodlots. Owing to transportation costs, the relevant geographic markets for logs was considered to be local, or at the most, regional. The parties’ log purchase operations overlap in the Saguenay-Lac-St-Jean region of Quebec, and with respect to the sale of logs, in Northwestern Ontario.
The Bureau took into consideration the relevant legislation relating to the market for logs in Ontario and Quebec and consulted extensively with provincial government officials, loggers and relevant associations. Owing to the significant regulatory oversight in Ontario and Quebec, among other reasons, the Bureau determined that the proposed transaction was unlikely to result in a substantial lessening of competition in the purchase or sale of logs.
UGW papers cover a wide range of paper products. It is not obvious in all cases whether each individual type of paper within the UGW family represents a unique product market. To evaluate all possible competitive effects, the Bureau analyzed the impact of the proposed transaction on both the UGW market as a whole, and the following product categories on an individual basis: bulky book, directory, high-bright, supercalendar and super-bright.
The majority of UGW customers expressed confidence that the parties would not be able to exercise market power, given effective remaining competition. Among other factors, customers cited the minimal switching costs involved in changing suppliers, and the ability in most cases to substitute a different UGW grade. While the merged entity would have high market shares in certain grades of UGW, the Bureau found insufficient grounds to make an application to the Competition Tribunal (“Tribunal”).
The Bureau devoted significant attention to analyzing the potential effects of the proposed transaction on the market for newsprint. Newsprint is the least expensive and lowest grade of paper produced from wood pulp. It is primarily consumed by daily newspaper publishers and, to a lesser extent, by publishers of flyers, inserts and non-daily newspapers. The most common forms of newsprint are referred to as "standard newsprint" and have a basis weight of 45 or 48.8 grams per square metre.
- Market Definition
From the perspective of a Canadian review, the Bureau considered the relevant product market to be newsprint, and the relevant geographic market to be Eastern Canada (all provinces east of Manitoba excluding Newfoundland)3. Transportation costs were found to be a significant component of the price of newsprint, comprising, on average, 10 per cent of the total price. There are real cost and other incentives that encourage local supply arrangements. In addition to transportation costs, there is the need, in certain cases, for timely delivery. As well, among other considerations, customers value proximate technical support. For these principal reasons, Western Canadian newsprint mills and US newsprint mills were not considered sufficiently competitive alternatives for Eastern Canadian customers4.
The parties’ combined share of Eastern Canadian capacity would be in excess of 35 per cent, which gave rise to a prima facie concern about the impact of the proposed transaction on the sale of newsprint.
- Barriers to Entry
The Bureau found significant barriers to entry in the newsprint industry. Entry into newsprint production involves significant capital investment, complex logistics and technical knowledge. A new entrant would need to secure a significant workforce, arrange for the supply of large amounts of electricity and secure a stable supply of pulp or fibre.
The ongoing decline in newsprint demand and the strength of the Canadian dollar further dissuade new entry. The decline in demand for newsprint has resulted in a significant number of mill closures and machine conversions to value-added papers such as UGW papers or coated paper grades.
- Foreign Competition
The impact of foreign competition on Canada’s newsprint industry has been limited. While there have been some Asian newsprint imports into North America, large volumes have not yet been observed, particularly in Canada. The main effect of increased
Asian production thus far has been the displacement of North American newsprint that was previously exported to India and South Asia.
- Effective Remaining Competition
While the merged entity would hold a significant share of the Eastern Canadian newsprint production capacity, the capacity held by the remaining competitors (in excess of 2.8 million metric tonnes) amounts to more than 3.5 times the Eastern Canadian demand for newsprint. The remaining newsprint competitors in Eastern Canada would be Kruger, White Birch, Tembec, Stora Enso and Atlantic Packaging. A focus of the Bureau’s review in this regard was identifying the ability and willingness of competitors to repatriate exports, and switching costs for customers.
On investigation, it was observed that suppliers typically prefer to serve local customers rather than export abroad; accordingly, while some small volumes being exported from Canadian mills were committed abroad, the majority could readily be recommitted to the Eastern Canadian market in the event of any material price increase. In turn, the Bureau concluded that switching costs are low in the newsprint industry. The homogeneity of newsprint and the apparent willingness of customers to switch suppliers were important considerations. Interviews with newsprint customers confirmed that they regularly switch suppliers to access preferable pricing, quality and/or printability. As such, customers are able to credibly negotiate pricing with their suppliers by quoting competing offers and threatening to take their business elsewhere.
The Bureau’s decision not to challenge the merger took into account the views of sophisticated customers who claimed to be satisfied that they could effectively source their newsprint supply from the remaining competitors in the Eastern Canadian market.
- Coordinated Effects
The Bureau found evidence of conditions that could facilitate non-cooperative coordination among newsprint suppliers in Eastern Canada. Specifically, there are a small number of firms with high levels of concentration, demand is inelastic, entry barriers are high, and the product is homogeneous. Finally, the industry is highly transparent, as a result of the data reporting services of organizations such as RISI5 and the Pulp and Paper Products Council (PPPC)6.
However, other factors suggested that coordination would be difficult to effect; in particular, the industry is experiencing declining demand and there are various reasons that make local orders preferable. The Bureau also noted recent instances of newsprint producers winning business from a competitor by clear price competition. The Bureau concluded that the evidence available was not sufficient to support an application to the Tribunal on this basis.
Over the course of its review, the Bureau identified certain potential competition issues in several markets, including the sale of newsprint and certain grades of UGW paper. While a number of factors raised competition concerns, after a thorough investigation and careful consideration of all available evidence, the Bureau concluded that there were insufficient grounds to support initiating proceedings before the Tribunal under the merger provisions of the Act.
Pursuant to section 97 of the Act, the Commissioner has up to three years to file an application with the Tribunal with respect to a merger that has been substantially completed.
1 Bowater also holds a 40 per cent partnership interest in Ponderay Newsprint Company, which operates a newsprint mill in Usk, Washington.
2 Wood chips are a by-product of sawmill operations.
3 Abitibi has a newsprint mill in British Columbia and Bowater has a 40 per cent interest in a newsprint mill in Washington State. However, owing to the effective remaining competition from large Western producers, the Bureau concluded that the proposed transaction would not raise significant competition concerns with regard to newsprint sales in Western Canada. There is no overlap between the parties with respect to newsprint in Newfoundland.
4 While it is possible to ship newsprint into Eastern Canada from the Northeastern US, there is not enough free US production capacity to render unprofitable a significant and non-transitory price increase by the merging parties.
5 Founded in 1985, RISI is a leading information provider for the global forest products industry.
6 The PPPC is an alliance of product associations serving an international membership in the pulp and paper industry.
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