‘The portion of platinum demand accounted for by industrial processes and autocatalysts is price-inelastic, probably with a very low
price elasticity, since there are basically no substitutes for platinum for these purposes, apart from limited substitution possibilities
between platinum and palladium for certain types of autocatalysts. The price elasticity for jewellery demand on the Japanese market
was found to be price-inelastic with an elasticity of –0,6. Since autocatalysts and industrial processes account for about
51% of the market, and the Japanese jewellery market for about 34%, this means that the price-elasticity of 85% of the global platinum
market is highly inelastic. The remaining 15% of demand is for jewellery outside Japan (5%) and investment (10%). The jewellery market
outside Japan is likely to have an inelastic demand, since platinum jewellery is a special, up-market product. Furthermore, the effect
of investment demand, on overall price elasticity, is limited. All in all, it can therefore be concluded that the price elasticity
for the total market is inelastic (numerically smaller than 1).’
14.
We recognise that these conclusions are based on research concluded some 8 years ago. However, little has changed since then - certainly,
the overall composition of demand is unchanged. As noted the degree of substitutability of palladium for platinum in certain autocatalysts
appears somewhat greater than predicted in the Gencor-Lonrho report but even in this limited area the tide – driven largely,
it appears, by technical considerations – seems to be turning platinum’s way once again. The Gencor-Lonrho report appropriately
qualifies its conclusions with the observation that the demand for platinum is only price-inelastic over its current price range.
Against that, though, it is clear that, even in response to significant price swings, the possibilities for substitution are highly
limited even over the medium term and particularly for platinum’s industrial applications. Nevertheless this may seem an important
qualifier in the case of a volatile commodity market – as we shall show the present transaction may be seen as part of a strategic
approach that is precisely intended to check price volatility through control of supply.
15.
South Africa, as already noted, is particularly richly endowed in PGMs and South Africa ore bodies are particularly richly endowed
in platinum. This has enabled South African based companies – notably, although not exclusively, Implats and Angloplats –
to assume a dominant position in the mining and refining of platinum. Lonmin, a British owned participant in the PGM market also
controls a significant share of the mining and refining of PGMs in South Africa. Russia is the other area in which PGMs are extensively
mined. PGMs are also actively mined in the US and Canada.
16.
PGMs are homogenous products with no apparent barriers to international trade. While it appears that mining activities are generally served by refineries located in the countries in which the PGMs are mined (this
accounting for the strong position of South African companies in the refining of PGMs) we are not aware of any insurmountable barriers
to exporting the raw material resource from countries where no refining capacity is located to those countries in which established
refining capacity is located. Indeed, according to Schroder Salamon Smith Barney, Implats – the only PGM company engaged in
refining mining output belonging to independent PGM mining companies – refines, at its South African refinery, the metals of
twenty groups from five continents.
17.
Accordingly the geographic market for the mining and refining of PGMs is international. This view is supported, although not necessarily
determined, by the existence of internationally quoted prices for PGMs.
18.
World shares of the platinum market are calculated by measuring shares of the refined product. Data submitted by the parties gives
Angloplats a 32% share of refined platinum in 2000, projected to increase to 39% in 2006. Implats share in 2000 is 18%, 17% of which
is attributable to ore extracted from mines which it owns – the remaining 1% is refined from the independently owned Kroondal
resource. Implats’s share is projected to increase to 23% in 2006. However by this later date only 15% of Implats’ share
is expected to derive from Implats’ mines with the remainder attributable to toll refining agreements. This includes output
from Two Rivers which is expected to account for approximately 6% of Implats’ refined output or slightly over 1% of world output.
Note however that Implats may have significantly understated its share because of its stake in Lonmin – henceforth referred
to as LPD - a UK registered company accounts whose South African-based mining and refining activities accounts for 11% of world output.
Implats owns a 27% share in LPD and is party to a shareholders agreement which appears to give it significant influence over this
company. For the purposes of this transaction, LPD’s output is counted as part of Implat’s output which increases its
2000 share from 18% to 29% and its projected share in 2006 from 23% to slightly under 32%. Note that LPD refines it own mined output
and does not, it appears, engage in any toll refining. Implats’ stake in LPD not only increases the former’s effective
market share but, as we shall elaborate below, also evidences widespread co-operation amongst the participants in the market for
mining and refining PGMs.
THE IMPACT ON COMPETITION
19.
This transaction has both a horizontal and a vertical dimension. Implats, an established miner and refiner of PGMs is acquiring, jointly
with Avmin, the right to mine the PGM resources previously owned by Assmang. This gives the transaction its horizontal dimension.
The transaction may also be viewed as an act of backward integration by a refiner acquiring additional sources of input. This provides
a vertical dimension to the contract.
20.
The market in question is highly concentrated. The two largest South African producers stand astride the world market, the more so
if, as for the purpose of evaluating this transaction, the Implats and LPD market shares are consolidated. Moreover the two largest
companies – Angloplats and Implats - are clearly taking steps to consolidate their powerful position in the world market. Angloplats
has a massive ore reserve and is in the process of establishing a second refinery in South Africa. Implats, on the other hand, is
clearly intent upon improving the efficiency of its refining operations and on building relations with independent miners who will
constitute an increasing source of input into its refinery.
21.
Implats avers that there is no price competition in the market for PGMs – price, they argue, is determined by ‘supply
and demand’ conditions on the world market in which all the participants are mere price takers. Although it appears that the
lion’s share of world trade is conducted through the medium of long term contracts it appears that the principal objective
of these contracts is to provide the purchasers with security of supply. Price, in the long term contracts, is effectively derived
from the world price prevailing at the delivery dates stipulated in the contracts.
22.
The parties nevertheless insist that the market is characterised by intense competition. In the absence of price competition the efficiency
of the operations of the participants in the market constitutes the basis for this competition – ‘the profitability of
PGM mining’ claim the parties, ‘depends on the margin achieved between the cost of production and the current market
price from time to time’.
23.
We are urged to view this transaction as pro-competitive. First, it is pointed out that Avmin, through its participation in the Two
Rivers joint venture, is a new entrant into the market. We do not accept this argument. Firstly, there is no evidence that Avmin
intends participating actively in this market – certainly there is no evidence that Avmin intends to expand in this market.
Its entry into the platinum market is manifestly incidental to its other mining activities. Moreover, while Avmin clearly participates
in the joint venture, from a competition perspective the most salient aspect of the JV is not the fact that one of the partners has
not hitherto been active in the relevant market, but rather that the other member of the JV is the second largest producer of PGMs
in the world and that it will assume ownership of the output of the JV from the point at which the output of the mine is sold to
the Implats owned refinery.
24.
Secondly, the parties aver that, in the absence of transactions of this nature – whereby Implats acquires access to a platinum
resource – Angloplats, with its huge reserves, will occupy an increasingly large share of the market. This argument is more
credible although, as we shall demonstrate below, it is somewhat undermined by evidence suggesting that co-operation, rather than
competition, characterises the relationship between Angloplats and Implats.
25.
We are enjoined by the Act to determine whether or not the transaction substantially lessens competition. The transaction is clearly
part of a pattern of acquisitions of PGM mineral rights by Implats. Indeed the acquisition of assets like Two Rivers is, together
with efforts to enhance the efficiency of the refining operations, a pillar of Implats’ growth strategy. Each of the targets
is, relative to the size of the international market for PGMs, usually small, adding, at most, one or two percentage points to Implats
share of the current and projected future market. Viewed collectively, however, these small transactions are the mechanism that,
together with Angloplats’ bountiful reserves, account for steadily increasing concentration levels in the market for PGMs.
26.
Is this ground for concern? As already indicated we have considered Implats’ argument that holds that these acquisitions are
necessary if it is to continue to offer competition to Angloplats. However, although on the face of it not without merit, this argument
is weakened by the exclusionary impact of these successive transactions and by evidence that suggests that co-operation rather than
competition best describes the relationship between the major participants in this market.
27.
This pattern of transactions is exclusionary to the extent that it discourages independent producers from establishing additional
refining capacity. New refining capacity is costly to establish and must be established at minimum efficient scale. It must also
have an assured supply of ore. Given that the mined raw material resource is committed to in-house refineries (as in the case of
Angloplats and LPD as well as a large proportion of the mined output of Implats) and the independents are locked into toll refining
agreements with Implats and, once the new Angloplats refinery comes into operation, possibly Angloplats as well, there is little
prospect of the establishment of new refining capacity emerging from outside the ranks of the dominant players in the market. Additional
PGM ore bodies will be identified and new entrants like Avmin may participate in the mining thereof. But it is unlikely that these
new entrants would enter the refining stage. They could only achieve the required critical mass for refining by entering into tolling
arrangements with other owners of PGM mining rights, a strategy, the potential for which is increasingly limited by Implats pattern
of acquisitions of which this transaction is part. The refineries are the gateway to the consumers of platinum, a gateway manned
by two increasingly dominant players, Implats and Angloplats. The following lengthy quote from the Schroder Salomon Smith Barney
report neatly summarises the distinctive exclusionary strategies of both Implats and Angloplats and essentially concludes that they
will be successful:
‘On the medium-term supply outlook, we believe that the underlining of the aggressive expansion plans by Anglo Platinum’s MD at its interim figures last week (ie two million ounces to 3.5 million ounces by 2006) virtually regardless of the state of global
demand, was a message not so much to the financial markets (which it unsettled heavily); it was aimed more at the developers of small,
much more marginal operations which individually account for relatively small amounts of incremental capacity, but which cumulatively could cause excess new capacity. Johnson Matthey considers that despite our estimate of some 80 new PGM projects on the drawing board as a result of high prices in
the industry, it is unlikely that any major new forces will emerge, given to (sic) the major capital cost of new PGM capacity expansions,
and the complexity of the metallurgy (witness the failures of BHP and Northam’s ventures in the previous bull markets).
In addition, while Impala has encouraged the growth of new entrants like Kroondal (now Aquarius Platinum), this umbrella for smaller
players without their own smelting capacity could also be nearing an end as Impala’s excess capacity is now effectively spoken
for in its own and Kroondal’s expansion plans. It is likely that in a tougher economic environment many of the current small
projects will be by the majors, as purchasing of new rights is becoming more expensive in southern Africa, and they will be able
to review them in the context of broader portfolios. This implies that if prices are weaker than forecast due to a dramatic deterioration
in demand, then not all of these will be brought on stream over the coming few years’
28.
Nor, it appears, do the major PGM producers actually compete with each other. The extent of cross ownership and joint projects involving
the major players is startling. As already pointed out, Implats owns a large stake in LPD and has entered into a shareholders agreement
that effectively gives it joint control of this company. Implats and Angloplats have been involved in asset swaps. Angloplats has a significant stake in Northam, a medium scale PGM mining company. On the face of it, this co-operation, read together
with Angloplats’ and Implats’ increasing domination of refining, appears to point in one direction: it reflects the persistent
desire on the part of participants in international commodity markets to control the supply, and hence influence the price, of their
product. This suspicion is heightened by an extraordinary statement in Implats’ annual report:
‘Overall demand is expected to increase at around four per cent per annum for the medium term. In line with this forecast growth, South
African producers have announced expansion plans that will meet this demand without causing an oversupply situation.’
29.
At the hearing of this matter the parties denied that this statement suggested collusion effectively contending that an intelligent
reading of market conditions would ensure that the major players would be sensitive to changes in demand conditions and that they
would take decisions regarding supply in response to these changes. While we accept that familiarity with market conditions would
permit reasonably accurate demand forecasting, the obvious difficulty that remains is for the several ‘producers’ to
ensure that their independently constructed supply responses or, in this case, ‘expansion plans’, do not cause an ‘oversupply
situation’. The Gencor-Lonrho report provides a pithy rejoinder to the parties’ argument:
‘Similar negative effects which arise from a dominant position held by one firm arise from a dominant position held by an oligopoly.
Such a situation can occur where a mere adaptation by members of the oligopoly to market conditions causes anti-competitive parallel
behaviour whereby the oligopoly becomes dominant. Active collusion would therefore not be required for the members of the oligopoly
to become dominant and to behave to an appreciable extent independently of their remaining competitors, their customers and, ultimately,
the consumers’ (para 140)
30.
Suffice to add that, should it prove necessary, several significant JVs and common shareholdings (as in the case of Implats’s
stake in LPD) would unquestionably facilitate intelligent forecasting of one’s competitors supply responses. Certainly, in
this case Impala states its own estimation of the expansions plans of ‘South African producers’ with considerable confidence.
31.
Nor, we should add, is this the only suggestion of co-ordinated determination of supply. The Schroder Salomon Smith Barney precious
metals report predicts that ‘going into 4Q, we thus believe prices should be stabilising as the swing supplier, Russia, has
promised to withhold spot palladium supplies..’
32.
We are then understandably reluctant to accept the notion that the platinum producers are pure price takers. Our reading of the competitive
circumstances of the international platinum market is that the largest participants in this oligopolistically structured market are
well placed to influence supply and hence price. And transactions like the one under investigation are the modest building blocks
that collectively secure dominance over an important global market. Why, after all, set a stated price when co-ordinated ‘expansion
plans’ that do not give rise to ‘an oversupply situation’ will suffice, if not to establish the actual price then,
at least, to place a floor beneath it.
33.
Our conclusions essentially square with those reached by the European Commission in the Gencor-Lonrho matter. The following passages
from that report are germane:
‘In economic terms the suppliers do not view themselves simply as price takers (para 138(a))……(hence)’ an economic
analysis of competition and dominance in the platinum industry has to start with the premises that the four main suppliers are aware
that prices are influenced by their output decisions…’(para 139)
34.
The fact, then, of an internationally quoted price for platinum should not be interpreted as indicating that the participants in the
oligopoly are price takers. The market is not akin to, say, the gold market inasmuch as the international price is not determined
by speculative or investment demand. It is determined by the intersection of the industrial demand for platinum and its supply which
in turn is determined by the output decisions of the major players. Indeed the quoted international price is undoubtedly a key factor
in providing the degree of transparency that is highly facilitative of co-operation in output decision-making without resort to explicit,
formal agreement between producers.
35.
Is this ground for prohibiting or imposing conditions on this transaction? We conclude that it is not. We are enjoined by the Act
to determine whether the transaction in question ‘substantially lessens of prevents competition’. We have, in previous
matters, been prepared to take an expansive view of this assessment, certainly to include the impact on potential competition and
we confirm our view that this is a valid approach to merger analysis. Moreover we are specifically enjoined to consider both the ‘the level and trends of concentration, and history of collusion
in the market’ and ‘the nature and extent of vertical integration in the market’. In this instance the trend is
clearly one of increasing concentration, there are strong suggestions of anti-competitive co-operation between the parties, and each
of the majors is vertically integrated.
36.
However, in this instance, we have nevertheless concluded that the transaction does not on its own substantially lessen or prevent competition either currently or potentially and that, conversely, prohibiting it or imposing conditions
upon it will not promote competition. Earlier mergers and acquisitions, including Implats’ pattern of acquisitions, have consolidated
an oligopolistically structured market for PGMs as well as vertical integration between the mining and refining stages of the production
process. However, neither of these competition-limiting factors – that is, neither the oligopolistic structure of the market
nor the integration between mining and refining – can be reversed through prohibiting or imposing conditions upon the transaction.
Had the competition problem in the PGM market resided in the degree of horizontal concentration alone, we may well have decided to
draw a line under Implat’s incremental accretion of market power by prohibiting this transaction. However, the market power
enjoyed by the participants in the PGMs market achieved through high levels of concentration in combination with the vertical integration
of mining and refining sounds, in our view, the death knell on achieving a competitive structure in the PGM market. Those wishing
to enter the PGM market at the mining end will do so with the agreement of the majors or find the gates to the refineries barred.
And, of course, lest this be an insufficient deterrent, a new entrant would also have to bear in mind Angloplats’ apparently
predatory threat to dump product on the market. On the other hand, a would-be entrant at the refining stage would have to be assured
of a large supply of ore. This is precluded by the majors’ control of PGM ore resources, including, through Implats, control
of most independent sources of ore. The only alternative is to enter the PGM market at both the mining and refining ends, a strategy
precluded by the massive capital and know-how requirements and, in all probability, a paucity of ore reserves. In short, the structure
of the PGM market is comprehensively anti-competitive. Competition can only be promoted through vigilant monitoring of the conduct
of the participants in the market.
37.
It is now for the competition authorities in South Africa as well as other jurisdictions to ensure that this anti-competitive market
structure is not abused, in particular to ensure that the oligopolistic structure of this market does not permit its small number
of major participants to manipulate the supply, and hence effectively set the price, of these important products.
CONCLUSION
38.
The merger between Two Rivers Platinum Limited and Assmang Limited is approved without conditions.
________
15 November 2001
DH Lewis
DATE
Concurring: NM Manoim, D Terblanche
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