3.
Chemserve is controlled by AECI Ltd, a public limited company listed on the JSE. No one shareholder directly or indirectly controls
AECI. Its five largest shareholders are:
Coronation Asset Management
18.9%
RMB Asset Management
17.1%
Old Mutual Asset Management
10.3%
Stanlib Ltd
9.8%
Bernstein Investment Research Management
6.1%
4.
Two shareholders control Leochem, namely:
Sandy Rae Family Trust
50%
Ashley McNabb Family Trust
50%
5.
Leochem, which owns depots in Cape Town, Durban and Johannesburg, does not directly or indirectly control any other firm.
Rationale for the transaction
6.
Chemserve views the acquisition of Leochem, whose current shareholders wish to exit the business, as an opportunity to expand and
complement its current product offerings.
Relevant Market
7.
The merger has horizontal as well as vertical effects. Both Leochem and Chemserve manufacture and distribute chemical products and
also act as third party distributors of imported chemical products.
8.
The horizontal overlap concerns two chemical products which are manufactured and distributed by a subsidiary of Chemserve, IOP, and
which is also imported and distributed by Leochem, namely distilled tall oil and gum rosin. The vertical effect pertains to products
that Leochem manufactures and which are sold as input products to two Chemserve subsidiaries, Plaaskem and Crest, namely petroleum
jelly and light white oils.
9.
According to the parties the size of the market for independent or third party chemical distribution is estimated to be approximately
R4 billion, which represents approximately 15% of all chemicals distributed in South Africa. Most manufacturers, approximately 85%,
distribute their own product.
Horizontal product markets
10.
As indicated above Chemserve and Leochem do not manufacture the same chemical products. They do however distribute the same chemicals,
two of which concern us because of high market shares post the transaction namely distilled tall oil and gum rosin.
11.
IOP is the only manufacturer in South Africa that produces a range of distilled tall oil products, which are used as a base product
in the production of certain lubricants. The particular distilled tall oil that IOP manufactures, called R30-5, has a 30% rosin content
and overlaps with a similar product imported and distributed by Leochem, known as PC300. Leochem sources its product on the international
market from Akzo Nobel. An import duty of 10% is imposed on imports. The parties estimate that this product constitutes between 4%
and 15% of the total input costs of downstream customers.
12.
IOP also taps crude gum from living pine trees in South Africa and then refines the gum rosin at its plant in Durban. Gum rosin is
used in the adhesive industry and is also used as a base building block for various resins. Leochem currently imports all its gum
rosin. There are no import duties on this product.
Vertical product markets
13.
Leochem manufactures petroleum jelly, blends white oils and also imports certain chemical products, all of which are supplied to various
AECI subsidiaries and other customers. Approximately 50% of Leochem’s turnover is derived from the manufacture and distribution
of petroleum jelly, while 25% of turnover is derived from the blending and/or distribution of imported white oils at its Durban plant.
The remaining 25% of revenue is derived from the import, supply and distribution of other chemical products.
14.
Petroleum jelly is a by-product of the refining of petroleum and is used in the pharmaceutical, cosmetic, printing ink, leather and
rubber industries. Leochem sells petroleum jelly to Chemserve Systems, which uses it in the production of waterless hand cleaner.
15.
Leochem imports all its white oils of which approximately 60% are then blended according to customer specification at its blending
facilities while the balance of 40% is sold as-is. White oils are produced as a by-product in the distillation of gasoline from crude
oils and are used as a blending base in the manufacturing of personal care and pharmaceutical products, plastics and in food applications. Leochem does not have any exclusive supply agreements with any of its international suppliers.
16.
Plaaskem, a subsidiary of AECI, uses liquid paraffin and light white oil in the production of anti-parasitic products used in the
veterinary industry. Plaaskem itself does not compete in the market for veterinary products but is merely contracted to produces
the products on behalf of Intervet (Pty) Ltd.
17.
We will thus consider the vertical effects of the transaction on:
1)
The upstream market for the manufacture of petroleum jelly and the downstream market for the manufacture of industrial hand cleaners,
and
2)
the upstream market for the manufacture of light white oils and/or liquid paraffin and the downstream market for the manufacture of
anti-parasitic products.
18.
The geographic markets identified in the horizontal and vertical product markets are all national.
19.
We will first analyse the horizontal effect of the transaction on competition and then the vertical effects.
Effect on competition
Horizontal effect on competition in the Distilled Tall Oil product market
20.
Post the transaction the merged entity’s market share will increase with 33% to approximately 83% in the market for the distribution
of distilled tall oil. It should, however, be noted that IOP’s market share of 50% pre-merger includes all the distilled tall
oil produced by IOP and not only the product R30-5 that overlaps with PC300 which is imported by Leochem. The post-merger market
share of 83% is thus not a true reflection of IOP’s market share in the narrow relevant product market.
21.
Import barriers are low, the import duty is 10%, and the product can be imported from large international competitors such as Akzo
Nobel (Netherlands), Arizona Chemicals (USA), Harima (Japan) to name but a few. According to the parties imports currently constrain
the pricing of IOP in South Africa. This is illustrated by the fact that Leochem, IOP’s largest competitor of distilled tall
oil, managed to import the product and compete successfully with it.
22.
IOP does not only sell R30-5 directly to its own customers but also sells a large quantity of this product, on a non-exclusive basis,
to independent chemical traders/wholesalers such as Chemical Industrial Marketing (“CIM”) and Protea Chemicals. During
April to December 2005, 22.9% of IOP’s total sales of distilled tall oil were sold to CIM and 9.4% to Protea. Approximately
64% of sales were direct sales to end customers.
23.
As stated above Leochem imports all its distilled tall oil from Akzo Nobel. Distilled tall oil represents 0.7% of its total turnover
and it does not have any formal supply agreement with Akzo Nobel or with any downstream customers. It imports it on an ad hoc basis
as and when the need arises.
24.
According to the Commission’s market inquiry it appears that by virtue of IOP being the sole manufacturer of distilled tall
oil in the country it is inevitable that IOP would have high market shares in the distribution of the product. To some extent, imports,
especially those by Leochem, appear to have disciplined IOP’s pricing policy. Therefore, it is the contention of market participants
who use distilled tall oil that the transaction will result in the removal of an effective competitor from this market.
25.
In our view the merger does not result in a substantial lessenin of competition in the narrow product market of R30-5/PC300. In the
first instance Leochem is an importer not a manufacturer. The merger will not relax the current constraint on IOP’s pricing,
which is the global price of the product. Moreover, other distributors of chemical products, such as Chemimpo, CJH Petrow and Protea
Chemicals have confirmed to the Commission that they could import distilled tall oil should there be a need in the local market thus
suggesting that entry barriers are low.
Horizontal effect on competition in the Gum Rosin product market
26.
The market shares of IOP, which manufactures gum rosin, and Leochem, an importer, for the distribution of gum rosin are 30% and 10%
respectively. Post the transaction the merged entity will have a market share of 40%.
27.
The Commission found in its investigation that gum rosin is imported duty free and with relative ease. The largest producer of gum
rosin is China with other large producers being Indonesia, Thailand and Brazil. The product is freely available on the world market
and there are numerous traders selling the product locally. There have also been imports of gum rosin by direct users such as Pekay
Chemicals, Plascon Paints and Quialichem. Another company indicated to the Commission that it imports the majority of its gum rosin
requirements from its sister company based overseas. Local distributors such as Protea Chemicals, C.J. Petrow Chemicals, Carst and
Walker and Daytona Chemicals also supply gum rosin.
28.
IOP’s production has decreased from approximately 300 tonnes per month in 2002 to 40 tonnes per month currently. The reason
for this, according to the parties, is that the South African trees are drying up. This has resulted in an increase of imports in
gum rosin to supplement local production.
29.
Leochem currently imports all its gum rosin from Akzo Nobel.
30.
In light of the fact that imports are increasing, various alternative importers of the product exist and entry barriers are low, we
agree with the Commission that the merger would not substantially prevent or lessen competition in this relevant market.
Vertical effect on the upstream market for the manufacture of petroleum jelly and the downstream market for the manufacture of industrial
hand cleaners
31.
As indicated above Leochem is a manufacturer of petroleum jelly. Chemserve sources its total supply of petroleum jelly from Leochem,
and uses it as an input product in the manufacturing of waterless hand cleaner. Chemserve consumes less than 1% of the total production
of petroleum jelly.
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