South Africa’s Competition Tribunal on Tuesday released the reasons for its decision to approve the merger of LNM Holdings NV — the world’s second-largest steel marker — and South African steel producer Iscor to create Ispat Iscor.
On June 8, the Competition Tribunal unconditionally approved the merger between the two groups.
The Competition Tribunal found that the merger would not lead to a substantial lessening or prevention of competition, as after the merger, the combined market share of Iscor and LNM would be less than 5% of world steel production.
In 2003 LNM, through its European subsidiary Ispat Trefil Europe, made direct steel sales to South Africa, which represented less than 1% of total steel sales in South Africa and, according to Iscor, had no effect on its steel pricing policy.
Iscor’s products are largely priced at import parity, although it does provide some strategic discounts to domestic customers.
However, in terms of the local market, the merger raised three possible concerns.
The first concern was that LNM as a potential competitor to Iscor might have an effect of constraining Iscor’s pricing policy.
However, LNM cannot be considered a participant in the local market as its sales in South Africa over a three-year period are too erratic and too small, the Competition Tribunal said.
LNM may still have had an effect on the domestic market if Iscor perceived it as a credible potential entrant and constrained its prices accordingly.
“There appears to be no evidence that this is the case,” the tribunal said.
For its part LNM does not appear to favour grassroots entry and, as its history illustrates, the group’s strategy has been to acquire incumbent firms with the potential for turnaround.
“That suggests that other than through acquisition, it was an unlikely entrant,” the tribunal added.
Given Iscor’s size in the local market and its own willingness to seek a strategic technology partner, it seemed the only likely target for LNM, if it were to consider a local acquisition.
The second concern was that Iscor with LNM — as an owner and a global steel player — would have different incentives to an Iscor with no dominant shareholder.
Iscor candidly states its prices at import parity while LNM candidly states that it “made its decision to invest in Iscor on the basis that Iscor prices steel consistent with the prevalent global steel markets”.
On May 5 2004 a memorandum of understanding regarding a new pricing model was entered into between the Department of Trade and Industry and LNM.
However, the tribunal considered the merger as if the agreement had not been entered into between LNM and the department.
“At worst the status quo will prevail and that is not a situation created by the merger, but the present structure of the market,” the tribunal said.
A third concern is that, LNM, as the controlling shareholder, would embark on a policy of retrenchments that the existing Iscor would not have done.
“We received submissions from two of Iscor’s unions — Solidarity and the National Union of Metalworkers of South Africa. The unions have alleged, but not established, any link between Iscor’s current employment policies and the influence of LNM,” the tribunal said.
In conclusion, the tribunal found that the merger would not have a specific effect on employment policy at Iscor nor would it have an adverse effect on any other public interest the Competition Act seeks to protect. — I-Net Bridge