Case No COMP/M BIRLA/ COLUMBIAN CHEMICALS. REGULATION (EC) No 139/2004 MERGER PROCEDURE. Article 6(1)(b) NON-OPPOSITION Date: 15/06/2011

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1 EN Case No COMP/M BIRLA/ COLUMBIAN CHEMICALS Only the English text is available and authentic. REGULATION (EC) No 139/2004 MERGER PROCEDURE Article 6(1)(b) NON-OPPOSITION Date: 15/06/2011 In electronic form on the EUR-Lex website under document number 32011M6191 Office for Publications of the European Union L-2985 Luxembourg

2 EUROPEAN COMMISSION Brussels, C(2011)4355 In the published version of this decision, some information has been omitted pursuant to Article 17(2) of Council Regulation (EC) No 139/2004 concerning non-disclosure of business secrets and other confidential information. The omissions are shown thus [ ]. Where possible the information omitted has been replaced by ranges of figures or a general description. PUBLIC VERSION MERGER PROCEDURE To the notifying party Dear Sir/Madam, Subject: Case No COMP/M BIRLA/ COLUMBIAN CHEMICALS Commission decision pursuant to Article 6(1)(b) of Council Regulation No 139/ On 5 May 2011, the European Commission received notification of a proposed concentration pursuant to Article 4 of the Merger Regulation by which the undertaking Indigold Carbon (The Netherlands) controlled by Mr Kumar Mangalam Birla, Chairman of the Aditya Birla Group ("Birla", India, hereinafter "the notifying party") acquires within the meaning of Article 3(1)(b) of the Merger Regulation control of the whole of the undertaking Columbian Chemicals Acquisition LLC and associated companies ("Columbian", United States) by way of purchase of shares. I. THE PARTIES 2. Birla is a diversified industrial group with activities including the production of aluminium and copper, viscose staple fibre, insulators, acrylic fibre, cement, fertilisers and carbon 1 OJ L 24, , p. 1 ("the Merger Regulation"). With effect from 1 December 2009, the Treaty on the Functioning of the European Union ("TFEU") has introduced certain changes, such as the replacement of "Community" by "Union" and "common market" by "internal market". The terminology of the TFEU will be used throughout this decision. Commission européenne, 1049 Bruxelles, BELGIQUE / Europese Commissie, 1049 Brussel, BELGIË. Tel.:

3 black. In India, Birla is also active in telecommunications and financial services. Birla Carbon, a division of the Birla group, is the fourth largest producer of carbon black in the world. Birla does not have any carbon black production facilities in the EEA. It supplies its customers located in the EEA with carbon black produced and delivered by its subsidiary in Egypt Alexandria Carbon Black SAE ("ACB"). In addition to Egypt, Birla Carbon has production plants in India, Thailand and China. 3. Columbian is a US-based producer of a wide portfolio of carbon blacks for use mainly in tyres but also in plastics, hoses, cables, seals, coatings, paints, inks etc. The group is present in different parts of the world including the EEA. Its manufacturing facilities in Europe are located in Hungary, Italy, Spain and Germany. It also has production plants in Canada, the United States, Brazil, South Korea and China. Since 2009, Columbian has been under the sole control of One Equity Partners, the merchant banking arm of JPMorgan Chase & Co. 2 II. THE OPERATION AND THE CONCENTRATION 4. On 28 January 2011, Indigold Carbon and its subsidiaries entered into a Purchase Agreement to acquire Columbian Chemicals Acquisition LLC and its associated companies which, together, comprise the Columbian Chemicals business. 5. Birla will therefore acquire sole control of the business carried out by Columbian Group. The proposed transaction constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation. III. EU DIMENSION 6. The operation does not have an EU dimension within the meaning of Article 1 of the Merger Regulation. This is because although the undertakings concerned have a combined aggregate worldwide turnover in excess of EUR million (Birla: EUR million, Columbian: EUR [ ] million), both of them have an aggregate Community-wide turnover below EUR 250 million (Birla: EUR [ ] million, Columbian: EUR [ ] million). The proposed transaction also does not meet the thresholds of Article 1(3) of the Merger Regulation as the combined aggregate turnover of all the undertakings concerned does not exceed EUR 100 million in each of at least three Member States. 7. On 4 March 2011, however, the German competition authority (Bundeskartellamt) made a request pursuant to Article 22(1) of the Merger Regulation for the proposed concentration to be examined by the Commission. This request was subsequently joined by the competition authorities of Spain, France and the United Kingdom within the applicable time limit specified in Article 22(2) of the Merger Regulation. The Commission accepted the requests by decisions dated 8 April 2011 and it has therefore decided to examine the proposed concentration under the Merger Regulation pursuant to Article 22 (3). 2 Commission Decision of 27 February 2009 in Case no COMP/M.5453 OEP/CCH. 2

4 IV. RELEVANT MARKETS 1. Relevant Product Market 8. Carbon black is virtually pure elemental carbon in the form of colloidal particles that are produced by the incomplete combustion or thermal decomposition of gaseous or liquid hydrocarbons under controlled conditions (in a reactor). Its physical appearance is that of a black, finely divided pellet or powder. It is used in tyres, rubber and plastic products, printing inks and coatings is related to properties of specific surface area, particle size and structure, conductivity and colour. 9. Almost all carbon blacks are produced by the so-called furnace black process through partial pyrolysis of hydrocarbons. 3 Birla and Columbian use the furnace black process. 4 This method forms carbon black by blowing the raw material such as heavy crude oil (or feedstock supplied by the mineral oil industry or from the distillation of coal tar) into high-temperature gases to combust them partially. The production furnace uses a reactor to atomize the feedstock oil under carefully controlled temperature and pressure conditions hence ensuring a wider control over the characteristics of the carbon black produced. The carbon black produced is conveyed through the reactor, cooled, and generally collected into 25kg multi-wall paper bags, polyethylene bags or super-sacks for dispatch to customers, or loaded into tanker trucks in a continuous process Carbon black can be produced in a variety of grades, distinguished on the basis of the size of the primary particles, the number of the primary particles (structure) and the surface area. 11. In terms of volume, most carbon black grades are standardised products uniformly produced on a worldwide level in accordance with the respective standards of the international standards organisation ASTM International (USA). 6 The producers responding to the market investigation have confirmed the widespread reliance upon the ASTM classification system of grading of carbon blacks. According to the Parties, ASTM grades are predominantly used as reinforcing filler in rubber products and only to a limited extent for other purposes, such as the black pigment for the production of printing inks for newspapers or black plastic bags. Since the standardised grades are predominantly used as reinforcing filler in rubber products, they are usually called rubber blacks. 12. Besides these standardised grades, additional specialty grades are also developed and produced according to specifications provided by individual customers and/or market requirements. These specialty grades are variously used as black pigments in the plastic, 3 According to the notification, furnace black accounts for 98% of worldwide carbon black production volumes. 4 However, there are other manufacturing processes such as lamp black, thermal black, acetylene black or bone black. The lamp black process uses a flat steel vessel instead of a reactor. The thermal and acetylene black processes follow the same process as furnace black, but use natural gas or acetylene instead of crude oil-based feedstock. Bone black is manufactured using an animal bone char that is crushed to create bone black pigments. 5 Throughout the furnace black process, the residual gas from a furnace reactor includes a variety of gases such as carbon monoxide and hydrogen. This permits most furnace black plants to generate heat, steam or electric power through this residual gas. [ ]. 6 ASTM stands for the American Society for Testing and Materials. 3

5 coating and printing ink industries, as well as for the enhancement of electrical conductivity or absorption of UV light in plastics i.e. non-rubber applications. The Parties observe that these grades are sometimes referred to, depending on the producer, as industrial carbon blacks, carbon black pigments or specialty carbon blacks. 13. The main difference between rubber grades and specialty grades is product quality and purity. Specialty grades are substantially purer or cleaner than standardised grades and have lower levels of sulphur, ash and metals, as well as physical impurities and water wash residue. In addition, post-production many specialty grades are treated to improve key properties. 14. However, not all non-astm grades are specialty products because there is a range of non-astm grades which despite being substantially similar to ASTM grades, do not form part of the standardized/non-specialty rubber blacks segment along with ASTM grades. These tweaked ASTM grades are either variants of ASTM grades or contain a higher purity version of the conventional ASTM grades and are generally used in both rubber and non-rubber applications like plastics and inks. 15. Birla only produces ASTM and tweaked ASTM grades. It supplies these products to customers [ ]. 16. Under the ASTM nomenclature and indicative of the reinforcing properties of rubber blacks, there is a distinction between the hard and the soft grades. Hard grades are a reinforcing grade of carbon black corresponding to the 100, 200 and 300 series of the ASTM classification which are mostly in tyre treads. On the other hand, soft grades refer to a semi-reinforcing grade of carbon black corresponding to the 500, 600 and 700 series of the ASTM classification that is mostly utilised in rubber components requiring low heat build-up during dynamic stress, e.g. in the body (carcass) of a tyre. 17. Customers of rubber blacks typically purchase a combination of hard and soft grades which they mix together according to their specific requirements. However, depending on the applications, there is usually a limited ability to substitute between grades. 18. The Commission has considered carbon black in a number of previous decisions. In M.1301 Texaco/Chevron, carbon black was found to constitute a separate product market but in the absence of a horizontal overlap between the Parties to that transaction, it was not considered in any detail In M.5243 CVC/RAG/Evonik 8, the Commission considered a possible segmentation within carbon black between pigment blacks and rubber blacks and noted that whereas there is limited demand side substitutability between the two, "there is a greater degree of supply side substitutability." Most recently, in M.5453 OEP/CCH 9, the Commission noted the two main end applications of the carbon black produced by CCH (i) carbon black for rubber applications and (ii) specialty carbon black for other industrial applications such as pigments for printing inks, coatings, plastics and other non-rubber applications whilst ultimately leaving the exact definition of the relevant market open. 7 Commission Decision of 30 October 1998 in Case no IV/M.1301 Texaco/Chevron. 8 Commission Decision of 8 September 2008 in Case no COMP/M.5243 CVC/RAG/Evonik. 9 Commission Decision of 8 April 2009 in Case no COMP/M OEP /CCH. 4

6 20. In the present case, the Parties submit that there are grounds to argue that all grades of carbon black, with the possible exception of specialty blacks, form part of a single relevant product market due to, inter alia, the ease of supply-side substitution. However, although the carbon black producers have indicated in the market investigation that they are able to produce a range of grades, including soft and hard grades, the ability for producers to switch between the production of soft and hard grades is limited. This is because in order to ensure economies of scale in what is a continuous process, reactors in carbon black plants are usually limited to the production of one or two grades. Furthermore, although some producers may use swing reactors, 10 the market investigation has shown that this is not commonplace in the industry. 21. The Parties argued and the respondents to the market investigation confirmed that different grades of carbon black generally follow the same pricing pattern. This is because all grades are based on the same raw material (mainly from crude oil) and therefore they follow the price thereof irrespective of whether the grade is ASTM or not. Furthermore, the majority of customers noted that they could not replace one grade with another because of the compound recipe which they form for their specific applications. 22. Nonetheless, the market investigation has indicated that there is, to a certain extent, a degree of substitutability between different grades of carbon black. In effect, the customers have specified that some grades are similar and could be used as alternatives but that this substitutability is limited as it depends on the types of grades used. 23. For the purpose of this decision, the exact product market definition can be left open as to whether there are separate markets for rubber blacks and specialty grades and whether the market for rubber blacks can be further sub-segmented into hard and soft grades. In effect, irrespective of the exact product market definition, the proposed transaction would not lead to competition concerns. 2. Relevant Geographic Market 24. The Commission has concluded that the geographic scope of the relevant market in this case is at least EEA-wide. 25. The Commission had previously left open the exact definition of the geographic market for carbon black (or pigment blacks in the case of CVC/RAG/Evonik). In Texaco/Chevron, the Commission assessed the transaction on the basis of a worldwide market whilst the market investigation in CVC/RAG/Evonik indicated that the market was EEA-wide in scope. 26. In the context of the investigation at hand, the Commission has found no indications that there are material barriers to purchasers switching among different carbon black suppliers across national or other boundaries within the EEA. There is a well-developed trade network within the EEA, and a high proportion of carbon blacks purchased by EEA endusers are produced in another EEA state and transported across national frontiers. In support of the market being no narrower than EEA-wide, all but one of the market participants replied that they considered the market to be EEA-wide or wider. The Parties' submissions also support the proposition that the market is at least EEA-wide. The Parties 10 A swing reactor has the ability to switch the head of the reactor to either soft or hard grade, thus enabling the producer to use the same line for making different grades of carbon black. 5

7 note that tyre companies, which account for the major part of carbon black demand, typically purchase the same products for their various plants across the EEA and negotiate the terms of supply for their total EEA requirements at the same time, resulting in a single contract/pricing schedule for all EEA supplies. 27. However, it is less clear whether the market is only EEA-wide or wider (e.g. global). The Commission has received contrasting evidence on the question of whether EEA purchasers would readily switch to carbon blacks produced outside the EEA. 28. Evidence in favour of a geographic market wider than EEA-wide includes the following. First, there are no indications of any material tariff or non-tariff barriers to imports of carbon blacks at the EEA frontier. Second, for standardised grades, the ASTM standards applied and used are world-wide rather than EEA-wide, meaning that there are no regulatory barriers to switching from this perspective. Third, a number of market participants replied that transport costs for carbon blacks sourced from outside the EEA did not vary the final purchase price significantly (by more than 5%). Fourth, a majority of market participants replied either that they could readily switch to sourcing carbon black produced outside the EEA and imported into the EEA, or if they could not, that this inability to switch was due to their own internal control procedures rather than external market realities. Fifth, a number of participants perceived no significant differences between EEA prices and non-eea prices for carbon blacks, which supports the conclusion that the same competitive conditions prevail within and outside the EEA. Sixth, the broad pattern of significant international trade in carbon black, in particular across the EEA frontier, and also among other regions of the world, suggests that many market participants do in fact readily substitute among carbon blacks from inside and outside the EEA. Distributors responding to the market investigation noted that they largely serve their customers via their EEA-located warehouses or alternatively, especially in cases where the supplier is outside the EEA (e.g. Russia or Ukraine), they arrange for the direct consignment to the customer's manufacturing plant. Finally, many market participants replied directly that they consider the market to be as wide as a global market. Reasons given included that ASTM grades of carbon black are commoditised products, which are often contracted and traded on a world-wide basis. 29. However, there was also evidence against a geographic market wider than EEA-wide. Some market participants suggested that while carbon black produced outside the EEA is a substitute for EEA-produced carbon black, it is only an imperfect substitute. First, some participants suggested that transport costs from outside the EEA are sufficient to prevent ready switching at the margin to carbon blacks from outside the EEA, in particular as regards ship-borne transportation. Second, some participants replied that there are additional logistical concerns involved with importing carbon blacks by ship. Among these logistical concerns was the water- 6

8 absorbing nature of carbon blacks, and that this creates additional challenges to transporting carbon blacks by ocean shipping rather than by land freight. These logistical challenges may prevent carbon blacks from outside the EEA being a sufficiently close substitute for intra-eea carbon blacks for them to be in the same market. Third, a number of responses suggested that price levels can differ between the EEA and outside the EEA (contrasting with other responses that replied differently). In particular, some responses suggested that prices can vary across different world regions because of variations in the supply and demand balance both within and amongst regions. This suggests that there can be variations in the conditions of competition amongst regions. Fourth, a number of market participants identified that they cannot readily obtain all necessary grades, and at the required quality, from suppliers located outside the EEA, which suggests that ex-eea supply may be a good substitute in respect of some but not all grades ordinarily traded. Finally, some market participants responded that they consider the market to be only as wide as the EEA because of differing transport costs, increased supply chain logistical issues with importing carbon black, and that purchasing is conducted by many on a regional basis, rather than a global basis. 30. However, against these concerns, one could note that the issues of ship-borne transportation do not necessarily arise in relation to carbon black transported from Russia or the Ukraine, and that one of the Parties to the transaction (Birla) already transports its product into the EEA wholly by ship. 31. In this case, customers responding to the market investigation have indicated that the majority of carbon black is supplied from plants located within the EEA such as Italy, Belgium, Germany, Spain, France and Hungary. However, carbon black is also supplied from outside the EEA, namely, Egypt, Russia, Ukraine and USA. In effect, several producers of carbon black have their manufacturing plants or warehouses located in the EEA in order to facilitate distribution to customers and inter-state transportation within the EEA is not considered to constitute a barrier to trade. 32. The Parties' submissions in this case broadly support the conclusion that the market is at least EEA-wide. The Parties submit that there are no national geographic markets, and that the geographic market is at least as wide as the EEA. Further, the Parties submit that the market may be wider than EEA-wide, in support of which they note that there are significant imports and exports into and from the EEA each year as well as between other regions of the world. 33. In summary, there is clear evidence that the market is not narrower than EEA-wide. However, there is some evidence to suggest that the market may be EEA-wide rather than being world-wide. Thereby, the Commission concludes that the geographical scope of the relevant market is at least EEA-wide. 34. It is not necessary to conclude whether the market is wider than the EEA. In particular, it should be noted that adjacent markets can in some cases also impose a certain competitive constraint on a particular market, even if they constitute separate markets. In the present case, this can mean that even if the geographic market is only EEA-wide, outside-eea carbon black markets may still impose a constraint on the competitive conditions within the EEA market for carbon blacks. This is analysed further in the Competitive Assessment section. 7

9 V. COMPETITIVE ASSESSMENT 1. The Parties' Activities 35. The Parties' activities overlap worldwide and in the EEA in the supply of carbon black products, in particular in the supply of standardised, non-specialty carbon black ("rubber blacks") mainly to international tyre manufacturers. 36. Birla produces [ ] carbon black [ ] for use in tyre production, 11 although its carbon black may also be used for non-tyre applications. It exclusively produces standardised carbon black grades, mainly manufactured according to ASTM grades. No Birla businesses produce specialty carbon black. Birla Carbon is primarily active in the Middle East and Asia having production plants in Egypt, India, Thailand and China As Birla does not have any carbon black production facilities in the EEA, it supplies its customers located in the EEA with carbon black produced and delivered by its subsidiary in Egypt Alexandria Carbon Black SAE ("ACB"). Birla operates by importing carbon black from Alexandria, Egypt, either directly or with the support of its refilling/decanting stations in Spain, the UK, Italy and Belgium and third party decanting operations in the Netherlands and France. 13 ACB began operations in 1995 with an annual capacity of 20,000 metric tons (20 KMT) which has since grown to 285 KMT. 38. Columbian is a carbon black producer active on a worldwide level, with capacity of 1,090 KMT per year and eleven manufacturing facilities across the globe. Columbian s facilities in Europe are located in Hungary, Italy, Spain, and Germany and have a combined annual capacity of [ ] KMT. All these facilities produce both hard and soft carbon black grades. It also has facilities in Canada, the United States, Brazil, South Korea and China. Columbian s facility in North Bend (US) produces specialty grades. 39. Columbian manufactures carbon black for rubber for tyres, rubber products other than tyres and also for industrial applications. The rubber black grades supplied by Columbian in Europe are the same as those supplied by ACB, plus N539 and N650. Although there is an overlap between ACB and Columbian regarding the grades produced, there are no grades which are exclusively produced by ACB and Columbian. 40. Columbian supplies specialty carbon black in Europe from its US plant. However, since ACB exclusively produces standardised carbon black grades, there is no overlap in this area. 2. Non-coordinated effects 11 Out of its ACB supplies for the EEA, around [ ]% goes to tyre producers. 12 [ ]. 13 Where a high volume customer prefers to be supplied in bulk (i.e. by tanker trucks), an importer to Europe transporting using big bags can easily meet that requirement by contracting trucks and decanting services (i.e. services in which the carbon black is decanted from the industrial sacks into tankers) to make deliveries in bulk. Such services are relatively common in the chemical sector and, in any event, the time and investment required to install a decanting station is very limited. Birla Carbon estimates that a 'basic' decanting station could be installed in Europe [ ]. ACB notes however that it spent in the region of EUR [ ] to set up its decanting station in Spain. 8

10 41. On a global basis, the merged entity would have a share on the market for all carbon black of approximately [10-20]% in volume terms (Birla [5-10]%, Columbian [5-10]%). The other leading suppliers would be Cabot ([10-20]%) and Evonik ([10-20]%) with a fringe of smaller (regional) players with less than [0-5]% market share each The merged entity would have a stronger position in the EEA with a market share of [20-30]% (Birla [5-10]%, Columbian [10-20]%). This would place it ahead of Cabot ([20-30]%) but behind the market leader Evonik with [30-40]%. The remaining part of the market is served by imports, predominantly from Russia and Ukraine, produced by companies such as Yaroslavl ([5-10]%), Omsk/Volgograd ([5-10]%) and Nizhnekamsk ([0-5]%). Table 1: EEA carbon black sales Company KMT % KMT % KMT % ACB [ ] [5-10]% [ ] [5-10]% [ ] [5-10]% Columbian [ ] [10-20]% [ ] [10-20]% [ ] [10-20]% Combined [ ] [20-30]% [ ] [20-30]% [ ] [20-30]% Cabot [ ] [20-30]% [ ] [20-30]% [ ] [20-30]% Evonik [ ] [30-40]% [ ] [30-40]% [ ] [30-40]% Yaroslav [ ] [5-10]% [ ] [5-10]% [ ] [5-10]% Omsk [ ] [5-10]% [ ] [5-10]% [ ] [5-10]% Volgograd [ ] [0-5]% [ ] [0-5]% [ ] [0-5]% Omsk+Volgograd [ ] [5-10]% [ ] [5-10]% [ ] [5-10]% Nizchecansk [ ] [0-5]% [ ] [0-5]% [ ] [0-5]% Kremechug [ ] [0-5]% [ ] [0-5]% [ ] [0-5]% Other imports [ ] [0-5]% [ ] [0-5]% [ ] [0-5]% TOTAL [ ] 100% [ ] 100% [ ] 100% 43. If a separate market for rubber blacks were to be considered, the merged entity would hold a similar market share of [20-30]% (Birla [10-20]%, Columbian [10-20]%) in the EEA. This would place it in between the market leader Evonik ([30-40]%), the Russian/Ukrainian producers ([20-30]%) and Cabot ([20-30]%). Table 2: EEA rubber blacks sales Company KMT % KMT % KMT % ACB [ ] [5-10]% [ ] [5-10]% [ ] [10-20]% Columbian [ ] [10-20]% [ ] [10-20]% [ ] [10-20]% Combined [ ] [20-30]% [ ] [20-30]% [ ] [20-30]% Cabot [ ] [20-30]% [ ] [20-30]% [ ] [20-30]% Evonik [ ] [30-40]% [ ] [30-40]% [ ] [30-40]% Russia/Ukraine [ ] [20-30]% [ ] [20-30]% [ ] [20-30]% All the market shares are based on the Parties' estimates, which in turn have been based on the report of a key source of industry data - Notch (in particular with respect to the market size) and the Parties' sales. All tables in this decision have been submitted in the notification. 9

11 Other imports [ ] [0-5]% [ ] [0-5]% [ ] [0-5]% TOTAL [ ] 100% [ ] 100% [ ] 100% 44. If hard grades of rubber blacks were to be considered as a separate market, the merged entity would hold a similar market share of [20-30]% (Birla [10-20]%, Columbian [10-20]%) in the EEA. Table 3: EEA rubber black sales of hard grades Company KMT % KMT % KMT % ACB [ ] [10-20]% [ ] [10-20]% [ ] [10-20]% Columbian [ ] [5-10]% [ ] [10-20]% [ ] [10-20]% Combined [ ] [20-30]% [ ] [20-30]% [ ] [20-30]% TOTAL [ ] 100% [ ] 100% [ ] 100% 45. On the other hand, if the soft grades of rubber black were to be considered as a separate market, the merged entity would hold a market share of [20-30]% (Birla [0-5]%, Columbian [10-20]%) in the EEA. Table 4: EEA rubber black sales of soft grades Company KMT % KMT % KMT % ACB [ ] [0-5]% [ ] [0-5]% [ ] [0-5]% Columbian [ ] [10-20]% [ ] [10-20]% [ ] [10-20]% Combined [ ] [10-20]% [ ] [10-20]% [ ] [20-30]% TOTAL [ ] 100% [ ] 100% [ ] 100% 46. As explained above, in a hypothetical market for specialty grades no overlap occurs due to transaction and the merged entity would hold an EEA market share of [20-30]% (only Columbian is present - [20-30]%). This implies that the market leaders remain Evonik ([30-40]%) and Cabot ([30-40]%). The Russian/Ukrainian importers hold a market share of [10-20]%. 10

12 Table 5: EEA carbon black for specialty sales Company KMT % KMT % K % MT ACB [ ] [0-5]% [ ] [0-5]% [ ] [0-5]% Columbian [ ] [20-30]% [ ] [20-30]% [ ] [20-30]% Combined [ ] [20-30]% [ ] [20-30]% [ ] [20-30]% Cabot [ ] [30-40]% [ ] [30-40]% [ ] [30-40]% Evonik [ ] [30-40]% [ ] [30-40]% [ ] [30-40]% Russia/Ukraine 16 [ ] [5-10]% [ ] [10-20]% [ ] [10-20]% Other imports [ ] [0-5]% [ ] [0-5]% [ ] [0-5]% TOTAL [ ] 100% [ ] 100% [ ] 100% 47. The Parties and the investigation confirm that several other credible suppliers serving Europe such as Evonik and Cabot which in themselves constitute a competitive constraint to the merged entity. This is true for all types of carbon black. In effect, this permits the overwhelming majority of the European customers responding to the market investigation to multi-source from different suppliers across the EEA and beyond. Most respondents have also acknowledged the presence of the Russian and Ukrainian suppliers of carbon black in Europe. 48. In this regard, the Parties highlight that Russia and Ukraine are a key source of carbon black imports into the EEA. In the last 10 years Russian/Ukrainian suppliers have increased their share of EEA sales from around [5-10]% (2000) to [10-20]% (2010). The Parties further note that there is a significant export capacity in Russia with production outstripping domestic consumption by more than 300 KMT and Russian production capacity is also expected to increase significantly in the next few years. A case in point is Omsk Carbon Black which announced in its corporate newsletter its intention to increase its production capacities to 265 KMT and 200 KMT by the year 2015 in its Omsk and Volgograd production plants respectively. This marks a significant increase from the 2011 projections where the production capacities for the Omsk and Volgograd plants are estimated at 225 KMT and 75 KMT respectively This projected capacity increase is set to satisfy the increasing demand from Europe. Indeed, several customers responding to the market investigation have indicated that whilst the Russian/Ukrainian presence in carbon black supplies in Europe is appreciable, often the quantity is not enough. 50. The market investigation has also shed light on the substitutability of the different grades imported from Russian/Ukrainian supplies into the EEA. First, it resulted from the responses to the market investigation that the substitutability of the Russian/Ukrainian imports is largely dependent on the type of grades requested. This is in view of the fact that 16 These volumes do not relate to specialty carbon blacks in the strict sense but to rubber blacks used for applications outside the rubber industry. As such, the respective volumes should in reality be allocated to the rubber blacks segment. 17 See, p.6. 11

13 Russian/Ukrainian suppliers are similar to ACB as these are mainly active in rubber blacks and have minimal production in specialty grades. Therefore, the Russian/Ukrainian suppliers could satisfy only customers demanding standard, ASTM classified grades and not specialty grades. 51. However, as explained above, Birla is also only active with standardised rubber blacks within the EEA and is considered by customers to be a reliable source only with respect to such grades. Therefore the competitive constraint on the merged entity will remain in the area where the activities of the merging Parties overlap. 52. The above implies that the supply from Russia/Ukraine is only to a limited degree interchangeable with respect to certain more sensitive applications. Some examples relate to carbon black used for printing inks, rubber compounds or master batches. Hence, these producers would in any event not consider Birla as their supplier since it does not offer the grades required by them. 53. On the other hand, it is observed that Russian/Ukrainian suppliers already have existing supply relationships with the tyre companies in Europe. Indeed, for the tyre producers (which account for 67 % demand of the carbon black in the EU 18 ) the different grades of carbon black supplied by these companies are completely substitutable to carbon black grades supplied by EEA players. 54. Therefore, for the majority of demand, it has to be considered that the Russian/Ukrainian companies represent a competitive constraint on the main players on the carbon black market. 55. Furthermore, several respondents to the market investigation have also hinted at the existence of other suppliers located particularly in Asia where the production of carbon black is gradually increasing (especially in China). 56. Respondents expect that this will influence the dynamics of production of carbon black in the world, including Europe particularly given that transport costs and logistics do not constitute a strong barrier to trade in this market. This implies that there are a number of other carbon black suppliers which do exert a competitive constraint on the merging Parties. 57. The Parties explain that a large number of customers only source carbon black after an extended approval process. The existence of such a process, which is usually supplier, plant and grade specific (i.e. each grade coming from a different plant of a supplier is being approved separately) has been confirmed in the marked investigation. The approval process of carbon black supplier usually lasts from several months to 2 years. 58. The Parties indicated that to their knowledge, there are no grades for which only ACB and Columbian are approved for any particular customer. The overwhelming majority of the customers responding to the market investigation have indeed confirmed this. Moreover, the Parties also provide that in general Cabot and Evonik are approved for the same grades 18 This is according to estimates by Notch for

14 as ACB for each customer. Similarly, they contend that the Russian/Ukrainian suppliers are in direct competition with ACB as they produce the same grades In principle, this implies that there is a high degree of demand-side substitutability, reducing the risk of anti-competitive price increase. Indeed, the investigation has confirmed that the vast majority of customers multi-source at least for some grades in order to secure supply and due to customers' requirements. Consequently, in case the merged entity would reduce output and increase prices, the switching to other carbon black suppliers could easily take place since they are usually already approved as alternative suppliers of the same grade. 60. According to the notification, in part due to its reliance on the motor vehicle and tyre industries, the recession in 2008 and 2009 has hit the industry hard. Already in the earlier months of 2008, the industry had been put under strain with the elevated costs of crude oil which was ultimately reflected in feedstock costs. 61. When the demand for tyres drastically reduced, European manufacturers of carbon black responded to the low capacity utilisation by rationalising plants and lines, thus limiting the high fixed costs of operating carbon black plant. The closure of a number of carbon black plants in response to the crisis have been largely confirmed in the market investigation. The following table summarises the evolution of European production capacity and utilisation over the past decade. Table 6: European carbon black capacity, production and consumption Year Capacity Utilisation (%) Production Consumption According to the Parties, demand has recently recovered quicker than anticipated, which has resulted in a tighter supply and demand balance compared to the last few years. This has been exacerbated in the short term by ACB s supply disruption in light of the recent Egyptian political upheaval as well as the recent temporary closures of three European plants: Columbian s Santander plant in Spain; Cabot s Lillebonne plant in France; and DGW (consortium plant) in Germany However, as outlined by the customers responding to the market investigation, in such instances, they were still able to supply from other suppliers present in Europe. In effect, 19 Basically, given that most Russian/Ukrainian suppliers have existent supply relationships with the main tyre manufacturers in Europe, this implies that if one supplier is approved for one tyre manufacturer, the same supplier is able to obtain approval to start serving another tyre manufacturer. 20 According to the notifying party, Columbian s Santander plant was closed for [ ]. Cabot s closure was a force majeure event (problem with a flare on the stack, as a result of which the plant could not meet its environmental permits). The Parties believe that Cabot s plant was closed for two weeks. DGW was partly down for two weeks from 1 March to repair a leaking boiler. 13

15 this tightness in supply appears to be cyclical in nature as producers tend to react sharply in face of swings in demand. Indeed, the majority of the market respondents have indicated that the present shortage of carbon black supply is directly attributed to the recession and the consequential closure and/or slowdown of different production plants. However, the shortage in supply is expected to be short lived given the planned increase in capacity of a number of producers. For instance, Cabot, one of the largest carbon black producers in the world, has recently announced plans to expand its global production by 15% or some 300 KMT including de-bottlenecking operations at its European facilities which will expand their capacity by 10%. 21 Similarly, as previously outlined, Russian producers also intend to substantially increase their production capacities. The Commission has not identified any reasons why the proposed transaction would further contribute to the shortage in supply. 3. Coordinated effects 64. In spite of the fact that the proposed transaction reduces the number of carbon black suppliers by one, this does not appear likely to substantially increase the risk of coordinated effects. 65. The carbon black industry is characterized by a number of particular aspects. First, product differentiation is not a significant factor in this industry mainly because all suppliers are able to virtually produce all grades. This implies that the overriding parameter of competition is price. Second, the primary demand for carbon black derives from the tyre companies which are mainly a small number of large, globally active groups led by Goodyear, Dunlop, Michelin, Continental, Bridgestone/Firestone, and Pirelli. Together, these customers represent a very high proportion of sales from each supplier and thus, they hold significant leverage over the suppliers, hence enabling them to obtain the best products at the lowest price. Third, as the market investigation has clearly established, customers have a tendency to switch between suppliers and often, their demand is spread over a number of different suppliers. These tendencies are further facilitated by the fact that typically supply contracts are concluded for a period of one year or few months rather than long-term multi-annual periods. Moreover, even in the course of one year agreement, tyre manufacturers are able to shift supply volumes from one supplier to another relatively quickly as there is no lead time necessary given that the suppliers within which they cooperate are all certified for the relevant carbon black grades. Taken together, these factors do not appear a priori to be conducive to the emergence of tacit coordination on prices or customer sharing. 66. Notwithstanding the present relevant tightness in the market, coordination on capacity seems to be contradicted by the relatively high level of activity being registered in this market which is in reaction to combat the recent shortage in capacity. As previously mentioned, Cabot has publicly announced its plans to expand its global production by 15% and particularly within Europe, it intends to prepare de-bottlenecking actions thus expanding the company's European capacity by 10%. 22 In addition and as previously established, within this market, there exists an ease of supply via imports notably from Russia/Ukraine. These suppliers have also recently announced their intention to 21 This equates to some 35 KMT according to the industry report published by Notch Consulting. 22 See Cabot Corporation s website at the following address: 14

16 substantially increase their production capacities. This implies that their increasing presence within the EEA market coupled with the announced plans for increasing capacity within Europe exerts a potentially destabilising force on attempts to coordinate on capacity. 67. Thereby, it does not appear likely that the merger would create or reinforce the incentive ability of the remaining players to coordinate their conduct in the market for carbon black in Europe. VI. CONCLUSION 68. For the above reasons, the European Commission has decided not to oppose the notified operation and to declare it compatible with the internal market and with the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of the Merger Regulation. For the Commission (signed) Joaquín ALMUNIA Vice-President 15