Keywords: MOFCOM, Glencore, shares, Xstrata
Following a lengthy review lasting the best part of a year, on 16 April 2013 the Ministry of Commerce of the People's Republic of China (MOFCOM) gave a conditional green light to the acquisition by Glencore International plc. (Glencore) of all of the remaining shares of Xstrata plc. (Xstrata), in which Glencore already held a minority equity interest.
The long review period is not the only respect in which the decision stands out - although review periods of a comparable length have been seen before. Particularly striking is MOFCOM's confidence in seeking an extraterritorial divestiture in circumstances where the competition arguments that might justify this could appear borderline. Additionally, it is notable that the regulator has, for the first time, taken the decision to publish a detailed scheme of the remedial commitments it accepted from the parties as a pre-condition to clearance. This document, annexed to MOFCOM's decision, offers a valuable insight into the regulator's practice and merits careful consideration. It is also a further indication of MOFCOM's ongoing and developing commitment to a more transparent process.
Although neither Glencore nor Xstrata own or operate productive assets in the relevant markets in China, MOFCOM took great interest in the transaction, focusing on the importance of China as a major market for the parties and China's reliance on imports of raw materials of central importance to the wider Chinese economy. Explaining that import volumes of copper concentrate, zinc concentrate and lead concentrate accounted for 68.5%, 28.7% and 27.3% respectively of total supplies on the Chinese market in 2011 and that the parties had relatively high market shares in the production and supply of these products globally and in China, MOFCOM focused its review on these markets and ultimately concluded that the acquisition may have the effect of eliminating or restricting competition in them.
That said, the analysis of the parties' market power in the production and supply of copper concentrates in particular may suggest that MOFCOM is willing to find market power at what might otherwise be considered moderate market share levels. The regulator explains that Glencore and Xstrata are among the world's leading producers and suppliers of copper concentrate and that the global market shares of Glencore and Xstrata for the production of copper concentrate were 1.5% and 6.1% respectively in 2011, with a combined share of 7.6%, collectively ranking third in the world. Further, the global market shares of the parties in 2011 with respect to the supply of copper concentrate were 5.3% and 4% respectively, with a combined share of 9.3%, ranking first in the world. As regards the market shares of Glencore and Xstrata for the supply of copper in China itself, these were 9% and 3.1% respectively for 2011, giving a combined share of 12.1% - making for a leading position on the China market.
While the published decision does elaborate other reasons for concluding the parties would have market power post-merger in the copper concentrate market (vertical integration and foreclosure concerns, increased barriers to entry, weak bargaining power on the part of downstream Chinese customers), it is worth noting that these market share levels are all well below the 25% figure used by the European Commission to establish a threshold below which an absence of restrictive effects can be presumed.
What this means for the future and in particular whether MOFCOM will always be willing to find market power at such levels is not clear. Arguably, the central issue for the regulator in this case was an understandable concern that China was uniquely dependent on overseas supplies of a critical commodity:
"China is the world's major importing country for copper concentrate, with China's present demand accounting for about 50% of the total global demand. China's imports of copper concentrate in 2011 accounted for 68.5% of total domestic supply, and the trend shows an upward trajectory. In 2011, Glencore's and Xstrata's exports of copper concentrate to China accounted for 13.3% and 4.5% respectively of China's total imports, or 17.8% on a combined basis. The Chinese market is a major market for the undertakings concerned in the concentration. In 2011, Glencore and Xstrata sold respectively 53.7% and 17% of their copper concentrate supplies to the Chinese market."
The analysis of competition concerns in the markets for zinc and lead concentrate is in many respects comparable with the analysis for copper concentrate albeit that MOFCOM noted that China is less dependent on imports as indicated above. MOFCOM therefore took the view that softer behavioural commitments would address the competition concerns arising in these markets.
Extraterritorial divestiture of key mining asset in addition to pricing and volume behavioral commitments
Most notable of the restrictive conditions imposed, and likely the cause of the protracted review as the regulator and the parties sought to agree an acceptable compromise, is the required divestiture by September 2014 of Xstrata's Las Bambas copper mine project in Peru at a price not lower than the higher of the fair market value of the mine or the sum of all costs incurred in developing it. In common with regimes elsewhere the purchaser must be approved by MOFCOM, though somewhat interestingly Glencore has undertaken to use its best endeavours to submit the details of all potential buyers of Las Bambas to MOFCOM by 31 August 2014. Whether this means MOFCOM would then select a buyer is not entirely clear.
Further, to the extent that Glencore might fail to sell Las Bambas within the required time, the remedy scheme provides that Glencore must submit a proposal to MOFCOM for the appointment of a divestiture trustee empowered to sell without a reserve price Glencore's interest in one of a number of alternative copper mining projects in Latin America or South East Asia as might be specified by MOFCOM.
Aside from the structural remedy, MOFCOM sought conduct remedies of a kind seen in a number of other published decisions. In particular, behavioural conditions were imposed relating to the pricing and volumes of copper, zinc and lead concentrates supplied to Chinese customers. For a period of eight years, Glencore agreed to supply to the Chinese market 900,000 tonnes of copper concentrate annually at a regulated price - although the minimum volume is subject to adjustment in line with Glencore's actual levels of production. Further, in the case of supplies of zinc and lead concentrates, Glencore agreed that during the eight-year supply commitment period, its offer conditions (including conditions relating to price) would be "fair, reasonable, and consistent with the then prevailing terms used in the international market". As is to be expected, the remedies scheme provides for compliance with all of these measures to be monitored on an on-going basis by a trustee obligated to report periodically to MOFCOM. In this respect the decision follows the draft regulation on merger remedies issued by MOFCOM in March 2013.
At a more general level, it is significant that MOFCOM chose to publish the actual remedies scheme. As indicated at the outset, this is "a first" although also a further example of recent trends toward greater transparency. That said, a driver behind the decision to publish could well lie in recent statements by MOFCOM officials touching on the difficulties the regulator was experiencing with monitoring compliance with conduct remedies. In publishing the remedies scheme, MOFCOM may have been motivated to bring its contents to the attention of Chinese industry, which might then be expected to assist in ensuring compliance with it going forward.
How does the decision compare with approaches in other jurisdictions?
While the European Commission focused on the markets for the production and trading of zinc (ultimately requiring the divestment of Glencore's minority stake in the world's largest zinc smelter, Nyrstar, and the termination of Glencore's exclusive off-take agreement with it), most other competition regulators did not find that Glencore/Xstrata would result in likely adverse effects. Both the Australian Competition and Consumer Commission and the US Department of Justice cleared the deal unconditionally in 2012, and while the South African Competition Tribunal gave clearance with conditions in January 2013, its concerns did not relate to competition considerations but issues pertaining to anticipated redundancies post-transaction.
Lessons for the future
Overall, Glencore/Xstrata continues a trend toward ever more detailed and rigorous review decisions coupled with greater transparency. These are positive developments. The very lengthy review, which follows a pattern seen in a handful of other cases, highlights once again concerns parties have expressed with the sometimes burdensome procedures we see under the Anti-Monopoly Law. MOFCOM is known to be working to address these concerns and is expected to roll-out a fast-track procedure for simple cases during the course of this year. The Las Bambas divestiture demonstrates MOFCOM's growing confidence as regulator and willingness to pursue an extraterritorial structural remedy where the case requires it in MOFCOM's view - and notwithstanding that such a remedy might appear controversial to some.
Previously published on 6 May 2013
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