In a recently published decision, the Turkish Competition Board ("Board") assessed the application for Eregli Demir ve Çelik Fabrikalari T.A.S.'s ("Erdemir") acquisition of sole control over Kümas Manyezit Sanayi A.S. ("Kümas") which is ultimately controlled by Yildiz Holding A.S. and Gözde Girisim Sermayesi Yatirim Ortakligi A.S.1

In its review of the notified transaction, the Board deemed the transaction to be an acquisition that falls under Article 5/3 of the Communiqué No. 2010/4 on Mergers and Acquisitions Requiring the Approval of the Competition Board ("Communiqué No. 2010/4") given that proposed transaction concerns Erdemir acquiring sole control over and thereby changing the control structure of Kümas.

The Board first evaluated the parties' activities in Turkey to determine the relevant product markets for the transaction. Kümas is active in areas of refractory products and refractory raw materials. The acquirer Erdemir, on the other hand, is controlled by OYAK Group ("OYAK") which operates in various sectors through its subsidiaries, such as mining-metallurgy, cement, concrete, paper, energy, chemistry, finance, automotive and logistics.

For the purposes of its relevant product market assessment, the Board visited previous European Commission ("Commission") decisions and adopted the same categorizations for refractory products. Accordingly, the Board divided refractories into certain sub-segments with respect to supply and demand of products: (i) shaped and unshaped refractories, (ii) basic and non-basic refractories, (iii) refractories from dolomite and refractories from magnesite, and further divided refractory products both from dolomite and magnesite into fired and unfired refractory products since fired and unfired refractory products cannot be substituted with each other.2 Consequently, the Board adopted narrow product market definitions for refractory products as, (i) basic unshaped refractory products from dolomite, (ii) basic unshaped refractory products from magnesite ("BURM"), (iii) basic shaped unfired refractory products from dolomite, (iv) basic shaped fired refractory products from magnesite ("BSRM fired"), (v) basic shaped unfired refractory products from magnesite ("BSRM unfired"), (vi) non-basic unshaped refractory products.

Considering only calcined magnesite ("CCM") that is also produced by Kümas is used in the iron and steel sector, the Board also narrowly segmented raw materials of the refractory products. Consequently, the Board sub-segmented magnesite and dolomite raw materials that are used in Kümas's production portfolio into, (i) sintered magnesite ("DBM"), (ii) fused magnesite ("FM"), (iii) CCM, (iv) sintered dolomite ("DBD"), (v) magnesite ore. While considering Kümas's and OYAK's activities, the Board determined the relevant product market for the iron and steel sector to be the iron and steel market.3 The Board also decided that the relevant product market for the cement sector is the cement market. Furthermore, for refractory products, cement, iron and steel sectors the geographical market is determined as Turkey by the Board. 

In the light of the relevant product market definitions for each sector, the Board identified relevant product markets for the purposes of the notified transaction as, (i) BURM, (ii) BSRM fired, (iii) BSRM unfired, (iv) CCM, (v) iron and steel, (vi) cement markets.

In terms of concentration assessment regarding this transaction, the Board first indicated that the notified transaction does not give rise to horizontally affected markets as the parties operate in separate product markets, and the transaction would not lead to the creation of or strengthening a dominant position. However, the Board remarked that there are vertical relationships between (i) BURM and BSRM fired markets where Kümas is active and OYAK's iron and steel, and cement production, (ii) BSRM unfired market where Kümas is active and OYAK's iron and steel production, (iii) CCM which is manufactured by Kümas and is being used as a raw material input in Kümas's production of refractory products and OYAK's iron and steel production. 

The Board assessed each vertical relationship between the parties of the transaction in detail. The Board stated that given that BURM is used in the manufacture of iron, steel and cement there is a vertical relationship between BURM and iron and steel, and cement. To that end, the Board noted that, according to paragraph 25 of the Guidelines on the Assessment of Non-Horizontal Mergers and Acquisitions ("Guidelines"), unless the merged entity that arises from the non-horizontal merger transaction, holds a dominant position in at least one of the relevant markets in question after a merger, a non-horizontal (i.e., vertical) merger would not have any negative effect on competition. Accordingly, the Board decided that the acquisition would not raise competition concerns as OYAK's shares in iron and steel and cement markets and Kümas's shares in BURM market do not exceed the thresholds provided in the Guidelines.  

With regard to the vertical relationship between BSRM fired, iron and steel, and cement, the Board reminded that as per paragraph 27 of the Guidelines, a concentration would not raise competition concerns for so long that Herfindahl-Hirschman Index ("HHI") level in the relevant market is below 2500 and the merged entity holds less than 25% of the market shares. Consequently, the Board decided that although Kümas's shares in BSRM fired market exceed the market share thresholds provided by the Guidelines with an insignificant margin, since Kümas does not hold a dominant position in the relevant product market and the HHI level is below the thresholds provided by the Guidelines, the effective competition would not be significantly impeded with regard to the BSRM fired market.

With respect to the vertical relationship between CCM and iron and steel, the Board stated that calcined magnesite is used in the iron and steel sector with small amounts and it is not an imperative input. Therefore, the Board decided that the notified transaction would not significantly impede effective competition regarding the calcined magnesite market, either.

As regards the vertical relationship between BSRM unfired and iron and steel, the Board noted that Kümas has more than double of the amount of market shares its closest competitor has, and that it holds a dominant position in the relevant market. The Board decided that although both value and volume-based HHI levels are below the thresholds provided in the Guidelines, a detailed assessment regarding vertical effects of the transaction was necessary considering Kümas's and its competitors' market shares. 

Although the Board remarked that vertical mergers and acquisitions may have positive effects, such as the reduction of transaction costs, efficiency gains, and reduction of prices, the Board also underlined that vertical concentrations may lead to unilateral and coordinated effects. Moreover, such unilateral effects include anti-competitive market foreclosure, which occurs in cases where the merged entity has the ability and the incentive to prevent the access of its competitors to the supply. The Board emphasized that as per the Guidelines, market foreclosure is subdivided into supply foreclosure and customer foreclosure.

Accordingly, the Board remarked that the assessment regarding the vertical concentration in the BSRM unfired market concerns the determination of input foreclosure effect. Following this line of reasoning, the Board evaluated the transaction parties' market shares in the affected markets, the significance of the input for the downstream market, and scrutinized whether the merged entity would have the ability and incentive to refuse to sell input, thereby increasing the ultimate product prices for customers.

In its assessment, the Board noted that although the merged entity will not hold a dominant position in the upstream BSRM unfired market, it will still control a considerable amount of the relevant market. That said, the Board emphasized that although iron and steel production increased over the past years, the pace of production of refractory products did not match the pace of the iron and steel sector. Thus, the Board concluded that although refractory products still retain their importance as inputs and BSRM unfired products are irreplaceable for Erdemir's iron and steel production, their share in the total input costs has decreased.

For the purposes of assessment on input foreclosure effects, the Board also considered the established procurement practices in the refractory market. The Board emphasized the fact that each customer procures refractories from at least 2 or 3 suppliers which are selected from among 6-10 suppliers through a tender process. Therefore, the Board stated that in the event that OYAK procures refractories within its body, the rest of the input by the other suppliers will become alternative supplies for the producers in the downstream market. Therefore, refractory producers can easily be changed and it is unlikely that prices of the refractory products will increase as a result of the notified transaction.

Additionally, the Board highlighted that with new producers' entry into the market inputs can be supplied by numerous companies operating at a national or global scale, therefore the likelihood of input foreclosure is decreased. 

Consequently, the Board assessed that it is unlikely that the transaction will lead to input foreclosure effects and increase the costs for the competitors operating in the downstream market or the price of the product since, (i) despite the growth in the iron and steel sectors, the refractory products market does not indicate a growth trend, (ii) refractory products have a very small share in the iron and steel production costs, (iii) the number of enterprises operating in the upstream market increased in recent years, (iv) the amount of imports of refractory products has been continuously increasing, (v) the iron and steel manufacturers work with more than one supplier at the same time, (vi) there are no exclusive relations in the market.

The Board further evaluated customer foreclosure effects and indicated that customer foreclosure and thereby a market foreclosure is not likely since, (i) OYAK does not have enough power to restrict its competitors operating in the upstream market from reaching the customers in the downstream market considering the market range for iron and steel products, (ii) various undertakings operating at a national or global scale are active in the downstream market, (iii) each customer procures refractories from at least 2 or 3 suppliers selected from among 6-10 suppliers in tenders, (iv) undertakings operating in the downstream market can also export their products. 

In light of the foregoing, the Board ultimately concluded that the notified transaction would not cause a significant impediment of effective competition in the markets. Thus, the Board granted unconditional approval to the relevant transaction. The decision of the Board provides valuable insights in terms of the assessment to be made on mergers and acquisitions, in which the relationship between the parties to the concentration is only vertical (i.e., as supplier and customer).

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in December 2021. A link to the full Legal Insight Quarterly may be found here.


1 Turkish Competition Board's decision dated January 14, 2021, 21-03/32-16.

2 RHI/Magnesita Refratarios (M.8286);  

Imerys/Alteo Certain Assets (M.8130); Cookson/Foseco (M.496)

3 The Board noted that while it is possible to further segment these markets, such segmentation would not change the essence of its assessment and it did not provide a further segmented market definition.

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