Imerys South Africa (Pty) Ltd v The Competition Commission

• Jurisdiction: South Africa
• Judge: Davis JP and Rogers JA and Boqwana JA
• Judgment Date: 02 March 2017
• Docket Number: 147/CAC/Oct16
• Hearing Date: 16 December 2016
• Court: Competition Appeal Court

Rogers JA (Davis JP and Boqwana JA concurring):

[This is a redacted version of the judgment from which confidential information has been deleted.]

Introduction

[1]

In January 2015 the appellants ('ISA' and 'AR') notified the Competition Commission ('the Commission') of an intermediate merger in terms whereof ISA was to acquire all the shares in AR. In April 2015 the Commission prohibited the merger. The appellants referred the merger to the Competition Tribunal ('the Tribunal') for consideration. On 21 September 2016, and following a lengthy hearing, the Tribunal confirmed the prohibition. The appellants appeal to this Court, contending that the merger should have been permitted subject to tendered conditions.

[2]

Mr Unterhalter SC leading Mr Moultrie appeared for the appellants and Mr Wilson SC leading Mr Marolen for the Commission.

[3]

On 29 December 2016, ie about two weeks after the hearing of the appeal, the Department of Mineral Resources ('DMR') addressed a letter to the registrar and to the parties, intimating a wish to be admitted as an amicus curiae. In a letter dated 5 January 2017 the appellants' attorneys said that their clients had no objection. By letter dated 9 January 2017 the Commission objected to the DMR's admission as an amicus, setting out various grounds for the objection.

[4]

We decided summarily to reject the DMR's request. In terms of rule 28 of this Court's rules read with rule 16 of the rules of the Supreme Court of Appeal, the application for admission should have been made not later than one month after the appeal record was lodged with the registrar. This was not done. Needless to say, an application for admission brought after an appeal has been argued is highly disruptive and would cause delay and additional expense for the litigants.

2017 JDR 0531 p3

Rogers JA (Davis JP and Boqwana JA concurring)

[5]

Even if an application for admission had been timeously made, it would almost certainly have failed. In terms of SCA rule 16(8), an amicus is limited to the record on appeal, ie may not adduce fresh evidence. Yet it appears from the DMR's letter that the DMR wants to intervene precisely for the purpose of placing further facts before the court. The DMR's letter does not explain what those facts are or how they might affect the outcome of the appeal. The DMR has also not explained why it did not intervene in the proceedings before the Tribunal. According to the Commission, it engaged with the DMR prior to recommending the prohibition of the merger and also in the course of preparing for the Tribunal hearing. Information supplied by the DMR was placed before the Tribunal and forms part of the appeal record.

Background

[6]

The appellants mine andalusite, a mineral from which refractories are made. Refractories are used to line furnaces, kilns and other containers exposed to high temperatures, abrasion and chemical attack in the course of manufacturing iron, steel, cement, ceramics and other products. Refractories may be shaped (bricks and blocks) or unshaped (also known as 'monolithics' – dry bagged material which the user can mix with water and apply to the surface in question).

[7]

Vertically, the three levels of market activity most directly implicated in refractory minerals are (i) the mining of the minerals; (ii) the making of refractories; (iii) the making of goods whose processes require refractories. ISA conducts the first and second of these activities and is thus vertically integrated to that extent. AR conducts only the first activity. Demand for refractory minerals is determined by demand for refractories which is in turn driven by the demand for the goods manufactured by processes requiring refractories. Iron and steel typically constitute the major demand at the third level (about 60% in South Africa). Demand for the manufactured goods is, of course, driven by demand in a diffuse range of markets further downstream.

[8]

Refractories can be made from various substances. Andalusite forms part of a group of refractory substances, known as alumina-silicates, in which alumina

2017 JDR 0531 p4

Rogers JA (Davis JP and Boqwana JA concurring)

(aluminium oxide) is the common dominator. The naturally occurring minerals in this group include, in order of increasing alumina content, various clays (45% or less), andalusite, silianite, kyanite (60%) and bauxite (90%). Alumina is a 'neutral' refractory oxide because it is resistant to chemical attack. Refractory oxides such as calcium oxide (lime) and magnesium oxide (magnesia) are 'basic' refractory oxides because they may react chemically with acids at high temperature. Depending on the application, a neutral or basic refractory might be required.

[9]

South Africa is the world's largest producer of andalusite. ISA and AR are the only producers in this country. The Imerys group, of which ISA is part, has an andalusite mine in France. The only other significant producer is Andalucita in Peru. Within South Africa, the merger is two-to-one and would thus give rise to a monopoly.

[10]

China is the world's largest bauxite producer though bauxite is also mined in Brazil and Guyana. Most of China's bauxite is used to make aluminium. Only high-alumina bauxite is used for refractories. To be used as a refractory, bauxite must be calcined (the removal of moisture at high temperature). Andalusite does not require calcination.

[11]

The refractory substance derived from flint clay is called chamotte. This is produced by firing and sintering the clay. Because of its relatively low alumina content (around 40%), chamotte is not normally used on surfaces which have direct contact with liquid slag and metal.

[12]

The refractory substance derived from bauxitic or kaolinitic clays is known as mulcoa. Its alumina content is increased to about 60% by combining it with calcined bauxite.

[13]

At high temperature, andalusite converts to mullite and silica while bauxite converts to mullite and alumina. This process of mullitisation is an important feature of the refractoriness of the minerals. Mullite does not occur naturally in exploitable quantities but can be synthesised from raw materials. Synthetic mullite has an alumina content of around 75%.

2017 JDR 0531 p5

Rogers JA (Davis JP and Boqwana JA concurring)

[14]

Brown fused alumina, white fused alumina and tabular alumina (95% - 100% alumina) are refractory substances made by subjecting bauxite to further beneficiation.

[15]

Apart from their varying alumina contents, the performance of these substances may be affected, prejudicially or beneficially, by the presence of impurities.

[16]

The andalusite used in refractories consists of coarse, medium and fine granules. Coarse granules can be made smaller but not vice versa. ISA is able to produce all three sizes. Because of the nature of its ore, AR can only produce medium and fine granules. A refractory substance contains large granules (aggregate particles) and smaller granules (matrix particles). The smaller granules fill up the space between the large ones, reducing the substance's porosity.

[17]

AR entered the market in 2002. For several decades before that, ISA was the sole producer of andalusite in South Africa. Domestic refractory manufacturers cannot consume all the andalusite which ISA and AR are able to produce. A substantial part of South Africa's andalusite output has always been exported, mainly to Europe, some to China. Prior to 2012 there was, in general, parity between the ex-works prices paid by domestic and foreign buyers though obviously the gross price paid by foreign buyers, inclusive of delivery, was considerably more. Because of rand depreciation, export sales have since 2012 become more profitable. A gap has thus emerged between the ex-works prices paid by foreign buyers and those paid by domestic buyers, ranging from 9% to 46%. The export parity price ('EPP') is the price which domestic buyers would have to pay if ISA and AR charged them the same prices as their foreign customers.

Substitutability

[18]

There was a good deal of written and oral evidence about the extent to which andalusite could, from a functional perspective, be substituted by other refractory substances. The merging parties contended that andalusite could be substituted in all applications or at least most of them. The Commission contended otherwise.

2017 JDR 0531 p6

Rogers JA (Davis JP and Boqwana JA concurring)

There was no shortage of expert opinion to support both views. The answer may not be purely scientific. There are issues of perception. The Commission adduced evidence that manufacturers who use refractories perceive andalusite to have unique qualities and would be resistant to change.

[19]

Furthermore, and notwithstanding the technical evidence of substitutability presented by the merging parties, they market andalusite inter alia on the basis of its particular qualities. As Imerys' Mr Parte said, one tries to 'educate the customer why andalusite is better'. […]

[20]

[…]

[21]

There was also evidence about the extent to which other substances (assuming them to be functional substitutes) were economic substitutes for domestic consumers, ie whether it would be cost-effective for South African refractory manufacturers to switch. Bauxite and mullite, the most likely contenders, would have to be imported. The merging parties identified what they regarded as functional substitutes for ISA's top 12 andalusite-containing refractories. Their economist, Mr Murgatroyd of RBB Economics, did a cost analysis with a view to comparing the cost of the substitutes with the EPP of the andalusite-containing products. The comparison was based on the (higher) EPP rather than the actual (lower) domestic price because of the merging parties' fundamental thesis that within the next couple of years they will become capacity-constrained...