Merger control

Ineos/BP Dormagen: Illustrating the forward-looking nature of merger control analysis (1) Kamila KLOC-EVISON, Glykeria DEMATAKI and Enrique SEPULVEDA GARCIA; Directorate-General for Competition, unit B-3; Sofia ALVES, Directorate-General for Competition, unit A-2; Claes BENGTSSON, Directorate-General for Competition, Chief Economist Team

On 10 August 2006, the European Commission ­ethylene content of 82% and is a hazardous prod- approved, after an in-depth investigation, the acqui- uct, being highly inflammable and explosive. It is sition of BP’s ethylene oxide and ethylene glycol busi- also toxic and carcinogenic. EO can be used in the ness, situated in Dormagen, Germany (“BP Dor- non-purified state to produce EGs or be further magen”) by Ineos Group Limited (“Ineos”). Ineos is purified. a company active, among others in the manufacture EGs are intermediate chemicals produced mainly of ethylene oxide and ethylene glycols. () by the non-catalytic hydration of EO. EGs account The main part of the competitive assessment in this for 37.5% of total EEA consumption of EO and are case was related to the market of ethylene oxide, only produced by integrated EO producers. where the combined entity would have high mar- An alternative route for processing EO involves its ket shares irrespective of alternative product and further purification: purified EO can then be used geographic market definitions. However, after an for production of various other chemical interme- in-depth market investigation, the transaction was diates. Most of this purified EO is used captively cleared on the basis of the forecast middle-term mar- by the integrated EO producers in downstream ket development that would have significant effect operations to produce EO derivatives, the remain- on the parties’ future position on this market. der is sold to third parties, which compete with EO a. The concentration producers on the various EO derivatives markets. Ineos is a UK limited company active worldwide Ethylene oxide in the production, distribution, sales and market- The Commission has examined ethylene oxide in ing of intermediate and speciality chemicals. On previous cases (). It identified a separate product 16 December 2006, Ineos acquired Innovene, the market for EO as it is characterised by low sub- former olefins, derivatives and refining business stitutability especially when used as a direct raw of BP (excluding the BP Dormagen Business). material in chemical reactions. The investigation That operation was cleared by the Commission in this case confirmed this product market defini- on 9 December 2005 (Case No COMP/M.4005 tion. — Ineos/Innovene). On 24 January 2006, Ineos notified its intention to acquire control of the BP As only purified EO is sold to third parties, the Dormagen Business, controlled by BP. The BP Dor- competition assessment in this case concentrated magen Business consists solely of a plant located in on the market for purified EO. At a late stage of Köln/Dormagen (Germany). the proceedings, Ineos submitted that the purified EO could be further sub-segmented into high- The only products manufactured and sold by the grade EO (“HG-EO”) or low-grade EO (“LG-EO”) BP Dormagen Business are ethylene oxide (“EO”) depending on the level of impurities (mainly the and ethylene glycols (“EGs or glycols”). Ineos pro- content of aldehydes). However, the market inves- duces a wide range of chemicals including EO and tigation confirmed that it was not necessary to fur- EO-derivatives (including EGs). Consequently, the ther sub-divide relevant product market according only horizontal overlaps relate to EO and EGs. to purity levels of the purified EO as only H-G EO was sold to the third parties. b. The product market The Commission also investigated whether a EO is a colourless gas, which is produced by distinction needs to be made between long term the partial oxidation of the ethylene. EO has an arrangements for supply of EO to customers whose

(1) The content of this article does not necessarily reflect the official position of the European Communities. Respon- (2) Case No COMP/M.2345 — DEUTSCHE BP / ERDÖL- sibility for the information and views expressed lies enti- CHEMIE, 26 April 2001 and Case No COMP / M.4005 — rely with the authors. INEOS/INNOVENE, 9/12/2005.

56 Number 3 — Autumn 2006 Competition Policy Newsletter

plants are located on, or adjacent to, the EO sup- submitted that the market is EEA-wide as EO from MERGER CONTROL plier’s site and connected via pipe line (“on-site”) these plants is transported over long distances and supplies to other customers (“off-site”) which (according to Ineos’ data, in some cases more than are served by other means such as truck or rail. The 1000 km, although the majority of deliveries are Commission found that there were some differ- within 600 km). However, the great majority of ences in price levels, contract lengths, and quanti- customers and at least half of the competitors con- ties purchased between these two supply methods. sider the geographic market to be regional. Ship- However, the Commission did not have to make ping distances appear to be between 0 km to 800 a decision on this issue, given that the transaction km with the large majority between 0 to 600 km, would not significantly impede effective competi- due to transport costs and the hazardous nature of tion, irrespective of whether on-site and off-site the product. supplies are considered to constitute a single or According to the limitations on transport distance, two separate markets. the Commission identified possible regional mar- Ethylene glycols kets for EO as: (i) United Kingdom and Ireland, (ii) Nordic countries (Norway, Sweden and Finland), Ineos submitted that EGs constitute a separate (iii) Mainland North-West Europe, or “MNWE” product market, in line with a previous Commis- (the Netherlands, Denmark, Belgium, Luxem-  sion decision ( ). However, in a subsequent deci- burg, Germany, Austria, Central and Northern  sion( ), the Commission had noted that demand- France) , (iv) the Mediterranean basin (Italy, Por- side considerations might make it necessary to dis- tugal, Southern France, and Spain), and (v) Cen- tinguish between the different types of EG. These tral and Eastern Europe. In addition, the Commis- are: mono-ethylene glycol (“MEG”), di-ethylene sion found out that regional price differences and glycol (“DEG”) and tri-ethylene glycol (“TEG”). limited trade flows tend to confirm this geographic MEG accounts for the great majority of the pro- market segmentation. However, it was not neces- duction (about 90%), with the remaining produc- sary to conclude as to the exact geographic mar- tion divided between DEG (about 9%) and TEG ket definition for EO as the Commission found (about 1%). out that the transaction would not significantly In this case, the majority of market participants impede effective competition on either possible indicated that EGs should be further segmented geographic market (an EEA-wide geographic wide into three markets, for MEG, DEG and TEG, or a MNWE market, the only regional market because they are used in very different applications where both parties were active). and are not substitutable to any extent. However, from the supply-side point of view, MEG, DEG, Ethylene Glycols TEG are invariably manufactured together and Ineos submitted, in line with what has been are always produced in very similar proportions. argued in previous decisions (), that the relevant The exact market definition was left open as the geographic market for EGs is at least Western transaction would not significantly impede effec- Europe and even global. This is because EGs are tive competition with respect to EGs under any of not hazardous products and, in consequence, they the alternative product market definitions. are easily transportable. Prices are comparable at a global level, and imports into the EEA, mainly c. The geographic market from Middle East and Russia, represent around 13% of the total EEA consumption. Ethylene oxide The vast majority of the respondents to the market In previous decisions () the Commission has con- investigation confirmed that the geographic mar- sidered the geographic dimension of the EO market ket is at least EEA-wide. However, for the purposes was probably Western Europe (defined as the EEA of the decision, the exact market definition was plus Switzerland) although the exact market defi- left open as the transaction would not significantly nition was left open. In this case the relevant pro- impede effective competition in the common mar- duction plants are located in Antwerp (Belgium), ket or a substantial part of it under any alternative Lavera (France) and Dormagen (Germany). Ineos geographic market definitions.

(3) Case No COMP/M.2345 — DEUTSCHE BP / ERDÖL- CHEMIE, 26April 2001 (4) Case No COMP / M.3467 — DOW CHEMICALS/PIC/ WHITE SANDS JV, 28 June 2004 (5) Case No COMP/M.2345 — DEUTSCHE BP / ERDÖL- (6) Case No COMP/M.2345 — DEUTSCHE BP / ERDÖL- CHEMIE, 26April 2001 and Case No COMP / M.4005 — CHEMIE, 26/04/2001, Case No COMP / M.3467 — DOW INEOS/INNOVENE, 9 December 2005. CHEMICALS/PIC/WHITE SANDS JV, 28 June 2004

Number 3 — Autumn 2006 57 Merger control

d. The competition assessment First, the Commission assessed whether currently the parties’ competitors have sufficient spare EO Ethylene oxide capacity to supply the merchant market. In this The overall size of the EO market in the EEA, regard, it is the purification capacity that is criti- including production for captive use, is around cal as merchant market sales are only of purified 3,000 ktpa (kilo tonnes per annum). The mer- EO. The investigation showed that although the chant market represents around 18% of the total parties’ plants represent an important part of the production or about 560 ktpa, of which about 33% spare purification capacity, their competitors’ by value is accounted for by on-site customers and spare capacity would be able to constrain the par- 67% by off-site customers. ties’ anticompetitive behaviour as they represent significant volumes compared to the relatively In terms of market structure, the transaction is a small merchant market. merger between two of the three largest EO sup- pliers giving rise to combined market shares above Also, an important part of the Commission assess- 45% under any reasonable definition of the rele- ment in this case was focused on a relationship vant product and geographic markets for EO. The between the production of purified EO and EGs. combined entity’s closest competitor, Shell, repre- A reduction in the production of EGs may ena- sents [15-25] % of the overall merchant market for ble integrated producers (those producers mak- both on-site and off-site supplies. All the remain- ing both EO and EGs) to increase their purified ing competitors have market shares below 10% EO production. This relationship is based on the (many below 5%) for both total and off-site sales. fact that both products use the same raw material (unpurified EO) and, consequently, a reduction in However, taking into account that the merchant the production of EGs will release unpurified EO market represents a fairly small proportion of total which could be used for the production of addi- production, relatively small changes in the overall tional quantities of purified EO — subject to puri- production may have a significant impact on the fication capacity constraints. merchant market. As a result, in its assessment the Ineos submitted that MEG is used as a swing prod- Commission has concentrated on the importance uct allowing EO producers to switch to and from of integrated producers’ captive use of EO and its the supply of EO or other EO derivatives depend- impact on sales to third parties. The Commission ing on market conditions. In order to prove it, Ineos examined the conditions relating to the supply of submitted two econometric studies that examined EO and, in particular, those factors capable of con- the effects of capacity outages on EO production straining the behaviour of the combined entity on and EO usage. These studies show past evidence the merchant market for EO. that the parties’ competitors were able to increase In order to do so, the Commission identified the their production of purified EO at the expense of main aspects on which the availability of EO on the production of glycols in response to outages the merchant market depends: at the Ineos and BP Dormagen Business’ plants. — the production capacity for EO, Moreover, the outages were found not to affect total EO sales to third parties, which suggests that — the purification capacity, reductions in the EO sales by the affected plants — the downstream uses of EO, in particular the were (to some extent) offset by increased EO sales split between EGs and other uses, by competitors. — the incentives to use additional EO internally The Commission concluded that although these and/or sell to the merchant market. studies had some limitations (in particular they The diagram below shows the interrelationships relied on a small set of data) and as such could not between the production of EO and the possible be directly extrapolated to predict how the parties’ outlets for this material. competitors could react to more permanent reduc- tions in merchant sales by the combined entity, &0%4
they indicated a potential for such competitors to 163*'*$"5*0/ counteract anticompetitive behaviour of the com- bined entity. .&3$)"/5
."3,&5 The Commission then estimated how big this 6/163*'*&%
potential swing from glycols to purified EO could &0 be, taking into account all capacity constraints. The Commission found that in case of the largest (-:$0-4
foreseeable reduction in production of glycols the 130%6$5*0/ potential swing from glycols to purified EO could, in case of unilateral price increase by the merged

58 Number 3 — Autumn 2006 Competition Policy Newsletter

entity, bring to the EO merchant market quantities The Commission’s investigation revealed that in MERGER CONTROL that are significant compared to the current overall the near future, the EODs’ capacity of integrated size of that market. producers will be partially constrained due to increased demand for EODs. Increases in EODs The Commission also took into consideration the production capacity are more costly and take more impact of new glycols capacity coming on stream time than increases in EO purification capacity. in the Middle East and Asia on the market situa- Consequently, not all of the purified EO released tion in Europe. It found that these new EO produc- as a result of the decrease in production of glycols tion capacities were likely to result in an increase in the EEA will be absorbed by increased produc- of exports of EGs to the EEA and that as a result tion of EODs by integrated producers. It will con- a decrease in EG production in the EEA could be sequently be available to the merchant market. expected. This in turn could increase the availabil- ity of EO in the EEA for third party sales and the Therefore, a significant impediment of effective in-house production of other EO derivatives. competition in the merchant market for EO can be Accordingly, the Commission considered it appro- ruled out. EO customers will have supply alterna- priate to assess the impact of the operation in a tives which will be sufficient to constrain the com- prospective manner, that is in relation to the fore- bined entity’s behaviour. cast and reasonably expected developments in the Glycols future. The Commission’s investigation showed that the World production and consumption of EG is esti- total spare capacity for the production of EO in the mated at some 17,000 ktpa, of which EEA produc- EEA is expected to grow in the coming years and tion is around 1,700 ktpa for a demand of some utilization rates will be lower. Although the spare 1,950 ktpa. World demand over recent years has purification capacity is expected to decrease in the been relatively stable, due in particular to the near future, however, as the merchant market is demand in China and the Far East for MEG used relatively small and is not expected to increase sub- for polyester textiles. This has, in turn, stimulated stantially in the near future, the remaining spare investments in substantial new EG capacity in Asia purification capacity can still act as a constraint and the Middle East scheduled to come on stream on unilateral increases in prices by the combined over the next few years. entity. The Commission’s investigation indicated that Additionally, in order to assess the impact of the the combined entity’s market share on a global anticipated increase in imports of glycols from the merchant market did not exceed 5% for any pos- Middle East on the European EO merchant mar- sible product market definition. On an EEA-wide ket, future economic incentives of EO producers merchant market, the combined entity’s share did to supply the merchant market were taken into not exceed 20% for any relevant product market account. In order to compensate the predicted (around [10-20]% for EG as whole, MEG and DEG, downturn in EO consumption for glycols and in and around [15-25]% for TEG). Also the combined order to keep the utilization rates for EO produc- entity would face competition from various strong tion at the highest possible levels, EO producers competitors such as BASF, MEGlobal, Sabic, Shell, would need to find other outlets for their supply Clariant as well as from imports. of EO. As all other EO derivatives (apart from gly- In the light of the combined entity’s limited market cols) and the merchant market require purified EO, share, the presence of significant competitors with European EO producers would have incentives to comparable or larger market shares and the pre- increase their current purification capacities. dicted downturn in glycols production in Europe The Commission found that in contrast to front- (as a result of increased imports), the Commission end expansions in the main EO reactor and recov- concluded that the proposed transaction does not ery stages, expansion in the purification sections raise competition concerns in the market for EG. is less expensive and often does not need to be accompanied by other investments across the e. Conclusion plant. Assuming that competitors will be able to increase their current purification capacities in This case is a good example of the fundamentally order to absorb the expected decrease in pro- prospective nature of merger analysis. It shows duction of glycols, the extent to which increased how such a forward-looking analysis may need depends upon EO producers’ captive use of EO for to be broadened to several interrelated markets EODs, their ability to increase their EODs capaci- in order for the Commission to reach sufficiently ties and their incentives to use EO captively or sell robust conclusions — and cautions that such ana­ it to the merchant market. lysis may be quite sophisticated.

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