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 7.5% 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 (2). It identified a separate product 6 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.245 — DEUTSCHE BP / ERDÖL- sibility for the information and views expressed lies enti- CHEMIE, 26 April 200 and Case No COMP / M.4005 — rely with the authors. INEOS/INNOVENE, 9/2/2005. 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 CONTROL MERGER 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 000 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 4 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 %). 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 (6), 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 % of the total EEA consumption. Ethylene oxide The vast majority of the respondents to the market In previous decisions (5) 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.245 — DEUTSCHE BP / ERDÖL- CHEMIE, 26April 200 (4) Case No COMP / M.467 — DOW CHEMICALS/PIC/ WHITE SANDS JV, 28 June 2004 (5) Case No COMP/M.245 — DEUTSCHE BP / ERDÖL- (6) Case No COMP/M.245 — DEUTSCHE BP / ERDÖL- CHEMIE, 26April 200 and Case No COMP / M.4005 — CHEMIE, 26/04/200, Case No COMP / M.467 — DOW INEOS/INNOVENE, 9 December 2005. CHEMICALS/PIC/WHITE SANDS JV, 28 June 2004 Number 3 — Autumn 2006 5 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 ,000 ktpa (kilo tonnes per annum). The mer- EO. The investigation showed that although the chant market represents around 8% of the total parties’ plants represent an important part of the production or about 560 ktpa, of which about % 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.