Commission, September 10, 2014, No M.7061

I. THE PARTIES

(1) Huntsman is a US company producing a diverse range of specialty and intermediate chemicals. Huntsman operates in five divisions: (i) Polyurethanes, which produce raw materials for the production of polyurethanes, thermoplastic polyurethanes and intermediate chemicals; (ii) Performance products, which produce various products, including amines, surfactants, carbonates, ethylene glycols, linear alkyl benzene, and maleic anhydride as well as internally used chemicals, e.g., ethylene oxide; (iii) Pigments, which produce TiO2; (iv) Advanced Materials, which produces epoxy resins and related chemicals as well as formulated systems based on both epoxy and non-epoxy chemistries; and (v) Textile Effects, which produces textile dyes and textile chemicals.

(2) Rockwood is a US-based global developer, manufacturer and marketer of specialty chemicals and advanced materials used for industrial and commercial purposes. As of 2012, Rockwood's activities were focused on the following areas: lithium and surface treatment chemicals, TiO2 pigments, iron-oxide pigments, timber-treatment chemicals and clay-based additives.

II. THE OPERATION

(3) On 29 January 2014, the Commission received a formal notification pursuant to Article 4 of the Merger Regulation by which Huntsman International LLC, a wholly-owned subsidiary of Huntsman Corporation ('Huntsman' or 'the Notifying Party', US) acquires a number of businesses from Rockwood Specialties Group, Inc. ('Rockwood', US), namely:

- Rockwood's titanium dioxide ('TiO2') pigments and functional additives businesses, which together operate under the name Sachtleben,

- Rockwood's colour pigments business, timber treatment and wood protection chemicals business in North America, and water treatment business, and

- Gomet, a specialist provider of automotive spare parts developed for the automotive aftermarket.

(4) Huntsman and Rockwood are collectively referred to as the 'Parties'.

III. SUMMARY

(5) Based on the results of the phase I market investigation, the Commission raised serious doubts as to the compatibility of the transaction with the internal market in relation to the EEA markets for TiO2 (a) for printing ink applications; (b) for cosmetics, pharmaceutical and food applications; and (c) for fibres applications. On 5 March 2014, the Commission adopted a decision initiating the proceedings pursuant to Article 6(1)(c) of the Merger Regulation ('Decision opening the proceedings') and opened a phase II market investigation.

(6) The results of the in-depth market investigation confirmed the competition concerns raised in the Decision opening the proceedings with respect to one market, namely the EEA market for TiO2 for printing ink applications. On 8 July 2014, the Commission addressed a Statement of Objections to the Notifying Party spelling out its concerns in relation to the unilateral effects likely to arise on the EEA market for TiO2 for printing ink applications.

(7) On 18 July 2014, the Notifying Party submitted a remedy proposal pursuant to Article 8(2) of the Merger Regulation. On 23 July 2014 the Notifying Party submitted an improved remedy proposal. On 28 July 2014, the Notifying Party submitted a final set of commitments. The Commission conducted two market tests in relation to these remedies respectively on 18 and 28 July 2014.

(8) On 28 August 2014, the Advisory Committee gathering representatives of national competition authorities agreed with the Commission's assessment of the case and the finding that the commitments submitted on 28 July 2014 were suitable and sufficient to remove the significant impediment of effective competition in the EEA market for TiO2 for printing ink applications and that the notified transaction must be declared compatible with the internal market and the functioning of the EEA Agreement in accordance with Article 2(2) and 8(2) of the Merger Regulation and Article 57 of the EEA Agreement.

(9) On 10 September 2014, the Commission issued a clearance decision under Article 8(2) of the Merger Regulation.

IV. EXPLANATORY MEMORANDUM

A. The relevant product markets

1. Introduction to TiO2

(10) TiO2 is an inorganic chemical which is essentially used to opacify, brighten and whiten various industry and consumer good products. Specifically, it is used in paints and coatings (61 %), plastics (25 %), paper (8 %), usually referred to as 'mass applications', as well as in a variety of so called 'specialty applications', including printing inks (3,5 %), fibres, and cosmetics, pharmaceuticals and food (altogether 2,5 %).

(11) There are two technologies used to produce TiO2: a sulphate-based production process (55 % of global capacity, predominant in the EEA and in China) and a chloride-based production process (45 % of global capacity, predominant in North America).

(12) TiO2 is produced in a number of different grades, which can be differentiated by varying in particular (i) the average crystal size of the product; and (ii) the coating applied on the crystal. Although they generally have the same basic properties, TiO2 grades differ as regards certain technical characteristics and their intended use.

2. The Notifying Party's views

(13) The Notifying Party claims that, with few exceptions (2), there is no significant difference in the production of different TiO2 grades as the production process, the machinery and the inputs are essentially the same. Although TiO2 suppliers manufacture different grades, TiO2 grades are generally suitable for use in many end-applications. The Notifying Party states that most TiO2 manufacturers can produce or readily switch to producing most grades and thus can serve most end-use applications. As regards the difference in the manufacturing process, the Notifying Party acknowledges that switching production from chloride to sulphate and vice versa is not possible. However, they maintain that chloride and sulphate TiO2 can be used interchangeably for around 80 % of all applications. Finally, according to the Notifying Party, from the demand-side most TiO2 grades are suitable for any use and the different positioning of grades in relation to different applications is the result of marketing strategy decisions, rather than real differences between the products. In conclusion, according to the Notifying Party, there is one overall market for TiO2 composed of differentiated products.

3. Commission's decisional practice

(14) The Commission analysed TiO2 markets in a number of previous cases, where it assessed these markets on the basis of end-applications. Specifically, the Commission identified three main categories of TiO2 end-applications: coatings, plastics and specialty applications. In addition, the Commission considered that these categories could be further subdivided in the following subcategories: '(coatings) into decorative, automotive, industrial durable and general industrial applications; plastics into masterbatches, PVC and other plastics applications; specialities into inks, paper, laminates and fibres applications' (3).

(15) The Commission also found that within each application subcategory, a number of grades are used to match the specific technical requirements of the customers (4). However, in previous decisions, the Commission considered that there was no need to further delineate the relevant product markets on the basis of TiO2 grades, as one grade can be used for a range of end-applications and as there is a high degree of supply-side substitutability, in particular in relation to the grades within mass applications and within the same chemical process. Ultimately, the Commission left the issue open (5).

(16) As to the differences in manufacturing processes, the Commission found that due to the different production equipment the switching between sulphate and chloride-based processes is not possible from a supply-side perspective. In addition, from a demand-side perspective, the Commission found that while chloride and sulphate-produced TiO2 can be used interchangeably for around 80 % of all applications, there are nevertheless certain specific applications where either chloride or sulphate-produced TiO2 is preferred. In particular, it was found that sulphate-based TiO2 grades cannot be substituted by chloride-based grades for certain speciality applications, such as inks and fibres (6).

4. Commission's assessment

(17) On the basis of the findings of its market investigation, the Commission established that ink manufacturers cannot switch between chloride- and sulphate-based TiO2 grades, and that only sulphate-based grades can be used for the production of printing ink in the EEA. Moreover, the Commission found that only specific TiO2 grades can be used for the production of printing ink applications, and not all the TiO2 suppliers can produce TiO2 grades for printing ink applications as a very specific know-how is required for the production of these types of grades. Finally, the Parties themselves, as well as independent industry sources, distinguish TiO2 markets on the basis of the final applications and specifically they analyse the TiO2 market for printing ink application as a separate market.

(18) Therefore, the Commission considers that TiO2 for printing ink applications constitutes a separate relevant product market. B. The relevant geographic markets

1. The Notifying Party's views

(19) The Notifying Party submits that the TiO2 market is global irrespective of any segmentation among the various end-applications for the following reasons.

(20) First, there are significant trade flows between the different world regions, representing 30 % of the global TiO2 demand. Second, a high price correlation can be observed between world regions. There are only minimal price differences which reflect costs of freight and duties between regions. Third, the Notifying Party submits that the larger TiO2 customers are typically global companies and their quality standard is similar across the world. Most customers source from a variety of global suppliers having lists of approved global suppliers. Consolidation of the customer base has increased the customers' buyer power. Fourth, the Notifying Party submits that there are no significant regulatory or other constraints limiting the supply of TiO2 into or within the EEA, and that existing tariffs (ranging from 5,5 % to 6,5 %) do not prevent global trade flows. Fifth, the Notifying Party submits that there is no local manufacturing or local distribution network needed.

2. Commission's decisional practice

(21) Regarding the geographic market definition, the Commission considered in previous decisions, without referring specifically to the TiO2 for printing ink applications, that 'the relevant geographic market for titanium dioxide is considered at least the Community' (7), because of absence of any national barriers, limited impact of transport costs, the capability of the main TiO2 suppliers to serve Western European customers from a few plants and the limited variation of prices across Member States.

(22) With regard to TiO2 trade flows, the Commission observed main trade flows between the EEA and Northern America. In 1997, more than 20 % of TiO2 were imported into the EEA and 16 % thereof came from Northern America (12 % came from one US chloride-based supplier). The other main importers were Eastern European suppliers as 'penetration from Asia/Pacific and other world areas has been less significant so far' (8). Against this background, the Commission assessed the question whether Northern America should be included in the relevant geographic market (9).

(23) The Commission noted that trade flows appeared to be driven by different production technologies in the EEA (sulphate-based) and Northern America (chloride-based) and currency fluctuations. The Commission found that chloride-based TiO2 accounted for the major part of the Northern America market, whereby the EEA market was still mainly served by sulphate-based TiO2. In view of different prices and conditions of competition in the EEA and Northern America as well as local EEA distribution and large stock held by suppliers, the Commission concluded 'that the EEA is still a separate market.' (10)

(24) In its most recent case, the Commission observed that TiO2 customers source from suppliers located in Member States other than the country in which their own manufacturing plant is located and several customers import TiO2 from (chloride) plants in the US. In that case the Notifying Party argued that Chinese capacity and worldwide exports from China were increasing, while the market investigation appeared to only identify imports from Japan and Singapore. Ultimately, the Commission left the precise geographic market definition open (11).

3. Commission's assessment

(25) On the basis of the findings of its market investigation, the Commission established that whereas indeed import duties and transport costs do not constitute barriers to international TiO2 trade, the demand characteristics and the competitive landscape in the market for TiO2 for printing ink applications differ across world regions. Moreover, the Commission found that: the price of TiO2 for printing ink applications varies across different geographic regions; negotiations between suppliers and printing ink manufacturers have regional scopes, and geographic proximity of suppliers plays a role in the customer's purchasing decisions. Finally, independent industry sources and the Parties' internal documents report on TiO2 on a regional basis.

(26) Therefore, the Commission takes the view that the geographic market for TiO2 for printing ink applications is EEA-wide.

C. Competitive assessment

1. The Notifying Party's views

(27) The Notifying Party submitted that the market for TiO2 for printing ink applications is competitive, that today and post-merger the Parties will face competitive pressure from both chloride-based and other sulphate-based TiO2 suppliers, and in particular from Chinese TiO2 suppliers who have ample sulphate-based capacity.

(28) The Notifying Party submitted that the market for TiO2 in general and for TiO2 for printing ink applications in particular is characterised by the ease of entry and expansion. In this context the Notifying Party argued that no significant investments in capacity would be required, since the market, in particular the sulphate-based market, is characterised by substantial overcapacity. The supposedly high degree of supply-side substitutability would in any event make it easy for TiO2 suppliers to counter any capacity constraint by enabling them to switch volumes to the production of TiO2 for printing ink applications. It would therefore be easy and attractive for any sulphate-based manufacturer to enter or expand in the market for TiO2 for printing ink applications.

(29) The Notifying Party indicated in its response to the Statement of Objections that Chinese suppliers in particular will be able to constrain the merged entity in a timely manner and that Kronos, a TiO2 supplier, would be able to defeat any hypothetical price increase.

(30) The Notifying Party also considers that customers face low barriers to switching and that major customers have a significant buying power.

2. Commission's assessment

(i) Huntsman and Sachtleben are leaders and close competitors in the EEA market for TiO2 for printing ink applications

(31) In the EEA market for TiO2 for printing ink applications Huntsman and Sachtleben are market leaders, each holding a market share of 30 to 40 % in 2013. They are distantly followed by the number three supplier, Kronos (10 to 20 %). They are the only two TiO2 suppliers, apart from Kronos, which specifically address the market for TiO2 for printing ink applications in the EEA. Both of them market grades that are designed to fit the technical specifications of ink manufacturers (in particular Huntsman's TR52 and Sachtleben's RDI-S). Other sulphate-based TiO2 suppliers do not have dedicated grades for ink manufacturers although they may make some opportunistic but very limited sales of their grades mainly used in other applications to ink manufacturers.

(32) This structural leadership of Huntsman and Sachtleben reflects their technical and commercial advantage in the EEA market for TiO2 for printing ink applications compared to other sulphate-based TiO2 suppliers. Their leading position and closeness of competition in this market have been extensively confirmed by the information the Commission obtained in its market investigation, as well as by the analysis of the Parties' internal documents.

(33) Therefore, the Commission takes the view that Huntsman and Sachtleben exert a significant competitive constraint on each other in the EEA market for TiO2 for printing ink applications. (ii) Printing ink manufacturers have limited possibilities of switching suppliers

(34) With large TiO2 sulphate-based capacities located mainly in the EEA, Kronos is the third biggest player in the EEA market for TiO2 for printing ink applications, although currently lagging far behind the Parties with a market share ranging between 10 and 20 % in 2013. Similarly to the Parties, Kronos has a dedicated printing ink grade which is marketed under the brand name 'KRONOS 2064'. During the market investigation, respondents indicated however that Kronos is a more distant competitor to the Parties in the EEA market for TiO2 for printing ink applications, having the know-how and a suitable product, but generally lacking a strong multipurpose grade (that is, suitable for all printing ink applications), equivalent to TR52 or RDI-S, as well as a competitive price offer in the EEA.

(35) The Commission analysed the role of Chinese suppliers in the EEA market for TiO2 for printing ink applications. Although the Commission observed that there is sufficient sulphate-based TiO2 capacity in China to enable Chinese suppliers to export to the EEA and there are no significant barriers to trade that could hinder exports, currently Chinese suppliers have a very limited presence in the EEA market for TiO2 for printing ink applications. This is explained by a major gap in the quality of the Chinese products as compared to the Parties' grades for printing ink applications.

(36) In addition to the Parties and Kronos, there are three Eastern European suppliers that have sulphate-based capacities, namely Cinkarna Celje, Precheza a.s., and Zaklady Chemiczne 'Police' SA. They are mostly active either in general coatings grades or specialise on niche markets, such as cosmetics, pharmaceuticals and food. None of these suppliers have dedicated grades for the printing ink market. Other suppliers, such as Ukrainian, Japanese, Korean and Indian suppliers, have a very limited presence in the EEA market for TiO2 for printing ink applications as they are either more expensive or do not have the know-how to produce quality grades for printing ink applications. As regards chloride-based TiO2 suppliers, they are not considered as part of the EEA market for TiO2 for printing ink applications as their grades would only fit a very small part of the EEA ink manufacturers' requirements.

(37) In light of the above and on the results of the market investigation, the Commission takes the view that customers of the merged company would have limited possibilities of switching to other TiO2 suppliers. (iii) Post-merger, the merged entity will be in a position to increase prices in the EEA market for TiO2 for printing ink applications

(38) The merged entity will not only become the largest sulphate-based supplier worldwide, but it will also control a substantial amount of the EEA market for TiO2 for printing ink applications.

(39) Most TiO2 competitors are either unable to produce grades for printing ink applications of sufficient quality because they lack the required know-how, or do not have the incentive to produce grades for printing ink applications due to their size and the costs of entering the market.

(40) New entries into the EEA market for TiO2 for printing ink applications appear unlikely in view of the significant investment in terms of costs and time that is needed to start producing TiO2 for printing ink applications. Suppliers that already possess production facilities necessary to enter the market, would still have to acquire the necessary know-how to be able to develop and sell a grade for printing ink applications.

(41) In particular, Chinese TiO2 suppliers may have incentives to enter the market, and may have been trying to develop a suitable printing ink grade to match the ink manufacturers' technical requirements. Nonetheless, the market investigation revealed that there are significant uncertainties as to whether the market entry of Chinese suppliers will materialise in a timely fashion.

(42) The alleged countervailing buyer power enjoyed by customers is unlikely to prevent the merged entity from increasing its prices post-merger, even more so in relation to the smaller, less sophisticated customers representing 30-40 % of the demand. In addition, any degree of buyer power of the few large customers would be seriously weakened post-merger, since the merger would remove the most credible alternative on the market.

(43) In light of the above, the Commission considers that in this case there are no significant mitigating factors, such as the existence of competitors that could act as a disciplining element on the merged entity, or customers with the ability to directly constrain the merged entity's pricing behaviour.

(iv) Conclusion

(44) Therefore, the Commission concludes that the notified concentration raises serious doubts as to its compatibility with the internal Market with regard to the EEA market for TiO2 for printing ink applications. D. The proposed remedies

1. Undertakings submitted by the Notifying Party

(45) In order to address the aforementioned competition concerns in the EEA market for TiO2 for printing ink applications, Huntsman proposed to divest its global TR52 business, which mainly includes:

- the assignment of the technology that is necessary to develop, manufacture and sell TR52;

- the full global transfer of the TR52 brand;

- the key personnel with TR52 expertise;

(46) In addition, during a transitional period Huntsman will provide for: (i) a supply or toll manufacturing agreement for TR52; (ii) a technological support agreement for the provision of necessary technical support and training on the use of the TR52 know-how; (iii) a transitional support agreement for the provision of necessary support in sourcing the necessary equipment and raw materials for the production of TR52, and procuring logistics and distribution services for the distribution of TR52 in the EEA.

(47) In order to ensure the transfer of the TR52 business to a suitable buyer, the up-front buyer provision was included in the commitments submitted by Huntsman.

2. Assessment of the undertakings submitted

(48) The Commission concluded that the transaction will create a dominant position in the TiO2 market for printing ink applications, while eliminating competition between close competitors that hold large market shares in a market characterised by high barriers to entry in view of the specific know-how necessary to produce TiO2 for printing ink applications.

(49) TR52 is not only one of Huntsman's flagship TiO2 products for printing ink applications, but also one of the two best-selling (by volume) TiO2 products for printing ink applications in the EEA (the other being Sachtleben's RDI-S). Under current market conditions, the TR52 business represents 30 to 40 % of the overall market.

(50) The transfer of the technology and know-how required to develop TR52 will therefore enable, on a stand-alone basis, the entry of a new player, which will swiftly gain an important role in the market and be able to constrain the merged entity. In particular, the provisions about the transitional supply/toll agreement will ensure the timely entry of such new player, who will be able to continue supplying TR52 even during the time needed to complete the technology and know-how transfer and to set up its own production of TR52.

3. Conclusion

(51) In its decision, the Commission has reached the conclusion that, on the basis of the undertakings submitted by the Parties, the notified concentration will not lead to a dominant position of the Parties in the EEA market for TiO2 for printing ink applications.

V. CONCLUSION

(52) For the reasons mentioned above, the decision concludes that the proposed concentration will not significantly impede effective competition in the internal market or in a substantial part of it.

(53) Consequently the concentration should be declared compatible with the internal market and the functioning of the EEA Agreement, in accordance with Article 2(2) and Article 8(2) of the Merger Regulation and Article 57 of the EEA Agreement.

(1) OJ L 24, 29.1.2004, p. 1.

(2) Nano/ultrafine grades, where the Parties' activities do not overlap.

(3) Commission Decision C 97/275/EEC in Case IV/M.984 DuPont/ICI (OJ C 275, 11.9.1997, p. 4, paragraph 36).

(4) Commission Decision C 97/275/EEC in Case IV/M.984 DuPont/ICI (OJ C 275, 11.9.1997, p. 4, paragraph 38).

(5) Commission Decision C 97/275/EEC in Case IV/M.984 DuPont/ICI (OJ C 275, 11.9.1997, p. 4, paragraphs 38-39), Commission C 2010/072/EU in Case M.5638 Huntsman/Tronox Assets (OJ C 72, 20.3.2010, p. 9, paragraphs 15-16-18).

(6) Commission Decision C 97/275/05/EEC in Case IV/M.984 DuPont/ICI (OJ C 275, 11.9.1997, p. 4, paragraph 34).

(7) Commission Decision C 90/304/EEC in Case No IV/M.23 ICI/Tioxide (OJ C 304, 4.12.1990, p. 27, recital 12).

(8) Commission Decision C 97/275/EEC in Case IV/M.984 DuPont/ICI (OJ C 275, 11.9.1997, paragraph 44).

(9) See footnote 8.

(10) See footnote 8.

(11) Commission Decision C 2010/072/EU in Case M.5638 Huntsman/Tronox Assets (OJ C 72, 20.3.2010, p. 9, paragraph 22).