Commission, November 7, 2012, No M.6471

I. THE PARTIES

(1) Outokumpu Oyj ('Outokumpu', Finland)is a Finnish public company listed on the Helsinki Stock Exchange. Outokumpu is active in the production, sale and distribution of stainless steel products and the production of ferrochrome. It has stainless steel production facilities located in Tornio (Finland), Avesta, Nyby, Degerfors and Kloster (Sweden), Sheffield (United Kingdom), New Castle and Richburg (United States of America, 'USA'), as well as a ferrochrome mine in Kemi (Finland).

(2) Inoxum GmbH and Nirosta GmbH (together, 'Inoxum', Germany) are the stainless steel division of ThyssenKrupp AG ('TK', Germany). Inoxum is active in the production, sale and distribution of stainless steel products, high performance alloys ('HPA') and forging. Inoxum's main stainless steel production facilities are in Krefeld, Bochum and Dillenburg (Germany), Terni (Italy), and outside Europe, in San Luis Potosi ('Mexinox') (Mexico), Calvert (USA) and Shanghai (Shanghai Krupp Stainless, 'SKS') (China). Inoxum is currently solely controlled by TK.

II. THE OPERATION

(3) On 10 April 2012, the Commission received a notification of a proposed concentration pursuant to Article 4 of the Merger Regulation by which Outokumpu acquires within the meaning of Article 3(1)(b) of the Merger Regulation control of the whole of Inoxum, by way of purchase of shares (2). Outokumpu and Inoxum are hereinafter referred to as 'the Parties'.

III. UNION DIMENSION

(4) The undertakings concerned had in 2010 a combined aggregate world-wide turnover of more than EUR 5 000 million (3) (Outokumpu: EUR 4 229 million; Inoxum: EUR 6 739 million). The aggregate Union-wide turnover of each of the undertakings concerned is more than EUR 250 million (Outokumpu: EUR [...] million; Inoxum: EUR [...] million). Finally, none of the undertakings concerned achieves more than two-thirds of its aggregate Union-wide turnover within one and the same Member State. The proposed transaction therefore has a Union dimension pursuant to Article 1(2) of the Merger Regulation.

IV. THE PROCEDURE

(5) On 21 May 2012, the Commission adopted an Article 6(1)(c) decision in which the Commission raised serious doubts as to the compatibility of the transaction with the internal market. Outokumpu submitted its written comments to the Article 6(1)(c) decision on 4 June 2012.

(6) On 9 August 2012, the Commission adopted a Statement of Objections ('SO') pursuant to Article 18 of the Merger Regulation. Outokumpu replied to the SO on 24 August 2012.

(7) On 30 August 2012, an oral hearing took place.

(8) On 19 September 2012, Outokumpu submitted commitments pursuant to Article 8(2) of the Merger Regulation ('the Proposed Commitments'). Following the submission of the Proposed Commitments, the Commission launched a market test in order to gather competitors', customers' and other market participants' views on these commitments.

(9) On 1 October 2012, Outokumpu submitted a revised set of commitments ('the Revised Commitments'). The Commission launched a market test on the Revised Commitments on the same day.

(10) On 9 October 2012, Outokumpu submitted a slightly modified version of the Revised Commitments.

(11) On 19 October 2012, Outokumpu submitted a final set of commitments ('the Final Commitments').

(12) The meeting of the Advisory Committee took place on 25 October 2012. The Advisory Committee discussed the draft of this Decision and issued a favourable opinion.

V. THE RELEVANT PRODUCT MARKETS

(13) The transaction gives rise to a number of overlaps in the stainless steel market. In particular, the Parties horizontally overlap in the production of (i) slabs (ii) hot rolled products, (iii) cold rolled ('CR') products, (iv) precision strip, as well as, (v) in the market for distribution of stainless steel products. In addition, the transaction leads to few vertical relationships between the Parties.

(14) In the present decision, the Commission raises competition concerns as to the compatibility of the transaction with the Internal Market with regard to the EEA market for CR products. Accordingly, only this market will be discussed in this summary note. Cold rolled flat products

(15) Stainless steel is defined as a steel alloy with a minimum content of 10,5 % chromium and a maximum of 1,2 % carbon.

(16) For certain applications, stainless steel competes with a variety of materials such as aluminium, copper, plastics, ceramics, composites or carbon steel. However, its properties make it uniquely suitable for certain applications in process engineering, automobile, white goods, etc. One of the main properties of stainless steel is its resistance to corrosion.

(17) In previous decisions, the Commission has considered that one overall market for CR exists (4). The Commission has not considered appropriate to divide the market according to further segmentations such as by type of surface finish, grades, widths or end application.

(18) During Phase I and II, the Commission has further investigated whether the market for CR could be further segmented. In particular, the market investigation focused on whether market segmentations by grade, grade family, commodities vs. specialties, surface finish, and end application could be taken into consideration. Each of these potential market divisions will be discussed below. Families and grades of stainless steel

(19) According to their chemical composition and crystalline structure, four main families of stainless steel can be distinguished: (i) austenitics, (ii) ferritics, (iii) martensitics, and (iv) duplex. Each of the families presents different chemical composition and physical properties.

(20) However, given the high degree of supply side substitutability between the different grades and grade families, an overall market for all CR products will be considered for the purpose of this Decision. Commodities vs. specialties

(21) Commodity grades usually cover a very wide range of applications (ca. [70-80] % of the market), whereas specialty grades represent [30-40] % of the market. There is no clear-cut and industry-wide definition of which grades can be qualified as specialty grades.

(22) On the basis of the information collected during the market investigation, the Commission confirmed that there is a high degree of supply side substitution between the different grades, regardless of being commodities or specialty grades. Consequently, the Commission considers, in line with the submissions of the Parties, that no separate market by type of grades should be considered in this case. Distinction by surface finish

(23) While there is a variety of CR surface finishes, the most common ones are 2D, 2B and BA finishes. There also exist other surface finishes which appear to be frequently used in the industry. The market investigation has confirmed that most producers and distributors have the equipment needed to produce the different surface finishes. The only exception is BA finish which requires special and dedicated equipment, as well as an investment of EUR 220 million to acquire a BA line.

(24) For the purposes of this decision, the overall market for the production and supply of CR products, independently of their surface finish, will be considered as well as the effects of the transaction on possible BA and non-BA segments. Distinction by end application

(25) Depending on the end use or application, a grade with certain mechanical characteristics is required. In general terms, grade selection for a specific end-use application depends on requirements relating to, inter alia, corrosion resistance, heat resistance, strength, aesthetics and workability.

(26) The Commission's investigation has confirmed that a variety of grades and grade families are used in the same end application. Moreover, many grades are used in a variety of end applications. Consequently, the Commission considers, in line with the submissions of the Parties, that no market segmentation by end application should be considered in this case. VI. THE RELEVANT GEOGRAPHIC MARKETS

Market for Cold rolled (CR)

(27) In previous decisions, the Commission has considered the possible scope of the market for CR as either not wider than Western Europe or at least Community-wide (5). However, the definition of the relevant geographic market was ultimately left open.

(28) The Parties consider the geographic market for all stainless steel products, including CR, to be at least EEA-wide.

(29) In its Phase I investigation, the Commission found evidence that confirmed that the market for CR is not wider than the EEA: (i) there remain significant differences in the price for CR in different areas of the world even for CR of the most common commodity grades, which cannot be justified by transport costs only; (ii) more than half of the customers responding to the Commission's requests for information during Phase I investigation indicated that they have never purchased CR from a non-European producer, regardless of the grade family or different grades; (iii) the Parties have provided econometric evidence and critical elasticity analysis which does not support a geographic scope of the market wider than the EEA.

(30) Furthermore, and according to the responses to the Commission's Phase II market investigation, customers do not regard CR imported from Asia as a full substitute for EEA CR because of (i) longer lead time, (ii) quality related issues, (iii) different payment conditions and (iv) range of products available (certain products are only produced in the EEA).

(31) For the purposes of this decision, the Commission concludes that the geographic scope of the market for the production and supply of CR flat products is not wider than the EEA.

VII. ASSESSMENT

EEA Market for CR

(i) Assessment of the effects of the proposed transaction on market shares and concentration levels

(32) The proposed transaction reduces the number of European integrated players from 4 to 3, with number 1 and 2 on the market merging. Inoxum is currently the largest producer and supplier of CR active in the EEA with a market share of [30-40] %. Outokumpu is the second largest player in the same market with a share of [10-20] %. The transaction, thus, will give rise to a combined market share of [50-60] % in the overall market for the production and supply of CR, and even larger combined shares in relation to important segments such as austenitic grades 304 ([50-60] %) and 316 ([60-70] %). Combined capacity shares will also be above 50 %.

(33) Furthermore, the combined entity will be three times larger than the next EEA competitors post-merger, i.e. Aperam with [10-20] % and, five times bigger than the third competitor, Acerinox with [10-20] %. All other competitors including Asian producers supplying imports into Europe are small with shares generally well below [0-5] %.

(34) According to well-established case-law, very large market shares - 50 % or more - may in themselves be evidence of the existence of a dominant position (6). In the present case, the market shares, the increments and the difference between the merged entity and its next competitor are however particularly large. Moreover, the stainless steel industry is a mature sector, where market shares and concentration levels provide an important and strong first indication of market power. The Commission therefore concludes that high market shares in this case constitute a strong first indication that the proposed transaction will result in non-coordinated effects in the EEA market for CR by means of the creation of a dominant position.

(ii) Entry in the CR market is unlikely

(35) Although there are no legal barriers to entry in the EEA CR market, the investments required to enter the market are very high, given that the industry is a capital intensive business. As such, entry in the future is unlikely.

(iii) Theory of harm

(36) In the context of the assessment framework set by paragraph 24 of the Horizontal Merger Guidelines, the Commission assessed all the factors that are relevant to assess the impact of the proposed transaction on the EEA market for CR and concluded that the proposed transaction is likely to result in a significant impediment to effective competition on the EEA market for CR, in particular through non-coordinated effects by means of the creation of a dominant position.

(37) The Parties however submit that the Commission's theory of harm is flawed, as overcapacity implies that the rivals of the merged entity will react to a price increase from the latter, thereby offsetting any anticompetitive effect of the proposed transaction.

(38) The Commission notes that even in markets which are characterised by excess capacity at the industry level, a merger which leads to a substantial consolidation of production capacities can be expected to entail non-coordinated effects as described in paragraph 24 of the Horizontal Merger Guidelines. This is because by combining the capacities of the merging parties, a merger eliminates the pre-merger competitive pressure between the merging parties, thereby reducing the competitive pressure on the merged entity compared to the competitive pressure on each of the merging firms pre-merger.

(39) The Parties also claim that the Commission's theory of harm is based on the underlying assumption that the market presents pre-merger elements of coordination. According to the Parties, the Commission's conclusion that the competitive constraints from rivals would not be sufficient to defeat a post-merger price increase relies on the existence of coordinated effects.

(40) The Commission notes that its theory of harm is entirely based on non-coordinated effects both pre- and post-merger, including its assessment of the competitive constraint on the merged entity from its EEA rivals. The Commission's assessment however observes that competition in the EEA market for CR is not as intense as the Parties' arguments suggest. This may be due to a number of factors, such as a small search or switching costs for customers to switch suppliers; small costs for suppliers to change their production mix; multi-sourcing strategies by customers; and a limited but appreciable degree of geographic differentiation between suppliers.

(41) In the Commission's view, the pre-merger situation is consistent with non-coordinated competition between EEA producers. Its theory of harm does not rely on the existence of coordinated effects pre-or post-merger.

(iv) Loss of competition between the Parties due to the transaction

(42) The transaction gives rise to a significant overlap of actual mutual customers of the Parties. The overlaps between the Parties by grade families, finishes as well as in important customer segments would be very significant.

(43) The merged entity will obtain increased power in negotiations with overlapping customers. Furthermore, multi-sourcing strategies by customers imply that the transaction is likely to produce more competitive harm than a 4 to 3 merger in an industry without such multi-sourcing.

(44) There is also a limited number of customers who can only purchase from the Parties. For these customers, the proposed transaction is likely to have even more detrimental effects.

(45) The planned transaction, therefore, will lead to an important loss of competition between the Parties. (v) Likely reaction of imports to a CR price increase in the EEA caused by the proposed transaction

(46) Imports account for approximately [10-20] % of the EEA market. In 2011, imports were slightly lower than export from the EEA to the rest of the world. The EEA is therefore a net exporter of CR.

(47) Non-European competitors mainly import in the EEA via independent distributors (around [90-100] % of the imports reach the EEA market via distributors). Moreover, imports represent a fringe of players with limited sales and presence in the EEA.

(48) According to the responses to the Commission's market investigation, customers do not regard CR imported from Asia as a full substitute for EEA CR. This is because of lead time, quality issues, payment conditions and range of products available.

(49) The Commission also found that the price competitiveness of imports depends on a number of variable factors, including fluctuations in the nickel price, currency exchange rates and relative cost-effectiveness of nickel pig iron.

(50) The market investigation also revealed that it is not likely that imports from Asia will exercise in the near future a significantly stronger constraint on European producers. First, POSCO, a strong Korean competitor, is building a new CR facility in Turkey which will primarily supply the Turkish market, and will be unlikely to affect the EEA market to any significant extent. Second, the cost competitiveness of Asian players is likely to decrease in the future. Inter alia, the ban on exports of nickel ore from Indonesia is likely to negatively impact Chinese players' competitiveness. Thirdly, the spare capacity of Asian and Chinese players appears to be likely to decrease in the future.

(51) Quantitative evidence also shows that the constraint from imports from Asia is unlikely to be sufficient to prevent a price increase. The Commission acknowledges that imports from Asia represent a certain competitive constraint on EEA producers. However, the quantitative evidence demonstrated that import reactions to a price increase would need to be substantially stronger to eliminate the risk of a price increase. Imports are thus unlikely to be a sufficient constraint to prevent price increases post-merger.

(vi) Assessment of the competitive constraint on the merged entity from its European competitors (Aperam and Acerinox)

(52) The Parties' EEA competitors have substantial levels of spare capacity which, according to the Parties, would award them the ability and incentive to make a post-merger price increase unprofitable for the merged entity.

(53) As regards ability, the Commission's assessment has shown that nameplate capacity utilisation is likely to overstate the degree of spare capacity held by competitors given that: (i) 100 % nameplate capacity utilisation is not achievable and sustainable in the long run; (ii) actual expansion possibilities by rivals are further reduced by mothballing and capacity suspensions; and (iii) overcapacity is likely to decrease naturally during the next years as a result of growing demand. Nevertheless the Commission concludes that Aperam and Acerinox have a certain degree of spare capacity which would possibly be sufficient to provide these firms with the ability to expand output sufficiently to make a post-merger price increase unprofitable for the merged entity.

(54) However, the Commission considers that neither Aperam nor Acerinox will have incentives to aggressively compete with the merged entity after the transaction.

(55) According to the Horizontal Merger Guidelines (paragraph 9) and to economic theory in the case of the assessment of non-coordinated effects, the pre-merger situation provides the relevant counterfactual for the assessment of mergers.

(56) In the case at hand, pre-merger price competition between European producers is not very intense as indicated by the coexistence of positive margins and excess capacity. This implies a certain degree of pre-existing market power. Statements from market participants confirm the view that pre-merger competition is not intense. In particular, the Parties' competitors are not competing aggressively to fill their spare capacity.

(57) Moreover, there is no indication that Aperam and Acerinox will start competing more aggressively post-merger. Aperam and Acerinox have publicly welcomed the transaction, which is consistent with the view that these firms expect price increases post-merger.

(58) On the contrary, Aperam and Acerinox may well compete less aggressively post-merger. First, a price increase by the merged entity will reduce the competitive pressure on rivals. Second, the reduction of the number of suppliers means that customers have weaker bargaining positions in negotiations with suppliers. Third, multi-sourcing strategies by customers imply that Aperam and Acerinox will gain some customers and will hence have increased. Fourth, expected demand growth will likely reduce available spare capacity by rivals thereby reducing rival's incentives to compete aggressively.

(59) A detailed assessment of the Parties' competitors' incentives confirms that Aperam and Acerinox will not find profitable to offset a price increase from the merged entity. This is because the Parties' competitors are not competing aggressively pre-merger and are unlikely to do so post-merger.

(60) In the light of the above, the Commission concludes that European competitors do not have the incentive to expand output sufficiently to make a post-merger price increase unprofitable for the merged entity. Therefore, such firms do not exert a sufficiently strong competitive constraint liable to prevent post-merger price increases.

(vii) Assessment on the customers and independent distributors' reactions and buyer power

(61) As regards the assessment of the likely reaction of independent distributors to a CR price in the EEA, the Commission considers that independent distributors, contrary to the Parties' arguments, are not a strong competitive constraint on the merged entity.

(62) Concerning buyer power, the Commission market investigation indicated that the demand side of the stainless steel market is largely atomized. As a consequence, customers do not usually purchase large quantities of stainless steel, or if doing so, they do not represent a significant percentage of the manufacturers' sales.

(viii) Synergies

(63) In addition to the above mentioned arguments, the Commission also analysed the impact of the potential synergies generated by the transaction. The Commission concluded that synergies, even if present, would be insufficient as their effect on the merged entity's marginal costs is relatively small.

(ix) Joint assessment of the Parties' arguments

(64) A joint prima facie assessment of all the Parties' defensive arguments would appear to confirm that these are not sufficient for the transaction not to result in a significant impediment to effective competition.

(65) In addition, the Commission therefore produced a coherent economic assessment framework assessing the Parties main arguments against the inexistence non-coordinated effects.

(66) The model takes the Parties' main arguments and evidence at face value in the most competitive interpretation and also includes a full balancing exercise of marginal cost synergies. The model provides no indication that the Parties' arguments would be jointly sufficient to overturn the conclusions from the assessment above.

(x) Conclusion

(67) On the basis of the above analysis, the Commission concludes that the elimination of competition between the merging parties will increase the market power of the merged entity. Countervailing factors (i.e. constraint from imports, rival's reactions to a potential price increase post-merger, reactions from independent distributors, marginal cost synergies potentially arising from the transaction, buyer power and entry) are not sufficient to prevent post-merger price increases by the merged entity.

(68) The Commission therefore concludes that the transaction will lead to a significant impediment of effective competition by means of the creation of a dominant position in the EEA market for CR.

VIII. COMMITMENTS

(69) On 19 October 2012, Outokumpu submitted the Final Commitments, which consist of:

(a) Inoxum's production units (comprising all the related sales and marketing activities and personnel) at the Terni stainless steel production site; (b) Inoxum's Terninox SSC in Ceriano Laghetto (Italy); (c) Outokumpu's SSC in Willich (Germany); (d) At the option of the Purchaser, one or more SSCs located in France (Inoxum's Tours) and/or the UK (Outokumpu's Birmingham) and the Terninox warehouses in Padova, Ancona, Florence and Bologna (Italy); (e) At the option of the Purchaser, the divestiture package will include Terni's forging business (Societa delle Fucine); and (f) At the option of the purchaser, Outokumpu commits to exclude from the investment Business Terni's bright annealing line LBA2.

(70) In addition, at the option of Outokumpu, Outokumpu and the Purchaser will enter into a transitional, arm's length supply agreement for the Purchaser to supply Black Hot Band from Terni to Outokumpu Calvert/Mexinox.

(71) The divestiture package does not include Terni's tube-making business at Tubificio di Terni.

(72) The Commission considers that the commitments, as submitted on 19 October 2012, are sufficient to ensure the maintaining of the viability of the Divestment business while addressing the competition concerns raised by the proposed transaction. IX. CONCLUSION

(73) The Commission concludes that, subject to full compliance with the undertakings given by the Parties, the proposed concentration will not lead to the creation of a dominant player as a result of which effective competition would significantly be impeded in the Internal Market or in a substantial part of it. Accordingly, the Commission declares the concentration compatible with the internal Market and the EEA Agreement, in accordance with Articles 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) OJ C 116, 20.4.2012, p. 4.

(3) Turnover calculated in accordance with Article 5(1) of the Merger Regulation and the Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (OJ C 95, 16.4.2008, p. 1).

(4) Case IV/M.239, Avesta/British Steel/NCC/AGA/Axel Johnson, 4 September 1992; Case IV/M.484, Krupp/Thyssen/Riva/Falck/Tadfin/AST, 21 December 1994.

(5) Cases COMP/M.5211 - Outokumpu/SoGePar of 25 June 2008; COMP/ECSC.1351 - Usinor/Arbed/Aceralia of 21 November 2011 (concerning carbon steel products).

(6) See Horizontal Merger Guidelines, para. 17. Footnote 20 clarifies however also that it is a distinct question whether a dominant position is created or strengthened as a result of a merger.