SCR-Sibelco SA and Fife Silica Sands Ltd and Fife Resources Ltd: A report on the merger situation

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Summary

On 9 January 2001 the Secretary of State for Trade and Industry referred to this Commission for investigation and report the acquisition of Fife Silica Sands Ltd (FSS) and Fife Resources Ltd (Fife Resources) (referred to together as 'the Fife companies') by SCR-Sibelco SA (Sibelco) on 22 September 2000. The full terms of reference are set out in Appendix 1.1.

Sibelco, a global producer of silica sand and derived products, and other industrial minerals and clays, is a private, family-owned company registered in Belgium. Its total turnover in 1455 was some £764 million. In July 2000, Sibelco acquired Hepworth Minerals & Chemicals Ltd (HMC), the UK's principal supplier of silica sand, from Hepworth PLC and renamed it Sibelco Minerals & Chemicals Ltd (SMC). In our report we use the name HMC/SMC to refer to the company both before and after its acquisition by Sibelco. That acquisition was not referred to the Competition Commission (CC).

Before their acquisition by Sibelco, the Fife companies were owned by Anglo Pacific Group PLC (Anglo Pacific), a company involved in diverse activities including mining and quarrying. FSS owns a sand quarry at Burrowine Moor in Fife, Scotland, which started production in 1985. It produces high-quality silica sand primarily for use in glassmaking, in particular the manufacture of clear-glass containers. Fife Resources was incorporated in 1997. Its main asset is freehold land and mineral rights at Burrowine Moor.

The main types of sand product are, broadly, construction sand and industrial or silica sand. Silica sand includes sand used for glassmaking but it also embraces grades of sand used for a variety of other industrial uses. Annual silica-sand usage in the UK is around 4 million tonnes in total, of which sand for glassmaking accounts for around 1.7 million tonnes. Annual usage of construction sand is typically around 40 to 45 million tonnes. Construction sand fetches about £5 or less on a local delivered basis. Silica sands can fetch anything from £10 to £50 a tonne, depending on their quality.

In this inquiry, we are concerned primarily with the supply of sand for glass manu-facture as opposed to other industrial uses. Glass sand is low in iron and high in alumina. The three main types of glass for which such sand is used are clear-container glass, float or flat glass (for making windows) and coloured-container glass. Glass sand is also used in the production of other glass products such as TV tubes, crystal glass and ovenware.

Glass sand is a scarce resource. The main reason why Sibelco wished to acquire the Fife companies was because they offered it the prospect of significant glass-sand supplies over the longer term. In those parts of the Fife companies' site where Sibelco has mineral extraction rights and planning permission, there are thought by Sibelco to be resources of up to [$] million tonnes of sand, which could contain up to [$] million tonnes of glass sand. In addition, it is currently estimated that there are possibly 50 million tonnes of glass-sand resources and a further 50 million tonnes of other grades of sand in adjoining land where extraction rights and planning permission have yet to be obtained.

From 1997 to 1455, FSS was experiencing losses before tax and in the first part of 1455 Anglo Pacific decided to dispose of the Fife companies. An auction by way of tender was held during the third quarter of 1455 and a number of companies, including Sibelco, expressed an interest. No offer acceptable to Anglo Pacific was, however, made. In January 2000, Sibelco began a series of discussions with Anglo Pacific and in June 2000, the sale of the Fife com-panies to Sibelco was agreed. Anglo Pacific's shareholders approved the disposal on 22 September 2000 and the shares were transferred on that date.

In determining the relevant market for the purposes of our inquiry, we noted that, while there is no scope for substitution on the supply side, on the demand side there is the potential for a degree of substitution between glass sands for some different manufacturing uses. We therefore decided that the relevant market was that for all glass sand. As to the geographic scope of the market, glass production plants in Yorkshire, the main users of glass sand, are being or have in the recent past been supplied from quarries as far away as Fife in Scotland and Reigate in Surrey. There is almost no international trade in glass sand between Great Britain and Continental Europe because of the costs of transportation, and so no constraint on UK glass sand prices is provided by imports. We therefore find that the relevant geographic market extends to, but is no wider than, England and Scotland.

Most of the glass producers that took glass sand from FSS and HMC/SMC before the merger have production plants in Yorkshire. HMC/SMC's four glass-sand quarries that are located in central and northern England are conveniently located for supplying them. Before the merger, during the winter of 1455/2000, FSS had failed to secure new contracts for the supply of glass sand from two of its former customers, Allied Glass Containers Ltd and Beatson Clark plc. A third, Rexam Glass Barnsley Ltd (Rexam), had reduced its purchases from FSS. All three companies had then switched all or most of their requirements to HMC/SMC on longer-term contracts. We found that the loss of these contracts was attributable partly to quality problems with the sand that FSS delivered to these customers during 1998 and 1455, brought about by mismanagement of its quarry operations, and partly to rising haulage costs, which were making FSS's sand less competitive. Immediately before the merger, therefore, FSS was supplying only some of Rexam's requirements in Yorkshire and those of the plant in Irvine, Scotland, belonging to Rockware Glass Ltd. Sibelco submitted that, as a result of the loss of almost all its Yorkshire business, FSS was no longer an effective competitor to HMC/SMC before the merger and that therefore the merger had not resulted in any loss of competition.

We were told by FSS's glass manufacturing customers that competition between HMC/SMC and FSS before the merger had kept HMC/SMC's prices lower than they would otherwise have been. Despite the quality problems it was experiencing during 1998 and 1455, FSS was still actively negotiating with its Yorkshire customers for orders in the latter part of 1455 and the early months of 2000. In our view, HMC/SMC would have been unlikely to offer two of these customers the favourable terms it did if FSS had not been in the market actively competing for their business. We conclude that, although in 1455/2000 FSS had lost much of its Yorkshire business, it was competing with HMC/SMC before the merger.

Sibelco also maintained that FSS had been a failing firm before the merger and that Anglo Pacific would have withdrawn financial support from it, with the result that it would very soon have failed. We do not accept this characterization. We conclude, first, that the sand quality problems being experienced by FSS during 1998 and part of 1455 were attributable largely to failures of management and that, by the time of the merger, FSS was beginning to realize the benefits of new management put in at the end of 1455. Second, in the short term, FSS could have continued to operate on a cash-neutral basis. Third, for the medium to long term, there are probable silica sand resources of around 50 million tonnes in areas adjacent, or near, to the existing Burrowine quarry site. These resources contain sand suitable for both container- and float-glass manufacture. Such assets would have existed even in the absence of the merger. We conclude that, if Sibelco had not acquired the Fife companies, they would have been acquired by another company and remained a competitive force in the supply of sand for container glass and become a new competitive force in the supply of sand for float glass.

Sibelco, through HMC/SMC, had a 71 per cent share by volume and a [$] per cent share by value of glass sand supplied to third parties in the UK in 1455/2000. The acquisition of FSS increased those shares to 86 per cent and [$] per cent respectively. Prices in the UK are subject to individual negotiation; there are no price lists. There is no likelihood in the short term of glass-sand prices being constrained by imports. Moreover, there are severe constraints on new entry. Following the merger and without the competitive constraint formerly exercised by FSS in the market, we conclude that glass-sand prices may be expected to be higher than would otherwise have been the case.

We considered whether any benefits might be expected to flow from the merger. In this context we considered: Sibelco's reputation in the silica-sand industry; whether the balance of production between glass sand and construction sand at FSS would be significantly more in favour of glass sand if Sibelco continued to own the Fife companies than if another purchaser were to acquire them; environmental benefits in relation to the Fife companies' site and sur-round-ing area; and employment prospects. We concluded that there were no benefits flowing from the merger.

We conclude that the merger may be expected to operate against the public interest in that, without the competitive constraint of FSS, glass-sand prices in the UK may be expected to be higher than would otherwise have been the case.

We considered various behavioural and structural remedies. We decided that the most appropriate remedy to address the loss of competition brought about by the merger would be the divestment of the Fife companies by Sibelco. In the light of the evidence, we think it more likely than not that whoever became the owner of the Fife companies would sell FSS's output to third party customers. It is possible, however, that on or following a divestment the Fife companies would be acquired by a company that chose to use FSS's sand exclusively within its own group of companies. In that case, the competition detriments would not be addressed, since an existing competitor in the supply of glass sand would have been removed and would not have been replaced, to the disadvantage of other customers in the market.

We accordingly recommend that Sibelco should be required to divest the Fife companies. Sibelco should also undertake to divest the Fife companies to a purchaser approved by the Director General of Fair Trading, within six months of the publication of this report.

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