|EUROPEAN COMMISSION |

Brussels, 22.11.2012

C(2012) 8685 final

In the published version of this decision, some information has been omitted pursuant to Article 17(2) of Council Regulation (EC) No 139/2004 concerning non-disclosure of business secrets and other confidential information. The omissions are shown thus […]. Where possible the information omitted has been replaced by ranges of figures or a general description. PUBLIC VERSION MERGER PROCEDURE

To the notifying party: | |

I. THE PARTIES 7

II. THE OPERATION 7

III. THE CONCENTRATION - Acquisition of control over an independent undertaking 8

III.1. Background 8

III.2. Position of the Notifying Party 8

III.3. Assessment of the Commission 9

III.3.1. Applicable legal standard 9

III.3.2. De jure control 9

III.3.3. De facto sole control 10

III.3.4. Conclusion 13

IV. EU DIMENSION 13

V. COMPETITIVE ASSESSMENT 13

V.1. Introduction 13

V.2. Horizontal issues with regard to market definition 14

V.2.1. Product markets for spot and longer-term sales contracts 14

V.2.1.1. Position of the Notifying Party 14

V.2.1.2. Assessment of the Commission 14

V.2.1.3. Conclusion 15

V.2.2. Product markets for purchases from traders and producers 15

V.2.2.1. Position of the Notifying Party 15

V.2.2.2. Assessment of the Commission 16

V.2.2.3. Conclusion 16

V.2.3. Domestic Chinese market 17

V.2.3.1. Position of the Notifying Party 17

V.2.3.2. Assessment of the Commission and conclusion 17

V.3. Horizontal issues with regard to the competitive assessment 18

V.3.1. Industry practices in pricing concentrate and metals 18

V.3.2. Methodology for calculating market shares 19

V.3.2.1. Position of the Notifying Party 19

V.3.2.2. Assessment of the Commission 20

V.3.2.3. Conclusion 20

V.3.3. Financial trading on the LME 20

V.3.3.1. Position of the Notifying Party 20

V.3.3.2. Assessment of the Commission 20

V.3.3.3. Conclusion 22

V.3.4. LME warehousing rules 22

V.3.4.1. Position of the Notifying Party 22

V.3.4.2. Assessment of the Commission 22

V.3.4.3. Conclusion 23

V.4. Zinc 23

V.4.1. Introduction 23

V.4.2. Zinc Concentrate 24

V.4.2.1. Relevant product market 24

V.4.2.2. Relevant geographic market 24

V.4.2.3. Assessment of effects on competition - Horizontal assessment 25

V.4.2.4. Assessment of effects on competition – Vertical assessment 28

V.4.2.5. Conclusion 28

V.4.3. Zinc metal 29

V.4.3.1. Relevant product market 29

V.4.3.2. Relevant geographic market 31

V.4.3.3. Assessment of effects on competition 39

V.4.3.4. Conclusion: Serious Risk of Non-Coordinated Effects 53

V.5. Copper 54

V.5.1. Introduction 54

V.5.2. Copper concentrate 55

V.5.2.1. Relevant product market 55

V.5.2.2. Relevant geographic market 55

V.5.2.3. Assessment of effects on competition 56

V.5.2.4. Conclusion 57

V.5.3. Secondary copper products 58

V.5.3.1. Relevant product market 58

V.5.3.2. Relevant geographic market 59

V.5.3.3. Assessment of effects on competition 60

V.5.3.4. Conclusion 61

V.5.4. Refined copper 61

V.5.4.1. Relevant product market 61

V.5.4.2. Relevant geographic market 63

V.5.4.3. Assessment of effects on competition 64

V.5.5. Conclusion 65

V.5.6. Assessment of vertical effects 65

V.5.6.1. Copper metal (upstream) and copper rods (downstream) 65

V.5.6.2. Copper concentrate (upstream) and copper metal (downstream) 66

V.5.6.3. Secondary copper products (upstream) and copper metal (downstream) 66

V.5.6.4. Conclusion on vertical links between copper markets 67

V.6. Lead 67

V.6.1. Introduction 67

V.6.2. Lead concentrate 67

V.6.2.1. Relevant product market 67

V.6.2.2. Relevant geographic market 68

V.6.2.3. Assessment of horizontal effects on competition 69

V.6.2.4. Vertical Assessment 70

V.6.2.5. Conclusion 72

V.6.3. Lead metal 72

V.6.3.1. Relevant product market 72

V.6.3.2. Relevant geographic market 74

V.6.3.3. Assessment of horizontal effects on competition 74

V.6.3.4. Conclusion 77

V.7. Nickel 77

V.7.1. Introduction 77

V.7.2. Refined Nickel 78

V.7.2.1. Relevant product market 78

V.7.2.2. Relevant geographic market 78

V.7.2.3. Assessment of effects on competition 79

V.7.2.4. Conclusion 81

V.8. Cobalt 81

V.8.1. Introduction 81

V.8.2. Relevant product market 82

V.8.3. Relevant geographic market 82

V.8.4. Assessment of effects on competition 83

V.8.5. Conclusion 85

V.9. Ferrochrome 85

V.9.1. Introduction 85

V.9.2. Relevant product market 85

V.9.3. Relevant geographic market 86

V.9.4. Assessment of effects on competition 86

V.9.5. Conclusion 87

V.10. Thermal coal and coking coal 88

V.10.1. Introduction 88

V.10.2. Thermal coal 88

V.10.2.1. Relevant product market 89

V.10.2.2. Relevant geographic market 90

V.10.2.3. Assessment of effects on competition 92

V.10.2.4. Conclusion 103

V.10.3. Coking coal 104

V.10.3.1. Relevant product market 104

V.10.3.2. Relevant geographic market 105

V.10.3.3. Assessment of effects on competition 105

V.10.3.4. Conclusion 106

V.11. Non-core products 106

VI. REMEDIES 106

VI.1. The remedy proposal of 30 October 2012 106

VI.1.1. Commission assessment of the initial Proposed Commitments on commodity grade zinc 107

VI.1.2. Objective of the initial Proposed Commitments 107

VI.1.3. The volumes addressed 108

VI.1.4. Independence of Nyrstar, incentives to compete on a lasting basis with Glencore, and effectiveness of the initial Proposed Commitments 109

VI.1.5. Transition periods 110

VI.1.6. Divestiture of minority stake in Nyrstar 110

VI.1.7. Conclusion on the initial Proposed Commitments 111

VI.2. The remedy proposal of 13 November 2012 111

VI.2.1. Evaluation of the second Proposed Commitments 111

VI.2.1.1. […] 111

VI.2.1.2. Partial termination of the Nyrstar agreement 112

VI.2.1.3. Effectiveness of the second Proposed Commitments 112

VI.2.1.4. Conclusion on the second Proposed Commitments 112

VI.3. The remedy proposal of 19 November 2012 112

VI.3.1. Assessment of the final Proposed Commitments 113

VI.3.1.1. Objective 113

VI.3.1.2. Zinc metal volumes 114

VI.3.1.3. Structural nature of the remedy 114

VI.3.1.4. Transitional period 115

VI.3.1.5. Conclusion on the final Proposed Commitments 115

VI.4. Overall conclusion on the final Proposed Commitments 116

VII. CONCLUSION 116

Dear Sir/Madam,

Subject: Case No COMP/M.6541 – GLENCORE/XSTRATA Commission decision pursuant to Article 6(1)(b) in conjunction with Article 6(2) of Council Regulation No 139/2004 [1]

1. On 2 October 2012, the European Commission received notification of a proposed concentration pursuant to Article 4 of the Merger Regulation by which the undertaking Glencore International Plc ("Glencore", incorporated in Jersey and headquartered in Switzerland) ("the Notifying Party") acquires within the meaning of Article 3(1)(b) of the Merger Regulation control of the whole of the undertaking Xstrata Plc ("Xstrata", Switzerland) by way of purchase of shares ("the Proposed Transaction"). [2] The undertaking resulting from the Proposed Transaction will be referred to as the "Merged Entity".

I. THE PARTIES

2. Glencore is an integrated producer and trader of a wide range of commodities. Glencore's business is organised around three segments: (i) metals and minerals – e.g. aluminium, alumina, zinc, copper, lead, ferroalloys, nickel, cobalt, and iron ore; (ii) energy products – e.g. crude oil, oil products, coal and coke; and (iii) agricultural products – e.g. wheat, maize, barley, edible oils, oilseeds, cotton and sugar.

3. Xstrata is an international group active in mining, mineral processing and metals extraction. The group comprises five major businesses: (i) an alloys business, comprising ferrochrome and vanadium operations and a platinum group metals business; (ii) a coal business; (iii) a copper business; (iv) a nickel business; and (v) a zinc-lead business.

II. THE OPERATION

4. Pursuant to the Proposed Transaction, Glencore will acquire all of the outstanding shares in Xstrata by way of a scheme of arrangement under Part 26 of the UK Companies Act 2006. Xstrata shareholders will receive new shares in Glencore as consideration. When the scheme is approved, sanctioned by the Court and registered, all Xstrata shares (other than the shares the Glencore group already holds) will be cancelled and new Xstrata shares will be issued to Glencore, giving it a 100% shareholding in Xstrata. Xstrata’s Board of Directors recommended Glencore’s offer on 1 October 2012. On 20 November 2012, Xstrata's shareholders’ meeting voted in favour of the Proposed Transaction.

III. THE CONCENTRATION - Acquisition of control over an independent undertaking

III.1. Background

5. Xstrata was created in 2002 as a spin-off of Glencore's coal mining activities in Australia and South Africa and floated on the London Stock Exchange in 2002. At the time, Glencore maintained a shareholding of around 40% in Xstrata.

6. While Glencore did not hold the majority of shares, Glencore enjoyed a stable majority at Xstrata's shareholders' meetings until 2006. In 2006, Xstrata's shareholding was diluted and Glencore lost its majority at the shareholders' meeting which since then has not been regained.

7. Prior to that moment, the Commission concluded at several occasions that there was de facto control by Glencore over Xstrata in the sense of paragraph 59 of the Jurisdictional Notice. [3] The last instance where the Commission made this conclusion was the 2006 case M.4256 Xstrata / Falconbridge. [4]

8. After a number of share issuances, in particular the USD 5.9 billion share issuance in January 2009, Glencore now owns only 33.65% of Xstrata's shares.

III.2. Position of the Notifying Party

9. The Notifying Party does not claim or argue in the Form CO that currently it exercises 'decisive influence' over Xstrata also after the dilution of its shareholding in Xstrata. The exercise of decisive influence pre-merger within the meaning of paragraph 54 of the Jurisdictional Notice is decisive in order to determine whether the Proposed Transaction will lead to the acquisition of control and hence constitutes a concentration.

10. It merely notes that it continues to exercise “significant influence” over Xstrata as it did when the Commission investigated the Xstrata/Falconbridge transaction and that this should be taken into account in the substantive assessment. [5]

11. In this context, the Notifying Party argues that it remains "by far the largest shareholder and has a strategic interest in Xstrata" and that the remainder of the shareholder base is highly fragmented and made up of financial investors.

12. The Notifying Party further argues that it has "considerable influence" on the nature and content of resolutions that are put to Xstrata shareholders through the directors it nominates to the Xstrata Board. [6] Furthermore, it submits that Xstrata's Board resolutions […].

13. Finally, the Notifying Party considers that its influence over Xstrata is increased as a result of various agreements governing their relationship and commercial activities. [7] These concern, inter alia, the Notifying Party’s right to appoint at least three members of the Xstrata Board as well as different agency, services, marketing and distribution agreements.

III.3. Assessment of the Commission

III.3.1. Applicable legal standard

14. Sole control is defined as a situation where one undertaking alone can exercise decisive influence over another undertaking. [8] Such sole control can be "positive sole control" where one undertaking determines the strategic commercial decisions of another undertaking or "negative sole control" where only one shareholder is able to veto strategic decisions in another undertaking without having the power to impose such decisions on its own.

15. This means that when Article 3(2) of the Merger Regulation and the Jurisdictional Notice refer to decisive influence they require at least the power to veto important strategic business decisions, such as the appointment of senior management or the adoption of the budget and business plans. In order to attain the threshold of control, the ability to influence the strategy of the business must go beyond the typical rights of a minority shareholder designed to protect its financial interests, such as the right to veto the sale of the undertaking in question. [9]

16. However, the evidence available to the Commission shows that Glencore currently no longer has the ability to exercise decisive influence over Xstrata either on a de jure or a de facto basis:

III.3.2. De jure control

17. According to the Jurisdictional Notice, control is normally acquired on a legal basis where an undertaking acquires a majority of the voting rights of a company. However, even in the case of a minority shareholding, control may occur on a legal basis in situations where specific rights enable that shareholder to determine the strategic commercial behaviour of the company, such as the power to appoint more than half of the members of the supervisory board or the administrative board. [10]

18. The Commission takes the view that Glencore does not currently hold de jure sole control over Xstrata, since Glencore currently only holds the minority of Xstrata's shareholding and voting rights, and can only appoint significantly less than half of Xstrata’s Board [11] where decisions are taken by simple majority. There are also no indications as to the existence of de jure joint control. There is no equality in voting rights between the large number of Xstrata shareholders and none of the shareholders has significant veto rights. There are also no legally binding agreements in place to ensure the joint exercise of voting rights. [12]

III.3.3. De facto sole control

19. A large minority holding in another undertaking can confer de facto control in situations where the shareholder is likely to achieve a stable majority of the votes cast at future shareholders’ meetings. Whether the minority shareholder has de facto control has to be assessed in view of the level of its shareholdings, the presence of shareholders in previous shareholders’ meetings, the historic voting patterns at the shareholders’ meetings and the position of other shareholders. [13] Furthermore, the Jurisdictional Notice acknowledges that, in exceptional circumstances, a situation of economic dependence may lead to de facto control where, for example, very important long-term supply agreements or credits provided by suppliers or customers, coupled with structural links, confer decisive influence. [14]

20. The Commission takes the view that Glencore's shareholdings and the various distribution, agency, advisory and service agreements between Glencore and Xstrata do not suffice to currently confer Glencore decisive influence over Xstrata. This is based in particular on the following elements:

a) Glencore has lost its majority of the votes cast in Xstrata’s shareholders’ meetings. In all of the shareholders’ meetings held since June 2006, Glencore achieved between […]% (May 2012) and […]% (March 2009) of the votes cast. Furthermore, Glencore’s percentage of the votes cast has […] since March 2009.

b) Glencore today only holds 3 out of the 13 members of Xstrata's Board, which is in charge of the main commercial/strategic decisions, such as budget and business plans, major capital expenditures, major acquisitions and disposals. According to the information available to the Commission, issues such as business plans are […].

c) Glencore no longer holds the Chairman position in Xstrata's Board (which it had held since 2002). The chairman has a casting vote. Therefore, Glencore now needs the support of four other members on Xstrata's Board in order to approve a resolution that Glencore wishes to pass.

d) Glencore has no representatives in Xstrata's Board’s Executive Committee, responsible for implementing Xstrata's strategy, overseeing various businesses and setting financial and non-financial performance targets. Out of all the Board Committees of Xstrata, Glencore is only present in the Nominations Committee, where it only has one member out of four. [15]

e) Glencore has [explanation regarding pattern of proposals in Xstrata's shareholders' meeting] in Xstrata's shareholders' meeting. Instead, it is [explanation regarding pattern of proposals in Xstrata's shareholders' meeting] that has [explanation regarding pattern of proposals in Xstrata's shareholders' meeting] at Xstrata's shareholders' meeting. [16]

f) Shareholding in Xstrata is no longer widely dispersed. For example, Qatar Holdings owns 12.29% (as of 29 August 2012 [17] ) and Black Rock 4.36% (as of 20 September 2012) of Xstrata’s shares. [18]

g) Although Glencore remains an important shareholder in Xstrata, Qatar Holdings has vested interests in the company. Qatar Holdings has played a decisive role as to whether and when the Proposed Transaction would take place and has shown in this context that it is able to forge alliances with other small shareholders in Xstrata. [19]

h) In the products which are most important for Xstrata in terms of operating profit, such as copper, zinc and coal, [20] Xstrata has its own marketing department and sells a large proportion of its production independently of Glencore. Furthermore, according to results of the Commission's market investigation [21] and internal documents, [22] Xstrata sells products in direct competition with Glencore at least to some extent. With regard to copper and zinc, Glencore's role is limited to providing market intelligence for a fixed annual fee under contracts that can be terminated with a one-year notice. [23] With regard to thermal coal, Glencore has only entered into a non-exclusive [24] agency-advisory agreement with Xstrata according to which it presents sales opportunities to Xstrata for a remuneration per tonne sold.

i) The only products sold by Xstrata that are covered by exclusive distribution agreements with Glencore are ferronickel, nickel, cobalt and ferrochrome, which together represent about 10% of Xstrata's operating profits in 2011. Furthermore, […] of the exclusive distribution agreements on ferronickel and cobalt was […]. Internal documents from Xstrata show […]. [25]

j) Furthermore Xstrata, at least occasionally, does not refrain from acting against the interests of Glencore, e.g. by selling to competing traders.

k) Moreover, the Notifying Party expects to realize annual synergies of at least EUR 359 million post-merger. [26] Certain of these synergies concern actions that Glencore would like Xstrata to take, but that the latter currently does not undertake, e.g. with respect to cost-savings through blending of different types of coal or more efficient handling of logistics. This further confirms that the pre-merger situation is one where Glencore is unable to exert decisive influence over Xstrata.

l) Finally, it is noteworthy that Glencore's IPO documents refer to Xstrata as a "non-controlled" industrial asset. [27]

III.3.4. Conclusion

21. On the basis of the above, the Commission concludes that Glencore no longer holds decisive influence over Xstrata within the meaning of paragraph 54 of the Jurisdictional Notice and Article 3 (2) of the Merger Regulation. Under the Proposed Transaction, Glencore would acquire 100% of the issued share capital. Consequently, the Proposed Transaction constitutes the acquisition of sole control over an independent undertaking within the meaning of Article 3 (1) (b) of the Merger Regulation.

IV. EU DIMENSION

22. The undertakings concerned have a combined aggregate worldwide turnover of more than EUR 5 000 million (Glencore: EUR 133 730 million; Xstrata: EUR 24 336 million) [28] . Each of them has an EU-wide turnover in excess of EUR 250 million (Glencore: […]; Xstrata: […]), but each does not achieve more than two-thirds of its aggregate EU-wide turnover within one and the same Member State.

23. The Proposed Transaction therefore has an EU dimension under Article 1 (2) of the Merger Regulation.

V. COMPETITIVE ASSESSMENT

V.1. Introduction

24. The proposed transaction gives rise to horizontal overlaps in the production and/or supply of the following products:

a. Zinc and zinc concentrate;

b. Copper and copper concentrate;

c. Lead and lead concentrate;

d. Refined nickel;

e. Refined cobalt;

f. Ferrochrome;

g. Thermal coal and coking coal;

h. And certain other, "non-core" products, in particular chrome ore, gold, molybdenum, platinum, palladium, sulphuric acid, vanadium/ ferrovanadium, and silver.

25. The Proposed Transaction also gives rise to a number of vertical relationships. These relationships concern metal concentrates or metal intermediates as input products for the smelting processes of downstream refined metals and the production of other downstream metal products.

26. In line with the Commission’s mandate under the Merger Regulation, the Commission's assessment in the present decision is limited to merger-specific competition issues and without prejudice to any future antitrust investigations.

V.2. Horizontal issues with regard to market definition

27. Certain issues are common to most market definitions for the products covered in this decision. These concern possible distinctions between: (i) spot and longer term contracts, (ii) purchases from traders and purchases from producers, and (iii) a worldwide market and a domestic Chinese market. These issues will be assessed here for all markets in common.

V.2.1. Product markets for spot and longer-term sales contracts

28. The commodities concerned by the Proposed Transaction are traded on the spot (i.e. with immediate delivery) and on the basis of longer-term contracts. The Commission has investigated if separate spot markets need to be defined based on the assumption that competitive conditions in sales on the spot and under longer-term contracts might diverge and that Glencore, as a trader, might be a strong player on potential spot markets.

V.2.1.1. Position of the Notifying Party

29. According to the Notifying Party any distinction between spot and longer-term contract sales is artificial. [29] It argues that the prices for spot and contract sales are virtually indistinguishable and that spot premia are not consistently higher then contract premia. Furthermore, spot sales (i.e. sales with duration of less than three months) [30] and contract sales with short duration (i.e. sales with a duration of just above three months) are close substitutes. In this context, the Notifying Party submits that market participants aim at achieving maximum profits from the use of both types of sales: profitability can be increased by reducing longer-term contract sales when prices are low (and are expected to increase) and increasing longer-term contract sales when prices are high (and expected to fall).

V.2.1.2. Assessment of the Commission

30. The Commission has investigated the issue with market participants surveyed in the market investigation.

31. The overall picture emerging from the market investigation across the different commodities is that no separate spot markets can be defined. In particular, the vast majority of market participants consider that the competitive conditions in sales on the spot are not sufficiently different from competitive conditions in sales on the basis of longer-term contracts. [31] In addition, there is near-consensus that there are no important entry barriers for suppliers currently selling through longer-term contracts to sell on the spot. [32] Market participants are also of the view that although prices in spot and long-term contracts may differ, there is still strong interaction between the two. [33]

32. The Commission therefore finds that competitive conditions are not markedly different between sales on the spot and sales under longer-term contracts. Since prices interact strongly and there are no entry barriers to sales on the spot, there is not sufficient evidence for the Commission to conclude that separate product markets should be defined.

V.2.1.3. Conclusion

33. On the basis of the above, the Commission concludes that there are no distinct markets for spot sales and sales under longer-term contracts in the metal commodity markets covered in this decision.

V.2.2. Product markets for purchases from traders and producers

34. Glencore and Xstrata pursue different business models in the commodity value chain. Glencore is both a producer and a commodity trader i.e. it does not only sell its own production but also purchases products for resale. Other companies, such as Trafigura, Transamine and the Noble group are also active in the trading business. In contrast, Xstrata is an integrated commodities producer that sells primarily its own production. Other companies such as BHP Billiton, Codelco, Freeport, Rio Tinto and Anglo American have a similar business model to Xstrata’s in this respect.

35. Consequently, while it can be said that both companies offer metal and intermediaries for sale, the question is pertinent as to whether a distinction must be made between a supply market for traders and a supply market for producers.

V.2.2.1. Position of the Notifying Party

36. The Notifying Party submits that traders and producers compete for supplying metal and metal intermediates to customers and, hence, are part of the same product market. [34]

V.2.2.2. Assessment of the Commission

37. In its M.4256 Xstrata/Falconbridge decision of 2006, the Commission left open whether metal traders are active on the same relevant product market as metal producers although the market investigation provided evidence that such distinction was not appropriate. [35]

38. The Commission has investigated this matter in its market investigation. The overall view of market participants is that traders and producers compete for the same customer base in the market place since traders and producers offer substitutable products. [36] Traders and producers may offer different terms as regards prices, nature of the contract, or other factors. [37] Elements mentioned in the market investigation related for instance to the fact that traders may, in general, be more willing to offer smaller quantities and to do spot trades and have more flexible conditions, whereas producers may have a better product range and prices. However, these elements do not point to elements that render products less substitutable, but to different characteristics of otherwise similar product offerings.

39. Furthermore, the majority of customers buy indifferently from metal traders and metal producers. [38] Customers also appear to be able to switch between buying from traders and producers. Customers maintained that they would switch between traders and producers in response to a potential small but significant non-transitory change in the price (in the range of 5-10%) obtained from one group or the other, even if a given customer has a preference of buying from either traders or producers. [39]

40. The Commission therefore finds that traders and producers enter into competition for sales to customers. There is sufficient demand side substitutability between supplies from traders and producers to conclude that both types of suppliers are part of the same product market.

V.2.2.3. Conclusion

41. On the basis of the above, the Commission concludes that there are no distinct markets for sales from traders and producers in the metal commodity markets covered in this decision.

V.2.3. Domestic Chinese market

42. China is the most important consumer of metals in the world accounting for a large share of global consumption. [40] Due to its strong domestic demand exceeding domestic production, China is a net importer of many metal commodities. Accordingly, exports are limited, in part also due to export restrictions in the form of tariffs, export taxes or other export barriers. Furthermore, industry analysts appear to report figures for China and the rest of the world separately. [41] This situation might raise doubts whether domestic Chinese volumes enter into active competition with volumes traded in the rest of the world.

V.2.3.1. Position of the Notifying Party

43. In its IPO document of 2011, Glencore presented its “market shares” in the metals business segment in a global market excluding all production within the Chinese domestic market. [42] This was because Glencore aimed at presenting its market position in comparison with other traders and because Western traders currently have little penetration in China. [43]

44. In the present case, the Notifying Party argues that China is an integral part of the global commodity trade. According to the Notifying Party, global commodity trade flows are interconnected because sales into China compete with both sales outside of China and intra-Chinese sales. [44]

V.2.3.2. Assessment of the Commission and conclusion

45. The Commission has considered excluding China from the relevant geographic market in previous metal commodities cases. [45] In the present case, however, this issue can be left open for most of the markets at issue. The details of the Commission’s analysis will be presented in the individual product sections below.

V.3. Horizontal issues with regard to the competitive assessment

46. Certain issues are common to the competitive assessment of all metal commodities covered in this decision. These concern: (i) industry practices in pricing concentrate and refined metals, (ii) the methodology for calculating market shares, (iii) the role of financial trading on the London Metal Exchange (“LME”), and (iv) the relevance of the LME warehousing rules. These issues will be discussed here for all metals markets covered in this decision.

V.3.1. Industry practices in pricing concentrate and metals

47. As regards price setting, the LME plays a central role in metals and concentrates. The LME is a commodity market in which standardised contracts (in terms of e.g. volume and grade) for metal are traded on a spot and futures basis. In non-ferrous metals, trading on the LME covers aluminium, copper, lead, nickel, tin and zinc. There is thus a global market price for these metals that is determined on the LME. [46]

48. The price set on the LME acts as a benchmark for metal and metal intermediate products traded in the physical market i.e. between suppliers and customers.

49. When trading refined metal for physical supply to customers, a premium is added to the LME price. This premium reflects, amongst other factors, the logistical costs of delivery from the actual location of the metal and the metal grade/purity. The LME price reflects the metal grade/purity of metal meeting the LME specifications (e.g. SHG zinc metal). If a different grade/purity is delivered physically, the premia will be adapted to reflect these differences in grade/purity. Thus, contrary to the LME price, the premium varies between transactions.

50. When trading intermediate products, such as concentrates, refiners of metal, such as smelters, purchase their concentrate inputs with a rebate from the LME price, referred to as a "treatment and refining charge". The net difference between the LME price and the treatment and refining charge rebate is in effect the price that is paid to the concentrate supplier. The treatment and refining charge varies between transactions depending, for instance on transport costs. Zinc smelters typically also benefit from "free" zinc metal, which measures the difference between the zinc recovered and sold by the smelter, and the percentage of zinc contained in the concentrate that is paid to the miner.

51. A zinc refiner's gross margin is thus determined by the treatment and refining charges, the value of free metal and the premium on top of the LME price for supplies of refined metal in the physical market. In addition, zinc metal smelters earn revenues from the sale of by-products (e.g. sulphuric acid or different metals recovered in the smelting process). As both input and sales prices are expressed with reference to the LME price, variations in the LME price do not directly affect the margin for metal refiners. Instead, they mainly affect the price that producers of concentrate obtain.

52. LME prices but also regional premia, “benchmark premia” [47] and treatment and refining charges are published by the trade press on a regular basis and provide a basis for pricing in the market.

53. Producers of metal typically prefer to sell to end-customers (e.g. to maintain long established client relationships and generate good will). [48] In addition, metal producers always have the option of selling the metal instead on the LME, meaning that the metal will be stored in an LME warehouse, if the metal produced has the correct LME grade. The LME thus functions as a buyer of last resort for the physical metal markets.

54. Purchasing metal on the LME entitles a buyer to a warrant that represents a unit of that metal stored in one of the LME warehouses. When a warrant is cancelled, the owner is entitled to the physical delivery of the metal from the LME warehouse where the metal is located. The LME thus functions as a source of last resort for the physical metal markets. However, depending on whether a queue exists at the warehouse where the metal is located, physical delivery of the metal may take a significant time. In practice, few transactions are physically settled at the LME, with most physical trading taking place between suppliers and customers off the LME.

55. Thermal and coking coal are not traded on the LME and hence other pricing mechanisms apply. These will be described in the sections on these coal products below.

V.3.2. Methodology for calculating market shares

56. The Proposed Transaction combines a trader with significant production assets and a producer. In the metal commodity markets, traders aim at establishing long-term and possibly exclusive agreements with producers (at least on a de facto basis) to ensure access to material. A specific type of long-term agreement is the “off-take agreement” concluded between a producer and a buyer of a commodity to purchase/sell portions of the producer's future production. These relationships raise methodological issues with respect to the allocation of sales among producers and different traders in the assessment of market power.

V.3.2.1. Position of the Notifying Party

57. The Notifying Party argues that the Parties’ activities should be assessed at the production and the supply level of the relevant markets.

58. For the purpose of calculating market shares at the supply level, the Notifying Party suggests to include all transactions to end customers and to exclude sales to traders or other on-sellers. According to the Notifying Party, this is to avoid double-counting between direct and indirect sales and over-representation of the Parties’ market shares. [49]

V.3.2.2. Assessment of the Commission

59. The Commission broadly agrees with the Notifying Party’s approach of calculating market shares both at the production and supply level. This allows assessing market power both in terms of original access to volumes (production level) and in terms of market relations with customers (supply level). This approach also allows taking into account imports and exports influencing market conditions at the supply level.

60. As regards the assessment at the supply level, however, the Commission suggests a different allocation of sales among producers and different traders. Sales volumes should be attributed to a trader, independently of who they sell the product to, if they derive from (i) the trader’s own production, or (ii) the acquisition from a producer on the trader’s own account (including in particular through de facto long-term and/or exclusive off-take agreements). Consequently, also for sales that take place between traders, volumes should be attributed to the trader that produced the volumes or that first procured the volumes from a producer on its own account.

V.3.2.3. Conclusion

61. Differences in the methodology therefore mainly concern the attribution of volumes between different traders in the assessment of market power at the supply level. In cases where produced volumes are sold through a chain of traders, the different approaches allocate the volumes either to the first trader in the chain (Commission’s approach) or to the last trader in the chain (Notifying Party’s approach).

62. However, the Parties’ sales to traders are limited for most products. Therefore the practical differences between the approaches are generally not material. Where the approaches diverge materially, details will be discussed in the individual product sections below.

V.3.3. Financial trading on the LME

63. Following allegations in the press that Glencore might play a role in manipulating the LME price, which is the benchmark for most contracts of LME metals, the Commission has investigated these allegations to the extent that they are of relevance to the Proposed Transaction.

V.3.3.1. Position of the Notifying Party

64. The Notifying Party submits that post-transaction the Merged Entity will not be able to increase the LME price by virtue of Glencore's financial trading activities. [50] It claims that neither Glencore nor Xstrata has a privileged position in the LME organisation, that they trade financially relatively low volumes and that the LME has in place effective mechanisms to prevent abuses.

V.3.3.2. Assessment of the Commission

65. With respect to the Parties' position in the LME, Glencore has a stake of 0.5% in LME Holdings and both Glencore and Xstrata are Category 5 members of the LME with no access to the “ring” [51] and no special rights or privileges. While Glencore and Xstrata are represented on certain committees, [52] neither company can veto the recommendations of the committees on which they sit, [53] which are in any event not binding on the LME’s Executive Committee. Therefore, neither Glencore nor Xstrata has a privileged position in the LME organisation.

66. In terms of trading volumes on the LME platform, Glencore's share of future trades – the main products traded on the LME – is […]. For example, out of the total volume of futures traded in the LME during 2011, Glencore accounted for [0-5]% in zinc metal, [0-5]% in refined copper, [0-5]% in lead, [0-5]% in refined nickel and [0-5]% in refined cobalt. [54] Xstrata has from time to time hedged volumes of copper on the LME, but as a general rule does not hedge with futures on the LME, [55] and its share of trades is […].

67. In addition, the LME trading platform is supported by supervision and regulations outlawing market abuses. [56] In particular, if at any time a member holds 50% or more of the warrants and/or cash positions in relation to a metal, that member (or client) is deemed to hold a “dominant position” (in the terminology of the LME rules) and the LME’s "lending guidance" is automatically triggered. The "lending guidance" provides that any member that is short in a metal is entitled to borrow metal from the “dominant” member at a modest cost, so as to be able to fulfil its contractual delivery obligations. [57] Furthermore, special obligations are imposed on brokers acting for dominant clients to act in compliance with the UK Financial Services Authority (FSA) Code of Market Conduct and its Code of Business Rules. The obligation to lend applies for as long as the member’s holding of warrants and cash positions is not less than 50%. The rationale behind the "lending guidance" is that a member should not be able to exploit its long position in a metal to its financial advantage.

68. Since the rules are applied on a rolling day-to-day basis, it is not difficult for a member of the LME to build a substantial long position on a given day and to be deemed “dominant” and therefore subject to the lending guidance. In fact this happens regularly. For the period from 1 January 2012 to 25 May 2012, for instance, there were at least 346 “dominant positions” on the LME, of which […] were attributable to Glencore. [58] During the investigation, telephone calls with the LME and the FSA have also confirmed that "dominant positions" on the LME are a regular phenomenon and that other companies have acquired "dominant positions" more often than Glencore.

69. […] [59]

V.3.3.3. Conclusion

70. On the basis of the above, the Commission concludes that the allegations in the press regarding the LME financial trading system do not raise competition concerns pertinent to the Commission's assessment of the Proposed Transaction.

V.3.4. LME warehousing rules

71. Glencore is also active in providing warehousing services within the LME. Following allegations in the press on alleged malfunctioning of the LME network of warehouses, the Commission has investigated these allegations to the extent that they are of relevance to the Proposed Transaction.

V.3.4.1. Position of the Notifying Party

72. The Notifying Party submits that post-transaction the Merged Entity will not be able to affect the LME price by virtue of Glencore's LME warehousing services, [60] because the Proposed Transaction will have no effect on Glencore’s warehousing strategy.

V.3.4.2. Assessment of the Commission

73. The LME functions via a network of certified warehouses for the storage and delivery of metals traded on its platform. Glencore’s subsidiary Pacorini Metals (“Pacorini”) manages a number of warehousing facilities worldwide that are LME-certified to stockpile zinc and other LME traded metals. In contrast, Xstrata does not own or operate any LME-certified warehouses.

74. Currently, certain LME warehouses accumulate large quantities of metals while they only release relatively limited quantities even in periods of high demand. This can result in long "queues" in certain locations, where customers need to wait several weeks or months before they can retrieve the metal they purchased. This issue is for example relevant in New Orleans, where Glencore has recently shipped and stored significant amounts of zinc metal into LME warehouses operated by Pacorini. Most of the metal derived from its EEA activities. The presence of long "queues" at LME warehouses can have the effect of supporting premia in the physical market, as buyers cannot effectively turn to the LME as a source of last resort.

75. One important driver behind the accumulation of stocks in LME warehouses is of macroeconomic nature. In the course of the last five years, consistently low interest rates and access to cheap liquidity have reduced the costs, especially for banks, of financing holdings of LME metal. The LME has also confirmed that banks and other investors have increasingly entered the LME financial trading business in search of a relatively safe investment in the present economic environment. [61] Strategic considerations (whereby warehouse companies are able to pay high incentives to obtain metal due to the bottleneck effect created by the LME rules) may also be at play, as noted in the Notifying Party's internal documents. [62]

76. However, notwithstanding specific considerations applicable to zinc metal and analysed in the relevant section, [63] the allegations on the operation of the LME warehouses are not, as such, specific to the Proposed Transaction.

V.3.4.3. Conclusion

77. On the basis of the above, the Commission concludes that the allegations in the press regarding malfunctioning of the LME network of warehouses do not, as such, raise competition concerns pertinent to the Commission's assessment of the Proposed Transaction.

V.4. Zinc

V.4.1. Introduction

78. Zinc is mined as an ore, typically containing other metals such as copper, lead, silver and iron. Zinc ore usually contains 3-11% zinc and is rarely rich enough in zinc to be used directly in a zinc smelter. Therefore, the ore is processed into zinc concentrate at or near the mine by crushing, grinding, and a process called "flotation". The zinc concentrate is then transferred to a smelter/refinery for the production of zinc metal.

79. The conversion of zinc concentrate to zinc metal is accomplished through one of two methods: the electrolytic process ("EP") or the imperial smelting process ("ISP"). Both methods begin with the elimination of most of the sulphur in the zinc concentrate through a roasting process. Roasting involves heating the zinc concentrate to a high temperature to convert it to an impure zinc oxide called calcine.

80. The EP method converts calcine into zinc metal through a process of leaching, purification and electrolysis before the metal is melted and cast. The ISP method involves the sintering (crushing and mixing into a fine powder) of the zinc concentrate before it is fed into a furnace for smelting and then casting.

81. The Notifying Party considers that, for the purpose of the Proposed Transaction, zinc can be analysed in the following two main markets:

(a) zinc concentrate

(b) zinc metal

V.4.2. Zinc Concentrate

V.4.2.1. Relevant product market

82. In line with previous Commission decisions, [64] the Notifying Party submits that the market for zinc concentrate is not in the same product market as other metal concentrates and that each of zinc concentrate and zinc metal constitute separate product markets. The Notifying Party also submits that any further segmentation of a market for zinc concentrate is inappropriate. The Notifying Party's position was broadly confirmed by the market investigation. [65]

83. In a previous case, [66] the Commission also considered whether zinc concentrate and zinc secondary products are part of the same product market. However, the Commission ultimately left this question open. The Notifying Party's activities do not overlap in the production and supply of zinc secondary materials. Even on the basis of a more narrowly defined market comprising only zinc concentrate, the Proposed Transaction does not give rise to any competition concerns. Accordingly, for the purpose of the present decision, it is not necessary to establish whether zinc concentrate and secondary zinc products are part of the same product market. In the absence of overlaps for zinc secondary materials, the remainder of this decision will only address zinc concentrate.

V.4.2.2. Relevant geographic market

84. The Notifying Party submits that the market for zinc concentrate should be defined as worldwide in scope.

85. The Commission has previously concluded that the relevant market for the supply of zinc concentrate is worldwide in scope, given that its price is determined globally based on LME quoted prices, that zinc concentrate is transported from mines to smelting facilities across the globe and transport costs do not represent a significant proportion of the total cost of zinc concentrate. [67]

86. The market investigation broadly confirmed that the market can be considered global in scope. [68] Market participants confirmed that purchases and sales of zinc concentrate are generally organized at the worldwide level. [69] Customers also pointed to their flexibility to redirect purchases of zinc concentrate to suppliers located in other geographical regions in response to a potential price increase in the EEA. [70] Market participants also broadly confirmed that they would be able to switch purchases/sales to every region in the world. [71]

87. A minority of the market participants stated that the geographic market for zinc concentrate should be considered worldwide excluding Chinese production and intra-China sales. [72] On the one hand, none of the customers in the market investigation purchased zinc concentrate from China in the last two years. [73] The majority of the market participants also stated that zinc concentrate on offer in China does not compete with zinc concentrates on offer outside China. [74] On the other hand, most market participants maintained that sales of zinc concentrate into China influence the price and conditions of concentrate sales in other geographic areas [75] and that demand and supply conditions for zinc concentrate within China affect competitive conditions for the production and supply of zinc concentrate outside China. [76]

88. In any case, the geographic market definition can ultimately be left open as the Proposed Transaction does not give rise to competition concerns regardless as to whether the market for zinc concentrate is considered to be worldwide or worldwide excluding Chinese production and intra-China sales.

V.4.2.3. Assessment of effects on competition - Horizontal assessment

89. Glencore and Xstrata's activities overlap in the production and supply of zinc concentrate. The Merged Entity will become the world’s most important producer and supplier of zinc concentrate.

90. Glencore and Xstrata's 2011 production market shares (in volume) exceed [10-20]% only on a potential worldwide market excluding Chinese production: [77]

|Worldwide | |Worldwide excluding Chinese production |

|Glencore |Xstrata |Combined | |Glencore |Xstrata |Combined |

Zinc Concentrate production |[0-5] |[5-10] |[10-20] | |[0-5] |[10-20] |[10-20] |

91. The worldwide production of zinc concentrate is fragmented. Glencore and Xstrata's most important competitors at the production level include Vedanta Resources ([5-10]%, including Hindustan Zinc Sterlite Industries volumes), Teck ([0-5]%), China Minmetals Group ([0-5]%), Votorantim ([0-5]%), New Boliden ([0-5]%), Minera Volcan ([0-5]%), Sumitomo Corp ([0-5]%) and Chinese state owned enterprises (together [0-5]%). [78]

92. The Notifying Party estimates the combined market shares in the supply of zinc concentrate in 2011 as follows: [79]

|Worldwide | |Worldwide excluding intra-Chinese sales |

|Glencore |Xstrata |Combined | |Glencore |Xstrata |Combined |

Zinc Concentrate supply Glencore and Xstrata's supply volumes include sales made to traders for on-sale following the Commission’s methodology. If only sales to end customers are considered following the Notifying Party's’ methodology, the supply share of the Merged Entity is reduced to [10-20]% at the worldwide level. Glencore and Xstrata's supply volumes include sales made to traders for on-sale following the Commission’s methodology. If only sales to end customers are considered following the Notifying Party's’ methodology, the supply share of the Merged Entity is reduced to [10-20]% at the worldwide level. |[10-20] |[0-5] |[10-20] | |[20-30] |[5-10] |[20-30] |

93. Glencore and Xstrata's most important competitors in zinc concentrate production as mentioned above, are also active at the supply level. Further supply competitors include commodity traders such as Trafigura, Transamine, Louis Dreyfus, MRI Trading and Ocean Partners. Trafigura and Teck have a supply share in the range of 5-10%. Others include MRI ([0-5]%), Boliden ([0-5]%), Goldcorp ([0-5]%) and Befesa ([0-5]%). [81]

94. Regarding supply shares in a potential market excluding intra-Chinese sales, the market shares of competitors Trafigura and Teck are in the range of [10-20]%. The market shares of other important competitors are as follows: MRI ([5-10]%), Boliden ([5-10]%), Goldcorp ([5-10]%) and Befesa ([5-10]%). [82]

95. Glencore has been […] over the past years, purchasing approximately […]% of Xstrata’s total zinc concentrate production in 2011. In addition, the Parties entered into a service agreement in 2007 according to which Glencore advises Xstrata in relation to pricing and structural issues regarding its zinc concentrate business. Accordingly, the Notifying Party argues that the impact of the Proposed Transaction on the zinc concentrate market will be limited. [83]

96. Zinc smelters require specific zinc concentrate mixes to achieve an optimal level of zinc contained and impurities (i.e. lead, iron etc). Accordingly, they regularly purchase zinc concentrates from different mines in order to blend and achieve an optimal product mix for their smelting facilities and to reduce dependency on individual suppliers. [84] Furthermore, supply contracts are generally not exclusive. [85]

97. Overall, the majority of market participants surveyed in the market investigation – including the smelters based in the EEA – did not raise any substantiated competition concerns with respect to zinc concentrates.

98. Although some market participants stated that Glencore and/or Xstrata have a competitive advantage over their competitors due to their global reach, size and financial strength, [86] only a minority of market participants find that Glencore and/or Xstrata play a particular role in global zinc concentrate price setting, including in spot sales. [87] The market investigation also confirmed that market participants believe that the competitors are comparable to the Parties in their ability to supply similar quantities of zinc concentrate. [88] Accordingly, the vast majority market participants do not expect the Proposed Transaction to have an impact on zinc concentrate prices [89] or on their business. [90] Customers also maintained that a sufficient number of zinc concentrate suppliers will remain after the Proposed Transaction. [91]

99. In light of the above, the Commission finds that a number of viable competitors will remain active in the market for zinc concentrates. The Commission also took into account that market participants use non-exclusive contracts and that customers adopt multi-sourcing strategies to achieve optimal product mix and accordingly reduce dependency on individual suppliers.

100. Consequently, and on the basis of the results of the market investigation, the Commission therefore concludes that the Proposed Transaction does not give rise to horizontal competition concerns on the market for zinc concentrate, regardless of its geographic scope.

V.4.2.4. Assessment of effects on competition – Vertical assessment

101. The Proposed Transaction also leads to vertically affected markets with respect to Glencore and Xstrata's activities in zinc concentrate and zinc metal. However, no substantiated foreclosure concerns were raised by market participants surveyed in the market investigation.

102. The Parties submit that they will continue to buy and sell zinc concentrate on the market because of their own need to blend zinc concentrate from different mines. [92] As mentioned in paragraph 98 above, market participants – including European zinc smelters – considered that a sufficient number of zinc concentrate suppliers will remain after the Proposed Transaction and that the merger will have no negative impact on zinc concentrate prices. [93] Accordingly, due to the Parties’ incentives to keep supplying concentrate to zinc smelters to achieve optimal product mixes and on the basis of the results of the market investigation, the Commission finds that input or customer foreclosure concerns are not likely to arise.

103. Some of the competing traders surveyed in the market investigation raised concerns regarding access to zinc concentrate for their trading business. However, as explained by the Notifying Party in reply to the questions on Xstrata's commercial strategy, Xstrata […] and it […] zinc concentrate to other producers to enable them procuring different blends of zinc concentrate and thus guaranteeing an optimal mix of different concentrates for their smelters. [94] Accordingly, the Commission considers that there is a low probability that Xstrata would have sold material to traders other than Glencore in the future. Therefore, no input foreclosure concerns with respect to competing trader’s access to zinc concentrates arise.

104. The Commission therefore concludes that the Proposed Transaction does not give rise to vertical competition concerns on the market for zinc concentrate, regardless of its geographic scope.

V.4.2.5. Conclusion

105. Therefore the Commission concludes that, with regard to the production and supply of zinc concentrate, the Proposed Transaction does not raise serious doubts as to its compatibility with the internal market.

V.4.3. Zinc metal

V.4.3.1. Relevant product market

V.4.3.1.1. Introduction

106. Zinc metal is used, among other things, for galvanising, die casting alloy, oxides and chemicals, and in the brass industry.

107. There are five commercially traded grades of zinc metal:

a. Special high grade ("SHG") zinc metal (99.995% pure), which is suitable for a wide range of end applications including galvanising, die casting and alloy production.

b. Continuous galvanising grade ("CGG") zinc metal, used for galvanising steel.

c. Die casting alloys ("DCA"), which are alloys of SHG zinc and other non-ferrous metals, such as aluminium and copper, used in the making of precision parts such as sprockets, gears and connector housings predominantly in the automotive and construction sector, but also in the manufacturing sector.

d. Good ordinary brand ("GOB") zinc metal (98.5% pure), suitable for production of alloys such as brass.

e. High grade ("HG") zinc metal (99.95% pure), suitable for a similar range of end applications to SHG zinc metal (save for the production of casting alloys, such as DCA).

108. Commodity grade zinc metal is characterised by the fact that it is a standardised product, i.e. a product which is suitable for numerous customers. It can therefore be traded. This contrasts with non-commodity grade zinc metal where an otherwise identical product is of a form which is of use only to a limited set of customers. According to the Notifying party, SHG and CGG can both be commodity and non-commodity grade zinc metal, DCA is always non-commodity grade zinc metal, and HG and GOB are both always commodity grade zinc metal. [95]

109. SHG, CGG and DCA are the most widely produced and heavily used grades of zinc metal throughout the world.

V.4.3.1.2. Position of the Notifying Party

110. The Notifying Party considers that the market for zinc is a distinct product market from other metals due, in particular, to its different physical characteristics, its different usage and different price levels. It further claims that zinc concentrate and zinc metal constitute separate product markets.

111. The Notifying Party submits that the market should not be further segmented by grades of zinc metal because there is a high degree of supply-side substitutability. In particular, the Notifying Party claims that a producer of SHG can switch to producing DCA or CGG grades of zinc metal without incurring significant costs. No special technology or high capital investment are required to make the necessary adjustments/modifications to start producing. As regards HG metal, the Notifying Party submits that, although it has a slightly lower purity level than SHG zinc metal, it is to a large extent used in the same applications as SHG, with the sole exceptions of die casting alloys and rolled and extruded products. The Notifying Party considers that GOB is a by-product of the zinc concentrate smelting process that has minor merchant sales and that is subsequently further purified into SHG through the use of distillation columns. This is, according to the Notifying Party, a strong indication of GOB's substitutability with SHG.

112. On the demand-side, the Notifying Party argues that different grades of zinc metal have multiple uses (e.g. SHG can be used for galvanizing, die casting alloys, oxides and chemicals, brass semis & casting, and rolled & extruded products).

113. However, the Notifying Party considers that, in any case, the product market definition for GOB and HG can be left open since there are no overlaps between Glencore's and Xstrata's activities in these two grades of zinc metal.

V.4.3.1.3. Assessment of the Commission

114. In its previous decisional practice, the Commission has concluded that zinc is a distinct market, because of its special characteristics. [96] The Commission has treated zinc metal as a distinct market [97] and has stated that the market may be further segmented by grades. However, the Commission has ultimately left the exact market definition open. [98]

115. In their responses to the Commission's questionnaire, all the customers indicated that they would not be able to use all grades of zinc metal for their application. [99] As regards SHG, if the price of such grade were to increase by 5%, none of the customers responded that they would stop purchasing SHG and a small minority said they would reduce their SHG purchases. However, in the past, none of the customers have actually switched to other zinc grades as a result of a 5% price increase of SHG. [100] As regards CGG, none of the customers said they would stop or reduce their CGG purchases as a result of a price increase. Only a very small minority indicated that they had actually switched to other zinc grades as a result of a 5% price increase of CGG in the past. [101] These responses suggest that demand-side substitutability between the different grades is low.

116. The replies of competitors to the questionnaire shows that a majority of zinc smelters can easily and relatively quickly switch between the production of different grades of zinc metal. [102] The majority of smelters can switch between SHG and CGG, and a few replied that they can also switch between SHG, CGG, zinc aluminium and GOB. [103] These responses indicate that supply-side substitutability between certain grades is relatively high (e.g. SHG and CGG). However, the market investigation was not conclusive with respect to supply-side substitutability between all grades.

117. In addition, there can be however contractual constraints on the ability of individual smelters to switch production and compete in different grades. This is particularly the case of the largest smelter in the EEA (Nyrstar, with production capacity of 705,000 MT), which under its exclusive long-term off-take with Glencore, […]. [104]

118. The exact product market definition can nonetheless be left open since, even under the largest plausible market definition, i.e. in markets for all grades of zinc metal, the Proposed Transaction gives rise to serious risks of non-coordinated effects.

V.4.3.2. Relevant geographic market

V.4.3.2.1. Commission Precedents

119. In previous Commission decisions, the scope of the relevant geographic market for zinc metal was defined as either EEA-wide, or left open.

a. In Case COMP/M.2348 - Outokumpu/Norzink, the Commission found that the market was EEA-wide due to the limited share of imports in EEA consumption (less than 15%), and the presence of non-negligible transport costs.

b. In Case COMP/M.4256 - Xstrata/Falconbridge, the results of the market investigation were found to be in line with an EEA-wide definition of the market, due to the presence of transport costs, a 2.5% import tariff on zinc metal imports into the EU, and due to the fact that a number of customers purchased predominantly from EEA-based producers.

c. In Case COMP/M.4450 - Umicore/Zinifex/Neptune JV, the market investigation did not provide conclusive evidence in support of either a global or EEA-wide geographic definition of the market, and the Commission left the precise market definition open since the transaction did not give rise to concerns under the alternative definitions.

V.4.3.2.2. Position of the Notifying Party

120. The Notifying Party argues, contrary to the Commission precedents summarised above, that the scope of the geographic market for zinc metal is global. The Notifying Party puts forward a number of arguments in support of this geographic market definition, including the following :

a. The level of imports are significant, amounting to 15% of total EEA zinc metal consumption in 2011;

b. Long distance supplies from "swing countries" to different export regions (i.e. EEA, US, or Asia) are subject to similar transport costs, and similar import duties;

c. There are a number of countries that are exempt from the 2.5% import duty (including Namibia, Mexico, Algeria, South Korea, South Africa and Chile);

d. Imports into the EEA (in particular from swing countries) have reacted to changes in the relative level of zinc metal prices in the past;

e. Historically relative zinc metal prices across regions (i.e. EEA, US and Asia) have moved within a narrow band, normally within 2.5% - and only occasionally above 5% - of the sum of the LME price and the regional premia ("total zinc metal price");

f. Glencore's […] trading margins ([…]) indicate the presence of intense competition pre-merger, including competition from swing country producers.

121. The Notifying Party submitted a number of economic papers in support of some of these arguments as part of the Form CO. [105]

V.4.3.2.3. Results of the market investigation

122. Responses to the Commission's Phase I questionnaire from zinc metal customers in the EEA do not support the Notifying Party's contention on the existence of a global zinc metal market, and indicate at least a serious possibility that the market should be defined as EEA-wide.

123. A majority of these respondents did not import zinc metal in 2011 and 2012, and considered that total zinc metal prices and premia differed across regions. Moreover, a clear majority of customers purchased zinc metal at EEA or national level, from suppliers located close to their production facilities. A significant majority of respondents also consider that total transport costs (including import duties of 2.5% on the full zinc metal price where applicable) represent a significant portion of the total zinc metal price, and that they constitute a constraining factor for trade to and from the EEA. Most customers also indicated that shipment times and security of supply considerations negatively affect the ability of zinc metal importers to effectively compete with EEA suppliers. Additional factors mentioned by zinc metal customers as constraints on imports into the EEA include considerations on flexibility of supply, availability of product, quality standards, and the costs involved in adjusting the product to the specifications and quality required. [106]

124. Notwithstanding the answers summarised above, approximately half of the respondents considered the zinc metal market to be wider than the EEA. A similar proportion of respondents answered that they would reduce their purchases of zinc metal from EEA suppliers in the event of a small but permanent increase in price (in the order of 5% of either the total zinc metal price, and/or of the regional premium). However, the overwhelming majority of respondents stated that they actually had not responded to price increases of this magnitude by reducing their purchases from EEA suppliers in the past. Moreover, only a minority of customers considered that imports of zinc metal would be able to mitigate or eliminate a hypothetical 5-10% increase in the EEA total zinc metal price, or that competitors outside the EEA would be able to effectively constrain an attempt by the Merged Entity to increase price post-merger.

125. Overall, the Commission considers that the responses received from zinc metal customers do not provide sufficient support for the claim made by the Notifying Party that the market should be considered as global. On the contrary, these responses provide an indication (at least on a preliminary basis) that imports would not be able to constrain a small but significant and lasting price increase by a hypothetical monopolist in Europe, and therefore that the market should be defined as EEA-wide.

126. Responses received from competitors in the zinc metal market broadly confirm this preliminary conclusion on market definition. Half of the competitors consider that transport costs constitute a significant part of the final price of zinc metal and a majority see transport costs as a constraining factor for trade between the EEA and other geographic areas. Furthermore, a majority of competitors have not responded in the past to increases in EEA prices or premia by increasing their imports into the EEA, and none considers that imports would be able to mitigate or eliminate a hypothetical 5% increase in European prices. On the other hand, the majority of zinc metal competitors consider the zinc metal market to be global in scope.

127. In the Commission's assessment the evidence from the responses received from zinc metal competitors shows at least the serious possibility that the appropriate scope of the zinc metal market should be EEA-wide.

V.4.3.2.4. Evidence on imports, prices and margins

128. The available evidence on imports, prices and margins also does not confirm the Notifying Party's submission that the geographic scope of the zinc metal market is global, and instead points to a serious possibility that the correct scope of the market is EEA-wide.

V.4.3.2.4.1. Evidence on imports and import duties

129. The volume of imports into the EEA has not been significant relative to the level of consumption over the recent past. On average during the period 2009-2011, imports have accounted for 15% of total EEA consumption. If one considers a longer period stretching back to 2003, the annual share of consumption accounted for by imports has averaged 14%, and only exceeded 20% in 2007. [107]

130. Moreover, Glencore itself accounts for a […] share of imports into the EEA (on average around [40-50]% of imports during the period 2006-2011). In 2011, Glencore imported […] MT of zinc metal into the EEA, accounting for […] of total imports ([…] from its zinc metal operations in […]). [108] The fact that Glencore accounts for a […] share of imports reinforces the conclusion that imports will not act as a significant competitive constraint post-merger.

131. The fact that some countries benefit from an exemption of import duty does not imply that aggregate imports into the EEA are not constrained by the presence of a 2.5% import duty. Countries that are exempted from the import duty have only accounted for 6% of total zinc metal consumption in the EEA in 2011, and for a similar average during the past three years. [109] The majority of imports into the EEA are, thus, still subject to the import duty.

132. This is a significant constraint on imports, in part because the import duty represents a significant share of the gross refining margin realised by zinc metal smelters (defined as the sum of treatment charges, the value of "free" zinc, premia and by-products [110] ). Data submitted by the Notifying Party on the margins earned by their smelters in the EEA during 2011 shows that the gross refining margin realised by these smelters represents less than […]% of the overall zinc metal income (including revenues from zinc metal premia). [111] This reflects the fact that the raw material costs associated with purchases of zinc concentrates represent a significant share of total income. [112] This evidence indicates that the 2.5% import duty tariff on the full zinc metal price represents a significantly higher share of the gross refining margins of zinc metal producers (likely to be in the order of 5% or more).

133. The importance of the 2.5% import duty on competitive conditions in the EEA is also reflected in the December 2008 long-term off-take agreement between the Notifying Party and Nyrstar. [113] The contract includes a provision ([…]) that is explicitly designed to […].

134. Moreover, the Commission considers that the close correlation that can be observed between European premia and the LME price also constitutes preliminary evidence that the import duty (which is computed on a full price basis, and therefore fluctuates with the level of the LME price) is an important determinant of the level of premia.

V.4.3.2.4.2. Evidence on regional premia

135. Evidence on the divergences of regional premia in the recent past also supports a definition of the relevant geographic market that is EEA-wide in scope. Regional premia provided by the Notifying Party on the basis of data collected by CRU shows that US, EEA and Asian premia have diverged significantly. [114]

136. During the 2002-2011 period, monthly divergences between EEA and US premia were on average in excess of 40% of the monthly EEA premium, and ranged between roughly -60% and 100%. During this period, there were prolonged episodes of significant divergences between premia (for example, the monthly EEA-US premia differential was above 40% of the monthly EEA premium continuously during the period between early 2007 and early 2011). [115]

137. Large discrepancies in regional premia can also be observed between the EEA and Asia, even though adjusting for differences in delivery terms is less straightforward in this case. [116] Comparing the unadjusted CRU premia for the EEA and Asia, one observes average monthly differences of around 20% during the 2002-2011 period, also with prolonged periods with larger discrepancies (for example, above 35% between mid-2006 and late 2007).

138. The evidence on premia is relevant to geographic market definition because regional premia are the element of price which directly reflects differences in competitive conditions across regions, and more generally differences in regional demand-supply balances. As such, the regional premium appears to represent the main element of price of zinc metal that is subject to commercial bilateral negotiations between buyers and sellers of zinc metal. The rest of the price agreed between zinc metal buyers and sellers is indexed to the global LME cash price during the period of delivery, and is therefore not subject to commercial negotiations. These pricing practices are in line with the fundamental economics of zinc metal smelting, and with the fact that smelting margins do not depend on the level of the LME price (see section VI.3.1).

139. […]. [117] […] [118] ; […] [119] ; […] [120] ).

140. Responses received from zinc metal customers in the EEA also confirm that a clear majority would be concerned about a 5-10% increase in zinc metal premia as a result of the merger, and would not only be concerned about increases in the total zinc metal price.

V.4.3.2.4.3. Evidence on the total zinc metal price and on price responsiveness of imports

141. The Notifying Party has argued that the appropriate scope of the geographic market for zinc metal should be assessed on the basis of the full price for zinc metal (inclusive of the LME price), and not by only considering regional premia.

142. The Commission has also assessed the evidence on geographic market definition by looking at alternative approaches that do not consider premia as the relevant benchmark for the purposes of geographic market definition. These alternative approaches do not provide compelling evidence that the geographic market should be defined as global, and confirm a serious possibility that an appropriate definition of the market is EEA-wide.

143. In particular, the evidence on the evolution of the total zinc metal prices across regions does not clearly point to a worldwide geographic market. Whilst the total zinc metal prices have moved closely across regions in the recent past, this correlation has been largely driven by the impact of the common element in these prices (i.e. the LME price). If this common element is accounted for, the correlation across regional prices becomes substantially lower. [121]

144. Moreover, whilst the percentage differences in the full prices of zinc metal across regions are significantly lower than the percentage differences in premia, there are still persistent differences in prices that are not arbitraged away by trading between regions. For example, the full price for zinc metal in the EEA remained consistently above the US price (controlling for differences in delivery terms) by 3.5% or more during the period between early 2007 and late 2009 (an almost 3-year period). [122] Whilst a price difference of this level is below the 5-10% price threshold typically used for market definition purposes (as part of the hypothetical small lasting change in relative prices test [123] ), it nonetheless represents a significantly higher share of the gross refining margin of a zinc metal smelter (i.e. the total zinc metal price net of the cost of zinc concentrate, as defined above). [124] When evaluated as a share of the element of the vertical value chain accounted for by smelters, the presence of persistent price differences across regions is therefore indicative of a relatively weak constraint between smelters located in different regions of the world, and not supportive of a global market definition for zinc metal.

145. Furthermore, the observation that price differences across regions have historically been below the 5% threshold typically considered for market definition purposes is not sufficient to infer that the scope of the geographic market is wider than EEA. A relevant factor that also needs to be considered is the actual responsiveness of absolute aggregate import and export flows to relative price changes across regions, since this indicates the competitive constraint that foreign producers impose on a hypothetical monopolist of zinc metal in any given region. In particular, if one is considering a hypothetical monopolist of zinc metal in the EEA, a key determinant of the market definition assessment is the responsiveness of total zinc metal imports into the EEA to price differences between the EEA and other regions.

146. The Notifying Party has provided two examples that seek to illustrate the response of the absolute level of imports into the EEA to relative price differences (measured in terms of differences in the full zinc metal price). [125] One of the examples illustrates the fact that a 3.1% increase in EEA-US price differentials between 2006 and 2007 was associated with an increase in imports into the EEA of approximately 106k MT from "swing" countries (equivalent to approximately 5% of current EEA zinc metal consumption). The second example shows that a 4.1% increase in EEA-Asian price differentials between 2005 and 2006 was associated with an increase in imports into the EEA of 36k MT (equivalent to less than 2% of current EEA zinc metal consumption).

147. The Commission considers that the responsiveness of imports to relative price changes suggested by these two examples (coupled with the evidence of low price elasticity of demand for zinc metal also submitted by the Notifying Party [126] ) is not of sufficient magnitude to render unprofitable a hypothetical 5-10% price increase by suppliers of zinc metal in the EEA. In particular, the combined effect of the reduction in demand and loss of volumes to non-EEA suppliers that is likely to be induced by such an increase in price does not appear to be sufficiently large to offset the increase in profits brought about by the assumed increase in prices. Therefore, in the Commission's assessment, these two examples provided by the Notifying Party on the reaction of imports to price changes do not provide sufficient evidence in favour of a global geographic market definition for zinc metal.

148. In order to further verify this preliminary conclusion, the Commission has carried out internally a more systematic assessment of the statistical relationship between total imports into the EEA and the absolute price differences between the US and the EEA (accounting for differences in delivery terms), during the 2002-2011 period (on a monthly basis). The purpose of this analysis was to further examine the responsiveness of total aggregate imports into the EEA to relative price changes (controlling for other factors such as changes in consumption). Whilst this preliminary analysis suggests that there is a statistically significant relationship between the level of imports and EEA-US price differentials, the analysis confirms the conclusion discussed above that imports do not appear to be sufficiently responsive to price changes so as to make a 5-10% price increase by EEA suppliers unprofitable. The analysis therefore indicates that the historical responsiveness of EEA imports to relative price changes does not appear to be of a sufficient magnitude to support a wider than EEA definition of the market.

V.4.3.2.4.4. Evidence on margins

149. The Commission also considers that the Notifying Party's arguments that its […] trading margins indicate the presence of intense competition for zinc metal (and are therefore indicative of a global market) cannot be accepted. In order to assess market power and competitive conditions in a zinc metal market that includes both smelters and traders, it is necessary to consider the aggregate gross margin earned by smelting and trading activities together. Margin data submitted by the Notifying Party indicates that their EEA smelting variable margin (defined as total smelter revenues minus variable costs) […]. [127] The level of these margins (particularly bearing in mind the fact that they are expressed as a fraction of total smelter revenues, evaluated at the total zinc metal price) is not consistent with a global market definition for zinc metal, and with intense competition from smelters located outside the EEA.

V.4.3.2.5. Conclusion on relevant geographic market

150. Based on the evidence summarised above, including responses from market participants and an analysis of the evolution of zinc metal prices and import flows, the Commission considers that there is at least a serious possibility that the market is EEA-wide.

V.4.3.3. Assessment of effects on competition

151. The Notifying Party claims that, despite the merger resulting in high combined market shares, the Proposed Transaction will not give rise to any significant competition concerns, primarily because the market is worldwide in scope and because, due to Glencore's and Xstrata's complementary strategies and vertical integration, they currently do not exert any significant competitive constraint on each other.

V.4.3.3.1. Market Shares and Concentration Levels

152. Glencore and Xstrata's activities overlap both in the production and the supply of zinc metal. In this regard, the Proposed Transaction leads to a number of affected markets and, in particular, to high market shares in the supply of zinc metal in the EEA. The market power of the Merged Entity is even greater if the total quantities of zinc metal it would control are taken into account.

V.4.3.3.1.1. Production of Zinc Metal

153. Glencore produces zinc metal mainly through three subsidiaries: (i) the Portovesme smelter in Italy, with an annual production capacity of 120,000 MT […], (ii) the Kazzinc facility in Kazakhstan, with an annual production capacity of 300,000 MT, and (iii) the AR Zinc Group, with an annual production capacity of 44,000 MT. In addition, Glencore has […] tolling arrangements under which it obtained […] of zinc metal in 2011. Overall, the production capacity of Glencore's controlled zinc metal plants at 31 December 2011 was approximately […] MT. With 2011 production volumes of […] MT, Glencore produces […]. [128]

154. Xstrata produces zinc metal mainly through two subsidiaries: (i) the Nordenham smelter in Germany, with an annual production capacity of 150,000 MT, and (ii) the San Juan de Nieva smelter in Spain, with an annual production capacity of 490,000 MT. Overall, the production capacity of Xstrata is of 640,000 MT of zinc metal, and production volumes in 2011 amounted to […] MT. [129]

155. The Notifying Party estimates Glencore's and Xstrata's combined market shares as follows: [130]

Production of Zinc Metal in 2011 – Worldwide |

Parties |All Grades of Zinc |SHG |CGG |

|Volume (in K MT) |Shares(%) |Volume (in K MT) |Shares(%) |Volume (in K MT) |Shares(%) |

Glencore |[…] |[0-5] |[…] |[0-5] |[…] |[0-5] |

Xstrata |[…] |[5-10] |[…] |[5-10] |[…] |[0-5] |

Combined |[…] |[5-10] |[…] |[5-10 |[…] |[5-10] |

Production of Zinc Metal in 2011 – Worldwide Excluding China |

Parties |All Grades of Zinc |SHG |CGG |

|Volume (in K MT) |Shares(%) |Volume (in K MT) |Shares(%) |Volume (in K MT) |Shares(%) |

Glencore |[…] |[5-10] |[…] |[0-5] |[…] |[0-5] |

Xstrata |[…] |[5-10] |[…] |[5-10] |[…] |[5-10] |

Combined |[…] |[10-20] |[…] |[10-20] |[…] |[5-10] |

Production of Zinc Metal in 2011 – EEA |

Parties |All Grades of Zinc |SHG |CGG |

|Volume (in K MT) |Shares |Volume (in K MT) |Shares |Volume (in K MT) |Shares |

Glencore |[…] |[5-10] |[…] |[5-10] |[…] |[0-5] |

Xstrata |[…] |[20-30] |[…] |[30-40] |[…] |[20-30] |

Combined |[…] |[30-40] |[…] |[40-50] |[…] |[20-30 |

156. On the basis of the Notifying Party's estimates, the Proposed Transaction would lead to three affected markets: a market for the production of all grades of zinc metal in the EEA, a market for the production of SHG in the EEA and a market for the production of CGG in the EEA. For CGG, the merger does not lead to competitive overlaps as Glencore did not produce CGG in its EEA plants in 2011.

157. As regards the market for the production of all grades of zinc metal in the EEA, the Merged Entity would become the largest player, with some important competitors remaining, namely Nyrstar ([30-40]%), and Boliden ([20-30]%), [131] as well as some smaller ones such as ZGH Boleslaw ([5-10]%), KCM AD ([0-5]%) and LZC AD ([0-5]%). [132] The Notifying Party has not provided the competitors' market shares for the production of SHG and of CGG in the EEA.

158. The Proposed Transaction would lead to an increase in concentration in the EEA production market (as measured by the HHI) of [300-400] points. Adjusting the concentration measure to take into account the minority stake that Glencore owns in Xstrata would reduce the increase in concentration due to the merger to between approximately [100-200] and [200-300] points (depending on whether the stake is considered as silent, or as conferring some partial control). [133]

159. Given that, as mentioned above in paragraph 41, traders and producers are part of the same product market, and that the zinc metal sector is characterized by a number of off-take agreements, the assessment of the Proposed Transaction should be based on Glencore's and Xstrata's market shares on the market for the supply of zinc metal.

V.4.3.3.1.2. Supply of Zinc Metal

160. In 2011, Glencore made sales of approximately […] MT of zinc metal worldwide, of which […] MT within the EEA. In addition to the volumes it produces, Glencore markets zinc metal from Xstrata and from third party suppliers.

161. Over the period 2007-2011, Xstrata supplied on average approximately […] MT in the EEA to Glencore. [134]

162. The other major supplier of zinc metal to Glencore is Nyrstar, with whom Glencore has an exclusive long-term off-take agreement. [135] This agreement was entered into in December 2008, initially for the […]-year period running between […] and […]. In June 2011 the agreement was subsequently extended until December 2018 (i.e. for a […]-period relative to the initial term). Under the terms of the agreement, the supply of commodity grade zinc products from Nyrstar to Glencore is exclusive. The exclusivity clause means that Nyrstar cannot market independently of Glencore commodity grade zinc metal produced at its smelters in the EEA, US and Australia. The agreement provides for […] premia to be paid by Glencore to Nyrstar, in addition to the LME price. These premia are […]. The agreement also applies to lead metal products.

163. During 2011, Glencore purchased from Nyrstar around […] MT of zinc metal globally under the off-take agreement, out of which […] MT were supplied in the EEA. [136] In 2011 Nyrstar produced a total of 707,000 MT of zinc metal at its European smelters, and, according to the parties' estimates, it sold about […] MT of specialty zinc metal independently of Glencore. [137]

164. In 2011, Glencore also imported […] MT of zinc metal in the EEA, out of a total of imports into the EEA amounting to 317,000 MT. [138]

165. The differences between Glencore's overall sources of zinc metal in the EEA and its sales is either exported outside the EEA, or stored (as is further discussed below).

166. Xstrata markets most of its production of zinc metal in EU countries and Canada. In 2011, it sold […] MT of zinc metal worldwide, of which […] MT in the EEA.

167. The Notifying Party estimates Glencore's and Xstrata's combined market shares as follows: [139]

Supply of Zinc Metal in 2011 – Worldwide |

Parties |All Grades of Zinc |SHG |CGG |

|Volume (in K MT) |Shares(%) |Volume (in K MT) |Shares(%) |Volume (in K MT) |Shares(%) |

Glencore |[…] |[10-20] |[…] |[10-20] |[…] |[5-10] |

Xstrata |[…] |[0-5] |[…] |[0-5] |[…] |[0-5] |

Combined |[…] |[10-20] |[…] |[10-20] |[…] |[10-20] |

Supply of Zinc Metal in 2011 – Worldwide Excluding China |

Parties |All Grades of Zinc |SHG |CGG |

|Volume (in K MT) |Shares(%) |Volume (in K MT) |Shares(%) |Volume (in K MT) |Shares(%) |

Glencore |[…] |[20-30] |[…] |N/A The Parties are unable to estimate the total market size. The Parties are unable to estimate the total market size. |[…] |N/A The Parties are unable to estimate the total market size. The Parties are unable to estimate the total market size. |

Xstrata |[…] |[5-10] |[…] |N/A |[…] |N/A |

Combined |[…] |[20-30] |[…] |N/A |[…] |N/A |

Supply of Zinc Metal in 2011 – EEA |

Parties |All Grades of Zinc |SHG |CGG |

|Volume (in K MT) |Shares(%) |Volume (in K MT) |Shares(%) |Volume (in K MT) |Shares(%) |

Glencore |[…] |[20-30] |[…] |[20-30] |[…] |[20-30] |

Xstrata |[…] |[10-20] |[…] |[20-30] |[…] |[10-20] |

Combined |[…] |[40-50] |[…] |[50-60] |[…] |[30-40] |

168. In light of the above, the Proposed Transaction would lead to affected markets for the supply of all grades of zinc metal and of SHG regardless of the geographic scope of the market. The market for the supply of CGG in the EEA would also be affected.

169. In particular, the combined market shares of Glencore and Xstrata would be above 40% on the market for the supply of all grades of zinc metal and of SHG in the EEA, with increments over [10-20]%. Glencore and Xstrata would have a higher share in commodity-grade zinc, given the focus of Glencore in this market segment, and the fact that Nyrstar, one of the main competitors in the EEA, is contractually excluded from this market segment as a result of its long-term off-take agreement with Glencore. [142] On the basis of the Notifying Party's estimate of Nyrstar's sales of non-commodity grade zinc other than DCA, the size of the commodity grade zinc metal supply segment would be of at most […] MT, of which Glencore and Xstrata would account for […] MT post-merger, resulting in a market share in excess of 50%. [143]

170. The share of EEA supply of the merged entity drops to [40-50]% under the Notifying Party's market share methodology, where sales to traders are excluded from the market share computation, and only sales to end-customers are included. [144] This is largely due to the fact that of Glencore's […] MT of EEA sales, […] MT are made to follow-on traders. A further […] MT are sold by Xstrata to […], for follow-on trading.

171. Even under the Notifying Party's market share methodology, the position of the combined entity in the EEA supply market remains significant, and its share of total available volumes in the EEA (as defined below) is unaffected. Moreover, a significant share of the Parties´ combined sales to traders (roughly […] MT) are made to […], for follow-on trading purposes. The information provided by the Notifying Party indicates that […] uses […] zinc metal purchases for […], and therefore does not appear to have as its main focus its activities as […]. […] also appears to act as […] given its strong relationships with […]. [145] As such, its trading activities appear to be largely complementary with those of the Parties, rather than in competition with them.

172. The rest of Glencore’s contracts with other traders are […], as stated by the Notifying Party in the Form CO [146] , and confirmed by the contractual terms for Glencore’s top 10 trading customers in the EEA [147] . The zinc metal contracts with these trading partners appear to be […] in terms of […]. Moreover, the contracts between Glencore and these traders […]. It therefore appears that the traders supplied by Glencore within the EEA do not represent effective competitors to Glencore in the EEA supply market. As such, it is appropriate to attribute the relevant volumes to Glencore’s share of the EEA supply market, as under the Commission’s preferred market share methodology.

173. The Notifying Party submits that the Merged Entity would be constrained by a number of competitors both at a worldwide and at an EEA-wide level. At an EEA-level, for the supply of all grades of zinc metal, there would only be a limited number of competitors, each having market shares […] as the market share of the Merged Entity: Nyrstar ([10-20]%), Boliden ([20-30]%), ZGH Boleslaw ([5-10]%), KCM AD ([0-5]%) and LZC AD ([0-5]%). [148] At a worldwide level, there would be significant competitors, such as Trafigura, Votorantim, Euromin and Marubeni Corporation.

174. In addition, contrary to the Notifying Party's allegations, Glencore's and Xstrata's activities on the market for the supply of zinc cannot be considered complementary from a geographic point of view, [149] since as a result of the off-take agreement with Nyrstar, they compete in Northern Europe (especially Germany, Austria, Netherlands and France). [150]

175. Based on the figures provided above, the Proposed Transaction would lead to a post-merger HHI above 2000 and an increase in concentration in the EEA supply market (HHI delta) of approximately [900-1000] points. Adjusting the concentration measure to take into account the minority stake that Glencore owns in Xstrata would reduce the increase in concentration due to the merger to between approximately [500-600] and [800-900] points (depending on whether the stake is considered as silent, or as conferring some partial control). Such increases in concentration are well above the HHI thresholds contained in the Horizontal Merger Guidelines, taking into account the concentrated nature of the market pre-merger. [151]

176. The Merged Entity's high market share on the supply market, regardless of whether the market is defined as comprising all grades of zinc metal or as being SHG only, is a strong indication of market power especially given the homogeneous nature of the product. [152]

V.4.3.3.1.3. Control over the Zinc Metal Quantities in Europe

177. The Merged Entity would control a higher share of total available volumes in the EEA than its share of supply to EEA customers reflects. In 2011, Glencore sourced a total […] MT of zinc metal in the EEA (excluding stocks removed from warehouses). Glencore's procurement sources were ([…]): the Nyrstar off-take agreement ([…] MT); the Xstrata agreement ([…] MT); production from Portovesme ([…] MT); imports from Kazzinc ([…] MT); and other third-party sources from both within and outside the EEA ([…] MT). [153]

178. Of these total volumes, […] MT were sold to customers in the EEA, […] MT were exported (including […] MT to the LME), and […] MT were put in private warehouses (on a net inflows basis). [154]

179. The volumes that Glencore did not sell to customers in the EEA accounted for a substantial share of the total EEA volumes that were […]. [155] This indicates that Glencore effectively acted as the "swing" supplier in the EEA market, […]. [156]

180. Glencore's position as the swing supplier in the EEA is reinforced by its worldwide warehousing activities. During the past three years, Glencore has supplied […] MT of zinc metal to the LME on a net basis ([50-60]% of which was sourced from the EEA). [157] Over the same period, net stocks at the LME have grown by 567,000 MT (to a level of 820,000 MT at the end of 2011) [158] , implying that on a net basis Glencore has accounted for […] of the increase in LME stocks.

181. Combined with Xstrata's supply volumes of […] MT, the Parties would account for a total of […] MT post-merger. This amounts to [50-60]% of total quantities available to the EEA market, given as the sum of EEA production volumes and imports. The Parties would have a similar share of total effective capacity in the EEA, defined as the sum of its own smelting capacity and the long-term exclusive off-take agreement that Glencore has with Nyrstar for commodity-grade zinc metal.

V.4.3.3.2. Market Investigation

182. The results of the market investigation confirm that the Merged Entity will have significant market power on the market for the supply of zinc metal in the EEA and will face only few competitors.

183. As regards the zinc metal market in the EEA as a whole, several EEA customers reported that the current market conditions for the supply of zinc metal in the EEA are not sufficiently competitive. [159] Some of these customers explain that the market is already very concentrated. [160]

184. In particular, Glencore is considered, both by competitors and by customers, as already having a very strong position in the EEA.

185. Competitors' responses to the Commission's questionnaire indicate that Glencore is the largest supplier of zinc metal [161] and a majority of customers and competitors consider that Glencore already holds a significant degree of market power in the EEA regarding zinc metal. [162] One competitor described Glencore as already being dominant. [163]

186. Glencore is considered by a large majority of the customers and almost half of its competitors as having a special competitive advantage in the market for zinc metal in the EEA. [164]

187. One of the reasons of Glencore's strong position appears to be its off-take agreement with Nyrstar: a number of competitors emphasize that this off-take agreement enables Glencore to control a very large proportion of zinc metal in Europe. [165] Approximately half of the customers and a little over half of the competitors consider that this off-take agreement has significantly altered the competitive conditions in the EEA. [166] One competitor also mentions that Glencore controls a high proportion of the tradable zinc metal in the EEA. [167]

188. Furthermore, Glencore and Xstrata are considered by a majority of respondents as necessary or inevitable suppliers [168] and several customers consider that they are dependent on either Glencore or Xstrata as a purchaser of zinc metal. [169]

189. Whilst approximately half of the customers considered that the existing ownership link between Glencore and Xstrata affects competitive conditions, a similar proportion considered that the Parties compete with each other (albeit to a limited extent). [170]

190. These elements suggest that the Proposed Transaction would lead to a significant increase in market power on markets that are already very concentrated. In this regard, it is worth noting that a number of customers have complained about the Proposed Transaction, claiming that is a step towards an almost monopolistic market that will enable the Merged Entity to raise prices or that it will be dominant. [171] The risk of a price increase post-merger is emphasized by a majority of customers: half of them consider that the LME price will increase, whereas a majority believes that the premia and the overall price will increase as a result of the Proposed Transaction. [172]

191. The Notifying Party has submitted an economic analysis of pricing incentives in the EEA zinc metal market, allegedly showing that the Parties to the concentration would face very limited incentives to increase prices post-merger. [173] This conclusion is based on an “Upwards Pricing Pressure" (UPP) framework, and it relies on the combined effect of three main assumptions: [