Summary of Commission Decision

of 1 October 2019

declaring a concentration compatible with the internal market and the functioning of the EEA Agreement

(Case M.9076 – Novelis/Aleris)

(notified under document C(2019) 7061)

(Only the English version is authentic)

(Text with EEA relevance)

(2021/C 36/08)

On 1 October 2019 the Commission adopted a Decision in a merger case under Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (1) , and in particular Article 8(2) of that Regulation. A non-confidential version of the full Decision, as the case may be in the form of a provisional version, can be found in English on the website of the Directorate-General for Competition, at the following address: http://ec.europa.eu/competition/elojade/isef/index.cfm?clear=1&policy_area_id=2

I. THE PARTIES

(1) Novelis is a global manufacturer of flat rolled aluminium products and a recycler of aluminium. The company operates 24 manufacturing facilities across North America, South America, Europe and Asia. Novelis is a 100 % owned subsidiary of Hindalco, an India-based supplier of aluminium and copper.

(2) Aleris is a global manufacturer of flat rolled aluminium products. Aleris operates 13 production facilities in North America, Europe and Asia.

II. THE OPERATION

(3) On 18 February 2019, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 (the ‘Merger Regulation’) by which Novelis Inc. (‘Novelis’, USA), a fully owned subsidiary of Hindalco Industries Limited (‘Hindalco’, India), acquires, within the meaning of Article 3(1)(b) of the Merger Regulation, sole control of the whole of Aleris Corporation (‘Aleris’, USA) by way of purchase of shares (hereinafter the ‘Transaction’). Novelis is designated hereinafter as the ‘Notifying Party’. Novelis and Aleris are designated hereinafter as the ‘Parties’. The entity resulting from the Transaction is designated hereinafter as the ‘Merged Entity’.

III. UNION DIMENSION

(4) The combined aggregate worldwide turnover of the Parties is more than EUR 5 000 million and the aggregate Union-wide turnover of each of the Parties is more than EUR 250 million. Neither of the Parties achieve more than two-thirds of their Union-wide turnover within one and the same Union Member State.

(5) The Transaction therefore has a Union dimension pursuant to Article 1(2) of the Merger Regulation.

IV. PROCEDURE

(6) On 26 July, Novelis announced it had signed a definitive agreement to acquire Aleris. The Transaction was notified to the Commission on 18 February 2019.

(7) By decision of 25 March 2019, the Commission found that the proposed Transaction raised serious doubts as to its compatibility with the internal market and initiated proceedings pursuant to Article 6(1)(c) of the Merger Regulation.

(8) On 1 July 2019 the Commission adopted a Statement of Objections (‘SO’) where it came to the preliminary view that the Transaction would likely significantly impede effective competition in the internal market in relation to the production and supply of Aluminium Automotive Body Sheets (‘Aluminium ABS’) in the EEA.

(9) An Oral Hearing took place on 23 July 2019.

(10) The in-depth investigation did not allow dispelling the competition concerns preliminarily identified.

(11) In order to remove the competition concerns identified in the SO, on 9 August 2019, the Parties submitted commitments pursuant to Article 8(2) of the Merger Regulation.

(12) On 13 August 2019, the Parties submitted revised commitments pursuant to Article 8(2) of the Merger Regulation in order to address the competition concerns identified in the SO (the ‘Commitments of 13 August 2019’).

(13) On 13 August 2019, the Commission launched a market test of the Commitments of 13 August 2019. In order to address some minor issues raised in the market test, on 3 September 2019, the Parties submitted improved commitments (the ‘Final Commitments’).

V. EXPLANATORY MEMORANDUM

V.1. The relevant product markets

(14) The Transaction concerns aluminium flat rolled products (‘Aluminium FRPs’). These are produced from aluminium slabs processed mainly in three steps: (i) hot rolling, which reduces the thickness of the slab by heating it up and rolling it in the so-called hot roll mill; (ii) cold rolling, which further reduces the thickness; and (iii) finishing, which can include a number of treatments. The resulting Aluminium FRPs are sold as such by the producer, or are cut to desired length and width before being sold. Aluminium FRPs are used for manufacturing various different final products, such as beverage cans, food cans, aluminium foil, or parts of automotive bodies.

(15) Aluminium FRPs used for manufacturing automotive body parts are referred to as Aluminium ABS. Following its market investigation, the Commission found that the Aluminium ABS belong to a relevant product market separate from other types of Aluminium FRPs. Moreover, evidence shows that due to limited demand substitutability and absent supply substitutability, Aluminium ABS constitutes a distinct product market, separate from flat steel products used in automotive bodies.

(16) The Commission found that the market for production and supply of Aluminium ABS is differentiated across different market segments, in particular with respect to different alloy-series. For these market segments, demand-side substitutability is limited but a level of supply-side substitutability exists. As a consequence of the supply-side substitutability, the Commission concludes that all types of Aluminium ABS belong to the same relevant product market.

(17) With regard to other Aluminium FRPs than Aluminium ABS, the Commission's market investigation suggested that (i) aluminium anodising sheet and (ii) aluminium sheet for compound tubes may constitute distinct relevant product markets, separate from other Aluminium FRPs (‘Standard FRPs’). However, the exact market definition can be left open, as it does not have an impact on the competitive assessment of the Transaction.

V.2. The relevant geographic markets

(18) Following its market investigation, the Commission concludes that the market for the production and supply of Aluminium ABS is EEA-wide in scope. Indications of competition taking place at EEA-level include the following: (a) Different world regions are typically characterised by different suppliers, and only few suppliers have a global footprint; (b) While trade flows between different world regions exist, these are limited and producers sell the majority of their products in the region where their production sites are located; (c) There are significant differences in terms of prices and of conditions of competition between the EEA, North America and Asia; and (d) There are technical reasons that make it difficult for a car manufacturer to source from a long distance Aluminium ABS, particularly for certain high-quality alloys.

(19) With regard to the Standard FRPs, results of the Commission’s market investigation of the present case support the view taken in previous cases that the market for Standard FRPs has an EEA-wide dimension. The Commission concludes that the geographic scope of the market for Standard FRPs, and of the putative product markets for aluminium anodising sheet and aluminium sheet for compound tubes, are EEA-wide.

V.3. Competitive assessment

(20) The Commission finds competition concerns with respect to the production and supply of Aluminium ABS. These concerns are based on a number of considerations and findings, including the following.

The Transaction would lead to very high combined sales and capacity shares

(21) The Transaction would lead to very high combined sales and capacity shares, above the threshold for presumptive dominance, suggesting the creation or strengthening of a dominant position in the market for the production and supply of Aluminium ABS.

(22) Already prior to the Transaction, Novelis has a significant market share in the EEA. Following the Transaction, the share would further increase to well above 50-60 %. In terms of capacity, the Merged Entity would have a capacity share above 50-60 % in 2018 and close to 50-60 % in 2023.

(23) In addition, the Transaction would increase the concentration in the already concentrated market for the production and supply of Aluminium ABS.

The Transaction would result in higher prices for Aluminium ABS

(24) By controlling a large share of the output and of production capacity, the Merged Entity would enjoy significant pricing power.

(25) The elimination of Aleris negatively affects competitive interaction by removing bidding interaction between the Parties, which focus on the same high value product segment and serve common customers.

(26) During the market investigation, market participants indicated that they expect higher prices of Aluminium ABS as a result of the Transaction.

(27) The competitive pressure from steel suppliers would not be sufficient to prevent price increases. This is because the demand of Aluminium ABS is primarily driven by the automotive manufacturers’ need to produce lighter vehicles to comply with CO 2 emission regulations. In this respect, flat steel products can only marginally replace Aluminium ABS.

(28) Therefore, the Transaction would result in higher prices for Aluminium ABS in the EEA as the Merged Entity would have significant pricing power due to its large share of sales and production in the EEA, while Aleris would no longer be a constraint on Novelis.

The Transaction would significantly reduce the Merged Entity’s incentives to increase capacity in the market

(29) The economic theory of capacity competition predicts that a decrease in the number of producers also decreases the producers’ incentives to expand, and, in some cases, to maintain their manufacturing capacity. This softening effect on capacity competition is known to be particularly strong if, as in this case, the market shares of the merging parties are high. This is because a capacity increase typically leads to price reduction, which has the largest impact on the market leader.

(30) Consistent with the economic theory, evidence in the file suggests that Novelis, already pre-Transaction, had only limited incentive to expand its capacity due to its position as the market leader. Post-Transaction, due to an even stronger position, the Merged Entity would have even less incentives to expand capacity.

(31) Therefore, the Transaction would have the effect of reducing the Merged Entity’s incentive to expand capacity in the market.

Competitors are unlikely to offset price increases resulting from the Transaction

(32) Economic literature and the Commission’s past case practice suggest that, in markets with capacity constraints, firms playing a pivotal role for covering the market demand enjoy an appreciable degree of market power. In this case, the inability of competitors to cover the entire market demand results in Novelis’ market power already pre-Transaction. By acquiring the capacity of Aleris, Novelis would face even less rival capacity, and would result to be pivotal for an even larger share of market demand.

(33) With respect to spare capacities, the market investigation indicated that these are limited and are likely to decrease further. In addition, a large part of the spare capacities appear to belong to Novelis.

(34) After the Transaction, the Merged Entity would not only control a large share of the market (in terms sales and capacity) but would also face competitors with limited capacity (and limited spare capacity) compared to market demand. This would allow the Merged Entity to increase prices after the Transaction as rivals would not be able to readily and adequately expand supply.

(35) Formal, structural and ad-hoc links with competitors already pre-Transaction are liable to soften competition, as they lead to shared interests among competitors in a certain market outcome. Post-Transaction these existing links will increase in their relative significance on the market.

(36) Barriers to entry are high as the manufacturing of Aluminium ABS requires specific equipment, substantial investment and time for its installation and ramping-up to full capacity. Moreover, new entrants face significant difficulties in establishing themselves as credible alternatives due to the significant amount of industrial know-how necessary for the high value segments of the market, where both the Parties are active. Therefore, the competitive constraint of new market participants to the Merged Entity would be of limited magnitude.

(37) Imports into the EEA are not a sufficient competitive constraint to the Merged Entity. Contrary to the Notifying Party’s claim, the market investigation indicates that the alleged competitive constraint from Chinese suppliers, if existent at all, is limited, and is not expected to significantly increase in the foreseeable future.

(38) Therefore, the Commission considers that competitors lack the ability and the incentive to react to a price increase in a way that would be sufficient to offset the negative effects of the Transaction.

The negative effects of the Transaction are likely not countervailed by buyer power

(39) While the customers of the Parties are often sophisticated buyers who organise their purchases through tenders, they often face difficulties in switching significant volumes already pre-Transaction. This is due to a number of reasons, including the different product capabilities of each supplier, the qualification requirements, the supply agreements in place and the existing long-term relationships between some customers and suppliers, and, importantly, the limited available capacity in the market.

(40) Post-Transaction, customers would have one less credible supplier available and thus would be even more restricted in their options of switching volumes in case of a price increase.

Conclusions

(41) The Commission concludes that the Transaction would significantly impede effective competition in relation to the market for the production and supply of Aluminium ABS in the EEA because the Transaction would create or strengthen a dominant market position in the relevant market. In any event, the Transaction would also give rise to horizontal non-coordinated effects in relation to the production and supply of Aluminium ABS in the EEA resulting from the elimination of an important competitive constraint.

V.4. Remedies

(42) As explained in paragraphs (11)-(13), the Parties submitted commitments on 9 August 2019, followed by a submission of revised commitments on 13 August 2019. After considering the results of the market test, the Parties submitted the Final Commitments on 3 September 2019.

(43) The Final Commitments consist of the divestment of, Aleris’ (i) Aluminium ABS Business, and (ii) Other FRPs Business located in Duffel, Belgium (the ‘Duffel Plant’) (together the ‘Divestment Business’) to an independent purchaser with proven expertise in the aluminium and/or in the flat rolled products sector, subject to approval by the Commission.

(44) The Divestment Business currently produces Aluminium ABS and a number of Standard FRPs (for example for compound tubes, building facades, floor heating and other applications).

(45) The Divestment Business includes intangible assets such as intellectual property necessary to operate the Divestment Business as well as licences, permits and authorisations for its benefit. It further comprises contracts, leases and commitments, including supply agreements as well as lists of customers and customer contracts and purchase orders. It also includes Personnel and key personnel necessary to operate and ensure the viability of the Divestment Business. All ABS-related EEA R&D activities also form part of the Divestment Business.

(46) The Divestment Business is an integrated business that covers the whole production chain from the casting of slabs to rolling and finishing of Aluminium ABS. While for certain limited upstream supply the Divestment Business requires certain limited upstream supplies from the Merged Entity, the Final Commitments include transitional arrangements and funding for an investment that will further foster the plant’s independence also in relation to these limited quantities.

(47) As the market test confirmed, the Final Commitments address the Commission’s competition concerns because they remove the entire Parties’ overlap in the market for the production and supply of Aluminium ABS in the EEA.

(48) The market test also supported that the Final Commitments are viable and competitive because they consist of assets covering the entire value chain from the casting of slabs to the finishing of Aluminium ABS.

VI. CONCLUSION

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

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

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