EFTA SURVEILLANCE AUTHORITY DECISION No 121/97/COL of 24 April 1997 relating to a proceeding under Article 53 of the EEA Agreement in case COM 020.0130 - TFB (Only the Norwegian and the English texts are authentic)

THE EFTA SURVEILLANCE AUTHORITY,

Having regard to the Agreement on the European Economic Area (the EEA Agreement), in particular Article 1 of Protocol 21 thereto,

Having regard to Chapter II of Protocol 4 to the Agreement Between the EFTA States on the establishment of a Surveillance Authority and a Court of Justice (the Surveillance and Court Agreement), and in particular Article 3 (1) thereof,

Having regard to the application for negative clearance and the notification for exemption submitted by Treforedlingsindustriens Bransjeforening, pursuant to Articles 2, 4 and 5 of Chapter II of Protocol 4 to the Surveillance and Court Agreement,

Having regard to the EFTA Surveillance Authority Decision of 3 July 1996 to initiate proceedings in this case,

Having given the undertakings concerned, as well as other natural or legal persons with a sufficient interest, the opportunity to make known their views on the objections raised by the EFTA Surveillance Authority in its Statement of Objections of 3 July 1996, in accordance with the provisions of Article 19 (1) and 19 (2) of Chapter II of Protocol 4 to the Surveillance and Court Agreement and with Chapter IV of the same Protocol,

After consulting the Advisory Committee on Restrictive Practices and Dominant Positions,

Whereas:

I. THE FACTS

1. The notification

(1) On 22 February 1996, Treforedlingsindustriens Bransjeforening (TFB), the Norwegian association of wood processing industries, notified, on behalf of its members, a geographical market sharing agreement for the purchase of round wood and wood chips in Norway (virkesfordelingsavtalen) dated 22 January 1986, with a view to obtaining a negative clearance or an exemption from Article 53 of the EEA Agreement. This agreement did not have a fixed expiry date, but was, according to the notification, no longer formally in force (1). Subsequently, a revised market sharing agreement adopted at TFB's annual meeting on 25 March 1996, which replaces the previous agreement, was presented to the Authority on 26 March 1996.

(2) The notification also included the implicit agreement between the members of TFB that TFB had the right to negotiate prices and other trading conditions for pulpwood on behalf of its members for the purpose of central price negotiations with the forest owner's associations. However, the notification of this agreement was withdrawn by the parties in a letter to the Authority dated 16 September 1996, in which it is stated that the members of TFB had decided not to co-operate through TFB as regards such price negotiations. The parties have subsequently in writing confirmed that there is no cooperation between the members of TFB as regards prices or other commercial conditions at a national level in connection with purchases of round wood or wood chips. In view of these developments, the Authority will not take any further action in this part.

2. The parties

2.1. TFB

(3) TFB is a forum for co-operation between all companies active in the Norwegian wood processing industry (see below), e.g. as regards the purchase of wood-based raw material for this industry. The purpose of TFB, according to its statutes, is to safeguard its members' common interest, function as a forum for the common interest as regards trade in wood, recyclable paper etc., as well as to co-operate with other industrial associations.

(4) A part of TFB's activities has traditionally been related to price negotiations for the paper and pulp industry's purchases of pulpwood and chips, as well as their distribution to its members via virkesfordelingsavtalen. The actual purchasing contracts, however, are made by the members individually or through joint purchasing organisations.

(5) TFB is led by a general assembly and a board of directors. However, in practice, the activities of TFB mainly take place in working groups, appointed by the assembly or the board, in which TFB's members are represented.

(6) The working group for wood supply (Virkesutvalget, hereinafter referred to as the Wood Supply Group) is responsible for issues relating to the supply of pulp wood and chips to the members of TFB. The Wood Supply Group is described by TFB as a forum for discussing the operation of the notified agreement, as well as political issues such as forestry policy and infrastructure.

2.2. The members of TFB (2)

(7) Borregaard Industries Ltd (Borregaard), with a turnover of Nkr 3 155 million, is the chemical division within the Orkla Group, whose turnover is Nkr 20 800 million. Its wood processing plants (paper and pulp) include Hellefos in Hokksund and Vafos in Kragerø.

(8) M. Peterson & Søn AS is the mother company in the Peterson Group, active in the paper industry with a turnover in 1995 of Nkr 3 390 million. Peterson Moss AS is the only user of round wood in the Group and produces kraft liner. Its turnover is Nkr 852 million.

(9) Norske Skogindustrier ASA (Norske Skog) is the main wood processing company in Norway, with a turnover of Nkr 9 170 million. The biggest group of owners is the forest owners associations which control 30 % (36 % (3)) of the shares in the company. Its main wood using units are Nordenfjeldske Treforedling, Follum and Saugbrugsforeningen which mainly produce paper, and Tofte Industrier and Folla CTMP, producing mainly pulp.

(10) A/S Egelands Verk is active in wood processing and mechanical engineering with a turnover in 1995 of Nkr 46 million.

(11) Hunsfos Fabrikker AS (Hunsfos) produces mainly paper and wallboards and had a turnover in 1995 of Nkr 859 million.

(12) Rena Karton AS is a producer of different types of carton board with a turnover of Nkr 296 million.

(13) Fritzøe Fiber AS is a wholly owned subsidiary to Laagen Skogindustrier AS (4). It is active in pulp production and to a limited extent in electricity generation. Fritzøe's turnover in 1995 was Nkr 209 million.

(14) Rygene-Smith & Thommesen AS (Rygene) produces pulp with a turnover in 1995 of Nkr 126 million.

(15) A/S Union is mainly active in paper production, electricity generation and commercial properties with a turnover of Nkr 1 250 million in 1995. Norske Skog owns 57,4 % (47,8 %) (5) of the shares in A/S Union.

3. The agreement

(16) Virkesfordelingsavtalen, hereinafter referred to as VA, is an agreement within TFB between its members. It follows the principle that each individual operator within the wood processing industry buys round wood and wood chips from its 'natural supply area` based on proximity to the concerned processing unit and to its own forests. Based on quotas that were earlier set by Norwegian authorities, the participating companies are grouped within four geographic regions as shown in Table 1 below. Three of these regions are allotted a quota of a fixed percentage of the total supply of Norwegian round wood and chips to these regions. The North Region is not part of this quota system. According to the agreement, the share allotted to the individual company is determined through agreements between the companies in each region.

>TABLE>

(17) In recent years, the geographic determination of each region is said by TFB to have become more important and the fixed quotas based on total supply have in practice become less important.

(18) The revised agreement is a somewhat simplified version of the previous VA. According to the title, the agreement concerns co-operation in allocating Norwegian coniferous round wood and wood chips between all wood-using members of TFB. The stated purpose is to secure rational logistics of available Norwegian round wood and wood chips in the Norwegian market. The revised agreement is based on the quotas and geographic division of the previous VA. The geographic regions remain, with a few minor adjustments, the same. However, no explicit reference is made to the quota for each region in the new agreement.

(19) There are some provisions regarding the allocation of round wood and chips within the regions. In municipalities where there is more than one buyer, the current allocation shall 'in the short term ` be maintained. There is a stated goal, however, that a redistribution of municipalities between buyers shall take place with a view to obtaining the 'most rational logistics possible`. For wood chips, the traditional supplier to the undertaking concerned shall be maintained.

(20) In addition it is stated that temporary fluctuations in supply or demand shall be solved by the TFB members after discussions in the Wood Supply Group. The agreement is to be reviewed annually by the TFB Board.

(21) There is no structure set up for the operation and enforcement of the VA, except the possibility to discuss and agree on issues relating to the supply of pulpwood and chips within the Wood Supply Group. Furthermore there is no co-ordination of transport or other logistic activities stipulated in the agreement.

4. The product

(22) A fundamental characteristic of round wood is the very long production time from planting the seedling to its economically optimal harvesting. In the Nordic countries this may take as long as 70 to 100 years for fully grown saw-wood log. In principle, up to a limit, the quality and thus the value of the forest will increase with age. Consequently, it is normally possible for an individual forest owner to 'store` the round wood by keeping it on root, without jeopardising the value.

(23) Round wood can be characterised as an intermediate product, used in the production of wood based products such as paper, board and sawn wood. The high quality part of the round wood logs in mainly sold as saw-wood to the sawmill and wood industry (hereinafter referred to as sawmills), whereas most of the remaining part is sold as pulpwood to the paper and pulp industry. A smaller share of the round wood harvested is used for heating purposes, often for personal use. In total some 10 to 12 million m³ of round wood are harvested every year, of which 8 to 9 million m³ are sold to the forest industry in the form of pulpwood or saw-wood. The harvested round wood mainly consists of spruce (77 %) and pine (20 %). The harvest of broad leaved wood, mainly birch, only amounts to some 3 % of the total harvest.

(24) The harvested round wood is a product which due to its form is difficult to handle and has a large volume relative to its price. Handling costs in terms of harvest and transport are relatively high and demand special machinery. It is estimated that the average transport cost constitutes some 25 % of the total cost both for saw- and pulpwood.

(25) The pulpwood users, mainly the paper and pulp industry, normally account for about 40 % of the domestically harvested round wood for industrial use or about 3 to 4 million m³. The saw-wood users, mainly sawmills, account for around 5 million m³. It has been estimated that 35 to 38 % in volume terms of the saw-wood used by the sawmills become wood chips. Due to improvements in production techniques, this share is probably somewhat lower today. The wood chips are almost exclusively sold for use in the production of paper and pulp. Other uses for wood chips, such as the manufacture of briquettes for heating, seem not to be an economically feasible alternative. Due to the quantities involved, the trade in wood chips is considered to be vital for the profitability of the sawmills.

(26) The pulpwood can be divided into different categories according to type and quality. The production of paper and pulp is often specialized so that only one or a few types and qualities of pulpwood are technically or economically feasible to use. For example most of the TFB members can use fresh spruce, some can use all qualities of spruce and others can use both spruce and pine. Similarly, wood chips can be divided into type and quality, depending on which wood type was used by the sawmill and the freshness of the chips.

5. The market

(27) According to national statistics, the gross value of the 8.5 million m³ round wood cut for industrial sale in Norway 1993/94 was NOK 2.5 billion. Due mainly to a decline in the rate of harvest, this value decreased successively from NOK 3.8 billion 1989/90. The corresponding value of exports and imports in 1994 was NOK 121 and 657 million respectively. On average around 50 % of the harvested round wood marketed is sold to the sawmills and slightly less to the paper and pulp industry. Since the price for saw-wood is higher, saw-wood represents approximately two thirds of the revenue for the forest owners.

5.1. Suppliers of round wood

(28) The main part (78 %) of the forested area in Norway belongs to some 126 000 private forest owners. About 75 % of these are also farmers. A smaller portion (12 %) is publicly held, mainly by Statsskog which is a state owned company, and individual municipalities. The forest industry's share is relatively insignificant constituting only 2-3 % of the total.

(29) Norges Skogeierforbund (NSF), the main forest owners' association, consists of some 57 000 forest owners divided into 19 forestry district societies and 446 local forestry squads. The NSF system represents on average some 75 % of the total supply of round wood harvested in Norway. All forest owners who are members of NSF are obliged to sell all their marketable harvested round wood to the NSF district society in their respective geographic area. The overall sale of round wood through the NSF system amounted to approximately NOK 2 billion in 1994.

(30) Many of the larger individual forest owners are members in the other forest owner's association, Norskog. Norskog has presently around 200 members. These members represent some 5-10 % of the supply of round wood harvested in Norway. Members have an obligation to sell 50 % of their harvested round wood through Norskog.

(31) Statsskog is a state-owned undertaking which harvests and sells from forests owned by the state and the church. It represents some 5-10 % of the total supply of round wood harvested in Norway.

(32) Some 68 000 of mostly very small forest owners are operating outside the forestry associations. Many of these, however, harvest only at irregular intervals. Together, they represent some 10 % of the total supply of round wood harvested in Norway. They sell either individually to the industrial buyers, or through independent round wood traders. These traders are mostly active in Østfold.

5.2. The purchasers of round wood and wood chips

5.2.1. Saw-wood purchasers

(33) There are about 600 saw and planing mills in Norway. Purchases are done individually by each sawmill, or in cases of ownership links, by groups of sawmills. In addition, some purchases of saw-wood are made by the purchasing organizations of the paper and pulp industry, either, as in the case of Norske Skog, because they also own sawmills, or for the purpose of exchanging saw-wood for wood chips with the sawmills.

5.2.2. Pulpwood and wood chips purchasers

(34) Although some smaller paper and pulp mills purchase pulpwood individually in their respective geographic region, some 90 % is procured through two pulpwood purchasing organizations.

(35) Norsk Virke AS is a joint purchasing company owned by Norske Skog AS (91 %) and A/S Union (9 %). It is responsible for procuring pulpwood and wood chips for the wood processing industries of Norsk Skog and Union, except supplies to Saugbrugsforeningen in the east of Norway and the company's factories in France and Austria. In addition it supplies raw material to the wall board companies of Norkse Skog, return paper to the extent this is utilised by Norske Skog's paper and pulpmills, as well as saw-wood to 4 of the 7 sawmills owned by Norske Skog. It purchases slightly less than 60 % of the Norwegian supply of pulpwood.

(36) Østfoldtømmer ANS is the joint purchasing company for Borregaard Industries Limited, M. Peterson & Søn A/S and Norske Skog Saugbrugs AS (Saugbrugsforeningen), and is active in Østfold in the east of Norway. It is responsible for purchasing pulpwood and chips for its owners to be used in their production facilities in Østfold as well as for Rena Karton. Østfoldtømmer accounts for more than 30 % of the Norwegian pulpwood supply.

(37) The relative size of the main purchasers of pulpwood and wood chips in their respective geographic regions is shown in Table 2:

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(38) It should be noted that the percentages in the table do not fully reflect the competitive situation in the respective regions. Norsk Virke is entitled to purchase pulpwood and chips in certain smaller regions within the East Region. Rena Karton's purchases are, according to TFB, taken care of by Østfoldtømmer. Norsk Virke and Østfoldtømmer, and possibly also other members of TFB, co-operate on a case by case basis to co-ordinate transport and may exchange round wood and chips between the regions. These factors are not reflected in the table above. It should also be noted that the numbers include broad leaved wood and wood chips. A total of 4.84 million m³ of coniferous wood pulp and chips were sold to the members of TFB in 1995.

5.3. International trade

(39) The cross border trade in round wood is restricted by factors such as relatively high transport costs, availability of types and qualities demanded, freshness, differences in measuring regulations and other national regulations (e.g. barking). The trade in wood chips is further restricted by the bulky nature of the product. Sill, international trade is growing. One reason for this is the increased use of fast growing and thus cheaper wood types from countries in particularly the southern hemisphere, for various types of wood products which previously required wood grown in the north. Increased availability of relatively low cost coniferous wood from Russia and the Baltic states has also led to an increase in trade within Northern Europe. In addition, the use of recycled paper has contributed to reducing the constraint on capacity put by local or regional supply of round wood. In Norway, there is presently a net import surplus of round wood for industrial use.

(40) The scope for imports of pulpwood and, to a more limited extent, wood chips, is relatively large since the Norwegian paper and pulp industry has access to ports and has the capacity to buy large quantities at a time. Hereby the per unit transport cost, which is the main obstacle to trade, can be kept down. Exports of pulpwood, on the other hand, seem to be limited due to, inter alia, the geographic and topographic conditions prevailing in Norway which increase collection and transport costs, the relatively high production costs, and an ownership structure with small and widely dispersed individual forest owners. There has, however, traditionally been a trade in pulpwood in border areas located close to Sweden. Exports of wood chips are even more limited, mainly due to the bulky nature of the product and the suppliers', i.e. the sawmills', limited access to ports.

Table 3 Domestic purchases and imports of coniferous pulpwood and wood chips by the members of TBF (1 000 m³) (6)

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(41) As illustrated in Table 3 above, imports of pulpwood and chips have grown considerably during the last few years. They more than doubled in 1994, apparently due to an increase in demand for wood products both domestically and internationally, at the same time as the domestic harvest was at record low levels. In 1995 imports amounted to almost 2,5 million m³, or over 30 % of the total supply of pulpwood and chips to the Norwegian forest industry. Sweden is the main source for these imports, but there is also regular trade with Finland, Denmark, Germany, Russia and the Baltic states. There is a possibility to buy on an international spot market. However, most imports are governed by annual contracts.

(42) Exports of pulpwood and wood chips are at a relatively low level, 400 to 600 m³ annually during the last few years equivalent to some 5 to 10 % of the total industrial use in Norway. Exports are made to neighbouring countries, mainly Sweden.

(43) Relative price developments of pulpwood seem to follow the same trends in Northern Europe. On the other hand, according to official statistics (7), there seem to be large differences in absolute prices of both pulpwood and saw-wood within Europe too. There are, however, considerable difficulties involved in making comparisons of relative development or absolute level of prices between different countries due to inter alia differences in relative proportions of types and qualities of round wood, currency fluctuations, sales conditions (e.g. ex road side, c.i.f., on root), national measuring systems, local price variations within the countries and availability of reliable price statistics. Therefore, it has not been possible for the Authority to draw any definite conclusions as to the price levels and price developments in Norway vis-à-vis other countries on the basis of available information.

(44) The various wood products stemming from pulpwood and wood chips are to a large extent exported. The trade within the EEA of such products is substantial. For example in 1994, the export of paper and paperboard from Norway to other EEA countries amounted to NOK 5.9 billion (8).

II. LEGAL ASSESSMENT

1. Article 53 (1)

(45) Under Article 53 (1) of the EEA Agreement, all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between the Contracting Parties and which have as their object or effect the prevention or distortion of competition within the EEA are prohibited.

1.1. General applicability of Article 53 (1)

(46) The members of TFB are companies who engage in commercial activities and are thus undertakings within the meaning of Article 53 (1). TBF is an association of undertakings. VA must consequently be considered as an agreement between undertakings or alternatively a decision by the association.

1.2. Defining the relevant market

1.2.1. The product market

(47) VA concerns the purchase of coniferous round wood and wood chips by the members of TFB. Although saw-wood is not excluded from the agreement, the TFB members mainly purchase pulpwood. The saw-wood quantities which are obtained are sold to sawmills or traded against wood chips. Consequently, it seems reasonable to limit the market to pulpwood and wood chips. In view of the relatively marginal trade in broad leaved wood in Norway, it is of no consequence for the purposes of the current assessment whether the reference markets are those of coniferous pulpwood and wood chips only or include broad leaved wood in addition.

(48) TFB has argued that pulpwood and wood chips belong to the same market. However, although pulpwood and wood chips are to a large extent physically substitutable for the industrial user, several factors indicate that the conditions of competition for the two products are different. Wood chips are by-products from the sawmills' processing of saw-wood, and the quantities produced are determined by the demand for the saw mills' end products rather than the industry's demand for wood chips and pulpwood. This inflexibility of supply if further aggravated by problems with long term storage due to the relatively greater bulk and quicker rate of deterioration of woods chips compared to logs. Since there seems to be few alternative economically feasible uses for the chips, this would indicate that the sawmills have a relatively weaker position vis-à-vis the purchasers than the pulpwood suppliers. Although there is admittedly a link between the pricing of wood chips and the price of pulpwood, the final price for the chips appears rather to be dependent on the bargaining power of the respective sawmill and paper and pulp industries and not on the pulpwood price. Consequently, wood chips and pulpwood do not seem to belong to the same market. It should be noted, however, that since the relative market position of TFB's members would be the same regardless of whether wood chips and pulpwood were considered one single or two separate markets, this distinction does not influence the assessment of the case.

(49) It also has to be considered whether the markets for pulpwood and wood chips have to be further divided. It is correct as pointed out by TFB that different types or qualities of pulpwood and wood chips respectively are not normally substitutable from the point of view of the end-users, partly because of price differences and partly because of technical requirements. However, some important conditions for trade, such as transporting arrangements and measurement requirements, are the same within these markets. Furthermore, the buyers and to some extent the sellers who set prices and other commercial trading conditions are principally the same within the pulpwood market and wood chips market respectively. For the purpose of assessing the impact of competition of the agreements at hand, it is thus sufficient to refer to a pulpwood and a wood chips market.

1.2.2. The geographic market

(50) The starting point for defining the relevant geographic market is the geographic area in which the agreements under scrutiny are applicable. In the case at hand, this is Norway. However, this area may be extended if the objective conditions of competition applying to the products concerned are the same for all traders within a larger geographic area.

(51) TFB has argued that the relevant geographic market consists of Norway, Sweden, Denmark, Germany, Finland, Poland, England, Scotland, Russia and the Baltic States, hereinafter referred to as Northern Europe. The basis for this is that the pulpwood and chips from these countries are substitutable in terms of type and quality, that there is considerable trade between these countries and that relative price developments seem similar in this region. It is also pointed out that although transport costs are relatively high, in particular due to the geographic and topographic conditions prevailing in Norway, imports - depending on relative prices and the availability of rational transport solutions - may still be profitable. This is shown by the present import level at 25 to 30 % (1994/1995) of the total supply of pulpwood and chips.

(52) The Authority has not been able to draw any definite conclusions from available price comparisons within Northern Europe (see paragraph 43). However, as a general observation, it would not be surprising if the relative price developments of round wood were similar in most countries around the world. This is to be expected since the ability to pay for round wood by the industrial buyers is linked to the price developments in internationally traded products such as paper, pulp, and other finished and semi-finished wood products, the prices of which to a large extent are set internationally. This is, however, not necessarily an indication of one international market for pulpwood. On the contrary, the absolute prices in different countries seem to show considerable variations, which would indicate national markets.

(53) It is acknowledged that pulp and pulpwood from Northern Europe are substitutable in terms of type and quality and that there is considerable scope, at least at present, for imports of pulpwood and, to some extent, wood chips. The Norwegian buyers are big enough to buy large quantities, e.g. a shipload, and thus keep transport costs down. Furthermore they have access to ports. Transport costs from the border region in Sweden, which is the largest source of imports, are not necessarily higher than for domestic raw material for industry located close to that region. Still transport costs and particular quality requirements for certain types of paper and pulp set limits to these imports.

(54) The Norwegian sellers on the other hand face considerable problems with the export of pulpwood. High transport costs in relation to the value of the pulpwood exclude export as a viable alternative for the majority of the forest owners, unless they are situated in the border region to Sweden or close to a port. In addition, the individual forest owners are in general too small to organise the marketing, the adaptation to different measurement regimes and the transport themselves, and the selling organisations available have limited activities in this regard.

(55) The general characteristics of actual market conditions, including pricing, which is determined through negotiations between domestic sellers and buyers, as well as distribution and purchasing systems, which are determined domestically, all indicate a national market. At the same time, the relatively high level of imports indicate a certain degree of demand side substitutability between domestically procured pulpwood and pulpwood originating in, primarily, Sweden, Russia and the Baltic States. It is acknowledged that prices that the purchasers may obtain for imports from these countries may be an important element in the price negotiations between buyers and sellers in Norway. This could to some extent influence the relative bargaining strength of the market operators and should thus be taken into consideration when assessing the actual market power of these operators. However, the relatively high level of import in itself is not enough to conclude that Norway and the main exporting countries belong to the same market. Instead, given the general market conditions together with the obstacles to trade indicated in paragraphs 53 and 54 above, the price and other trading conditions, which are the main elements in delimiting a market, would primarily be determined by domestic factors.

(56) Similarly, prices of wood chips are determined in negotiations between the sawmill and the local or regional industrial buyer. Although the purchaser may use the import prices as a ceiling for the offer to the sawmill, it is not possible for the sawmill to use international prices to get a higher price for the chips since export is not a viable alternative. In addition, the prices of wood chips are often set as part of a larger exchange of saw-wood, wood chips and to some extent pulpwood. The conditions for this trade are determined by the sawmills' access to alternative sources of saw-wood and to alternative outlets for wood chips and pulpwood rather than international prices of these commodities. It is thus domestic factors which are predominant in the determination of the final commercial conditions for trade in the wood chips market.

(57) In view of the above, it must be concluded that the objective conditions of competition are at present not sufficiently homogenous in an area wider than Norway and possibly certain areas in Sweden bordering Norway for it to be considered one geographic market. The trade with such border regions are not of such a dimension as to have an influence on the assessment in this case. It is thus sufficient to refer to Norway as the relevant geographic market for pulpwood and for wood chips.

1.3. Restrictions of competition

(58) The members of TFB are competitors or potential competitors in the market for buying pulpwood and wood chips. VA forms a market sharing arrangement prohibited explicitly in Article 53 (1) (c). The agreement limits the TFB members' access to alternative sources of pulpwood and wood chips as well as the suppliers' access to competing purchase offers for these products, and thereby artificially influences the balance of supply and demand. The agreement can also indirectly affect prices of pulpwood and wood chips, by giving the companies involved secure areas of supply where they face no or only a very limited number of competitors.

(59) In view of the fact that TFB represents practically all Norwegian purchasers of pulpwood and chips with a combined turnover in excess of Nkr 30 billion and that the market sharing agreement covers all of Norway, these restrictions of competition must be deemed to be appreciable.

1.4. Trade effect

(60) The notified arrangement may indirectly influence the prices of pulpwood and wood chips by reducing competition between potential buyers of chips and pulpwood. This in turn may affect the export of pulpwood and chips since the domestic price level may affect the pulpwood suppliers' willingness or possibility to export. It is acknowledged that exports from Norway are relatively low, only some 5 % of the total harvest, and are in principle restricted to the border regions with Sweden and certain coastal areas with a direct access to port, and that any such effect may thus be limited.

(61) However, according to case-law of the Court of Justice of the European Communities (9) fixing the price for an intermediate product which is not normally exported out of the region in question is capable of affecting trade between Member States where that product constitutes the raw material for another product marketed elsewhere in the Community. In the present case, the notified arrangements may influence prices or other trading conditions for pulpwood or woodchips indirectly by restricting competition between purchasers of pulpwood and chips. Pulpwood and wood chips are intermediate products used as the main raw material important export products of Norway such as paper and pulp. Since the notified arrangements may thus influence the price and other trading conditions of pulpwood and wood chips, they may affect the trade flow of the downstream products in the EEA.

(62) The notified arrangement may also affect imports of pulpwood and chips. Price is the most important factor in determining the supply of pulpwood. Changes in the domestic availability of pulpwood have a direct effect on the Norwegian industries' need for importing pulpwood and chips for its production of downstream products. The fact that the availability of domestic pulpwood has an impact on imports can be illustrated by the situation in 1994, when harvesting and thus the availability of domestic pulpwood was reduced and imports more than doubled in one year.

(63) It must thus be concluded, having regard to the large influence of the undertakings concerned on the relevant market and their combined size, that the notified arrangements may effect trade within the meaning of Article 53 (1).

2. Article 53 (3)

(64) In order to qualify for an exemption from the prohibition in Article 53 (1) the applicant must show that the agreements improve production or distribution or promote technical or economic progress while allowing consumers a fair share of the resulting benefit. To be characterized as such benefits, the objective advantages gained must outweigh the detriment to competition (10). Furthermore, the restrictions contained in the arrangements must be indispensable to the attainment of these benefits, and the arrangements must not afford the concerned undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. In the Authority's view, the notified arrangements have not been shown to fulfil any of these conditions.

2.1. Benefits of the notified arrangements

(65) TFB argues that VA reduces the transport costs of the Norwegian pulp and paper industry, stimulates harvest and secures a stable supply of raw material to the industry.

(66) The lowering of transport costs would primarily be a question of organising logistics more efficiently. However, no such arrangement has been notified. On the contrary, TFB has maintained that there is no co-operation as regards logistics which is directly related to VA. Although, by ensuring that the industrial buyers purchase their pulpwood or wood chips in their vicinity, or at least in the designated region, it might be expected that the pulpwood or wood chips would travel shorter distances, this does not necessarily follow from VA. One could equally well argue that an undertaking which had 'exhausted` the regional supply would be forced to import pulpwood or wood chips from abroad, with even a possible increase in transport costs, rather than turn to other domestic regions. It is thus doubtful that VA in itself actually contributes to lower transport costs.

(67) It must be assumed that the main stimuli for harvesting are the price or other sale conditions offered for the round wood. VA could conceivably stimulate harvest within the respective regions by offering a secure outlet for the pulpwood. However, the market sharing agreement hinders the forest owners and other sellers going outside the region to seek buyers who might be able to offer more attractive conditions for the pulpwood than the conditions offered within the region. This would reduce the sellers' incentive to harvest additional quantities. On balance, the market sharing agreement's effect on the rate of harvest would most likely be marginal and might even be negative.

(68) Finally, it is conceivable that VA, at least to some extent, promotes a stable supply of raw material to the individual industry by reducing the unpredictability of supply resulting from competition between the purchasers. However, other factors, such as the length and timing of contracts, and the efficiency of systems of logistics and general purchasing policies employed by the individual industries, would seem to be more important in this regard.

(69) In view of the above, there seem to be few, if at all any, objective advantages of the notified arrangements. On the other hand, the market sharing arrangement in VA effectively hinders an individual buyer from purchasing pulpwood or chips outside 'his` region, regardless of whether the conditions of supply and demand at any given point in time would make such purchases economically justified. By the same token, VA hinders sellers of pulpwood or chips going outside their region to find buyers who might find it justifiable to offer better conditions than those prevailing inside the region. The notified arrangements thus have a substantial negative impact on competition on the pulpwood and wood chips markets which may result in an inefficient allocation of resources in these markets.

(70) It must therefore be concluded that any objective advantages of the notified arrangements would not outweigh the resulting detriments to competitions in the pulpwood and wood chips markets. Consequently, VA cannot be held to have shown to improve production, distribution or to promote technical or economic progress within the meaning of Article 53 (3).

2.2. Indispensability

(71) Since the notified arrangements have not been shown to have the required benefits for an exemption under Article 53 (3), it is not essential to establish whether the restrictions contained in these agreements are indispensable for attaining such benefits. It should, however, be noted that even if the arrangements had contributed to the stated benefits, i.e. lower transport costs, stimulation of round wood production and the stable supply of raw material to the paper and pulp industries, and these benefits were not outweighed by the resulting detriments to competition, it would be difficult to see how the resulting restrictions of competition could be held to be indispensable for the attainment of these benefits.

(72) For the purpose of lowering transport costs, cooperation between the purchasers of pulpwood and wood chips limited to logistics co-ordination without market sharing elements would most probably be more efficient and have less restrictive effects than VA. Similarly, in order to stimulate the forest owners' harvest or promote a stable supply, a flexible pricing system and active purchasing policy from each of the individual industrial purchasers concerned would in all likelihood do more to this effect than a geographic sharing of supply.

(73) Consequently, even if the notified arrangements had contributed to improving production or distribution, or promoting technical or economic progress, the restrictions imposed on the undertakings concerned would not seem indispensable to the attainment of these objectives.

2.3. Elimination of competition

(74) Although it is not essential to establish whether the notified arrangements may result in a substantial elimination of competition since the other conditions for exemption are not fulfilled, the Authority would like to note the following in this regard. The notified arrangements cover almost the whole domestic supply of pulpwood and chips. This corresponds to around 70 % of the total supply of pulpwood and chips to the paper and pulp industry in Norway. Apart from a small minority of suppliers of these products, who are located in such a way that the paper and pulp industry from neighbouring countries would find it economically feasible to purchase from them, there are no alternative buyers to the TFB members on the Norwegian market. It must therefore be concluded that the notified arrangements afford the TFB and the members of TFB the opportunity to eliminate competition in respect of a substantial part of the products in question,

HAS ADOPTED THIS DECISION:

Article 1

The agreement of 22 January 1986 between the members of TFB referred to as virkesfordelingsavtalen and the subsequent revised version of 25 March 1996 of that agreement constitute an infringement of Article 53 (1) of the EEA Agreement.

Article 2

An exemption under Article 53 (3) of the EEA Agreement for the agreement as mentioned in Article 1 is hereby refused.

Article 3

The undertakings concerned shall bring the infringement as mentioned in Article 1 to an end forthwith and shall refrain from taking any measure having the same object or effect.

Article 4

This decision is addressed to:

Treforedlingsindustriens Bransjeforening,

A/S Egelands Verk,

Hunsfos Fabrikker,

Peterson Moss A/S,

Norske Skogindustrier ASA,

Borregaard Industries Ltd,

Rena Karton AS,

Rygene-Smith & Thommesen AS,

Fritzøe Fiber A/S,

and A/S Union.

Only the English and Norwegian texts of this Decision shall be authentic.

Done at Brussels, 24 April 1997.

For the EFTA Surveillance Authority

Knut ALMESTAD

President

(1) According to a letter from Østfoldtømmer ANS, a purchasing organization representing a number of members of TFB, to the Authority dated 2 November 1995, the agreement was to expire on 31 December 1995.

(2) Turnover figures are given for 1994 if not otherwise indicated. The members listed are the main users of pulpwood in TFB.

(3) Percentage of voting rights.

(4) No information has been given in the notification about Laagen Skogsindustrier AS.

(5) Percentage of voting rights.

(6) The graph is based on information supplied by TBF.

(7) See, inter alia, Forest product prices 1992-1994, Timber Bulletin Vol XLVIII (1995), No 1.

(8) Source: Official Statistics of Norway.

(9) See inter alia BNIC II (1987 ECR 4789)

(10) See, inter alia, Consten and Grundig v. Commission (1966 ECR 299, 348)