2002/737/EC: Commission Decision of 21 November 2001 declaring a concentration to be compatible with the common market and the functioning of the EEA Agreement (Case No COMP/M.2498 — UPM-Kymmene/Haindl Case No COMP/M.2499 — Norske Skog/Parenco/Walsum) (Text with EEA relevance) (notified under document number C(2001) 3703)
Date: 2001-11-21
Institutions: European Commission
Subjects: European Economic Area, agreement (EU), common market, economic concentration, merger control, pulp and paper industry

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COMMISSION

COMMISSION DECISION

of 21 November 2001

declaring a concentration to be compatible with the common market and the functioning of the
EEA Agreement

(Case No COMP/M.2498 — UPM-Kymmene/Haindl Case No COMP/M.2499 — Norske Skog/
Parenco/Walsum)

(notified under document number C(2001) 3703)

(Only the English text is authentic)

(Text with EEA relevance)

(2002/737/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community,

concerns the resale of
the six Haindl mills
two of
(Haindl-2), Parenco in the Netherlands and the Walsum
mill in Germany, by UPM-Kymmene to the Norwegian
paper manufacturer Norske Skog.

Having regard to the Agreement on the European Economic
Area (EEA Agreement), and in particular Article 57 thereof,

(2)

Having regard to Council Regulation (EEC) No 4064/89 of 21
December 1989 on the control of concentrations between
undertakings, (1) as last amended by Regulation (EC) No 1310/
97 (2), and in particular Article 8(2) thereof,

Having regard to the Commission decision of 23 July 2001 to
initiate proceedings in this case,

(3)

Having given the undertakings concerned the opportunity to
make known their views on the objections raised by the
Commission,

Having regard to the opinion of the Advisory Committee on
Concentrations (3),

After examination of the notification, the Commission
concluded that the notified operation fell within the
scope of Regulation (EEC) No 4064/89 (hereinafter: the
Merger Regulation) and raised serious doubts as to its
compatibility with the common market and the func-
tioning of the EEA Agreement.

the
Following thorough investigation of
the case,
Commission has come to the conclusion that
the
proposed concentration will not create a collective
dominant position as a result of which effective
competition in the common market and the functioning
of the EEA Agreement would be significantly impeded.

Having regard to the final report of the Hearing Officer (4),

I. THE PARTIES

Whereas:

(1)

On 20 June 2000, the Commission received notification
of a proposed concentration by which the Finnish firm
intends to acquire
UPM-Kymmene (hereinafter: UPM)
sole control over the German company Haindl'sche
Papierfabriken KGaA (Haindl) by way of purchase of all
shares in Haindl. On the same day, the Commission
received notification of a second concentration which

(1) OJ L 395, 30.12.1989, p. 1; corrected version published in OJ L

257, 21.9.1990, p. 13.
(2) OJ L 180, 9.7.1997, p. 1.
(3) OJ C 206, 30.8.2002.
(4) OJ C 206, 30.8.2002.

(4)

(5)

UPM-Kymmene is the holding company of a corporate
group active primarily in the forestry products industry,
divided principally into three business areas: printing
papers (newsprint, magazine and fine paper divisions),
converting (converting materials), and wood products
(sawn timber and plywood).

Haindl is a family-owned company active in the paper
industry. Another activity of the Haindl group is the
regional airline Augsburg Airways which will be trans-
ferred to the former Haindl shareholders prior to closing
of the transaction in question or by 31 December 2001
at the latest.

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L 233/39

Norske Skog is a company active in the forest products
industry. Its core business activity is the production and
sale of wood containing printing paper (newsprint and
magazine).

a Community dimension, and it constitutes a coopera-
tion case under the EEA Agreement, pursuant to Article
57 of that Agreement.

(6)

(7)

(8)

(9)

II. THE OPERATION AND THE CONCENTRATION

The proposed takeover of Haindl comprises two steps.
In a first step UPM-Kymmene acquires the entire capital
of Haindl. The second step concerns the resale by UPM-
Kymmene to the Norwegian paper manufacturer Norske
Skog of two of the six Haindl mills, which takes place at
the same moment on which UPM-Kymmene acquires
control over Haindl (back-to-back sale). These two mills
are Walsum in Germany and Parenco in the Netherlands
and are hereinafter referred to as Haindl-2, whereas the
remaining four mills will be referred to as Haindl-4. The
way the deal is structured means that the first deal can
happen on its own;
is
dependent on the first one.

the second deal, however,

UPM-Kymmene will acquire 100 % of Haindl's shares.
Norske Skog will acquire all of the shares in Parenco and
all assets of Walsum. Consequently, each notified opera-
tion constitutes a concentration within the meaning of
Article 3(1)(b) of the Merger Regulation.

III. COMMUNITY DIMENSION

As to the first transaction, the undertakings concerned
have a combined aggregate worldwide turnover (5) of
more than EUR 5 billion in 2000 (UPM-Kymmene
EUR 9,583 billion; Haindl EUR 1,49 billion). Each of
them has a Community-wide turnover in excess of
EUR 250 million (UPM-Kymmene EUR 6,9 billion;
Haindl EUR […]* (*), but they do not achieve more than
two-thirds of their aggregate Community-wide turnover
within one and the same Member State. The notified
operation therefore has a Community dimension, and it
constitutes a cooperation case under the EEA Agree-
ment, pursuant to Article 57 of that Agreement.

(10) As

to the

turnover of

second transaction,

the undertakings
concerned have a combined aggregate worldwide turn-
over (6) of more than EUR 2,5 billion in 2000 (Norske
Skog EUR 3,284 billion; Haindl-2 […]*). The aggregate
exceeds
Community-wide
EUR 100 million (Norske Skog […]*; Haindl-2 […]*). In
each of at least three Member States, namely […]*, each
of
the parties has a turnover in excess of EUR 25
million, and in each of those Member States the parties'
combined aggregate turnover exceeds EUR 100 million,
but they do not achieve more than two-thirds of their
aggregate Community-wide turnover within one and the
same Member State. The notified operation therefore has

each party

(5) Turnover calculated in accordance with Article 5(1) of the Merger
Regulation and the Commission Notice on the calculation of
turnover (OJ C 66, 2.3.1998, p. 25).

(*) Parts of

this text have been edited to ensure that confidential
information is not disclosed; those parts are enclosed in square
brackets and marked with an asterisk.

(6) See footnote 5.

IV. COMPATIBILITY WITH THE COMMON MARKET

(11)

The two concentrations concern the economic sectors of
pulp and publication papers. The only affected markets
are the markets for newsprint and magazine paper. On
the basis of a separate market for wood-free coated
(WFC) magazine paper the WFC market
is not an
affected market, because Haindl does not produce this
paper category.

RELEVANT PRODUCT MARKETS

1. NEWSPRINT

(12) Newsprint is primarily used for publication of newspa-
pers. The manufacturing of newsprint requires mechan-
ical pulp or recycled pulp of at least 65 % by weight.
There are different grades of newsprint, depending for
example on whether the paper is finished or calendered,
white or coloured, and brightness differs between grades.
Paper weight (grammage) and brightness are the key
variables. Standard newsprint is typically in the gram-
mage range of 40 to 52 g/m2 and brightness range of
ISO 57 to 60. Improved newsprint is in the grammage
range of 42 to 56 g/m2 and brightness range of ISO 61
and higher. Speciality newsprint includes low grammage
(28 to 40 g/m2), high brightness (ISO 63 to 80) direc-
tory paper and book paper.

(13)

In a decision of 30 October 1995 (7) the Commission
considered newsprint a single product market, finding
inter alia that there was a high degree of demand-side
and supply-side (8)
among different
substitutability
recognised newsprint grades and that the price differ-
ences were not significant. This approach was also
followed in Commission Decision 1999/641/EC in Case
IV/M.1225 — Enso/Stora (9). UPM-Kymmene claims that
this is still valid. This was broadly confirmed by the
therefore
market
considers for the purposes of this case that there is a
single product market for newsprint.

The Commission

investigation.

2. MAGAZINE PAPER

(14) Magazine paper is produced from mechanical, chemical
and recycled pulp as well as chemicals fillers and
is primarily used for publication of
It
pigments.
consumer magazines,
advertising
material using mainly gravure or offset printing. There
are three different grades: uncoated grades (supercalen-
dered known as SC-A or SC-B), coated mechanical reels

catalogues

and

(7) Case IV/M.646 — Repola/Kymmene, OJ C 318, 29.11.1995,

p. 3.

(8) Most suppliers are able to handle different grades without costly

adjustments to their printing machines.

(9) Decision of 25 November 1998, OJ L 254, 29.9.1999, p. 9.

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grades (known as CMR) and wood-free coated reels
(known as WFC). Coated mechanical
reels consist
predominantly of the lightweight coated grade known as
LWC. Other coated mechanical grades include medium
weight and heavy weight coated (MWC and HWC
respectively) as well as machine-finished coated (MFC)
magazine paper.

(15)

(16)

(17)

The lowest quality is the SC-B grade and the highest
quality is the WFC grade, which costs between 30 % and
40 % more than SC-B; coated mechanical grades (LWC)
are in-between both in quality and price. As with news-
print grammage and brightness are the key variables for
each grade. By way of indication, SC-B has a grammage
of 50 to 55 g/m2 and ISO 65 to 69 %, SC-A grade has a
slightly higher grammage and a higher brightness of ISO
70 to 80 %. LWC has usually grammages between 55 g/
m2 and 65 g/m2 and a brightness of up to ISO 85 %,
whereas WFC has more than 80 g/m2 and a brightness
of beyond ISO 90 %.

The parties consider that the different grades belong to
the same magazine paper market because of a high
degree of both supply- and demand-side substitutability.
Moreover, the parties point to the fact that the Commis-
sion has in two previous cases based its assessment on a
single market for magazine paper (10). However, in both
of these two cases the Commission did so because the
assessment would not have been different even on the
basis of a separate relevant product market for WFC.

The Commission's investigation, however, has revealed
that WFC is not part of the overall market for magazine
paper. First of all, prices for SC-grades and LWC tend to
move in parallel whereas this seems not to be the case
for WFC. This is an indication that WFC is not part of
the overall magazine paper market. The parties strongly
disagreed with that analysis mentioning that price move-
ments between SC/CMR and WFC were largely similar.
A correlation analysis between the different prices
supports the Commission's analysis that WFC does not
belong to the same market as SC/CMR (11).

(10) Cases IV/M.646 Repola/Kymmene, at point 20; IV/M.1225 Enso/

Stora, at point 17.

(11) A price correlation analysis is designed to measure the sensitivity
of the price of one product to the price of an alleged substitute.
The higher the degree of correlation is for two products (that is
to say, the closer the coefficient is to 1), the more likely is the
existence of a combined product market including both of them.
The coefficient of correlation between LWC and SC is 0,85
whereas it is in the range of [0,45 and 0,55] between SC/LWC
less than 0,55 is not
and WFC. A correlation coefficient of
conclusive to support
than
SC/CMR.

that WFC is in the same market

(18) On the demand side there is very little substitution
possible. WFC has a grammage of at least 80 g/m2,
which makes it bulky compared to LWC. It is consider-
ably more resistant than mechanical grades and unlike
them does not ‘yellow’ over time, since it does not
contain lignin. Therefore, WFC is mainly used for covers
of publications and for expensive, high-end traveller,
lifestyle and fashion magazines where the price per copy
allows to pay for the higher purchase price as well as for
the higher transport costs, since each copy carries a
In their
higher weight due to the higher grammage.
reply to the Statement of Objections,
the parties
mentioned that
the Commission failed to take into
account overlaps that may occur between medium-
weight coated (MWC) and WFC. While it is true that
there is some substitution possible between the two
grades such substitution takes place at the margins and
is not pertinent in terms of volume.

(19)

From a supply side-perspective there is practically no
substitution between WFC and wood-containing grades.
All paper machines producing WFC are dedicated
machines (12). Moreover, the production of WFC requires
chemical pulp only as input whereas SC and LWC are
based on wood-containing mechanical pulp. Chemical
pulp is to a large extent produced by independent
suppliers and traded on the open market whereas
mechanical pulp is usually produced internally. The
price for chemical pulp, sometimes referred to as market
pulp, varies considerably over time. For example, the
market price for chemical pulp of the NSBK type varied
in 2000 between 630 USD/tonne and 710 USD/
tonne (13). This explains in part why the price for WFC
does not move in parallel with the other grades.

(20)

Some customers are of the opinion that also supercalen-
dered (SC) and LWC grades constitute different relevant
product markets. From a supply-side point of view there
is little to no substitution between CMR and SC grades.
There are no machines which produce both SC and
LWC (or other grades of coated magazine paper), since
this would require replacing a super calender by a coater
and vice versa, which is totally uneconomical. Therefore,
LWC machines
are normally dedicated machines
producing coated mechanical reels only. SC machines,
however, may be swing machines which can produce
both SC-B and newsprint.

(12) This has already been recognised by the Commission in its deci-

sion IV/M.646 Repola/Kymmene, at point 16.

(13) Rapport Annuel 2000, Matussière & Forest SA, p. 16.

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L 233/41

(21) While prices for the benchmark SC and LWC grades
tend to move in parallel the price differential is around
20 %. There is, however, a broad spectrum of qualities
and prices within both SC and LWC grades, which partly
overlap in terms of grammage and brightness. This does
therefore, suggest a clear break. There are also
not,
several examples of publishers switching between the
two grades. Therefore,
it seems more appropriate to
consider the relevant product market for the assessment
of this case to be wood-containing paper, namely SC
and CMR together.

(22)

To conclude, the Commission considers that wood-free
magazine paper (WFC) and wood-containing magazine
paper, that is, supercalendered (SC), coated mechanical
reels (CMR), which includes LWC, MWC and HWC and
machine-finished coated (MFC), constitute two different
relevant product markets.

RELEVANT GEOGRAPHIC MARKETS

1. NEWSPRINT

(23) According to the parties, present market trends point to
a significant influence of imports from Canada and the
United States of America into the EEA. Therefore, UPM-
Kymmene submits that the market for newsprint is at
least EEA-wide, taking into account the emergence of a
transatlantic market. In the Enso/Stora case of 1998,
however, the relevant geographic market for newsprint
was found to be no wider than the EEA.

(24)

(25)

(26)

Total imports and exports in 2000 accounted for 9,3 %
and 10 % respectively of EEA consumption. Approxi-
mately 80 % of
these imports come from North
America, in particular Canada which alone accounts for
almost 75 % of European imports. Canada is entitled to
a duty-free quota of 600 000 tonnes per year. Most of
these imports are directed towards the United Kingdom.

Imports are liable to a duty, which has been progres-
sively reduced and is currently at 0,5 %. The duty will be
abolished in 2002. Therefore, UPM-Kymmene claims,
imports will increase further. However, the investigation
carried out by the Commission in this case shows that
imports have not increased but have remained stable at
low levels, which goes against the idea of a market wider
than the EEA. In particular, imports of newsprint into
the EEA have remained at a low level of below 10 % and
been relatively stable in the past ten years. Moreover,
imports did not significantly increase since 1998, despite
a progressive reduction of the tariff from 3,5 % to the
current rate of 0,5 %.

There are five independent North American newsprint
producers which were named by European customers as
their suppliers. The majority of these supplies goes to
the British Isles. Of these five companies, three of those
ship significant volumes to Europe. These are Abitibi,
which is considered to be the world market leader in
terms of capacity, Bowater, which is also among the top
10 suppliers worldwide, and Kruger. Abitibi has also
established a foothold in the European market by
acquiring the Bridgewater newsprint mill
in Great
Britain. This mill has a capacity of 292 000 tonnes and
sells mainly into the British newsprint market. Bowater,
however, has only a small service office in Europe.
Kruger has no presence in Europe. These three compa-
nies account for more than 60 % of all imports into the
EEA. The quantities shipped by the two smaller Cana-

dian suppliers (Irving and Alliance Forests Products) are
insignificant. Alliance Forest Products is in the process of
being acquired by Bowater.

(27)

are

The parties claim that
imports by North American
producers can be expected to increase further, when the
Canadian producers no longer achieve premiums on
deliveries to the United States based on the strong US
dollar, and consequently, the exchange rate for the euro
becomes more favourable for exports to the EEA.
However, because of the dependency on exchange rates
Canadian producers
seen by many European
customers as rather sporadic suppliers with no clear
long-term strategy and commitment and, therefore not
suitable
for ongoing publishing. This has been
confirmed by two of the leading North American impor-
ters. Bowater stated that they would like to increase their
sales to Europe provided that the exchange rate becomes
more favourable. Kruger stated that they are reducing
shipments to Europe because of both the exchange rate
and transport costs. In addition, the industry association
Cepiprint forecasts a decline for imports from Canada
from 786 000 tonnes in 2000 to 750 000 tonnes in
2001 (14). The forecast by Cepiprint for the next two
years is a further decline. All these elements together
make it rather likely that imports from North America
will decrease over the next few years.

(28)

Furthermore, the qualities used in the EEA are not iden-
tical to the qualities produced in North America. The
the imports from Canada is perceived as
quality of
somewhat inferior to the European quality. Moreover,
many customers have stated that the quality of European
newsprint is constantly improving thereby widening the
already existing gap between Canada and Europe in that
respect.

(29) Another source of imports is Russia. Several mills such
as Kondopoga, Wolga and Solikamsk deliver into the
EEA, mainly into Germany. However, the quality of the
newsprint from these suppliers is seen as low quality
compared to those of the European producers and is
mostly used for free papers. Moreover, there are logis-
tical problems which put a steady and reliable source of
supply into question. Imports from Russia are around
2 % of EEA consumption.

(14) Demand-Supply Report June 2001, p. A.2.

(30)

(31)

(32)

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To summarise, it seems that the newsprint market is not
wider than the EEA and Switzerland because (i) imports
accounted for only 9,3 % of the total EEA consumption
in 2000 and are going down in 2001;
(ii) despite
reduced tariffs, exchange rate fluctuations and lagged
behind business cycles, trade flows between the EEA and
North America do not vary to any significant extent. In
other words, even in years of favourable exchange rate,
imports from Canada have not grown significantly.

2. MAGAZINE PAPER

The parties are of the opinion that the market for maga-
zine is at least EEA-wide. There are no significant non-
tariff barriers to intra-EEA trade. However, imports to
the EEA of some of the magazine paper grades are
subject to a duty. While there is no duty for SC-grade,
LWC and WFC are subject to a duty of currently 3,6 %
and 2,4 % respectively. Both duties will be reduced to
zero in 2004.

which explains why some firms active in the publication
paper business may also be involved in other areas.

(35)

The manufacturing process of publication papers (news-
print and magazine paper) starts within the activity of
forestry, which includes the initial planting and raising
of trees, as well as felling and logging. Some paper
producers actually own forests and are involved in the
basic manufacture of wood products, such as panels and
boards or builders' carpentry. This is for instance the
case of UPM-Kymmene, which produces sawn timber,
plywood, planed timber and value-added derivatives. The
activities that follow within the production process may
be seen within a vertically integrated chain. Wood is
used as a raw material
in the manufacture of pulp,
which is then used as one of the raw materials within
the printing and publishing paper industry.

The EEA is a net exporter of magazine paper. Exports
amount to 23 % of total EEA deliveries, while imports
are only around 1 %. The investigation of the Commis-
sion has shown that any increase in imports in the
foreseeable future is unlikely. Leading North American
paper producers have explained that
they have no
concrete plans to develop their exports to the EEA area.

(36)

(33) Moreover, the Commission's investigations have shown
that magazine paper customers consider almost unani-
mously the EEA as the relevant geographic market for
magazine paper. Customers are also of the opinion that
neither North American nor Russian or other East Euro-
pean players should be considered as active in the Euro-
pean market. Therefore, the relevant geographic market
is considered to be the EEA plus Switzerland.

the paper product,

Pulp is a watery fibrous substance made of fresh fibres
or recycled fibres and is formed into paper sheets. There
are different kinds of pulp dependent on the desired
like strength,
characteristics of
appearance and intended use. Three types of pulp are
used for publication papers: mechanical pulp, which is
normally groundwood pulp or thermo-mechanical pulp
(TMP), made from wood, de-inked pulp (DIP), made
from recycled paper, and chemical pulp. Chemical pulp
is used only for magazine paper, as it increases the
strength of paper: it is used in combination with TMP
and DIP to produce SC paper, in combination with TMP
to produce LWC paper and on its own to produce WFC
paper. TMP or DIP is used for newsprint.

COMPETITIVE ASSESSMENT

1. GENERAL: THE PULP AND PAPER INDUSTRY

Production processes

(34)

Since the early eighties, the production value of wood,
paper, publishing and printing has increased to account
for more than 10 % of total European manufacturing.
The pulp and paper industry consists of five key busi-
ness areas: pulp, publication paper (newsprint and maga-
zine), high quality paper, paperboard and tissue. These
their production processes,
businesses share parts of

(37)

TMP and DIP are not sold on the open market
in
appreciable quantities, since newsprint and magazine
paper producers have integrated pulp production facili-
ties. The raw materials (wood or recovered paper) arrive
at the mill, which produces the pulp that is then used to
make newsprint or magazine paper. By contrast, integra-
tion level of to chemical pulp varies. Chemical pulp
makes up a relatively small proportion of the pulp used
to make magazine paper (except for WFC) and it can be
bought externally from a chemical pulp market. Some
producers
of WFC suppliers,
one-third
according to the parties) have integrated their paper
production capacity with a chemical pulp mill;
the
others buy chemical pulp from the market. Other key
production factors include chemicals, water and energy.
Some companies have developed integrated energy
facilities, in order to cover all or part of their own needs.

(around

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(38) During the nineties there have been a number of
changes in the production process of the pulp and paper
industry. These have come about through rationalisation
of production, changes in national or European environ-
mental policy, as well as new technological advances in
the production processes. One result has been a
dramatic reduction in the use of water and energy. Other
changes to the production process have included the
replacement of chlorine bleaching by elemental or
totally chlorine-free processes (bleaching is necessary to
increase the brightness of the paper). Another important
evolution relates to the increasing importance of recov-
ered paper as a raw material.

coating unit can produce CMR and newsprint, although
this is a very exceptional combination (15). However, a
paper machine producing calendered paper cannot
produce coated paper. The reason is that whenever a
switch in production is made the calender has to be used
instead of a coating unit. Not only are both units expen-
sive (10 % and more of the cost of a paper machine) it
would also take a lot of time to make the necessary
changes. Consequently, and given the fact that invest-
ments are high and the useful life of the machines is 20
years and more, the decision to invest in one type of
technology has critical
implications, both in terms of
cost structures and in terms of marketing positioning.

Investment processes

(39)

range of products

There has been a marked change in waste policy and
recycling as environmental awareness has risen. This has
led to a well-developed market
for used paper and
recycled fibres. Some manufacturers of pulp and paper
have even fully changed their production processes and
their
to use recycled
resources only. Recycled fibres have become an essential
raw material for the paper industry, that can be reused
up to six times (if mixed with fresh fibres). Recycling is
most attractive for mills operating in densely populated
areas because of the large supply of paper and short
distances for transporting materials (with manufacturers
relying on secure supply and an efficient collecting
system).

in order

(42)

to expand

speaking, opportunities

in the publication paper

the main strategic
Investment decisions are one of
industry.
choice variables
Generally
are
constrained by the suppliers' historic investment choices,
technological opportunities or future strategic evolution.
Investment processes are similar in the newsprint and in
the magazine market. Capacity expansions take usually
three forms: (i) expansion of capacity of existing plants
through minor modifications, so-called creep; (ii) expan-
sion of capacity of existing plants (by rebuilding or
upgrading plants);
(iii) building new plants. Capacity
creep can be done at each paper machine and usually
results in an increase of 1 % per year on average. The
introduction of a new plant is often combined with the
shutdown of an old inefficient one.

(43)

The publication paper industry is very capital-intensive.
Accordingly,

investments can be defined as:

(40) An important structural element

in the publication
paper industry relates to path-dependency in relation to
paper grades. It appears that paper mills using recovered
fibres cannot easily switch to fresh fibres and vice versa.
The decision to use one of the two inputs requires
different machinery, namely either a de-inking plant or a
grinder. Since the use of mechanical pulp is much more
energy intensive the source of energy becomes impor-
tant and is often generated in house. For example,
Haindl in Schongau switched from TMP to DIP which
reduced energy consumption by up to 85 %. The switch,
however, made it necessary to build a de-inking plant.

(44)

(41) A similar strategic decision has to be made as concerns
the finishing of the paper. Any paper machine that
produces a grade higher than newsprint has either a
supercalender or a coating machine to finish the paper.
A paper machine with a supercalender can, technically,
produce either SC or newsprint. A machine with a

(a) large, as a new machine has typically a capacity of
250 000 to 300 000 tonnes which cover up to 3 %
of European demand;

(b) costly (EUR 300 to 500 million for building a new
plant, between EUR 20 and 100 million for
upgrading and rebuilding).

the

the market

existing capacity/demand balance,

For that reason, investments in new capacities tend to
occur in large and infrequent lumps. Decisions about the
amount and timing of investments are made taking into
account
the
investments already decided by others, the long term
(which progressively
growth trend of
‘absorbs’ new capacities) and most
importantly the
aspirations of the investor in terms of rate of return on
that investment. Moreover, a certain time lag occurs
between the announcement of the investment project,
the committed announcement and the effective realisa-
tion. The period elapsing between the committed
announcement and the effective realisation varies gener-
ally between one and two years.

(15) There seems to be only one machine in operation in Europe,
which has been installed by Perlen Papier in 2000 with a capa-
city of 150 000 tonnes.

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The suppliers and the structure of the publication
paper industry

(45)

In the last years, the European pulp and paper industry
has been characterised by a high degree of horizontal
concentration and vertical
in particular
through the mergers between UPM and Kymmene in
1995 and Stora and Enso in 1998.

integration,

(49)

(46)

Today, the European publication paper industry is fairly
concentrated. According to the parties,
the top five
suppliers control almost [70 to 80 %]* of the market for
newsprint and the top four suppliers close to [70 to
80 %]* of the market for wood-containing magazine
paper in terms of capacity (respectively, [60 to 70 %]*
and [70 to 80 %]* in terms of sales). Moreover, the total
number of
firms involved in the publication paper
industry is quite limited.

(47) Although Cepiprint, the Association of European Publi-
cation Paper Producers, officially includes 48 companies,
the actual number of members, when considering inde-
pendent groups of companies, is 14. The Commission
investigation identified other paper producers that may
provide newsprint or wood-containing magazine paper
in small quantities, but
they tend to use only one
production site and to be very small players. Altogether,
the industry comprises about 19 European producers.
Among these market players, two firms are actually
subsidiaries of non-European groups. Sappi Europe, a
subsidiary of the South African group Sappi, is a notice-
able producer of coated mechanical papers and a Euro-
pean leader for wood-free coated papers. The Canadian
paper producer Abitibi has a subsidiary in Great Britain,
Abitibi-Bridgewater Paper, which represents around
[< 5 %]* of European newsprint capacity.

(48)

Three elements can be used to classify the suppliers:
first, their size, then their degree of horizontal integra-
tion and finally their degree of vertical integration. First,
there is a great difference in terms of size among market
players. The market contains some very small players,
accounting each for less than 1 % capacity of the total
European market capacity in either newsprint or maga-
zine paper; it also encompasses global players and some
medium-sized players. Second, the degree of horizontal
integration distinguishes market players. There are some
overlaps between the publication paper business and
some other related activities. It appears that a number of
companies have a stake in other paper and board
markets, such as high-quality papers, paperboard and
tissue. Finally,
there are some differences between
suppliers regarding their degree of vertical integration.
While some paper producers purchase their raw material

and energy, some others own forests, chemical pulp
factories, firms collecting recovered paper and energy
plants. These three elements allow for some distinctions
between the suppliers.

in its investigation, a
The Commission has identified,
group of very small market players, which share
common characteristics. This group comprises seven
companies: Dresden Papier, Leipa Gruppe, Lenk, Regeno
Papier, Robert Cordier, Perlen Papier, and Steinbeis
Temming Papier. They usually rely on one or two paper
machines and account each for less than 1 % of the
market. A large proportion of
them is based in
Germany, the largest national market, and they tend to
focus on local customers (even if they also sell across
borders). Most of these firms are privately owned, but
they tend to be flexible and to be customer-oriented. In
majority, they use production processes based on recov-
ered paper and not on wood. Finally, they tend to be
horizontally integrated, in the sense that they not only
produce publication papers: those producing newsprint
tend to also produce paperboard and those producing
magazine paper tend to also produce fine paper.

(50)

The other market players offer a contrasted picture,
according to their core-business: while some producers
focus exclusively or mainly on newsprint and magazine
papers, for some others, publication papers are only a
secondary business within pulp and paper activities. In
the context of increasing specialisation of major produ-
cers in the paper and board industry, publication paper
represents a core-business for some producers, but not
for others.

(51) When considering size, one recognises a number of
large global players with stakes in the European publica-
tion paper industry namely, Stora-Enso, Norske Skog,
UPM-Kymmene, M-Real/Myllykoski, SCA, Abitibi and
Sappi. However, these global players have different stra-
tegic focuses and should be distinguished, because they
do not account for similar market shares. Abitibi and
Sappi are European subsidiaries of Canadian and South
African international groups with own production sites
in Europe. Their market shares in the EEA for newsprint
and wood containing magazine papers are limited. Sappi
has less than [< 5 %]*, Abitibi some [0 to 10 %]*, if also
imports from Canada are included. Then, SCA, even if it
has more than 38 000 employees in over 40 countries,
is not primarily involved in publication papers. SCA
Hygiene Products
and SCA Packaging represented
respectively 46 % and 37 % of its total sales in 2000 (16).
SCA has around [5 to 10 %]* European market share for
newsprint and less than [< 5 %]* for wood-containing
magazine paper. Finally, M-Real and Myllykoski have
various structural
links which leads to the two firms
being recognised as one entity by market participants
and presented also as one by the notifying parties in
their respective CO forms. M-Real has 35 % of
the
shares in Myllykoski Paper, a subsidiary of the Mylly-
koski group, and joint-ownership with Myllykoski in the
German manufacturer Albbruck. These
two joint
for approximately […]* tonnes of
ventures account
wood-containing magazine paper, equivalent to [5 to
10 %]* of the market. Moreover, they have a joint sales

(16) See: http://www.sca.se, and Pulp & Paper

International,

June

2001:23

30.8.2002

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Official Journal of the European Communities

L 233/45

and distribution network through M-Real Alliance, a
100 % subsidiary of M-Real (17). M-Real
in its annual
‘Metsä-Serla's Paper Group,
report declares:
together
with Myllykoski,
is Europe's third-largest producer of
coated magazine paper’ (18). Myllykoski is also active in
the market for newsprint in both Europe and the USA,
where its market share is below 5 %; M-Real is first and
foremost the largest producer of fine papers in Europe
and has only limited involvement in magazine paper
(around […]* kt in LWC capacity in one mill in Finland
and around […]* kt capacity in WFC). For these reasons,
the two firms may be treated as one commercial entity
for the purpose of this decision.

The common feature to these global firms is their degree
of vertical
integration. This can be seen, for instance,
from Stora Enso and Norske Skog. As an integrated
company, Stora Enso is able to satisfy a significant part
of its raw material needs internally, ensuring continuity
of production. The company owns approximately 2,6
million hectares of forest-land in Finland and Sweden
and some 0,3 million hectares in the United States as
well as significant forest areas in Canada and Portugal.
Power plants at Stora Enso's mills provide approximately
40 % of the company's power requirements (19). Norske
Skog has set up a subsidiary, Norske Skog Supply, in
charge of supplying raw materials (wood or recovered
paper), energy and other consumables. Finally, Oy
Metsä-Botnia AB, in which M-Real has a 46 % holding
and UPM-Kymmene holding share 47 %, is a strategic
resource company whose main task is to assure a distur-
bance- free supply of pulp on competitive terms to its
owner companies, M-Real and UPM-Kymmene.

or exclusively on recycled paper. While Burgo focuses
on magazine paper, Holmen and Palm primarily
produce newsprint. Holmen and Burgo are medium-
sized firms, active across Europe, whereas both Matus-
sière and Palm are small firms which focus on their
respective home country.

(54)

There are developments which demonstrate Holmen's
commitment to the market for newsprint. Its market
share steadily increased over the past decade, closing the
gap with Norske Skog. Holmen has committed itself to
two investment projects which will bring it close to
Norske Skog. The first project concerns a new machine
at Hallsta which produces super improved newsprint
and replaces its old PM 11 newsprint machine (net
increase […]* tonnes) (20). The second project concerns a
standard newsprint machine to be in production at the
increase
end of 2003 or beginning 2004 and will
Holmen's capacity by another […]* tonnes. With this
additional net capacity of […]* tonnes Holmen will
achieve a share of European capacity of around [10 to
15 %]* in 2003 (21).

(55) On the basis of

In the market

the elements outlined above,

top
suppliers in the newsprint market are UPM-Kymmene,
Stora Enso, Norske Skog, Haindl and Holmen; other
companies are principally SCA, M-Real/Myllykoski, and
Palm.
for wood-containing magazine
paper, top suppliers are UPM-Kymmene, Stora Enso,
Haindl, and M-Real/Myllykoski; the remaining players
are comprised of principally SCA, Burgo, Sappi, and
Norske Skog. Note that M-Real/Myllykoski and Norske
Skog are considered either
fringe
depending on the considered market.

top supplier or

Buyer characteristics

The remaining publication paper suppliers represent a
group of companies with a European focus. They are
capable of serving clients all over the EEA and even to
export part of their production, but their production
locations are exclusively European. The Commission
identified the following companies as having a European
focus: Burgo, Haindl, Holmen, Matussière et Forest and
Palm. These companies do not appear to constitute a
homogeneous group. Burgo, Holmen and Matussière
have a large degree of vertical integration, owning power
plants procuring the electricity needed for production.
They also have some stakes in their supply of raw
materials (wood and recycled). They do not rely exclu-
sively on wood and have some mills using de-inked pulp
as well. Haindl and Palm, on the contrary, rely primarily

(56)

Customers for newsprint and wood-containing magazine
paper comprise newspaper and magazine publishers,
catalogues and retailers, speciality paper buyers, paper
merchants, and commercial printers.

(57) Whilst these customers use paper for distinct needs, they
choose within the same range of paper grades. Different
grades of publication papers are distinguished by gram-
mage, brightness and the intended printing process. The
different categories cover a range of printing quality that
can be achieved and the look and feel of the printed
product.

(52)

(53)

(17) Both the production joint ventures and the sales agreement have
been notified to the Commission on 4 March 1996 (Case IV/
35931 Metsä-Serla and Myllykoski). The Commission sent a
comfort letter dated 8 May 1996.
(18) M-Real, Annual report 2000, p.13.
(19) See: http://www.storaenso.com.

‘Searching for Stability’,

in PPI, June 2001, p. 41.

(20) Jim Kenny:
(21) It is possible to increase capacity by an extra 1 % on existing
machinery each year by running them slightly faster or making
continuous small improvements in the production process in the
mills. However, capacity creep is done by all competitors. There-
fore, capacity creep should not change market shares and can be
ignored for the calculation of future market shares.

L 233/46

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Official Journal of the European Communities

30.8.2002

(58)

The market is characterised by a large number of buyers,
of which few are large buyers. Some large publishers like
Axel Springer represent a fair amount of
the total
demand (up to 5 %). However, the vast majority of the
demand is atomised and consists of regional newspapers
and specialised magazines.

The bargaining process and the pricing policy

(59)

Even though it is a commodity product, the dominant
market mechanism for publication paper is not based on
a public exchange. There is admittedly a spot market
where companies can buy their supply but the dominant
market mechanism is
rather based on agreements
between suppliers and customers with specified supply
periods of usually one year. According to copies of such
agreements provided by the parties, delivery contracts
may specify:

— the quantity of paper to be delivered together with

its grade and thickness,

— price and possible rebates,

— delivery conditions,

logistics and packaging,

— quality control requirements, environmental specifi-

cations,

— payment conditions.

parency of the market situation at the time of nego-
tiating.

(63)

(64)

Customers' negotiation strategies appear to be elaborate.
On the one hand, after determining internally their
needs in terms of volume and paper grades, they may
develop some market
intelligence and look at pulp
prices, utilisation rates and capacity, in order to have an
idea of the constraints on producers and of their cost
structures. The main negotiating instrument consists in
confronting competing offers
from suppliers. Even
though customers have declared not to divulge to their
bargaining partners which competitor makes them a
good offer, they clearly signal when better price levels
can be obtained.

For customers it is vital to be supplied continuously.
Unlike paper producers, publishers cannot shut down
production and not publish a daily newspaper or weekly
magazine for a certain period. If the required tonnage of
paper is not available, publishers have no other choice
than to reduce pagination or even circulation, as has
happened in the autumn of 2000. Both have detrimental
effects on revenues from advertising generating adverse
reactions from readers and weakening the negotiating
position of the publishers further. For these reasons,
several customers have complained against the proposed
takeover of Haindl.

Contracts are company-specific and relate to individual
orders. Their duration varies between three months and
several years, but is generally of one year while rate of
deliveries may vary during the year according to
demand. Prices are generally negotiated for the calendar
year. It is not uncommon, that contracts are renego-
tiated during a year if a significant decline in demand
occurs.

(65)

The balance of power has tended to fluctuate in the past,
depending on the market cycle. When the demand is
high and consequently when capacity surplus is tight,
customers are under the pressure to find enough paper
for their products. During negotiations, they will have to
accept higher price levels corresponding to lower
bargaining power.

range;

relationships

Long-term and stable
are used by
customers to secure supply in terms of quantity and in
terms of product
they involve the largest
suppliers and possibly long-term contract (some exam-
ples were given of three-year contracts). Customers may
use short-term contracts (less than one year) to try to
obtain better prices for part of their supply; they involve
smaller suppliers and possibly extra-EEA producers.

(62) Negotiations operate in a particular way between the
suppliers of publication paper and their customers. The
Commission's inquiry showed that customers systemati-
cally adopt a multi-sourcing strategy. Multi-sourcing
strategy allows customers to secure some safety in the
regularity of their supply, to make sure that they get the
whole range of paper grades and qualities that they
require and importantly to increase their negotiating
power. From the point of view of the customers,
it
appears indeed that it is only through a confrontation
with a number of suppliers that they can increase trans-

(66) When demand is low, on the contrary, paper producers
are under pressure to reach profitable levels of capacity
utilisation. Since the pulp and paper industry is very
capital intensive and shows high fixed costs of between
45 % and 55 % according to paper producers, a high
utilisation rate of more than 90 % is required for the
business to be profitable. Consequently, when demand is
low or in situations of over-capacity, customers will
have a higher countervailing power and would be able
to obtain lower prices.

(67) However, it has been reported by some customers that
the optimal strategy for suppliers to resist these down-
ward pressures on prices is to take down times, that is,
idle paper machines temporarily. Down times may allow
suppliers to maintain prices at a certain level through
lower deliveries and may be part of the suppliers' stra-
tegic policy.

(60)

(61)

30.8.2002

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Official Journal of the European Communities

L 233/47

The industry in the past decade

(68)

(69)

The main driver of demand for publication paper is the advertising volume, which in turn affects the
volume of the editorial part and eventually pagination. As advertising is closely related to the
performance of the economy, the demand for publication paper is typically related to the general
economic trend. Traditionally, the paper industry is cyclical. Over the past ten years two peaks
occurred, one in 1995, the other one in 2000, followed by a slowdown in demand. These business
cycles imply a high volatility of prices over the cycle. For instance, in 1995 prices increased by
around 25 to 35 % followed by a decrease in 1997 by 15 to 20 %.

Since it normally takes two years between identifying the needs for additional capacities and
installing new capacity, and since expansion plans tend to occur when business is good, a mismatch
of installed capacity and demand often appears. As can be seen in Figure 1, the market oscillates
between periods of full capacity utilisation, around or more than 95 %, and periods of over-capacity.
For instance, in 1991 and in 1996 the industry capacity utilisation ratios were around 85 % and
90 % respectively. The capacity utilisation rate and the overall level of prices reflect the demand and
supply balance. In particular, periods of low demand of over-capacity are associated with a decline in
prices. The level of installed capacity relative to demand determines the profitability of the industry
in the long-run. As can be seen from Figure 2, prices have remained stable since 1998. Prices have
not been depressed by the introduction of new capacity as had been the case previously, in particular
in the early nineties. New capacity has been in line with increased demand.

Figure 1: Capacity utilisation rate

Source: Cepiprint.

(70)

Figure 2 describes the cyclical pattern of the newsprint market over the past 10 years. These
observations are also valid for the wood-containing magazine paper market.

L 233/48

EN

Official Journal of the European Communities

30.8.2002

Figure 2: Newsprint cyclical pattern at EEA level

Source: Cepiprint.

(71)

Regarding the development of
the long-run capacity
level in the market for newsprint until 2003, it seemed,
until spring of 2001, that new capacities coming on
stream, namely the new machines by Myllykoski, Stora
Enso and Holmen, as well as
rebuilds and creep
continued to be matching forecast demand thus stabi-
lising the supply and demand balance. At EEA level, the
long-term increase in demand for newsprint is estimated
to be approximately 2 % per year. The same figure was
also the estimation of Cepiprint until March 2001 for
the period until 2003 (22). However, the recent develop-
ments of the general economic climate have lead to a
substantial revision of forecasts for demand of publica-
tion papers, and, therefore, might well lead to a situation
in the short term, where more new capacity is built than
needed.

and raise prices. Jukka Härmälä, CEO of Stora Enso, was
quoted as saying that ‘Stora Enso is committed to taking
market related down time. We took 205 000 tonnes of
down time in the first quarter this year and we intend to
continue this if needed throughout the year’ (23). In a
similar fashion Juha Niemelä, CEO of UPM-Kymmene,
said ‘We shouldn't aim at running machines full all the
time’ (24) (that is to say, taking down time).

(73)

To support their assertion, customers pointed at the fact
that in 2000 publishers could not get the volume of
newsprint they needed and were in some cases denied
the volume they had actually ordered. Moreover, while
prices have been stable between 1997 and 2000, news-
print prices for 2001 rose by almost 20 % as compared
to 2000 (25). A similar observation could be made for
wood-containing magazine paper where prices have
risen by 10 to 20 % at the end of 2000. While the year
2000 may have been an exceptional year which cannot
be taken as a reference it nevertheless demonstrates what
can occur when supply is tight.

(23) R.

James: Stora Enso aims to be leader of the pack. PPI

June

(24) R.

James: UPM-Kymmene stays cool when the heat is on. PPI

2001, p. 29.

June 2001, p.16.

(25) See PPI This Week, Volume No 23, of 11 June 2001.

(72)

Several customers have suggested that suppliers may
stabilise prices by reducing their production on the
margins, so that production increases at a lower rate
than the growth in demand,
through
market-related downtime. This would keep supply tight

in particular

(22) Cepiprint Demand — Supply Report Newsprint and Magazine

Paper Grades 2001-2003, March 2001, p. 4.

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Official Journal of the European Communities

L 233/49

2. COLLECTIVE DOMINANCE

Market characteristics

(74)

(75)

(76)

Introduction

Collective dominance is usually associated with the joint
exercise of market power through the tacit coordination
of market behaviour of a group of firms.

The Commission investigated whether the two proposed
concentrations would result in the creation of a collec-
tive dominant position (26) in the markets for newsprint
and wood-containing magazine paper by a subset of
large firms called top-suppliers.

cases

In its investigation the Commission has carried out the
same type of analysis as in past decisions in collective
dominance
92/553/EEC
(IV/M.190 — Nestlé/Perrier) (27), Decision 97/26/EC (IV/
M.619 — Gencor/Lonrho) (28) and Decision 2000/
276/EC (IV/M.1524 — Airtours/First Choice) (29).
In
particular, the Commission has analysed:

as Decision

such

(a) the impact of the merger on competition;

(b) whether the characteristics of the market makes the

market conducive to tacit coordination;

(c) the sustainability of the coordination, that is to say:

(i) whether any one of the top-suppliers has the
ability and incentive to deviate from the coordi-
nated outcome, considering the ability and
incentives of non-deviators to retaliate;

(ii) whether buyers/fringe players/new entrants have
the ability and incentive to challenge the top-
suppliers' anti-competitive behaviour.

In addition, the Commission has examined the nature of
past competition.

(77)

it

The examination of collective dominance requires there-
fore examining a series of elements. In particular,
in
order to establish whether a market is conducive to
is necessary to consider a
collective dominance,
number of characteristics of the market. While these
characteristics are often presented in the form of a list, it
is necessary to examine all of them and to make an
overall assessment rather than mechanistically applying
a ‘check-list’. Depending on the circumstances, the fact
that one or another of the structural features usually
associated with collective dominance may not be clearly
established is not in itself decisive to exclude the likeli-
hood of a coordinated outcome.

(26) The terms collective,

joint and oligopolistic dominance are used

as synonyms in this Decision.

(27) OJ L 356, 5.12.1992, p. 1.
(28) OJ L 11, 14.1.1997, p. 30.
(29) OJ L 93, 13.4.2000, p. 1.

(78)

(79)

(80)

and

industry is characterised by
The publication paper
long-run competition in capacity
short-run
competition on prices under capacity constraints. That is
to say that in these markets, the level of capacity and
average demand determines the long-run average price
level whereas
the
short-run demand
short-run price at a given capacity level. These character-
istics are very similar in the market for newsprint and in
the market for wood-containing magazine paper and
can be summarised as follows:

determines

P r o d u c t h o m o g e n e i t y : both newsprint and the main
grades of wood-containing magazine paper can be
considered as homogeneous products, although some
variations within the different paper grades exist. The
homogeneous nature of the products is confirmed by a
tendency for a certain standardisation of the pricing
policy among the different qualities. For both newsprint
and wood-containing magazine papers, there exist well-
defined standard qualities to which all suppliers adhere.
For instance, the reference quality in newsprint is 45 g/
m2. This quality is taken as a benchmark to calculate the
prices for other qualities.

S t a b i l i t y o f t h e m a r k e t s h a r e s : as indicated in the
following graphs, there has been some degree of fluctu-
ation in the market shares of the top suppliers, in the
markets for newsprint and wood-containing magazine
paper respectively. These variations in terms of market
shares are limited for wood-containing magazine and
more pronounced for newsprint. Holmen, for instance,
notably increased its market shares in the newsprint
market over the past
four years. However, and as
explained by UPM-Kymmene, market shares in the
publication paper industry are strongly determined by
capacity shares and ‘strong short-term market share vari-
ations are excluded by the character of the industry’ (30).
On the basis of the above the Commission recognises
some instability in the market shares especially of news-
print producers, but also considers that such variations
do not necessarily preclude an overall stability in the
respective market shares of the largest suppliers.

[…]*

Figure 3: Market Shares in the newsprint market

Source: reply of the parties and the competitors.

[…]*

Figure 4: Market Shares wood-containing magazine paper

Source: reply of the parties and the competitors.

(30) Source: UPM-Kymmene, reply to the SO, p. 58.

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Official Journal of the European Communities

30.8.2002

(81)

S y m m e t r i e s o f m a r k e t s h a r e s : furthermore, as the
parties have also pointed out, there are some asymme-
tries in relation to top-suppliers' market shares. Holmen,
in particular, had a market share of [10 to 15 %]* in
terms of newsprint sales in 2000 against [20 to 25 %]*
for Stora Enso. In the past, however, the Commission
has found collective dominance even where the oligopo-
lists did not have totally symmetric market shares (31).
The main reason is that the existence of asymmetries in
market shares in these cases was not in itself an obstacle
to tacitly coordinated behaviour. Given the outcome of
its competitive assessment,
the Commission is not
taking a position here on whether the relative asym-
metry of market shares in this case might provide
It will,
different
however, further discuss the likely increase or decrease
in symmetry brought about by the proposed concentra-
tions in the section on ‘impact of the transaction’.

the top suppliers.

incentives

for

(82)

a n d
T r a n s p a r e n c y o n c a p a c i t i e s , d e l i v e r i e s ,
e x p a n s i o n s :
the Commission identified two main
channels of information for operators on the markets of
newsprint and wood containing magazine paper: profes-
sional associations and announcements by paper produ-
cers.

(83)

is

companies.

Cepiprint is the Association of European Publication
Paper Producers, representing the industry sectors of
newsprint and magazine papers within the Confedera-
tion of European Paper Industries (CEPI). Cepiprint is
based in Zürich and incorporated under Swiss law. Its
members are manufacturers of newsprint and magazine
financed by
in Europe. Cepiprint
paper grades
member
Cepiprint membership
The
currently includes almost all European producers of
newsprint and magazine paper, that is to say, 14 inde-
pendent companies or group of companies, owning over
60 paper mills and 162 paper machines in 13 European
countries. Cepiprint members represent more than 98 %
of supply in the EEA plus Switzerland of both newsprint
and magazine paper. Cepiprint produces various reports
about deliveries, paper orders, capacity, stock situation
as well as production and shutdowns, for each paper
grade separately. The data is aggregated and does not
specify mills or companies; it is generally organised on a
country-by-country basis, or even, for utilisation rates
and downtime, for all EEA members plus Switzerland.
There
information on investments
(announced and realised) provided by Cepiprint and PPI.

also public

is

(84)

(85)

(86)

Paper producers themselves may also make announce-
ments about
their investment plans and down time
levels, in particular. For instance, they may indicate their
intentions to build new paper machines at a given loca-
tion. Such declarations, however, are not to be consid-
ered as commitments until they are decided through a
board decision, which sometimes comes at a much later
Information on down time is also available
stage.
through public statements by individual
firms about
their amount of down time, which means tonnage taken
information on down
out of the market. In addition,
time becomes also known to customers and suppliers,
who need to be informed so that they can take it into
account in their planning.

Taking these elements into account, although it may be
recognised that there is some overall transparency in the
market, the Commission finds that there is a lack of
transparency in relation to investment decisions to
sustain the tacit coordination of investments alleged in
the Statement of Objections.

T r a n s p a r e n c y o n a v e r a g e p r i c e s : there seems to
be transparency on average transaction prices, whereas
there may not be for individual transaction prices. In the
Enso/Stora decision,
the Commission noted that,
according to Enso and Stora, secret price discounts indi-
cated that the markets lacked transparency (32). On the
other hand, several customers have pointed out that
actual price levels in the market appeared to be trans-
parent. Facilitating devices in this respect would be the
two publications EUWID (33) and PPI. Both publish
prices on a monthly basis per country. Customers have
indicated to the Commission that these publications are
quite accurate in their indications as to the general level
of transaction prices in the market.

(87)

It is however noteworthy that the final net price in both
the markets for newsprint and wood-containing maga-
zine paper is determined through individual contracts
which include inter alia often retroactive price rebates.
The Commission,
individual
transaction prices are likely not to be transparent even
though a certain degree of transparency exists on the
average level of prices charged by the different suppliers.

therefore, considers that

(88)

I n e l a s t i c a n d c y c l i c a l d e m a n d : in both the news-
print and the wood-containing magazine paper market,
suppliers face a short-run inelastic demand. This has also
been acknowledged by the parties. Short-run demand is
driven by the economic activity which is indeed highly

(31) See for example IV/M 1313 — Danish Crown/Vestjyske Slagte-

rier; IV/M.1524 — Aitours/First Choice.

(32) Decision of 25 November 1998, OJ L 254, 29.9.1999, point 68.
are
(33) EUWID (Europäischer Wirtschaftsdienst);

quotes

price

obtained from both customers and suppliers.

30.8.2002

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Official Journal of the European Communities

L 233/51

pro-cyclical. Short-run demand determines short-run
prices for a given level of supply. The Commission has
estimated the demand elasticities with regard to publica-
tion paper market. Estimated elasticities are in the range
of [–0,15;–0,3] for newsprint and [–0,3;–0,6] for wood-
containing magazine paper (34). The economic expert of
Norske Skog based his analysis of the market on an even
lower elasticity of between –0,1 and 0,3. This means
that a small proportionate decrease in the supply of the
products will

induce a higher price increase.

(89)

C o s t s t r u c t u r e s : generally speaking, production costs
are likely to vary in relation to the size or the age of the
paper machine or in relation to the mix of variable and
fixed costs. The Commission has analysed the cost struc-
ture of
the top suppliers based on cost details per
machine for their corresponding mills (35). In order to
the Commission has
compare their marginal costs,
examined their respective part of
fixed and variable
costs.

(90) Different measures of costs have been examined and in
particular
the one measuring the average variable
cost (36) of raw material and energy. The analysis shows
a certain dispersion of all average variable costs over
machines which reflects the mix of various generations
of machines. In particular, the average effective age of
the newsprint paper machine seems to affect the average
variable costs much more than the age of the magazine
paper machines does. The age of the machine is there-
fore a less relevant parameter in the latter market.
However, it should be noted that the industry operates
in such a way that the operating rate of the machines is
not
linked to their individual costs, suggesting that
average variable costs are a useful indication of marginal
costs.

Company

Newsprint

SC

Competitor 1

[...]*

[...]*

LWC

[...]*

Competitor 2

[...]*

[...]*

[...]*

Competitor 3

[...]*

[...]*

[...]*

Company

Newsprint

SC

Norske Skog

Haindl

[...]*

[...]*

[...]*

[...]*

LWC

[...]*

[...]*

Figure 5: Average effective age of the machines

Source: reply of the parties and the competitors.

(91)

For the purpose of the cost analysis, the value of the
different average variable cost per firm is analysed in
Figures 6 to 8. Two conclusions emerge from the cost
analysis of the newsprint market (Figure 6). First, […]*
and in particular […]* has the lowest variable costs of
the sample and thus possibly the lowest marginal costs
in the newsprint market. Second, the two transactions
would increase the symmetry between […]*, although a
certain degree of asymmetry would remain.

[…]*

Figure 6: Average variable cost of newsprint per firm

Source: reply of the parties and the competitors.

(92)

Conclusions for the wood-containing magazine paper
market seem to differ from the newsprint market. The
top-suppliers exhibit more similar cost structures.
In
addition, the Commission has examined the position of
competitor 4, which has not been identified by the
Commission as a top-supplier but rather as a fringe
player in the wood-containing magazine paper market.
A noticeable point is that competitor 4 appears to have
[…]*. Today competitor 4 has less market power among
the top-suppliers
in the wood-containing magazine
paper market. This is confirmed by its declining market
share position in the last two years. Competitor 4 has
plans to replace its existing machines in the next years,
which would make it more efficient in terms of costs.

UPM-Kymmene

[...]*

[...]*

[...]*

[…]*

(34) The Commission has estimated a simple model of supply and
demand. The analysis has been carried out by Bruno Jullien of
the University of Toulouse. The model is derived by combining
the work of Christensen and Caves (1997) and of Pesendorfer
(2000) on the pulp and paper industry. A demand has been
estimated using two stage least square, accounting for the endo-
geneity and serial correlation of prices and based on quarterly
data starting first quarter 1992 and ending the third quarter
1999. Cost analysis as well as an economic support
for the
analysis of collective dominance has been also carried out by
Professor Jullien.

(35) Source: the data bases have been constructed from the replies to
the different Commission' s questionnaires of phase I and phase
II investigation, OECD data and PPI data base.

(36) Labour has been considered as

the
analysis do not change when marketing and sales are considered
as variable costs along with raw material and energy.

fixed costs. Results of

Figure 7: Average variable cost of SC per firm

Source: reply of the parties and the competitors.

[…]*

Figure 8: Average variable cost of LWC per firm

Source: reply of the parties and the competitors.

L 233/52

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Official Journal of the European Communities

30.8.2002

(93)

(94)

The parties did not share the Commission's preliminary
conclusion that cost
levels were symmetric amongst
producers. In particular, they argue that the data and the
figures provided demonstrate rather that the alleged top-
suppliers have dissimilar cost structures. In addition, it is
noted that in such a situation the more cost-efficient
players will not have an interest to coordinate with the
less cost-efficient since they can afford to compete and
at the same time make profits. Finally, it would appear
that the cost components such as energy, pulp, other
top-
raw material, etc. differ between the different
suppliers. For instance, there is a difference in the cost
structure of
[…]* as compared to […]*, since the
percentages allocated to energy and to the raw material
among the total costs are lower. Energy represents
[…]* % of […]* total costs whereas it represents […]* %
of […]* total costs; […]* raw material represents […]* %
while it represents […]* % for these other two.

The Commission considers that, in the wood-containing
magazine paper market, top-suppliers do not exhibit
wide differences in cost structures, with the exception of
competitor 4. This is already so before the proposed
concentrations, and the situation would not change
much after they are implemented.
In the newsprint
market, both transactions, UPM-Kymmene/Haindl-4 and
symmetry
Norske Skog/Haindl-2, will
between all
structures. However,
although the two transactions will make the cost struc-
tures of the remaining top suppliers of newsprint more
it is recognised that these suppliers might still
equal,
react differently to changes in input prices. Therefore,
the degree of cost
the Commission recognises that
symmetry, especially in the newsprint market,
is not
necessarily conducive to collective dominance.

top-suppliers' cost

increase

the

(95) M u l t i - m a r k e t c o n t a c t s a n d l i n k s :

top-suppliers
usually operate in more than one pulp and paper
product market. For example, all top-suppliers, namely
Stora Enso, UPM-Kymmene, Haindl, Norske Skog, M-
Real/Myllykoski operate in both the newsprint and in
the wood-containing magazine paper market.

(iv) Austria Papier Recycling Ges.m.b.H.

(procurement
of waste paper): Haindl, SCA and Norske Skog
33,3 % each;

(v) Pressretur AB (Sweden): waste-paper

collecting

company; Stora Enso, Holmen, and SCA;

(vi) Keräyskuitu (Finland): DIP plant;

Stora

Enso

(68,1 %) and M-Real/Myllykoski (31,8 %).

(97) Other joint logistics services and distribution facilities

can be mentioned:

(i) Oy Transfennica AB: a shipping company; UPM-
Kymmene (49,91 %), M-Real/Myllykoski (36,65 %);

(ii) Corenso United Oy Ltd: a coreboard, cores and
tubes; UPM-Kymmene (29 %), Stora Enso (71 %);

(iii) distribution agreement between UPM-Kymmene and
M-Real/Myllykoski
at Hull Harbour, United
Kingdom, Tilbury, United Kingdom, and Antwerp
harbour, Belgium;

(iv) Holmen, M-Real/Myllykoski, and SCA long-term

arrangement regarding sea carriage;

(v) Steveco (Finland): a stevedoring company between
Stora Enso, UPM-Kymmene, and M-Real/Myllykoski.

(98)

Top-suppliers also interact with the fringe, in particular:

(i) Metsä-Tissue Oyj: a tissue-paper company: M-Real/

Myllykoski (65,6 %), and SCA (19,2 %);

(ii) Sodipel SA (Portugal): distribution facilities, Norske

Skog has a share participation with SCA;

(iii) Sappin SA (Belgium): purchasing of roundwood and
the Parenco mill)

(that

is,

wood chips; Haindl
(50 %), Sappi (50 %);

(iv) Laakirchen (Austria):

the
procurement of certain raw materials for specific
mills; SCA — Steyrermühl owned by Haindl.

local cooperation for

(96)

Furthermore, Stora Enso, UPM-Kymmene, Norske Skog,
in a
Haindl and M-Real/Myllykoski have joint control
number of firms in relation to inputs and transport:

(i) Oy Metsä-Botnia AB: a chemical pulp mill; UPM-
Kymmene (47 %), M-Real/Myllykoski (46,41 %);

(ii) Sunila Oy: a chemical pulp mill; Stora Enso and

M-Real/Myllykoski 50 % each;

(iii) Paperinkeräys Oy: procurement, processing and
supply of recovered paper; UPM-Kymmene (23 %),
(30,3 %)- Stora Enso (30,4 %);
M-Real/Myllykoski

(99)

In the context of collective dominance, multi-market
contacts may influence strategic behaviours and may
tend to substantially increase the sustainability of coordi-
nation on the markets.

(100) B u y e r p o w e r : the industry is characterised by few
large customers and a large number of small customers.
Both categories usually multi-source. Consequently, top-
suppliers serve a very large number of customers, and
these do not weight much in percentage of their total
sales. Deliveries to their respective Top-10 newsprint
[…]* % of Norske Skog, UPM-
customers represent
Kymmene and Haindl's total sales respectively; deliveries
to their top-five customers are [15 to 20 %]* and [15 to
20 %]* of Stora Enso and Holmen's respective total sales.
Percentages are of the same magnitude in the wood-
containing magazine paper market.

30.8.2002

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Official Journal of the European Communities

L 233/53

(101) The largest customers in the newsprint market such as
News Corp, United Kingdom ([< 5 %]* of the total news-
print deliveries), Associated ([< 5 %]*), Mirror News/
Trinity Mirror, United Kingdom ([< 5 %]*), SPPP, France
([< 5 %]*),
-source from UPM-Kymmene, Stora Enso,
Norske Skog, Holmen, and Haindl, meaning all top-
suppliers. The same phenomenon applies to the wood-
containing magazine paper market where the largest
customers, Axel Springer Verlag ([< 5 %]*), Burda
([< 5 %]*), Gruner + Jahr
IPC Magazines
([< 5 %]*) multi-source from UPM-Kymmene, M-Real/
Myllykoski, Stora Enso, and Haindl. Even the smallest
customers multi-source, although with less suppliers.
However, given the smaller quantities purchased, they
traditionally multi-source from one or two top-suppliers
and from the fringe.

([< 5 %]*),

(102) Beyond this imbalance in importance on both sides
there are two more reasons why buyer power may not
be enough to neutralise possible parallel oligopolistic
behaviour. First, switching to a new supplier takes time
and involves costs. It might be for this reason that some
customers rank continuing business relationships higher
than price. Customers are willing to accept higher prices
in order to continue with existing supply to avoid some
switching costs in changing to new suppliers. One
reason is related to the cost of starting a new long-term
business relationship. It seems also to be that although
standard newsprint is a commodity in the very short-run
it is not fully interchangeable across suppliers. In fact,
output from various suppliers needs to be matched to
each pressroom, and in some cases each press, to obtain
optimum runnability and printability. Parameters which
have to be optimised include paper machine direction
tensile and cores direction tensile as well as elongation,
calliper, stiffness, surface smoothness and oil and water
absorptivity of the paper. Once a customer has opti-
mised the paper quality from a particular machine to the
pressrooms where that quality is to be run he is very
sensitive
supplier. Therefore,
changes of
switching to new suppliers is time consuming and may
increase risks.

to any

(i)

(103) The parties describe the rather cumbersome procedure
of changing suppliers which has to follow several
steps (37):
laboratory tests to confirm the physical
properties of the paper; (ii) preliminary trial run to assess
the paper's
(iii)
extended trial run to confirm runnability; (iv) gradual
volume build-up to accommodate logistic system, ware-
housing, order handling, etc. The process will generally
take several months. Furthermore, it is common that the

runnability and press behaviour;

(37) Form CO UPM-Kymmene/Haindl, p. 85.

introduction of new suppliers and the rejection of estab-
lished suppliers will be phased over a suitable time
period, rather than through sudden switches.

(104) The fact that customers are not only concerned about
price is best illustrated by the fact that, in order to win
new business suppliers normally have to offer significant
discounts. Norske Skog described in its submission dated
24 August how new customers were won by offering an
introduction rebate of [… %]* (38). This example suggests
that customers are rather reluctant to switch to new
suppliers.

(105) The second factor limiting buyer power is that large
customers requiring high volumes face difficulties in
switching significant volumes
to
another. If a large buyer such as Axel Springer or Asso-
ciated Newspapers tried to switch 10 % of their needs
this would be equal to 40 to 50 kt. This would become
in normal business times in which paper machines run
at 90 % or more, extremely difficult if not impossible.

from one player

(106) T e c h n o l o g i c a l d e v e l o p m e n t : paper making is a
process industry. Innovation normally takes place more
in the paper production process and less in the products
Indeed, most of the research and development
itself.
spending is targeted to improve the production process
through improvement
technology and
process control. This kind of research and development
is to a large extent undertaken by and in cooperation
with the manufacturers of paper machines (39) and
benefit all clients (that is to say, the paper suppliers). For
that reason, up-to-date technology is easily available.
This development has helped to bring down costs.

in process

(107)

in the product

Innovations
itself have been made
through the improvement of existing qualities with
regard to brightness and surface. These improvements
also have been brought about by process developments.
The aim is principally to enable products to be used in
higher priced end-uses, therefore repositioning the paper
higher in the market.

(108) B a r r i e r s t o e n t r y a n d e x p a n s i o n : the pulp and
paper industry has the characteristics of a sunk-cost
industry. As mentioned by the parties, there have been
no new entrants into the market for newsprint or wood-
containing magazine for the last five years and entry in
the next years is less likely for the following reasons:
entry is costly and involves high risks and procedures
for changing to new suppliers are usually long.

(38) Reply to Article 6(1)(c) decision, 24 August 2001, p. 17.
remaining
(39) There

paper-machine manufacturers

exist

two

worldwide: Valmet and Voith Sulzer.

L 233/54

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Official Journal of the European Communities

30.8.2002

(109) Fixed costs which are largely sunk costs in this industry, represent on average 45 to 55 % and 35 to
50 % respectively of the total costs of the newsprint and wood-containing magazine paper industry.
New entry cannot be done stepwise. It requires the installation of a new machine, which has usually
a capacity of between 250 000 and 400 000 tonnes. This is equal to 2 to 4 % of demand. A
newcomer can not fine-tune by closing down obsolete machines. Most of the costs incurred are
sunk, and according to historical evidence, it is likely that profits are made only if the new machine
runs at 90 % of its capacity.

(110) The parties claim, however, that there are no barriers to expansion for existing players. A consider-
able percentage of around 50 % of all new capacity between 1999 and 2002 came from small and
medium sized firms. During this period there are five projects: one each by Palm, Norske Skog,
Myllykoski, Enso Stora and Holmen. One of the two projects of the smaller firms is Myllykoski's new
mill
in Germany. This project has been supported by a firm commitment of Axel Springer to
purchase a significant part of its production for a number of years. This comes close to creating
some vertical integration. Only very few customers can afford to buy 50 000 tonnes or more from
one supplier without becoming dependent from that supplier. Similar attempts by Burda and the
WAZ-Gruppe to vertically integrate failed. Therefore, it is rather unlikely that this kind of coopera-
tion will be replicated.

(111) The other project by a small supplier, Palm, would account for around 20 % of new capacity.
Differences however exist with regard to expansion of wood-containing magazine capacities. In the
period until 2003, a larger share of new capacity for SC and LWC grades is to be built by smaller
players as compared to newsprint.

Assessment

A. Impact of the proposed operation on the structure of the newsprint market

(112) The market shares of the major suppliers of newsprint in the EEA can be seen in the following table

(on the basis of the figures for the year 2000) (40):

Company

Capacity in 1 000 t

Market share

Sales in 1 000 t

Market share

Stora Enso

UPM-Kymmene

Norske Skog

Holmen

Haindl

UPM-Kymmene/Haindl

UPM-Kymmene/Haindl — 4

Norske Skog/Haindl — 2

Top four suppliers post-merger.
After both transactions

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[20-25 %]*

[10-15 %]*

[15-20 %]*

[10-15 %]*

[10-15 %]*

[25-30 %]*

[20-25 %]*

[15-20 %]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[20-25 %]*

[10-15 %]*

[10-15 %]*

[10-15 %]*

[5-10 %]*

[20-25 %]*

[20-25 %]*

[15-20 %]*

[70-80 %]*

[60-70 %]*

(40) Capacity figures are given for capacities installed in western Europe. About 10 % of the production is exported.

30.8.2002

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Official Journal of the European Communities

L 233/55

Company

Capacity in 1 000 t

Market share

Sales in 1 000 t

Market share

SCA

Myllykoski

[...]*

[...]*

[5-10 %]*

[< 5 %]*

[...]*

[...]*

[5-10 %]*

[< 5 %]*

Palm

[...]*

[< 5 %]*

[...]*

[< 5 %]*

Abitibi/Bridgewater

[...]*

[< 5 %]*

[...]*

[< 5 %]*

Matussiere & Forest

[...]*

[< 5 %]*

[...]*

[< 5 %]*

Perlen

Other

[...]*

[< 5 %]*

[...]*

[< 5 %]*

[...]*

[< 5 %]*

[...]*

[< 5 %]*

Imports

—

—

[...]*

[5-10 %]*

Total

12 045

100 %

11 720

100 %

Table 2: Market shares in the newsprint market

Source: based upon UPM-Kymmene figures and estimates.

(113) After the first merger, UPM-Kymmene/Haindl would have a market share of [25 to 30 %]* in terms
of capacity and [20 to 25 %]* in terms of sales. Stora Enso will be a close second with [20 to 25 %]*
and [20 to 25 %]* respectively. If the second transaction were to go ahead, UPM-Kymmene's market
share would be [20 to 25 %]* and [20 to 25 %]* respectively, making it number two in the market.
Therefore, single firm dominance as a consequence of either the first or both of the proposed
transactions can be excluded.

(114) The Commission has examined whether the operation may lead to the creation of a collective
dominant position by the four companies UPM-Kymmene/Haindl ([20 to 25 %]*), Stora Enso ([20 to
25 %]*), Norske Skog ([10 to 15 %]*) and Holmen ([10 to 15 %]*), resulting in a four-firm
concentration ratio of [60 to 70 %]* in terms of sales.
In terms of capacities the four-firm
concentration ratio would be [70 to 80 %]*. The fringe would include SCA with [5 to 10 %]*,
Myllykoski with [< 5 %]* and Palm with [< 5 %]* in terms of sales. If also the second transaction
were to be closed the market share of the top four players would become [20 to 25 %]* for
UPM-Kymmene/Haindl-4, [20 to 25 %]* for Stora Enso, [15 to 20 %]* for Norske Skog/Haindl-2 and
[10 to 15 %]* for Holmen.

(115)

I n c r e a s e i n c o n c e n t r a t i o n : the proposed transaction reduces the number of the leading firms in
this industry from 5 to 4. At the EEA level the four-firm concentration ratio will increase from about
[50 to 60 %]* to about [60 to 70 %]* in terms of sales, and from about [60 to 70 %]* to about [70
to 80 %]* in terms of capacities. If it is assumed that the independents contribute zero to the
Herfindahl-Hirschman-Index (HHI), then the HHI would have increased from […]* to […]* after the
first operation or an increase of […]* points in 2000, to […]* after the second operation (∆HHI =
[…]*). Both these estimates of the level of the HHI are conservative estimates, because none of them
include the market share of the smallest. However, the HHI would still be below the threshold of
1800 often regarded as a highly concentrated market.

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(116) E l i m i n a t i o n o f a c o m p e t i t o r : Haindl has been a pioneer in using very high levels of recycled
paper in newsprint production. Haindl is perceived by a certain number of customers as a very
innovative and customer-orientated producer. Its cost structure is somewhat different from the other
top-suppliers, especially in the newsprint market. [Indeed, Haindl
is …]*. Low marginal costs
increase Haindl's market power. The take-over of Haindl would, therefore, remove a significant
independent competitor from the newsprint market.

B. Impact of the operation on the market structure of the market for wood-containing

magazine paper

(117) After the two concentrations, the market shares of the major suppliers of wood-containing magazine
paper in the EEA will be as follows (on the basis for the figures for the year 2000) (41):

Company

Capacity in 1 000 t

Market share

Sales in 1 000 t

Market share

UPM-Kymmene

Stora Enso

M-Real/Myllykoski

Haindl

UPM-Kymmene/Haindl

UPM-Kymmene/Haindl — 4

three

suppliers

Top
post-
merger. After the first transac-
tion

three

suppliers

Top
post-
merger. After the second trans-
action

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[25-30 %]*

[20-25 %]*

[10-15 %]*

[5-10 %]*

[35-40 %]*

[30-35 %]*

[70-80 %]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[20-25 %]*

[20-25 %]*

[15-20 %]*

[5-10 %]*

[30-35 %]*

[25-30 %]*

[70-80 %]*

[...]*

[60-70 %]*

[...]*

[60-70 %]*

Burgo

Norske Skog

Norske Skog/Haindl — 2

SCA

Sappi

Other

Imports

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

—

[5-10 %]*

[5-10 %]*

[10-15 %]*

[5-10 %]*

[< 5 %]*

[5-10 %]*

—

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[5-10 %]*

[5-10 %]*

[10-15 %]*

[5-10 %]*

[< 5 %]*

[< 5 %]*

[< 5 %]*

Total

12 689

100 %

9 677

100 %

Source: Notifying Parties.

(118)

I n c r e a s e i n c o n c e n t r a t i o n a n d r e d u c t i o n o f t h e n u m b e r o f p l a y e r s : as a result of the
first operation, the top three suppliers would have [70 to 80 %]* of such a market in terms of
capacity (UPM-Kymmene [30 to 35 %]*, Stora Enso [20 to 25 %]*, M-Real/Myllykoski [15 to 20 %]*)
and [70 to 80 %]* in terms of sales (UPM-Kymmene [30 to 35 %]*, Stora Enso [20 to 25 %]*,
M-Real/Myllykoski [15 to 20 %]*). If the second concentration takes place, [5 to 10 %]* market share
would be shifted from UPM-Kymmene to Norske Skog, and the top three suppliers would account
for [60 to 70 %]* of the market in terms of capacity and [60 to 70 %]* in terms of sales. If it is
assumed that the independents contribute zero to the Herfindahl-Hirschman-Index (HHI), then the
HHI would have increased from […]* to […]* after the first operation or an increase of […]* points.
The second operation will decrease the HHI down to […] thereby reducing the increase in concentra-
tion to […]*.

(41) Capacity figures are given for capacities installed in western Europe. About 23 % of the production is exported.

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(119) Although the transaction increases the concentration in
the market it diminishes symmetry between the three
top players. After both transactions
the symmetry
between these market players will decrease. UPM, which
prior to the operations has a market share similar to that
of Enso Stora, will increase its market share to emerge as
the market leader. Moreover, if the second transaction
takes place, Norske Skog will become stronger with a
market share slightly higher than that of Haindl prior to
the operations.

(125) However, and after carefully considering the parties'
reply to the Statement of Objections, the Commission
recognises that some elements would not be conducive
to the creation of a collective dominant position. In
particular, the limited stability of market shares, the lack
of transparency on capacity expansion projects prior to
a committed announcement and the lack of symmetry
in cost structures with regard to the various components
point in another direction.

(120)

It should also be noted that the smallest of the three
top-suppliers, M-Real/Myllykoski, consists of two firms
linked by production and sales agreements (see above).
Of the total capacity of […]* kt attributed to M-Real and
Myllykoski […]* kt belong to production joint ventures
between the two companies.
It needs to considered
therefore whether both companies would act as one
with regard to capacity investment decisions in any form
of coordination.

(121) E l i m i n a t i o n o f a c o m p e t i t o r : as in the newsprint
market, Haindl, in the wood-containing magazine paper
market, is perceived by a certain number of customers as
a very innovative and customer-orientated producer. In
the wood-containing magazine paper market, Haindl has
five years as it
been particularly active in the last
increase in capacity.
accounts for [… %]* of the total
therefore, remove a
The take-over of Haindl could,
significant
from the wood-
independent competitor
containing magazine paper market.

(122)

In light of the above elements it is considered that the
proposed operation would lead to changes to the market
structure which make it necessary to examine further
whether they may lead to the creation of a collective
dominant position in the newsprint
and wood-
containing magazine paper markets respectively.

C. The characteristics of

the markets and their

conduciveness to collective dominance

(123) The merger will result in a relatively more transparent
and less uncertain market, which is reflected in the
reduction from respectively five to four top-suppliers for
the newsprint market, from four to three top-suppliers
for the wood-containing magazine paper market. When
examining market characteristics, the Commission has
found some elements that may conduce to collective
dominance and some others that do not.

(124)

In its Statement of Objections, the Commission had
considered that market characteristics were conducive to
collective dominance. The Commission remains of the
opinion that products are sufficiently homogeneous,
demand is highly inelastic, buyer power is limited and
barriers to entry are high.

(126) For the sake of completeness, it is also appropriate to
examine the possible coordination mechanisms analysed
in the statement of objections, and their sustainability,
before reaching a definite conclusion.

D. Possibility of coordination

(127) The possibility of parallel behaviour resulting in a coor-
dinated outcome will depend on the transparency of
investment decisions and the availability of a device that
would allow firms to coordinate. The Commission, in its
Statement of Objections, believed that it had identified
two coordination mechanisms (one in the short-run and
another in the long-run) that would allow top suppliers
to restrict unilaterally their levels of capacity in order to
obtain or maintain artificially high prices. The same
mechanisms were regarded applicable for the two rele-
vant markets: newsprint and wood-containing magazine
paper. The following paragraphs will outline these
mechanisms and explain why they were not ultimately
considered satisfactory to guarantee that coordination
would operate in these markets.

Coordination mechanisms
Objections

identified in the Statement of

(128) As expressed in the Statement of Objections, coordina-

tion would occur through two mechanisms:

— first, through the coordination of investment in new
capacities, in order to limit capacity in the market
place raising thus the level of average prices in the
long-run,

— secondly,

through coordination of output down
times to support short-run prices during a slowdown
of demand (there is no need to coordinate in the
short-run in a period of a high level of demand).

(129) Coordination of

investment

in new capacities was
considered to operate along a process of announcements
and counter-announcements. All market players have a
investment projects, that is to say
series of potential
prospective sites where they could build new paper
machines. Investment decision-making usually involves a
number of parameters, and is ultimately related to return
on investment. The Commission argued in its Statement
of Objections, that a signalling game, by which the top

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players would announce their investment projects, was
the possible tool to facilitate a coordinated outcome.
The members of
the oligopoly would refrain from
investing, or delay their investments, on the basis of the
announcements made by other oligopolists (see para-
graphs 83 and 84), so that new investments would not
damage the common objective, discerned by each of the
producers independently, of reaching lower level of
capacity in the market, and consequently a higher return
on investment (ROI).

have the spare capacity to increase their deliveries to
these customers, for three main reasons: (i) since such a
situation would occur in period of low demand, all the
oligopolists would have sufficient spare capacity; (ii) they
could use swing machines (42) to increase production in
the desired grade; (iii) if this is not sufficient, they could
repatriate some of the amounts devoted to exports back
to Europe (43).

(130) Coordination of output down times was considered in
the Statement of Objections as an additional mechanism
which might sustain tight capacity levels during the
periods of the economic cycle when demand is low.
During these periods, it is indeed possible that market
capacity becomes notably superior to the demand, with
the possible consequence of a large price decrease. Coor-
dination of down times, temporary closure of paper
machines, would temporarily reduce supply in the
market. Whether through announcements, or through
the array of information about down time available in
the market, each of the oligopolists in newsprint and
wood-containing magazine paper would determine that
they ought to stop their machines instead of producing
paper that would run the risk of lowering market prices.

(131)

In the Statement of Objections, the Commission consid-
ered that coordinated outcome would be sustained in
particular because of the availability of retaliation mech-
anisms. Regarding coordination on investments in new
capacities, the retaliation mechanism would lie in the
very threat that other oligopolists would engage in an
investment race, which would result in over-capacity, in
prices collapsing and ultimately in low profitability for
the whole industry. Such a threat would be a sufficient
deterrent
to refrain from deviating. The
Commission had also considered whether coordination
could also be supported by the retaliation mechanism
explained in the next paragraph.

firms

for

(132) Regarding coordination on down times, the retaliation
mechanism would lie in the other oligopolist
firms
targeting the deviator's customers. The oligopolists
would offer lowered prices on an individual basis to the
customers of the deviator, in order to destroy the profit
margins of the latter. This would be feasible because top
players would have sufficient information about who the
customers of the deviator are and because they would

Reply to the Statement of Objections and conclusions of the
Commission

(133)

In their reply to the Statement of Objections, the parties
explored the issues regarding the feasibility and the
sustainability of coordination either of investments in
new capacity or of output down time. They provided
extensive arguments against the possibility for the mech-
anisms outlined above to result in tacit coordination.
They essentially argued that coordination was not
feasible and that it was not sustainable either, both as
regards investment
in new capacity and down time.
After carefully reviewing their arguments, the Commis-
sion concludes that coordination on investments would
likely not be achieved. However, it finds that coordina-
tion on down time might be a possibility in the markets
for newsprint and wood-containing paper.

(134) Regarding coordination on investment in new capacity,
the parties expressed the view that this mechanism was
not feasible for three main reasons. First, the parties
consider that reaching a coordinated outcome would be
impossible, especially in a tacit manner. The parties
mentioned the difficulty in defining investment, since
there exist rebuilds and creep, in forming an investment
rotation schedule, and in agreeing on the capacity divi-
sion between themselves. Secondly, the parties argued
that announced investments are irreversible, and conse-
quently that there is no room for a signalling game.
Finally, they argued that there is not sufficient transpar-
ency in the market before the moment of a committed
investment for any tacit agreement to being reached.
The parties also developed the argument that coordina-
investments in new capacity would not be
tion of
the incentives to
sustainable,
cheat and the lack of credible punishment.

for two main reasons:

(42) Three of

the top-suppliers have swing machines (Stora Enso,
Haindl and Myllykoski). After
the two mergers both UPM-
Kymmene and Norske Skog would also have swing machines.
Swing machines are paper machines which are able to produce
either newsprint or magazine paper (in most cases SC-B). The
time needed to implement a swing is limited (from a couple of
hours to 1 to 2 weeks) and costs are not great. The advantage
is to have more flexibility to shift capacities from one paper
grade to another. As mentioned by the parties, the impact of
swing machine on existing capacity may be significant. Such
swing capacities may provide a possibility for short-run retalia-
tion measures among the top-suppliers.

(43) In the EEA, 10 % of newsprint production is exported; more
than 20 % of wood-containing magazine paper production is
exported.

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it

competitors,

announcements,

to make meaningful

(135) The Commission, after examining the elements brought
forward by the parties, concludes that
is highly
improbable that oligopolists would be able to use
announcements to coordinate tacitly on investments in
new capacity. Because of a lack of transparency, it is
unlikely that coordination would be achieved nor
sustained. First, to achieve coordination, that is to be
able
and
announcements that would have an impact on the
behaviour of other
the Commission
considers that the oligopolists would require sufficient
transparency in order to judge whether a project would
have the required rate of return. Otherwise, announce-
ments would not be taken seriously by the other firms
and would not have any impact on their investment
decision-making. This does not seem to be the case.
Moreover, relatively few announcements are made in
Europe and most announcements are carried out, as
opposed to the situation in the United States of America.
Secondly, to sustain coordination, that is, to prevent any
member of the oligopoly from investing too much or
too soon, the oligopolists would need to pre-empt any
deviation from the tacitly agreed objective.
In other
words, they would need to be able to detect any poten-
tial deviator and to restrain deviation through some
credible punishment threat. However, the investigation
showed that it is very unlikely that the oligopolists could
become aware of an investment project by a firm
deviating from the tacit coordination objective, before
the investment is made irreversible. Without sufficient
transparency, this means that any announcement made
by the oligopolists would not succeed in putting off
unwanted investments. Once investment is committed,
threat would loose its credibility,
any punishment
because it would be too costly to pursue.

(136) Regarding coordination on down times, the parties first
argued that this mechanism had no impact on prices (44).
They then claimed that it is not possible to either define
or detect down time, because of a lack of transparency.
They sustained that down time may take so many forms
that it would not be possible for firms to recognise
when to coordinate; it would also be very difficult to
define an optimal operating rate at a given time. They
also said that it is not possible to detect a deviator.
Consequently, there would be high incentives for the
oligopolists to cheat, as soon as they have an oppor-
tunity to do so. Finally, they argued that the punishment

(44) Norske Skog-Lexecon (p. 31)

contracts are concerned,
affecting prices’.

stated that

far as yearly
there is no possibility of down time

‘As

of a deviator from an agreement on down time would
be extremely costly and not credible.

(137) However, the Commission does not share the view of
the parties that parallel strategies involving decisions on
down time are not possible in the newsprint and wood-
containing magazine paper markets respectively. First,
the Commission does not agree that down time has no
impact on prices. In fact UPM-Kymmene admits it when
it says that ‘down time may slow the decline of prices in
a market of falling demand’ (45). Then, it is difficult to
argue that down time can be hidden from market
players, since there is transparency on down time
through various channels. Suppliers normally tell their
customers about forthcoming down time on machines
which supply such a particular customer. This has been
confirmed by a submission of one of the major competi-
tors. Owing to customers' multi-sourcing policies, the
oligopolists very often deliver to the same clients. More-
over, there are statistics available in the market about
stock levels and down time levels.

(138) Secondly, the Commission considers that the available
retaliation tools are credible. When a competitor devi-
ates,
the remaining top-suppliers can take aggressive
actions without having to change prices for all their
remaining customers. This may induce some customers
to switch all or part of their demand away from the
deviator and to substitute supply from the other top-
suppliers, and may drive down the price paid by impor-
tant customers of
the deviator. Moreover, and as
explained in the Statement of Objections, in a period of
low demand, capacities are available if needed to
support retaliation. These capacities may be used to
target
important customers of a deviator without
affecting the whole market. This is credible as the main
customers of the top-suppliers are usually well-known
by the other ones. This can be seen from the CO Form
by UPM-Kymmene where the main customers of the
UPM-Kymmene and their corresponding suppliers, other
than the UPM-Kymmene, are listed. Moreover,
the
number of swing machines and their corresponding
capacities are not marginal and export sales are not
mainly based on long-term contracts. Both can be used
as potential sources of capacities and therefore as a
credible punishment device. Finally, the parties failed to
explain why the CEOs of several major paper producers
tell the public in various fora that they are prepared to
take down time if needed to maintain the balance
between supply and demand.

(45) UPM-Kymmene, response to the SO, p. 11.

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(139) The Commission concludes that the mechanism identi-
fied above for the coordination of investments would
not sustain the creation of a tacit coordination in the
markets for newsprint and wood-containing magazine
paper respectively. However, it maintains that tacit coor-
dination of down time cannot be excluded as a possible
coordination mechanism, which could support the crea-
tion of a collective dominant position of
the top-
suppliers in newsprint and wood-containing magazine
paper. However, as explained in the following para-
graphs, any such coordination would likely be under-
mined by the action of fringe players.

to treat Norske Skog as genuine
appropriate not
competitor
the wood-
to the merged entity for
containing magazine paper market, where it is not part
of
it
the identified group of oligopolists. Seemingly,
would not be appropriate not to treat M-Real/Myllykoski
as genuine competitors to the merged entity for the
newsprint market, where they are not part of the identi-
fied group of oligopolists. These elements, combined
with the limited symmetries of market shares identified
in the market characteristics, could limit the incentives
for these firms to coordinate their behaviour with other
oligopolists.

The fringe players' ability to challenge the top-suppliers' anti-
competitive behaviour

(140) The Commission argued in the Statement of Objections
that the fringe players could have little incentive to
challenge the top-suppliers, especially since they would
benefit from a higher level of average prices. It also
argued that Norske Skog would be reluctant to break the
discipline
in the wood-containing magazine paper
market because of its possible negative repercussion in
the newsprint market. Conversely, M-Real/Myllykoski
would be reluctant to break the coordination in the
newsprint market. However, after a careful examination
of these various competitors, it appears unlikely that the
top-suppliers would be in a position of simply disci-
plining a series of firms that can not reasonably be
qualified as fringe players because of their actual market
position.

(141) First of all, the position of Norske Skog and M-Real/
Myllykoski ought to be re-examined in the light of some
elements brought forward during the hearing. First,
it
appears that Norske Skog is itself an example of how a
relatively small paper producer can increase its market
shares and become a leading worldwide player. This is
what
from
this company achieved within 15 years,
being a medium player in Norway to becoming one of
the global leaders in newsprint. Such an example contra-
dicts the description given by customers that small
paper producers do not have the means to compete in
the newsprint or wood-containing magazine paper
markets. Moreover, the past history of Norske Skog's
aggressive growth questions the proposition that this
company would radically change its strategy after the
merger and stop investing or acquiring new business.
Secondly,
it appears that M-Real/Myllykoski may not
operate as a single entity with regard to investment
decision-making. These companies provided some docu-
ments indicating that they had separate investment poli-
cies.
their
respective capacity in wood-containing magazine paper
would be closer to the one of Burgo and SCA than to
the one of
top players like UPM-Kymmene. Conse-
quently, the Commission considers that it would not be

they were to be considered separately,

If

(142)

In any case, the Commission believes that the remaining
fringe players can play an active role in their respective
markets and make tacit coordination unsustainable. The
most important fringe players are SCA, Myllykoski, Palm
and Abitibi/Bridgewater in the market for newsprint and
Norske Skog, Burgo and SCA in the market for wood-
containing magazine paper. These players could break
tacitly coordinated behaviour by
the major players'
increasing production when each of the oligopolists,
individually perceiving their common interest in doing
so, would try to shut down their machines temporarily,
the definition of down time. As can be briefly illustrated,
these firms would have the means to take advantage of
the tacit coordination among top players, to improve
their competitive position, and increase their market
shares.

(143) SCA is a medium-size player with [5 to 10 %]* of
market share in both markets focusing on higher margin
markets such as tissue. The Commission argued in the
Statement of Objections that it is not committed to
newsprint and wood-containing magazine the same way
and, because of SCA's links with the top-suppliers that it
may have limited incentives
to challenge the top-
suppliers. However, SCA argued at the hearing that it
remained committed to the newsprint markets and was
considering new investment.
Indeed, SCA has been
rumoured to be considering building a new newsprint
machine at its Aylesford, United Kingdom, mill. There-
fore, the Commission recognises that SCA may be able
to challenge the top-suppliers' anti-competitive behav-
iours in particular in the newsprint market.

(144) Palm is an active regional player supplying mostly
southern Germany. It has invested in a new newsprint
machine which came on stream in 1999 expanding its
capacity from 150 to […]* kt increasing thus substan-
tially its market position up to [< 5 %]* of the newsprint
market. In their reply to the Statement of Objections, the
parties confirm that such new newsprint machine was
unexpected by the industry. Therefore, the Commission
considers that it is likely that Palm would be able to
challenge the top-suppliers especially at its regional level.

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is

(145) Burgo exhibited high costs and therefore was unlikely to
effectively challenge any collective dominant position in
the recent past. This
indeed confirmed by the
declining of its market shares in the last two years from
[5 to 10 %]* to [5 to 10 %]*. However, in the next two
invest in new machines and indeed
years, Burgo will
would be able to bring substantial new capacities
in the wood-containing magazine market.
(400 kt)
Investment
in new machines would lead to lower
marginal costs and raise it s ability to challenge the
top-suppliers.

(146) The Commission thus recognises that several medium
players are non negligible in terms of market positions
and that their investment policy in new machines has
been important in the recent past and may be also
substantial

in the next years.

(147) The fringe players in the two markets would be able to
make a parallel strategy of coordination on down time
unsustainable. If for instance, the top suppliers in the
market for newsprint were to coordinate on down time
by curtailing production in times of low demand, the
fringe would be able to counter such a move by
increasing its production. Looking at historic data the
utilisation rates of the fringe players is not significantly
different from the industry average. In the past, when
demand was at a low, capacity utilisation rates in the
industry have been, according to Cepiprint, of 90 % or
less. Applying this rate for the current installed capacity
would mean that at least around 260 000 tonnes of
spare capacity would be in the hands of the fringe
players in a period of low demand. As explained earlier,
the parties' and the Commission's economic experts
have estimated the elasticity levels of the two markets to
be between 0,1 and 0,3. For an elasticity of demand of
0,1 this tonnage would be sufficient to offset a price
increase of 22 %. The figures for an elasticity of 0,2 and
0,3 would be 11 % and 7 % respectively. Therefore,
curtailing production by taking down time would not be
a viable strategy in view of the possibilities for the fringe
to increase production almost
immediately through
higher capacity utilisation rates. Moreover, within a year,
the fringe would be able to increase production through
capacity creep and rebuilds. And over a two-year period,
some fringe players could have introduced a new paper
machine in the market.

(148) Therefore,

the Commission can conclude that

these
small and medium players cannot be considered as
marginal players. Indeed, they would be able to bring
new capacities in the newsprint and in the wood-
containing magazine markets as well as to take advan-

tage of an artificially created short-term shortage by
increasing their production. Therefore, the fringe would
be able to challenge the top-suppliers.

V. CONCLUSION

(149)

In particular in the light of the arguments presented by
the parties in response to the Statement of Objections,
relating in particular to the degree of concentration of
market shares attained, the size and competitiveness of
the medium-sized players and the problems identified
above in relation to possible coordination on capacity,
the Commission considers that the notified concentra-
tions will not create collective dominant positions in the
market for newsprint and wood-containing magazine
paper in the EEA.

(150)

In conclusion, the notified operations will not create or
strengthen a dominant position in any market as a result
of which effective competition would be significantly
impeded in the common market or in a substantial part
of it. The operations are, therefore, compatible with the
common market and the functioning of the EEA Agree-
ment,

HAS ADOPTED THIS DECISION:

Article 1

The concentrations notified by the parties on 20 June 2001
relating to the takeover of Haindl'sche Papierfabriken KGaA by
UPM-Kymmene and the subsequent sale of two of the Haindl
mills, Parenco and Walsum, to Norske Skogindustrier ASA are
compatible with the common market and the functioning of
the EEA Agreement.

Article 2

This Decision is addressed to:

The notifying parties

Done at Brussels, 21 November 2001.

For the Commission

Mario MONTI

Member of the Commission