2007/163/EC: Commission Decision of 10 July 2006 declaring a concentration compatible with the common market and the functioning of the EEA Agreement (Case COMP/M.4000 — Inco/Falconbridge) (notified under document number C(2006) 3052) (Text with EEA relevance )
Date: 2006-07-10
Institutions: European Commission
Subjects: cobalt, economic concentration, merger control, mining industry, nickel

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(Acts adopted under the EC Treaty/Euratom Treaty whose publication is not obligatory)

II

DECISIONS

COMMISSION

COMMISSION DECISION

of 10 July 2006

declaring a concentration compatible with the common market and the functioning of the EEA
Agreement
(Case COMP/M.4000 — Inco/Falconbridge)

(notified under document number C(2006) 3052)

(Only the English version is authentic)

(Text with EEA relevance)

(2007/163/EC)

On 4 July 2006 the Commission adopted a Decision in a merger case pursuant to Council Regulation
(EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (1),
and in particular Article 8(2) of that Regulation. A non-confidential version of the full Decision can be
found in the authentic language of the case and in the working languages of the Commission on the
website of the Directorate-General for Competition, at the following address: http://ec.europa.eu/comm/
competition/index_en.html

(1)

(2)

(3)

I. SUMMARY

This case concerns the acquisition by Inco Ltd (Inco,
Canada) of Falconbridge Ltd (Falconbridge, Canada).
Both companies are active worldwide in the mining,
processing, refining and sale of various nickel products,
copper, cobalt and precious metals.

Inco is an international mining company principally
active in the mining, processing, refining and sale of
various nickel products, copper, cobalt and precious
Inco’s worldwide
metals as well as sulphur products.
sales in 2004 were EUR 3 439 million. Inco’s activities
are mainly focused on nickel, which accounted for 83 %
of its total sales while copper accounted for 9 %, cobalt
for 1 % and precious metals for 5 %.

Falconbridge is an international mining company prin-
cipally active in the mining, processing, refining and sale
lead, zinc,
of various nickel products, copper, cobalt,
sulphur
aluminium and precious metals as well as

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

(4)

(5)

products. Falconbridge generated in 2004 worldwide
sales of EUR 5 610 million. Half of its sales related to
copper, 26 % to nickel, 14 % to aluminium, 6 % to zinc
and 2 % to cobalt.

On 11 October 2005, Inco announced its intention to
acquire, by way of a public bid, all of the outstanding
shares of Falconbridge. Under the proposed transaction,
Inco will acquire sole control over Falconbridge.
It
the
constitutes
therefore
meaning of Article 3(1)(b) of
the Merger Regulation.
The notified operation is therefore a concentration.

concentration within

a

the trans-
investigation has revealed that
The market
action, as notified, would significantly impede effective
competition on the market for the supply of nickel to
the plating and electroforming industry in the EEA, and
on the global markets for the supply of high-purity
nickel
for the production of super alloys/super alloys
used in safety critical parts and for the supply of high-
purity cobalt for the production of super alloys used in
safety critical parts. Post merger, the new entity would
have become by far the largest supplier in the EEA of

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to the plating and electroforming
nickel products
industry and the almost monopolistic supplier of high-
purity nickel used in super alloys and of high-purity
cobalt for super alloys used in safety-critical applications.
The investigation has indicated that the new entity would
have had the ability and incentive to increase prices on
these markets in the absence of any significant compe-
titive constraint. It was also discovered that the efficiency
gains brought about by the proposed transaction would
most likely not benefit directly consumers and would
thus not counteract the adverse effects on competition.

(6)

(7)

commitments. After

In order to remove the competition concerns identified
during the procedure, the parties submitted on 16 March
extensive
2006 a package of
the parties subse-
discussions with the Commission,
quently submitted a revised remedy package on 5 April
2006. The revised remedy package was the subject of a
market test with third parties. On 7 June 2006, the
parties
submitted a revised remedy package. These
commitments were slightly amended thereafter. A final
version was submitted by the parties on 26 June 2006.

In the final commitments submitted by the parties, the
parties undertake to divest the Falconbridge’s Nikkelverk
refinery in Norway together with related assets (divested
business) to a company active in metal mining and/or
processing with sufficient nickel resources to sustain the
viability of the refinery. In addition, on 7 June 2006,
Falconbridge entered into a binding agreement with
LionOre Mining International Ltd (LionOre) for the sale
of the divested business. On 7 June 2006, the parties
requested the Commission to approve LionOre as a
suitable purchaser
the divested business. The
Commission believes that the undertakings are sufficient
to remove the anticompetitive concerns stemming from
the transaction and that LionOre is a suitable purchaser
for the divested business.

for

(8)

A clearance decision with conditions and obligations
pursuant
the Merger Regulation is
therefore proposed for adoption.

to Article 8(2) of

II. EXPLANATORY MEMORANDUM

1. The relevant product markets

(9)

The proposed transaction concerns the nickel and cobalt
sectors. The parties claim that
the relevant product
markets are the supply of nickel and the supply of
cobalt. However,
investigation has clearly
shown that
is appropriate to define the relevant
nickel and cobalt product markets according to end

the market

it

size

in particular

and shape of

applications. First, demand patterns differ significantly
between end applications,
in terms of
the products, delivery
purity,
requirements and structure of
the demand; secondly,
nickel producers are to a large extent specialised in
supplying certain end applications; and thirdly, finished
nickel product prices appear to differ according to the
application.

(10)

The market investigation confirmed that relevant product
markets are the following:

(i) the supply of nickel
forming industry;

to the plating and electro-

(ii) the supply of high-purity nickel for the production
of super alloys/super alloys used in safety critical
parts;

(iii) the supply of high-purity cobalt for the production

of super alloys used in safety-critical parts.

A. The supply of nickel

to the plating and electroforming

industry

(11)

The plating process is used to coat an object in the
desired metal by passing electric current
through a
suitable solution (the electrolyte). Electroforming allows
covering various types of moulds with shapes or thin
metal deposits.

(12)

(13)

Plating

customers
in terms of purity,

The market investigation has shown that only specific
finished nickel products can be used for plating and
specific
electroforming.
requirements
and
packaging. Sales of nickel products for plating and elec-
troforming are usually made via distributors. The market
investigation has shown that the fragmented structure of
the demand implies the need for a nickel supplier to
develop and maintain a sales network of distributors.

have
shape,

size

From the supply-side perspective, not all nickel suppliers
are capable of supplying nickel products to the plating
and electroforming industry and certain producers,
in
particular the parties, have developed specific products
for
supplier not yet
active in the business would need to make significant
investments to be able to supply the wide range of
nickel products used in the plating and electroforming
applications.

this end application. A nickel

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(14)

In addition, the parties’ internal documents also point to
the existence of a distinct product market with distinct
pricing and marketing policies from other applications of
nickel.

for the production of super alloys used in critical appli-
cations. Producers of super alloys used in critical appli-
cations cannot substitute any other cobalt product with a
lower quality and/or different chemical composition.

(15)

(16)

B. The supply of high-purity nickel for the production of super

alloys/super alloys used in safety-critical parts

Super alloys are used in applications requiring operation
in high-temperature and high-stress environments. Such
applications include, in particular, the aerospace, power
generation and medical industries. A specific category of
super alloys are super alloys used in safety-critical
rotating parts, for example turbine engine blades and
discs for jet aircrafts.

The market investigation has shown that not all finished
nickel products from any supplier can be used inter-
changeably for
the production of super alloys, and
even less so as regards super alloys used in safety
critical parts due to the high purity of nickel required
(very low level of impurities and trace elements) and the
need for certification and traceability.

(17) As regards supply-side substitutability, not all nickel
producers can produce high-purity nickel suitable to
manufacture super alloys/super alloys used in safety-
critical parts. The comparison of the specifications of
the finished nickel products of a range of nickel
suppliers and the specifications required by a range of
super alloy producers shows that only very few suppliers,
including the parties, are able to produce finished nickel
products with a sufficient purity to meet the specifi-
investi-
cations of super alloy producers. The market
gation has also revealed that there were high barriers
to entry in this product market.

C. The supply of high-purity cobalt for the production of super

alloys used in safety critical parts

(18) A particular end application of cobalt is the production
of super alloys, a specific category of which are super
alloys used in safety-critical applications. Super alloys are
one of
cobalt,
end-use
accounting for 20 % to 25 % of total cobalt demand.

applications of

the major

(19)

The market investigation has indicated that not all cobalt
products suitable for use in super alloys meet the speci-
fications for high-purity cobalt for super alloys used in
safety-critical
a very specific
demand for high-purity cobalt — defined by its precise
chemical composition and low impurity levels — used

applications. There

is

2. The relevant geographic markets

(20)

The market
geographic markets are the following:

investigation confirmed

that

relevant

(i) the market for the supply of nickel products to the
plating and electroforming industry has a regional
geographic dimension (EEA wide);

(ii) the market for the supply of high-purity nickel for
the production of super alloys/super alloys used in
safety-critical parts has a worldwide geographic
dimension;

(iii) the market for the supply of high-purity cobalt for
the production of super alloys used in safety critical
parts has a worldwide geographic dimension.

3. Affected markets

A. Supply of nickel to the plating and electroforming industry

(21) After the transaction, New Inco will become by far the
largest supplier of nickel products to the plating and
electroforming industry, with a combined EEA-wide
market share of 70 % to 80 % and sales more than
five times as high as its closest competitor (1).

(22)

(23)

investigation has shown that

the other
The market
producers of nickel
for plating and electroforming
cannot exercise competitive constraints on New Inco,
either because they lack sufficient capacity and suitable
technology, or either because they are not active in the
EEA. Distributors and customers have confirmed that
OMG would be the only real alternative supplier to
New Inco. However, OMG’s difficulties in sourcing inter-
mediate products (feed) and its tolling agreement with
Inco considerably reduce the competitive constraint that
OMG could exercise on New Inco.

Internal documents provided by the parties also indicate
that Inco and Falconbridge are the closest competitors
for the supply of nickel products used in the plating and
electroforming industry. Furthermore, these documents
also confirm that
the parties are the market drivers,
having the greatest range of nickel products for plating
and electroforming (different
shapes and sizes) and
reputation in the market
brands with exceptional
(‘must have’ brands).

(1) In the EEA, the parties currently face very limited competition from
OMG (14 %), Eramet (5 %) and to a lesser extent Anglo American
(2 %).

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(24) New Inco will thus become the only supplier capable of
offering a unique range of products to the plating and
electroforming industry. Following the transaction, New
Inco will therefore have the power to increase unilaterally
prices for nickel products, while facing limited compe-
titive pressure from any other existing or potential
suppliers of nickel products to the plating and electro-
forming industry.

safety-critical applications. The market investigation has
revealed that no other cobalt producer is and will be able
to match the unique strengths of New Inco in terms of
high purity
cobalt
and consistent quality of
production, its production capacity, and excellent repu-
tation on the market for the supply of high-purity cobalt
for the production of super alloys used in safety-critical
parts. Therefore, no other cobalt producer will be able to
exercise any significant competitive constraint on New
Inco.

its

(29)

B. Supply of high-purity nickel

for the production of super

alloys/super alloys used in safety-critical parts

(25) New Inco will become by far the largest and almost
monopolistic supplier of high-purity nickel used in
super alloys, with a market share of 80 % to 95 %
globally. Competition in the super alloy market has
been basically driven by the rivalry between Inco and
Falconbridge. The position of New Inco will be very
strong as no other nickel supplier is or will be able to
match the unique strengths of New Inco in terms of
product quality, production capacity and reputation on
the market for the supply of high-purity nickel used for
the production of super alloys/super alloys used in
safety-critical parts. Most super alloy manufacturers and
customers expressed concerns about
the transaction,
which will reduce the number of suppliers of high-
purity nickel
leaving New Inco
facing mostly Eramet only.

from three to two,

for

suitable

supply of high-purity cobalt

There are significant barriers to entry into the market for
the
the
production of super alloys used in critical applications.
Given the importance of these barriers, constraints on
the future behaviour of New Inco by potential compe-
tition are likely to be minimal. Thus, as a result of the
merger, New Inco will be able to increase unilaterally
prices
required for
for high-purity cobalt products
super alloys used in critical applications.

D. Restriction of global nickel supply

(26) Given the significance of barriers to entry in the high-
purity nickel market (notably borne out by the absence
of entry at least during the past 10 years), constraints on
the future behaviour of New Inco by potential compe-
tition are likely to be minimal. As a result of the merger,
New Inco will be able to increase unilaterally prices for
high-purity nickel. This is particularly so in a context
is strongly
where the demand for high-purity nickel
increasing and high-purity nickel supply is extremely
tight, due
faced by other
suppliers.

to capacity constraints

in particular

(30) Certain third parties contended that New Inco would
its
have the ability and incentive to delay part of
nickel-mining projects,
the Koniambo
project and that this would have an impact on nickel
LME prices. However,
investigation has
shown that New Inco would neither have an economic
interest in delaying a mining project at an advanced stage
of development
(ramp up or committed) due to the
significant financial cost incurred nor to delay an early
stage mining project (potential) as the benefits of such
announcement, in terms of higher LME prices, are highly
speculative and certainly very limited in time.

the market

C. Supply of high-purity cobalt for the production of super

alloys used in safety-critical parts

(31)

(27) New Inco will become the almost monopolistic supplier
of high-purity cobalt
for super alloys used in safety-
critical applications. As in the market of the supply of
high-purity nickel, competition on the market for the
supply of high-purity cobalt used in super alloys for
safety-critical parts is driven by the rivalry between
Inco and Falconbridge.

(28) New Inco’s position will be very strong as very few
suppliers produce high-purity cobalt meeting the strict
specifications of manufacturers of super alloys used in

E. Efficiencies

The parties submit that the proposed transaction would
generate efficiency gains arising primarily from the close
proximity of their respective mines/processing facilities in
the Sudbury basin, which would help them to optimise
their mining and processing operations. This would
allegedly result
in increased production at lower cost
and would benefit all nickel customers. However, the
parties have failed to demonstrate that the efficiencies
brought about by the proposed transaction are not
attainable with a less anti-competitive alternative and
in the three
would directly benefit end customers
relevant product markets where competition concerns
have been identified. For these reasons, the efficiencies
presented by the parties cannot be considered to offset
the adverse effect of the proposed transaction on compe-
tition.

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F. Conclusion

(37)

therefore, concludes that

The attached Decision,
the
notified concentration is likely to significantly impede
effective competition,
the
creation of a dominant position, and appears incom-
patible with the Common Market and the functioning
of
the three
relevant markets.

the EEA Agreement as regards each of

in particular as a result of

(32)

(33)

4. Commitments offered by the Parties

In order
to address the aforementioned competition
concerns in the markets for the supply of nickel to the
plating and electroforming industry in the EEA, for the
supply of high-purity nickel for super alloys/super alloys
used in safety-critical parts worldwide, and for the supply
of high-purity cobalt
for super alloys used in safety-
critical parts worldwide, the Parties have submitted the
undertakings described below.

(34) Under the undertakings, the parties commit to divest
Falconbridge’s sole refinery, the Nikkelverk refinery in
Norway,
together with the related feed procurement
entity and existing third-party feed supply agreements,
related marketing organisations and existing customer
contracts, Falconbridge’s proprietary refining technology
and trademarks (the divested business)
to a suitable
purchaser, having access to sufficient feed resources to
sustain the economic viability of Nikkelverk. In addition,
the parties undertake to offer the purchaser to enter into
a 10-year flexible feed supply agreement, covering a
substantial part of Nikkelverk’s feed requirements.

(35)

Falconbridge

entered into a binding
In addition,
agreement with a third party company, LionOre,
for
the sale of the divested business. The parties requested
the Commission to approve LionOre as a suitable
purchaser for the divested business.

The proposed remedy therefore removes the entire quan-
titative overlap between Inco and Falconbridge on the
three markets where competition concerns have been
the divested business will
identified. Provided that
it will thus
operate as a viable and competitive entity,
take over Falconbridge’s market position in the three
relevant markets and restore the effective competition
prevailing thereon prior to the proposed transaction.

The investigation has, however, shown that the essential
issue for the assessment of the proposed remedy is the
ability of the divested business to secure a long-term
source of nickel
feed suitable for the production of
high-purity nickel on a consistent basis, at economically
attractive conditions. If this condition is not satisfied, it is
the divested business will be a weak and
likely that
vulnerable competitor on the relevant markets, unable
to effectively compete with New Inco.

the vertical

shown that

The assessment of the current structure of the nickel
integration of
industry has
mining, processing and refining facilities was the predo-
minant business model. There is currently no stand-alone
refinery in the nickel industry and the few refineries that
source third-party feeds also own interests in mining and
processing facilities. This situation is not expected to
change significantly by 2015 as the vertically integrated
business model is an efficient response to the need for
refineries to secure stable feed sources in the long term.

intermediate nickel products,

Therefore only a purchaser, with experience in mining
to mines and
and processing of nickel and access
sufficient
could bring
sufficient comfort as
to ability and incentive of a
purchaser for the divested business to restore compe-
tition in the long term. This is strongly supported by
the
investigation on the
remedies carried out by the Commission.

from the market

results

(38)

(39)

(40)

5. Assessment of the commitments submitted

(36) Nikkelverk is Falconbridge’s only refinery and produces
all the nickel products supplied by Falconbridge to the
plating and electroforming industry, all the high-purity
nickel products sold by Falconbridge for the production
of super alloys and all the high-purity cobalt products
supplied by Falconbridge for the production of super
alloys used in safety-critical parts.
the
divested business includes all the Falconbridge entities
in charge of the marketing and the sale of these nickel
and cobalt products.

In addition,

(41) As regards cobalt, contrary to the nickel industry, vertical
integration is not the prevailing business model
in the
cobalt industry, with significant trading of cobalt inter-
mediates. Over 50 % of Nikkelverk’s cobalt production is
sourced from third parties. Falconbridge refines custom
feed, including cobalt contained in the matte purchased
from BCL, and cobalt intermediates from Australia and
Africa, under both feed-purchase
and toll-refining
arrangements. In addition, for a period up to 10 years,
New Inco has committed to supply the divested business
with similar quantities of cobalt feed as those currently
supplied by Falconbridge to Nikkelverk.

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(42)

(43)

(44)

(45)

(46)

that

final

commitments provide

to sustain the economic viability of

the divested
The
business will be sold only to a company active in
metals mining and/or processing with sufficient nickel
resources
the
divested business upon the expiry of the Matte Supply
Agreement with New Inco. The level of 55 000 MT per
to
year, which
Nikkelverk,
relevant
benchmark.

Falconbridge
is mentioned by

currently

Inco as

supplies

a

(47)

This provision fully addresses the Commission’s concerns
as regards the viability and the competitiveness of the
divested business as it clearly provided for sufficient
feed
assurance
supply. The Commitments are therefore suitable to
entirely remove all the competitive concerns identified
above.

to the divested business nickel

as

In addition, the conditions of the 10-year flexible feed
supply and the pricing mechanism proposed in the final
version of the Commitments have been found to be
sufficient to protect the viability and competitiveness of
the divested business if it is sold to a company already
active in metal mining.

(48)

6. Suitability of the proposed purchaser

is a mid-
LionOre Mining International Ltd (LionOre)
sized producer of nickel with operating mines
in
Botswana, South Africa, and Australia and in several
in these regions. LionOre’s current
mining projects
mines and mining projects are all sulphide mines. The
company has been in the nickel business since 1996,
producing about 29 000 MT of nickel in 2005, and is
the 10th largest nickel producer in the world.

working towards becoming a fully integrated nickel
producer
through its Activox technology, LionOre
currently only produces nickel concentrate (1), and does
not have any refining capabilities. The total proven nickel
resource base of LionOre amounted to 2,3 million MT at
the end of 2005.

In line with general principles and with the criteria set in
the commitments, it must be assessed whether, after the
acquisition of the divested business, LionOre will become
an independent competitive force on the markets where
competition concerns have been identified. In particular,
an assessment was made of whether LionOre is/will
remain independent of Inco/New Inco and has sufficient
financial resources to acquire the divested business. This
implies focusing on how LionOre could integrate its
and future-nickel mining operations with
existing
Nikkelverk and on whether LionOre
could supply
sufficient quantities of feed to Nikkelverk to sustain the
economic viability of the divested business at the expiry
of the Matte Supply Agreement, as provided for in the
commitments.

It

and the

suitability of

LionOre meets all the criteria in the commitments for
the
generic
the purchaser
conditions set by the Commission for the suitability of
the purchaser in a divestiture remedy.
is therefore
concluded that LionOre is a suitable purchaser for the
divested business and that
it will ensure the inde-
pendence, viability, and competitiveness of the divested
business in the long term. LionOre combines a number
of characteristics that were identified as crucial to meet
these conditions: (i) extensive experience and knowledge
of
(ii) ownership of mines and
mining projects that already/will produce suitable feed
for Nikkelverk, and (iii) knowledge of the Nikkelverk
refinery process and output.

the nickel

industry;

In Africa,

LionOre has ownership interests in four producing nickel
the company
mines and one gold mine.
in Botswana
controls an 85 % interest in Tati Nickel
and a 50 % interest
in the Nkomati nickel mine in
South Africa.
In Western Australia, LionOre has a
100 % interest in the Lake Johnston nickel operations,
an 80 % interest in the Black Swan nickel operations,
and a 100 % interest in the Thunderbox gold mine. In
addition, LionOre has plans to develop the Honeymoon
Well deposit in Western Australia. While the company is

(49)

(50)

7. Conclusion

the abovementioned reasons,

the commitments
For
submitted by the parties are sufficient to address the
competition concerns raised by this concentration.

The draft decision therefore proposes declaring the
notified transaction compatible with the
common
market and the functioning of
the EEA Agreement
pursuant to Article 8(2) of the Merger Regulation.

(1) LionOre also has a 20 % interest in the Botswana-based BCL smelter

(nickel processing).