Andalusite producers Andalusite Resources and Imerys South Africa have requested that the Competition Tribunal consider the proposed merger between the two companies. The request for consideration will be heard in October and follows the Competition Commission’s decision to prohibit the two companies merging.
In a press statement released on April 16, the commission explained that it had taken the decision to prohibit the proposed intermediate merger, whereby Imerys South Africa intended to acquire Andalusite Resources.
Andalusite forms part of the alumina-silicate group of compounds that have heat-resistant properties and are widely used in high-tempera- ture industrial processes such as in furnaces and kilns, which require refractories.
These refractories are used in downstream industries, such as steel and cement, which require competitively priced inputs, the commission stated.
Andalusite Resources FD Colin Bain states that the request for consideration is based on the companies’ belief that the merger will not have the adverse effects that the Competition Commission suggests it will have.
In the press release, the commission stated that it “found that the merging parties are close competitors and the proposed transaction would result in the removal of an effective competitor in the market for fine- and medium- grade andalusite”.
Further, the commission found that barriers to entry in the mining and supply of andalusite are relatively high, as a result of significant capi- tal and regulatory requirements. In addition, a new entrant will require access to deposits.
The Competition Commission was informed that some refractories and end-users were concerned that the proposed merger would result in there being no competition, as there will be no alternative supplier of andalusite locally.
“The merger would have created a monopoly in the South African andalusite market, thereby limiting the choice of suppliers and significantly preventing competition,” Competition Commission acting deputy commissioner Hardin Ratshisusu said in the statement.
Bain, however, argues that stakeholders’ concerns could be assuaged because issues surrounding price inflation associated with a monopolistic market are avoidable.
He points out that South Africa is by far the cheapest market for andalusite in the world and, therefore, posits that the market can accommodate some price increases without the local industry being dented by strategic, profit- maximising prices.
In addition, there are many substitutes for andalusite, such as bauxite, silicate products, chamotte and kyanite, which will provide a cap on the price that the merged entity would be able to charge, says Bain.
Although there is no perfect substitute for andalusite, the entire American refractory industry uses only 5 000 t/y of andalusite, but still produces products that achieve the same results as countries that rely more heavily on andalusite.
However, with the exception of andalusite and chamotte, all other alumina- silicates are not mined in South Africa and are imported from countries, such as China, France, Brazil, the US, Russia, Australia and Germany, said the Competition Commission.
Bain admits that some South African companies rely on andalusite for their refractory recipes.
He maintains, however, that any outstanding issues can be dealt with by implementing certain mechanisms to monitor the sale of andalusite.
Initially, in response to the concerns raised by industry stakeholders, Andalusite Resources and Imerys proposed a supply condition – limited to between two and three years – for all grades of andalusite other than coarse grade.
The Competition Commission suggested these proposed remedies to customers who were contacted during the investigation. However, some of the customers responded that the proposed remedy would not address their concerns, or did not go far enough to address their concerns.
The commission concurred, finding that the proposed remedy would not sufficiently address the structural changes in the market as a result of the proposed transaction.
Meanwhile, Bain states that fears of the local industry, although understood, are not necessarily justified, and that mechanisms can and will be found to ensure that the local industry is not bombarded with unfair price increases.
He believes that it will, therefore, be “business as usual”, regardless of the merger.
Further, while the Competition Commission stated that the companies expected that a total 3.6% of their employees were likely to be retrenched as a result of the proposed merger, Bain said Andalusite Resources had no plans to retrench employees as part of the merger.
In addition, the synergies to be gained from the merger will most likely be technological, rather than from the reduction in staff.
The Competition Commission also noted that the merging parties had failed to provide evidence of how the proposed transaction would enable them to become more competitive globally, as the two companies, particularly the Imerys group, are currently the main players in the global market for andalusite.
Andalusite Resources and Imerys currently supply 75% of the world’s andalusite.
Bain concludes that Andalusite Resources regards Imerys’ acquisition offer as favourable because some Andalusite Resource shareholders, including him, are nearing retirement age. In addition, Investec, another shareholder, never intended to be a long-term shareholder and is therefore looking to release its shares.