SUMMARY OF KEMIRA OY AND IMPERIAL CHEMICAL INDUSTRIES PLC: A REPORT ON THE PROPOSED MERGER

In July 1990 Kemira Oy (Kemira), a Finnish company, agreed in principle to acquire from Imperial Chemical Industries PLC (ICI) its United Kingdom business in the manufacture and sale of solid and liquid agricultural fertilisers. We were asked to investigate and report on the proposed merger (see Appendix 1.1).

There are three major fertiliser manufacturers in the United Kingdom, which account for two-thirds of supplies to the market: ICI with about 29 per cent; Kemira with 18 per cent; and Hydro Fertilizers Ltd (Hydro Fertilizers), a Norwegian-owned company, with 19 per cent. The remaining supplies are accounted for largely by imports, either directly or through blenders. These are fragmented, with no company having more than a small share.

Kemira and Norsk Hydro (the parent company of Hydro Fertilizers) are also the leading fertiliser manufacturers in Western Europe, having market shares of approximately 12 per cent and 18 per cent respectively. Kemira is wholly owned by the Finnish Government, while the Norwegian Government has just over 50 per cent of the equity of Norsk Hydro.

There is vigorous competition among the three major manufacturers and between them and imports. The availability of cheap imports from Eastern Europe (founded on cheap, subsidised natural gas supplies from Russia) and from oil-producing countries has had a depressing effect on fertiliser prices in the United Kingdom and Western Europe generally. Moreover demand flattened from the mid-1980s after a long period of strong growth. These factors have caused significant overcapacity in the United Kingdom and in Western Europe generally.

There are indications that, due to political and economic developments in Eastern Europe, as well as in the Gulf, imported supplies will no longer be as competitive as hitherto. Moreover, steps have been taken and will continue to be taken to reduce capacity in both the United Kingdom and elsewhere in Western Europe, bringing production more into balance with capacity. Accordingly, we believe that world prices will harden and the pressures created by excess supply will ease.

The effect of the merger would be that Kemira, already the third largest supplier to the United Kingdom market, would acquire the largest supplier and become market leader. We believe Kemira's share would be upwards of 40 per cent and could rise well above this if imports were to slacken. With modern production facilities in the United Kingdom and a strong position in Western Europe as a whole Kemira would be well placed to exploit this market leadership. Kemira's commitment to the fertiliser industry, coupled with its state ownership, could lead it to take a longer-term view while importers were squeezed by short-term market pressures.

The sale would reduce the number of manufacturers from three to two, holding between them some two-thirds of the market, with other suppliers having small shares, and with little prospect of new entry in manufacturing. The merger would therefore bring a significant reduction in competition in the United Kingdom market. We conclude that the merger may be expected to operate against the public interest.

If the merger were not to proceed there is a real prospect that ICI would sooner or later withdraw from the fertiliser market, closing its plants, with a loss of employment and of domestic productive capacity. This would be an adverse consequence but we did not consider that it outweighed the detriment to competition arising from the merger. We nevertheless explored whether there were appropriate remedies (other than outright prevention of the merger) which might sufficiently limit the reduction in competition.

In our view, however, these alternatives would not offset the detrimental effects on competition, and we have accordingly recommended that the proposed merger should not proceed.

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Last Revised: June 1999