Dynochem Ireland Limited/Irish Fertiliser Industries Limited (Urea Supply Agreement). [1999] IECA 553 (27th May, 1999)

[ Home ] [ Databases ] [ World Law ] [ Multidatabase Search ] [ Help ] [ Feedback ] [ DONATE ] Irish Competition Authority Decisions You are here: BAILII >> Databases >> Irish Competition Authority Decisions >> Dynochem Ireland Limited/Irish Fertiliser Industries Limited (Urea Supply Agreement). [1999] IECA 553 (27th May, 1999) URL: https://www.bailii.org/ie/cases/IECompA/1999/553.html Cite as: [1999] IECA 553 [ New search ] [ Printable RTF version ] [ Help ] Dynochem Ireland Limited/Irish Fertiliser Industries Limited (Urea Supply Agreement). [1999] IECA 553 (27th May, 1999) COMPETITION AUTHORITY Competition Authority Decision of 27 May 1999 relating to a proceeding under Section 4 of the Competition Act, 1991 Notification No. CA/34/96 - Dynochem Ireland Limited/Irish Fertiliser Industries Limited (Urea Supply Agreement). Decision No. 553 Price £0.80 £1.30 incl. postage Competition Authority Decision of 27 May 1999 relating to a proceeding under Section 4 of the Competition Act, 1991 . Notification No. CA/34/96 - Dynochem Ireland Limited/Irish Fertiliser Industries Limited (Urea Supply Agreement). Decision No. 553 Introduction 1. Notification was made on 23 December 1996 with a request for a certificate under Section (4) of the Competition Act, 1991 or, in the event of a refusal by the Authority to issue a certificate, a licence under Section 4 (2) in respect of an agreement between Dynochem Ireland Limited and Irish Fertiliser Industries Limited. The Facts (a) Subject of the Notification 2. The notification concerns a long-term agreement dated 20th March 1996 between Dynochem Ireland Limited (“Dynochem”) and Irish Fertiliser Industries Limited (“IFI”) for the supply of urea. An ancillary Services Agreement, and an agreement for the supply of urea formaldehyde concentrate by Dynochem to IFI (notified as CA/35/96) also form part of the arrangement. (b) The Parties Involved 3. Dynochem is a 100% subsidiary of Dyno Industrier ASA (“Dyno”), an international Norwegian-owned corporation with three core businesses: explosives, chemicals and plastics. Dyno is one of Norway’s largest industrial companies, with more than 100 wholly or partly-owned companies in 30 countries worldwide. Dyno is one of the world’s major producers of resins for the wood processing industry, and this is the business in which Dynochem is engaged. In 1997 Dynochem reported a loss of IR£2,279,235 on a turnover of IR£7,824,268. Construction of the company’s facility at Marino Point was completed during that year. 4. IFI manufactures and sells nitrogen-based fertilisers and associated chemical products. It is 51% owned by Nitrigin Eireann Teoranta, a state-owned company which formerly carried on the fertiliser business now run by IFI but whose only function now is the purchase of natural gas from Bord Gais Eireann, another state-owned company, and its sale to IFI. The other 49% of IFI is owned by Imperial Chemicals Inc. plc, a UK-based multinational company with wide-ranging activities in the chemicals industry. In 1998 IFI reported a loss of IR£10.7m on a turnover of IR£157.8m. 5. The parties to the urea supply agreement are IFI and Dynochem. The parties to the services agreement are IFI, Dynochem and Dyno. (c) The Product and the Market 6. The product involved is technical grade urea, which is used by Dynochem to manufacture formaldehyde and formaldehyde derivatives. Formaldehyde derivatives include urea formaldehyde (UF) resins, melamine formaldehyde (MF) resins, melamine urea formaldehyde (MUF) resins and phenol formaldehyde (PF) resins. They are used to manufacture panelboard products, such as fibreboard, particleboard, plywood, medium density fibreboard (MDF), etc. There are seven manufacturers and distributors of the product in the State. It is estimated that there are a further nine producers and distributors of the product in the rest of the EU. The total volume purchased in the State annually is 160,000 tonnes. Approximately 20% of this is imported from the UK. Dynochem purchases approximately 30,000 tonnes annually from IFI under the agreement, giving it a market share of approximately 18% of the total purchases of urea in the State. IFI produces 350,000 tonnes of urea in the State annually; that which is not purchased within the State is exported. Urea is a particular chemical which is required for the formaldehyde production process and for which there are no direct substitutes in the context of this process. The Authority therefore considers that the product market is that for technical grade urea. Urea is produced in the State and is also imported from outside the State; a substantial proportion of the urea produced within the State is exported. The Authority therefore considers that the geographic market is wider than the State. (d) The Agreement 7. The notification relates to an industrial supply agreement for the supply of the product by IFI to Dynochem. The agreement forms part of an arrangement whereby IFI, which owns and operates a manufacturing plant at Marino Point in Cork, leases part of its property to Dynochem so that Dynochem can build and operate plants to manufacture formaldehyde and formaldehyde derivatives. Technical grade urea is a necessary input for such manufacture. By an ancillary arrangement, separately notified (see Decision No. 554), IFI buys back a certain proportion of urea formaldehyde concentrate, an intermediate product in the production of resin, from Dynochem. Total investment by Dynochem is approximately IR£13 million. The Urea Supply Agreement 8. The term of the agreement is fifteen years. Unless otherwise terminated, the agreement may, at Dynochem’s discretion, be continued on the same terms and conditions for a further fifteen years. The agreement may be terminated (i) if the lease agreement terminates (ii) if IFI ceases permanently to manufacture the product (on 12 months’ notice to Dynochem) (iii) if Dynochem ceases permanently to manufacture formaldehyde and formaldehyde derivatives (on 12 months’ notice to IFI) (iv) in the event of default, bankruptcy, liquidation, receivership etc. (v) if either party ceases to be a subsidiary of its parent and the new owner or controller is not acceptable to the other party. Under Clause 13.3, the parties are to meet every three years to review the agreement, but there is no obligation on either party to re-negotiate, change or modify it. 9. Under Clause 2.2 of the agreement, Dynochem must buy not less than 80% of its requirements of the product for the UF plant from IFI. The remainder of its purchases may be made from other parties. Other clauses of the agreement set out methods for planning and estimating Dynochem’s requirements, and for placing purchase orders. If Dynochem’s requirements exceed the output capacity or available stocks of the product of IFI, Dynochem may purchase elsewhere. Dynochem may change the specification of the product at six months’ notice, but IFI may accept or decline the new specification. The agreement sets out terms for delivery, weighing of the product, pricing and payment, storage facilities, force majeure, etc. 10. Clause 13.6 of the agreement deals with confidentiality. The contents of the agreement itself, and of any supplementary agreement, may not be disclosed without the consent of the other party. All information exchanged between the parties pursuant to the terms and operation of the agreement are also to be kept confidential. The confidentiality obligations apply for as long as the agreement remains in force and for five years thereafter. The Services Agreement 11. The Services Agreement is an agreement between IFI, Dynochem and Dyno. IFI agrees to lease to Dynochem a portion of its property at Marino Point to enable Dynochem to construct and operate plants to manufacture formaldehyde and formaldehyde derivatives, for which Dynochem will require certain services and assistance. IFI agrees to provide Dynochem with certain services on a shared basis. These services include technical engineering assistance, maintenance shift cover, call-out maintenance service, shipping, haulage and transport, shared facilities (reception, board room, training centre, conference room, etc.), medical facilities, safety and emergency assistance, the use of laboratory equipment, sewage and effluent discharge facilities, security, upkeep of facilities, engineering spares and administration. There is also a list of additional services of which Dynochem may avail at its option. 12. Dynochem has certain obligations to provide personnel to liaise with IFI, to sign for and receipt the time spent by IFI personnel providing the Services, to reimburse IFI for costs not covered by the Service Agreement, to afford IFI and its personnel access to Dynochem’s facility, to keep certain records and to notify IFI promptly of any problems related to the utilisation of the services. Dynochem pays IFI a fixed charge for the services each year [ ]. Costs and expenses for the Additional Services are to be agreed in advance. 13. The term of the agreement is for thirty-five years from the effective date (the date on which Dynochem receives its first shipment through IFI’s jetty) unless terminated earlier. The agreement may be terminated on the same conditions as the Urea Supply Agreement. The agreement contains confidentiality clauses. The contents of the agreement itself, and of any supplementary agreement, may not be disclosed without the consent of the other party. All information exchanged between the parties pursuant to the terms and operation of the agreement are also to be kept confidential. The confidentiality obligations apply for the term of the agreement and for five years thereafter. (e) Submissions of the Parties Arguments in support of issuing a certificate 14. The parties submitted that the entire arrangement was part of the IDA’s efforts to develop the panelboard industry in Ireland. The main raw materials for this industry were timber and resins. Prior to the agreement all resins were imported from abroad, incurring significant transport costs. Dynochem planned to construct a facility to manufacture urea resin and supply the Irish panelboard industry, at a cost of £13m approximately. This facility would employ 40 people directly. The site had been leased for 51 years from IFI and was adjacent to IFI’s own manufacturing facility. Producing all the raw material for the panelboard industry in Ireland would reduce costs and make Irish industry more competitive. 15. The parties stated that urea was a vital raw material for Dynochem’s production of resin. Dynochem in the UK already had a significant portion of the Irish market for resin. The effect of the agreement would be to transfer the manufacture of this resin from the UK to Ireland. The parties stated that the urea supply agreement was by far the most important part of the arrangement between IFI and Dynochem, in that Dynochem would rely in the main on IFI for the supply of urea which was its main raw material to manufacture the resin. It was to the advantage of both parties that the agreements should last for a long period of time. Dynochem needed to be assured of a regular and reliable supply of urea in order to justify the size of its investment. Similarly, it was also in IFI’s interest to have a regular customer for its urea. As the plants were located close together, transport costs would be minimised. 16. The parties pointed out that the Authority had previously issued a certificate for a similar type of agreement in Decision No. 390, “ESB Industrial Holdings Limited/Irish Cement Limited - Pulverised Fuel Ash.” That agreement operated for an initial period of 10 years, and indefinitely thereafter unless terminated. The parties quoted the Authority’s opinion that that agreement “... was a commercial agreement between two major industrial companies involving a low-value bulk commodity where transport economies appl[ied] because of the relative nearness of the companies to one another.” 17. The parties argued that the services agreement was subsidiary to the urea and UFC80 agreements. The main object of the agreement was the sharing of certain facilities by IFI with Dynochem. The most important of these was the use of the jetty which belonged to IFI. Dynochem would use this facility for the delivery of other raw materials. The other services to be provided by IFI to Dynochem were ancillary to the use of the jetty and arose from the fact that the plants were on adjacent sites. Essentially, the services agreement was a shared facilities agreement. 18. The parties submitted that there was no prevention, restriction or distortion of competition as a result of this agreement, that it was in fact pro-competitive in nature, and that the Authority should issue a certificate. Arguments in support of granting a licence 19. The parties stated that the ultimate aim of the arrangements was to make the Irish panelboard industry more competitive. The level of investment required to set up the manufacturing facility justified the length of the agreement. The agreement contributed to improving the distribution of both the raw material - urea - and the end product - resin. Transport costs for urea would be minimised because the plants were located close together, and the distribution of resin would be improved, since customers of Dynochem would no longer have to import it from abroad. The agreement therefore contributed to promoting economic progress by creating efficiencies in both the urea supply market and the market for the sale of resin. These efficiencies would be passed on to the customers of Dynochem and IFI, and ultimately to consumers. Thus the agreement allowed consumers a fair share of the resulting benefit. 20. The parties submitted that the agreement did not impose on the undertakings concerned terms which were not indispensable to the attainment of the objectives set out in the Act , since, in order to justify the size of its investment, it was necessary for Dynochem to be able to obtain guaranteed supplies of its main raw material. The European Commission had held that long-term industrial supply agreements could be justified where there was significant investment. The establishment by Dynochem of the manufacturing plant at Marino Point would entail in investment of approximately IR£13 million. Therefore the applicants argued that the industrial supply agreement was justifiable. Further, the agreement did not afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question. Prior to the establishment of Dynochem’s facility, there had been no producers of resin in Ireland. Dynochem would be free to source 20% of its requirements of urea from other suppliers. However, because of the inter-dependence of the two plants, and their close proximity (given the significance of transport costs in these markets), it made commercial sense to source most of the raw materials from IFI. The Assessment (a) Section 4(1) 21. Section (1) of the Competition Act, 1991 prohibits and renders void all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State. (b) The Undertakings 22. Section (1) of the Competition Act defines an undertaking as “a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.” 23. IFI is engaged for gain in the production of nitrogen-based fertilisers in the State and is an undertaking. Dynochem is engaged for gain in the production of formaldehyde and formaldehyde derivatives and is also an undertaking. Its parent company, Dyno, is an international Norwegian-owned corporation engaged for gain in the production of explosives, chemicals and plastics, and is an undertaking. The agreement is an agreement between undertakings and has effect within the State. (c) Applicability of Section 4(1) 24. The aspects of the agreement which could give rise to competition concerns are the proportion of the market which is closed off to other competitors by the agreement, and its duration. These factors were considered by the Authority in its Decision No. 390 (ESB Industrial Holdings Ltd./Irish Cement Ltd.). In that instance, both parties were dominant producers in their particular product sector. However, the Authority stated that it did not “regard supply contracts, per se, between companies dominant in their particular product sectors as offending against Section 4 (1) of the Competition Act unless the arrangements ha[d] the object or effect of the prevention, restriction or distortion of competition in trade in any goods or services in the State.” 25. In the ESB/ICL agreement, the product was not traded and, apart from small quantities, was dumped prior to the agreement. The quantities contracted for under the agreement represented 50% of annual availability. ICL could take quantities in excess of this but was not committed by contract to do so. The agreement did not prevent parties other than ICL from obtaining supplies of the product (pulverised fuel ash) from the ESB or from other sources. The Authority therefore considered that the market was not foreclosed by the agreement. Neither did it consider that the duration of the supply contract, which ran for a minimum of 10 years, had the object or effect of preventing, restricting or distorting competition. The project required large-scale capital investment by both parties (IR£5.5 million and IR£6 million, respectively). The Authority did not believe that either party to the agreement would have committed the necessary capital resources to the project without long-term assurances regarding supply and purchase of the product. The Authority granted a certificate to the notified arrangements. 26. The Commission of the European Union has also considered a number of industrial supply arrangements. The principle underlying Commission Regulation 1984/83 [1] that an exclusive purchasing obligation may infringe Article 85(1) applies equally to agreements for the supply of raw materials, intermediate products or components [2] . For example, in Billiton/M&T [3] , the Commission objected to an exclusive purchase agreement (for tin tetrachloride) between Billiton, the Community’s largest manufacturer of this material, and M&T, the largest consumer, which took half of Billiton’s output, whereby M&T agreed to purchase all its requirements from Billiton, not to manufacture the product itself, and not to resell product purchased from Billiton. Similarly, in Soda-Ash [4] and Nutrasweet [5] , the Commission objected to exclusive long-term supply contracts where such arrangements foreclosed a substantial proportion of the market. In Soda-Ash, the largest suppliers of soda-ash (an important component in glass manufacturing) had entered into a number of long-term supply contracts with major clients on their respective domestic markets, most of whom were glass manufacturers. The Commission stated that the simultaneous existence of such contracts might foreclose competition in respect of a substantial part of the market for the products in question on the various national markets, and might also stifle competition between glass manufacturers. In the Nutrasweet case, Nutrasweet was the world’s largest producer of Aspartame and Coca-Cola and Pepsi-Cola were the largest and second-largest purchasers of the sweetener within the EEC. However, the Commission has applied the de minimis rule in cases where only a small share of the product market is affected [6] . 27. The Commission has applied similar considerations to an obligation to buy minimum quantities in an industrial supply agreement as in a purchasing agreement for resale. It has emphasised the duration of the agreement and the proportion of the purchaser’s requirements involved in assessing whether an agreement contravenes the competition rules. 28. In the case of the notified agreement, the amount of urea covered by the exclusive purchase agreement represents 18% of annual purchases in the State. There are a number of other producers and distributors in the State and the product can also be imported from the UK. Dynochem may continue to purchase up to 20% of its supplies from other producers of urea within or outside the State. The amount of urea purchased by Dynochem from IFI represents 8.5% of IFI’s total production of urea. Parties other than Dynochem are not prevented from obtaining supplies of urea from IFI or from other sources. Thus neither other producers nor other consumers of urea are disadvantaged. The Authority therefore considers that the exclusive purchase aspects of the agreement do not have the object or effect of preventing, restricting or distorting competition, and do not therefore contravene Section 4 (1) of the Competition Act, 1991 . 29. The Authority considers that the duration of the supply contract must be looked at in the context of the overall relationship between the parties. Dynochem has entered into a 51-year lease agreement with IFI. It has entered into a 35-year services agreement. It has made a substantial capital investment in plant and facilities for the production of formaldehyde and formaldehyde derivatives. In this context, the Authority believes that Dynochem is justified in seeking long-term assurances regarding supply and purchase of the product, and that the term of the agreement is a reflection of this. Furthermore, the agreement has been freely entered into by both parties in a market where there is a number of other suppliers and customers. (d) The Decision 30. In the Authority’s opinion, Dynochem Ireland Limited, Irish Fertiliser Industries Limited and Dyno Industrier ASA are undertakings within the meaning of Section 3 (1) of the Competition Act, 1991 , and the notified agreement is an agreement between undertakings. In the Authority’s opinion, the notified agreement does not have the object or effect of preventing, restricting or distorting competition and therefore does not contravene Section 4 (1) of the Competition Act, 1991 , as amended. The Certificate The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the Supply Agreement between Dynochem Ireland Limited and Irish Fertiliser Industries Limited notified to it on 23 December 1996 (notification no. CA/34/96) does not contravene Section 4 (1) of the Competition Act, 1991 , as amended. For the Competition Authority, Isolde Goggin Member May 1999 [1] Regulation 1984/83 on Application of Article 85(3) of the Treaty to Categories of Exclusive Purchasing Agreements, OJ 1983 L173/5. [2] Bellamy and Child, “Common Market Law of Competition”, fourth edition, 7-192. [3] Seventh Report on Competition Policy (1977), point 131. [4] Eleventh Report on Competition Policy (1981), points 73 to 76. [5] Eighteenth Report on Competition Policy (1988), point 53. [6] For example, Shotton Paper Co., Nineteenth Report on Competition Policy (1989), point 40. © 1999 Irish Competition Authority BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII URL: https://www.bailii.org/ie/cases/IECompA/1999/553.html