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Affected market:聽Animal feed fats

狈辞.听ME/1278/03

The OFT's decision on reference under section 33 given on 10 September 2003

PARTIES

Advanced Feed Fats Limited (AFF) is a joint venture between the ED&F Man Holdings Limited Group and the Feed Oil Company.聽AFF undertakes feed fat blending and trading.聽John Wyatt Limited (Wyatt) is a privately held company that is involved in animal feed fat trading and blending as well as haulage.

TRANSACTION

The proposed joint venture combines the activities of AFF with the oil and fat blending and trading operations of Wyatt.聽It is expected that the transaction will involve the formation of a new company which will sell feed fats produced by AFF and Wyatt.聽The transaction was notified to the OFT as an informal submission.聽The administrative deadline for a decision is 11 September 2003.

JURISDICTION

As a result of this transaction AFF and Wyatt will cease to be distinct. The parties overlap in the supply of fats to the animal feed industry and would hold a combined share of supply of approximately 55 per cent in the UK.聽Therefore, the share of supply test in section 23 of the Enterprise Act 2002聽is met.聽A relevant merger situation has been created.

RELEVANT MARKET

Animal feed compounders purchase feed fats from the parties and mix them with other ingredients such as cereals, grains and vegetable matter to make a compound feed that is sold to farmers.聽Blended feed fats are currently made up of around 50 per cent used cooking oil (UCO) and 50 per cent other straight fats such as soya acid oil, mixed acid oil and palm fatty acid distillate (PFAD).聽From 1 November 2004, the use of UCO in animal feed will be banned聽 (see [note 1]).

The parties supply blended feed fats and straight fats.聽Straight fats are a commodity that compounders purchase from a number of potential suppliers.聽The parties supplied less than 10 per cent of the straight fats for the UK animal feed industry in 2002 and no concerns were raised regarding the supply of straight fats.聽For these reasons the supply of straight fats is not considered further.

Product market

In order to assist in the analysis of demand side issues, a critical loss calculation was undertaken.聽It was found that prior to the ban on the use of UCO in animal feeds, the critical loss associated with a 5-10 per cent price rise by a hypothetical monopolist of blended feed fats is around 28 per cent to 44 per cent of sales.聽Compounders said that they would reduce their demand for blended feed fats by more than this percentage if price was raised 5-10 per cent, by replacing it with straight fats (see [note 2]).聽

Following the ban on the use of UCO in animal feeds in November 2004, which itself is likely to lead to an increase in the price of blended feed fats, it is unclear by how much demand for blended feed fats would decrease following an additional 5-10 per cent price rise.聽Most customers said there was a minimal level of blended feed fats that they would need to include in their feeds.聽As the demand for blended feed fats approached this minimum level, the effect of a price rise on demand for blended feed fats would be reduced.聽Given the uncertainty on the reaction of customers to a price rise following the ban, it is possible that a hypothetical monopolist might be able to increase the price of blended feed fats by 5-10 per cent.

It is entirely possible that a customer receiving a lower price for blended feed fats than another would be able to make a profit by selling on the feed fats to other customers, as long as the price difference was not cost related. Customers supported this view.聽It would therefore not be possible for the parties to price discriminate between customers, and investigation showed that the parties do not currently charge substantially different prices to different customers.

Geographic market

Blended feed fats are currently not imported to mainland UK聽(see [note 3]) in large quantities.聽Currently the price of imported blended feed fats is about the same as feed fats blended in mainland UK, therefore a price increase of 5-10 per cent would result in imports being cheaper than the domestic product.聽However, customers submitted that this is unlikely to lead them to switch to imports before the ban on the use of UCO in animal feeds takes effect in the UK, as the blended feed fat imports would be of a lower quality.聽 Currently, imports do not contain UCO, which has a higher nutritional content, as the ban has already been implemented on the continent. There would also be a slightly increased risk that the product will not be delivered on time.

After 1 November 2004, the required standards of blended feed fats will be the same across the EU and customers in mainland UK will be able to source feed fats from importers or direct from blenders abroad.聽Compounders indicated that, following the ban taking effect, if prices were 5-10 per cent higher in the UK than abroad, they would purchase feed fats from abroad.聽Blended feed fats are already exported from Holland to Germany, France and Belgium.聽Firms in Holland have indicated that they expect to be able to export blended feed fats to mainland UK after 1 November 2004 and do not appear to be capacity constrained.聽Indeed, straight fats are currently imported to mainland UK from Holland in significant quantities.

Currently the price of blended feed fats from the continent is around 拢260 to 拢280 per tonne.聽The price of blended feed fats in the UK is expected to rise to around 拢305-拢325 per tonne after 1 November 2004.聽Based on this information, a price rise of 5 per cent to 10 per cent in the UK would clearly make imports more than 10 per cent cheaper than domestic blended feed fat.

HORIZONTAL ISSUES

Market shares

Prior to 1 November 2004, the parties' combined share of supply of all feed fats (blended and straight) in the UK and Holland is around 17 per cent (increment 8 per cent) with several other competitors and brokers supplying between 6-8 per cent each.

After 1 November 2004, the parties' estimated combined share of supply of blended feed fats in mainland UK and Holland will be around 34 per cent (increment 17 per cent).聽Their competitors in mainland UK will be PDM and importers.聽There are also a number of large blending firms in Holland, several of which have indicated that they expect to be able to export to the UK after 1 November 2004.

Barriers to entry and expansion

The parties submit that the sourcing of UCO and its testing has been the most significant barrier to entry.聽To use UCO in blended feed fats each 25 tonne load of UCO must be individually tested as each batch might be different.聽Following the ban on the use of UCO in animal feeds, fats will be purchased in larger quantities and so, for example, a single shipment of 5,000 tonnes of palm oil would only need to be tested once.

Additional necessary equipment such as tanks for storing and blending fats and transportation can all be hired, reducing the total cost necessary for entry.聽The parties estimate that the sunk cost required would be minimal.聽Third parties estimate that if all facilities are hired, the cost of starting up the business would be between 拢250,000 and 拢1 million.聽It may also be necessary to have around 拢1 million to purchase raw materials.聽Existing feed fat blenders can easily expand their output with little investment.聽They would simply need to arrange for more haulage and purchase more raw materials.

Overall, the investigation into this merger has not revealed any substantial barriers to new entry or expansion.

Buyer power

The parties' largest five customers purchase a significant proportion of the parties' total supply of feed fats.聽While they still have a choice of alternative suppliers these five are likely to have a degree of buyer power as losing their business will have a significant impact on the parties profitability.聽Larger customers have commented that due to their size they hope to be able to maintain competitive pressure on the parties.聽The parties inability to price discriminate (discussed above) means that smaller firms would also benefit from this buyer power.

The parties submit that their larger customers could start blending feed fats themselves after the ban on the use of UCO in animal feeds.聽Some of those customers have commented that they could undertake their own blending, but some investment would be necessary.

VERTICAL ISSUES

No vertical issues arise from this transaction.

THIRD PARTY VIEWS

Customers had some concerns about losing one of the three potential suppliers of blended feed fats in mainland UK but considered that there is likely to be an increase in imports after the merger.聽Some customers considered that they held buyer power through their size and/or their ability to blend feed fats themselves.

Competitors were not concerned as they saw this as an opportunity to increase their business, at the expense of the merging parties.聽Firms in Holland saw the ban on the use of UCO in animal feeds as an opportunity to export to mainland UK.

ASSESSMENT

Prior to 1 November 2004, customers could switch from using blended feed fats to straight fats if the price of blended feed fats rose.聽However, there is a limit to which customers can reduce their use of blended feed fats.聽 Following the introduction of the ban on the use of UCO in animal feed in 2004, imports from Holland will become viable as the product will meet the same standards and it is likely to be slightly cheaper to import than it will be to blend feed fats in mainland UK.

The potential for firms to switch to using other straight fats or imported feed fats, the low cost of new entry, and buyer power of large customers together provide a significant competitive constraint on the parties post merger.

The merger does not appear to result in a substantial lessening of competition within a market or markets in the United Kingdom for goods or services.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTES

1. The ban on the use of UCO is in The Animal By-Products Regulations 2003 (which enforce Regulation (EC) No 1774/2002 of the European Parliament and of the Council laying down health rules concerning animal by-products not intended for human consumption).
2. The critical loss analysis is based on a number of assumptions and therefore is only an approximation.聽However, based on third party responses, it seems likely that the actual loss in sales following a 5-10 per cent price rise would be much higher than any critical loss estimate.
3. Feed fats are not supplied from mainland UK to Northern Ireland.聽As straight fats supplied to the UK are often sourced in the Netherlands, it is much cheaper to transport fats directly from the Netherlands and blend with locally sourced UCO.