Irish Competition Authority Decisions

1. Notification was made on 23 December 1996 with a request for a certificate under Section 4(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.

2. The notification concerns a long-term agreement dated 20th March 1996 between Dynochem Ireland Limited (“Dynochem”) and Irish Fertiliser Industries Limited (“IFI”) whereby Dynochem supplies IFI with urea formaldehyde concentrate (UFC). This agreement is linked to another (CA/34/96) whereby IFI supplies Dynochem with urea, an ingredient in the manufacture of UFC, and with an ancillary Services Agreement. The urea supply agreement and the Services Agreement are described in Decision No. 553.

3. Dynochem is a 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. In 1997 Dynochem reported a loss of IR£2,279,235 on a turnover of IR£7,824,268.

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 product involved is urea formaldehyde concentrate (UFC). It was described in the initial notification by the parties as UFC-80, i.e. an 80% solution. The product specification has since been changed to UFC-58, a 58% solution. The parties state that the difference between the two is mainly the water content. UFC is an intermediate product in the production of resin, which is used in the manufacture of panelboard products, such as fibreboard, particleboard, plywood, medium density fibreboard (MDF), etc. Prior to the setting up of the Dynochem plant there were no manufacturers of the product in the State; it was entirely imported. The parties state that there are a number of manufacturers of UFC in the rest of the EU, mainly based in the UK, Spain and Belgium. They state that (at the time of notification of the agreement, i.e. before Dynochem started to produce UFC) there were two buyers of UFC in the state, namely the parties to this agreement, who between them purchased approximately 7,000 tons per annum. Dynochem’s estimate of its total production of all urea-based products in 1999 is 75,000 tonnes, of which 3,000 tonnes will be purchased by IFI. This represents 4% of Dynochem’s production of urea-based products. The parties estimate that the total turnover in the State for this product is approximately £1.5 million to £2 million, and that the EU-wide turnover is £25 million to £35 million. Urea formaldehyde concentrate is a particular chemical formulation for which there are no direct substitutes. The Authority therefore considers that the product market is that for urea formaldehyde concentrate. Before the implementation of the agreement, urea formaldehyde concentrate was not produced in the State but was imported. The Authority therefore considers that the geographic market is wider than the State.

6. The notification relates to an industrial supply agreement for the supply of the product by Dynochem to IFI. 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. Total investment by Dynochem is approximately IR£13 million. Technical grade urea is a necessary input for such manufacture and UFC is an intermediate product. IFI requires supplies of urea formaldehyde concentrate for the operation of its plant.

7. The term of the agreement is fifteen years. Unless otherwise terminated, the agreement may, at IFI’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 urea (on 12 months’ notice to IFI)

(iii) if Dynochem ceases permanently to manufacture UFC (on 12 months’ notice to IFI)

(iv) in the event of default, bankruptcy, liquidation, receivership, winding-up 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 12.3, 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.

8. Under Clause 2.2 of the agreement, IFI must buy not less than 80% of its requirements of the product from Dynochem. The remainder of its purchases may be made from other parties. Other clauses of the agreement set out methods for planning and estimating IFI’s requirements, and for placing purchase orders. If IFI’s requirements exceed the output capacity or available stocks of the product of Dynochem, IFI may purchase elsewhere. IFI may change the specification of the product at six months’ notice, but Dynochem 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.

9. Clause 12.6 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.

10. 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.

11. The parties stated that UFC was an intermediate product in the manufacture of urea, which was the main purpose of the arrangement between the parties. It was more efficient for IFI to purchase UFC from Dynochem than to continue its current arrangement of buying from suppliers in continental Europe. It was to the advantage of both parties that the arrangements should last for a long period of time. Dynochem needed to be assured of a regular and reliable supply of urea, which was its main raw material in order to justify the size of the investment. Similarly, it was also in IFI’s interest to have a regular customer for its urea, and a regular supplier of UFC-80. As the plants were located close together, transport costs would be minimised.

12. 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.”

13. 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.

14. 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 urea fertiliser and technical grade urea. Transport costs for urea would be minimised because the plants were located close together, and the distribution of IFI’s end product would be improved, since IFI would no longer have to import the product from abroad. The agreement therefore contributed to promoting economic progress by creating efficiencies in both the UFC supply market and the market for the sale of IFI’s end product. These efficiencies would be passed on to the customers of IFI, and ultimately to consumers. Thus the agreement allowed consumers a fair share of the resulting benefit.

15. 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. It was in IFI’s interest to have secure regular supplies of the product, and it would increase its efficiency. 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 or 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. IFI would be free to source 20% of its requirements of the product 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 Dynochem.

16. Section 4(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.

17. Section 3(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.”

18. 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. The agreement is an agreement between undertakings and has effect within the State.

19. Previous Authority and European Commission decisions on industrial supply agreements are summarised in the Authority’s decision on the Dynochem/IFI Urea Supply Agreement (CA/34/96 - Decision No. 553). 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. The amount of UFC covered by the exclusive purchase agreement will represent 4% of annual production in the State. There are no other producers in the State but there are a number of other producers in the EU, including Dynochem’s own sister company in the UK. IFI may continue to purchase up to 20% of its supplies from other producers of UFC. Parties other than IFI are not prevented from obtaining supplies of UFC from Dynochem or from other sources. Thus neither other producers nor other consumers of UFC 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.

20. 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, and has entered into a long-term supply agreement for the purchase of urea from IFI. In this context, the Authority believes that IFI 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.

21. In the Authority’s opinion, Dynochem Ireland Limited and Irish Fertiliser Industries Limited 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 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/35/96) does not contravene Section 4(1) of the Competition Act, 1991, as amended.