PUBLIC THE COMPETITION TRIBUNAL IN THE MAT IER OF an application by the Commissioner of Competition for an Order pursuant to sections 92 and 105 of the Competition Act, R.S.C. 1985, c. C-34 as amended;
AND IN THE MAT IER OF the proposed acquisition by Lafarge S.A. of Blue Circle Industries pk, a company engaged in the construction materials business;
BETWEEN:
THE COMMISSIONER OF COMPETITION Applicant -and-
LAFARGE S.A.
STATEMENT OF GROUNDS AND MATERIAL FACTS COMPETITION TRIBUNAL TR!B~NAL OE LA CONCURRENU P
~ .JUN /lj/_ ~ L ~.,JUIM J 15 200~ l t -uD E D - f REGl>TR,;il - REGISTRAIRE T OTTAWA, ONT. I ( h)
Respondent
PUBLIC STATEMENT OF GROUNDS AND MATERIAL FACTS I. INTRODUCTION 1. The Commissioner of Competition (the "Commissioner'') brings this Consent application on the grounds that the acquisition by Lafarge S.A., directly or indirectly, of all the shares of Blue Circle Industries pk (the "Proposed Transaction") is likely to prevent or lessen competition substantially in the provision of cement, ready-mixed concrete, aggregates and asphalt/ paving in Ontario. The Commissioner, with the consent of the purchaser Lafarge S.A., respectfully submits for approval a draft Consent Order which, if implemented, will eliminate the likely substantial lessening or prevention of competition found by the Commissioner.
2. The Commissioner alleges certain material facts and makes certain submissions in this statement. Lafarge S.A. does not contest the facts or submissions herein for the purpose of this application, but nothing in this application shall be taken as an admission now or in the future by Lafarge S.A., or any of its affiliates, of any such facts or submissions.
II. THE PARTIES 3. The Applicant is the Commissioner appointed under section 7 of the Competition Act and is the sole person authorized to make this application to the Competition Tribunal (the "Tribunal").
4. The Respondent Lafarge S. A., which has its head office in Paris, France, is a global construction materials company. Lafarge S.A. is the majority shareholder of Lafarge Corporation, which has its headquarters in Herndon, Virginia, U.S.A. Lafarge Corporation is the sole shareholder of the common shares of Lafarge Canada Inc. ("LCf'), which is headquartered in Montreal, Quebec (all collectively referred to hereinafter as "Lafarge", unless indicated otherwise).
5. Blue Circle Industries pk is a global heavy building materials company, with headquarters in London, U.K. It indirectly owns one hundred percent of Blue Circle Inc. in the United States, as well as of Blue Circle Canada Inc. ("BCCI") in Canada, each of which own, directly or indirectly, certain of the assets which are the subject of the draft Consent Order (all collectively referred to hereinafter as "Blue Circle", unless indicated otherwise). In particular, Blue Circle Inc. owns a cement and slag grinding operation at Detroit, Michigan, U.S.A., shipping terminals located on the Great Lakes in the U.S., and certain tug and barge transportation assets. BCCI owns two cement manufacturing
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plants located at Bowmanville and St. Marys, Ontario, and related sales and distribution assets, including the shares of Hutton Transport Limited, which owns related Canadian cement transportation assets, as well as certain ready-mix concrete, aggregates and asphalt/ paving (road construction) businesses.
III. THE ACQUISITION 6. Pursuant to a scheme of arrangement dated January 8, 2001, and approved by the Blue Circle shareholders on February 19, 2001, Lafarge will purchase all of the issued and outstanding shares of Blue Circle and will acquire control of the following Canadian businesses of Blue Circle, more fully described at Schedule"A " of the Draft Consent Order:
(a) the cement business comprised of the Bowmanville and St Marys cement plants, quarries and other cement-related assets, including terminals in Ontario and the United States and cement sales, distribution and transportation assets;
(b) ready-mixed concrete businesses (predominantly) in Ontario; (c) aggregates businesses (predominately) in Ontario; (d) an asphalt /paving (road construction) business in Ontario; (e) a pre-cast concrete structure design and manufacturing business m Ontario;
(f) a 50 percent interest in Centennial Concrete Pipe and Products Ltd., a pre-cast concrete pipe business in Ontario; and
(g) a cold patch asphalt business in Ontario. IV. COMPETITIVE ANALYSIS A. Summarv 7. The Proposed Transaction involves, among other things, the purchase by Lafarge of all of Blue Circle's cement, ready-mixed concrete and other construction related businesses (predominantly) in Ontario. After an extensive study of these industries and wide consultation with industry participants and experts both in Canada and the United States, the
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Proposed Transaction would be likely to substantially lessen or prevent competition: cement, ready-mix concrete, aggregates, and asphalt/ paving (road construction). The Commissioner's conclusions are based on a number of factors including Lafarge' s high post-merger market shares, the competitive structure of each of the relevant markets, the extent of effective remaining competition, and barriers to entry.
8. With respect to cement, the geographic market in Canada identified by the Commissioner is no larger than Ontario. The Commissioner concluded that the Proposed Transaction is likely to prevent or lessen competition substantially in the provision of cement in Ontario.
9. With respect to ready-mix concrete, the Commissioner identified a number of local geographic markets in which Lafarge competes directly with Blue Circle. The Commissioner concluded that the acquisition would likely substantially lessen or prevent competition in all of the local ready-mix concrete markets in Ontario in which Blue Circle has a ready-mix operation, with the exception of Orillia and Bracebridge (where Lafarge has no preacquisition presence).
10. With respect to aggregates, the Commissioner concluded that the Proposed Transaction would likely substantially lessen or prevent competition in aggregates in both the East and West Greater Toronto Area ("GTA East'' and "GTA West''), Guelph/Kitchener-Waterloo/Cambridge ("Tri-City''), London, Brantford, Niagara Peninsula, Stratford, Cobourg/Belleville and Ottawa/Hull areas. The Commissioner concluded that the Proposed Transaction is not likely to substantially lessen competition in aggregates in Simcoe County.
11. The Commissioner concluded that the Proposed Transaction would likely prevent or lessen competition in asphalt/ paving (road construction) in the Brantford and London areas, which are the only areas in which Blue Circle has asphalt/ paving (road construction) operations.
12. The Commissioner further concluded that the Proposed Transaction is not likely to substantially lessen competition in Ontario in the markets for precast concrete structures, cold-patch asphalt or in concrete pipe.
B. Cement
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(1) Overview of the Cement Industry 13. Cement is made using materials that contain certain elements including calcium compounds, silica, alumina and iron oxide. Typically materials such as limestone, shale, iron ore, clay and fly ash are used. These materials are crushed and then placed in a rotating cement kiln. The materials are heated in the kiln to produce clinker. The clinker, which is in the form of small pellets, is then ground to produce cement. A small amount of gypsum is added during the grinding process to control the cement's set or rate of hardening.
14. Different types of cement are manufactured to meet various physical and chemical requirements. In addition, a number of special purpose hydraulic cements are manufactured. Blended hydraulic cements are produced by intimately blending two or more types of cementitious material. Expansive cements are hydraulic cements that expand slightly during the early hardening period after setting.
15. Cement is, principally, an ingredient of concrete. It is mixed with water to make a paste, and is then combined with aggregates (granular rock and sand), among other things, to make concrete.
16. Cement is sold in bulk or bagged forms. Bulk cement represents approximately 90 percent of the total volume of cement sold in Canada and the United States. The major end user of bulk cement is the ready-mix concrete industry. Approximately 70 percent of the bulk cement produced is used for ready-mix concrete; the remainder is used for road paving and precast concrete products. Bagged cement, which accounts for about 10 percent of the total volume of cement produced, is used by contractors and "do-it-yourselfers" to prepare their own concrete on-site.
17. Cement is produced at relatively large plants and is then transported directly to customers or to terminals for distribution to more distant geographic areas. Most cement producers in the Great Lakes region of Canada and the United States have access to water-side terminals to facilitate transportation by barge or other water-borne vessel to more distant areas.
18. Industry practice in Canada is to deliver cement to the customer, whereas in the United States, the majority of cement is picked up by the customer at the plant or terminal location.
19. Currently, capacity utilization in Ontario cement plants is relatively high.
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(2) Relevant Market Product Market 20. The relevant product market for the purpose of this application is cement. There are no competitively significant substitutes for cement.
Geographic Market 21. Geographic markets for sales of cement are regional and are determined in large part by plant location, distribution networks, and transportation costs. Given that it is less costly to transport cement by barge and other water-borne vessels, geographic markets for cement expand considerably where water access is available. Transportation between cement operations and terminals in the Great Lakes region is predominantly water-based and augmented by truck and/ or rail where required.
22. For the purpose of analyzing the likely effects of the Proposed Transaction in Canada, the Commissioner concludes that the relevant geographic market is no larger than Ontario.
(3) Market Concentration 23. Within Ontario, there are four major cement producers: Lafarge, Blue Circle, Essroc (Italcementi) and St. Lawrence (Holderbank).
24. The estimated shares of cement sales to Ontario customers in 2000 are as follows: Lafarge, [ ] percent; Blue Circle, [ ] percent; St. Lawrence, [ ] percent; Essroc, [ ] percent; and others, principally Southdown,1 [] percent. 25. Lafarge produces cement at two plants in Ontario, located in Bath and Woodstock. Bath has a rated capacity of approximately [ ] tonnes per year, and Woodstock has a rated capacity of approximately [ ] tonnes per year.
26. Historically, approximately [ ] percent of cement production from Lafarge' s Bath plant has been sold in the United States, and approximately [ ] percent has been sold in Ontario. Cement is transported from Bath by truck to customers located from approximately Ottawa through to the
1 Southdown supplies limited quantities from a U.S. plant by shipping to a third party, Miller Paving, in Owen Sound.
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GTA, and by vessel from a water-based terminal located at the plant to Lafarge terminals in Toronto and the United States (Buffalo, New York; Cleveland, Ohio; Detroit, Michigan; and Oswego, New York).
27. Historically, approximately [ ] percent of Lafarge's Woodstock production has been sold in Ontario and transported by truck directly to the customer. The remaining [ ] percent of Woodstock's production has been sold in the United States, and transported both by truck directly to the customer, and by truck and rail to Lafarge' s terminal in Lansing, Michigan.
28. Lafarge has cement plants in the eastern United States at Alpena, Michigan, Whitehall, Pennsylvania, Paulding, Ohio, Joppa, Illinois, Davenport, Iowa, Sugar Creek, Missouri and Fredonia, Kansas. Lafarge also operates approximately 30 terminals in the eastern United States.
29. Blue Circle has two cement plants in Ontario, located at Bowmanville and St. Marys. The Bowmanville plant has clinker capacity of approximately 1.75 million tonnes per year and finish grinding capacity of approximately 1.3 million tonnes per year. A limestone quarry at the Bowmanville site produces limestone for the cement plant, and has incidental production of construction aggregates of approximately [ ] tonnes annually. Bowmanville ships approximately [ ] of its cement production to the United States while the remaining [ ] is sold within Ontario. Bowmanville has been operating at [ ] capacity, with finish ground production in 2000 of [ ] million tonnes, of which [ ] tonnes were sold in Ontario. Within Canada, approximately [ ] percent of the cement produced at Bowmanville is shipped to the GTA. In addition, Bowmanville ships [ ] tonnes of clinker to the Blue Circle grinding operation in Detroit.
30. The St. Marys operation has clinker production capacity of approximately 740,000 tonnes per year and finish grinding capacity of approximately 685,000 tonnes per year. A limestone quarry at the St. Marys site produces limestone for the cement plant, and has incidental production of construction aggregates of approximately [ ] tonnes of aggregates annually. The St. Marys operation serves several large populations including Detroit, Toronto, and West Central Ontario. Approximately [ ] of St. Marys' production is shipped within Ontario and the [ ] is shipped to terminals in the United States.
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31. Blue Circle also has a cement grinding operation at Peerless (Detroit), Michigan with a capacity of approximately [ ] tonnes, and a slag grinding operation at Detroit, with a slag grinding capacity of [ ] tonnes. Pursuant to an agreement between Blue Circle and Algoma Steel, Blue Circle is to receive [ ] of slag per year from Algoma' s steel plant in Sault St Marie, to supply Blue Circle's Detroit slag grinding capacity.
32. Within Ontario, Essroc has a cement plant at Picton with clinker capacity of approximately 1.2 million tonnes, and finish grind capacity of approximately 750,000 tonnes. St. Lawrence has a cement plant at Mississauga with annual clinker capacity of approximately 1.75 million tonnes and annual finish grinding capacity of approximately 2.0 million tonnes. As mentioned, Southdown has an arrangement with Miller Paving through which it ships approximately [ ] tonnes of cement produced at its Charlevoix, Michigan plant to southern Ontario and GTA customers. Miller Paving operates a terminal on behalf of Southdown in Owen Sound, Ontario.
33. The Commissioner concludes, based on the above estimates, that Lafarge' s post-merger share of cement capacity in the Ontario would be approximately 58 percent
(4) Section 93 Factors Foreign Competition 34. There are currently very few imports of cement or clinker. Historically, imports have included clinker, for which the importer would require grinding operations. Availability of terminals would also be a factor having a bearing on the feasibility of imports. There is little evidence that foreign competition would have any timely disciplinary effects in the market.
Acceptable Substitutes 35. Certain cementitious products, such as cementitious slag (a by-product of steel production) and fly-ash (a by-product of sulphur scrubbers, notably on coal-fired power generation plants) 'can be used in small quantities as a partial substitute for cement. There are, however, no competitively significant substitutes for cement. Both Lafarge and Blue Circle are suppliers of cementitious slag and fly-ash materials in Ontario.
Removal of a Vigorous and Effective Competitor
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36. There has been price competition between Lafarge and Blue Circle in the supply of cement in Ontario. The Commissioner concludes that the proposed acquisition would remove a vigorous and effective competitor in this region.
Barriers to Entry 37. De novo entry of a cement producer is unlikely in the near future as it would require well in excess of $200 million to construct a new 1.1 million metric tonne plant in Canada. As cement plants have no alternative uses, a large portion of the construction costs are sunk. There are also environmental and regulatory requirements necessary to erect a new cement plant, both of which will involve a period of delay prior to any such plant becoming operational. While the expansion of existing operations is more feasible, such expansion would still require a significant capital expenditure and, thus, is unlikely to occur in the near future.
Effective Remaining Competition 38. The only remaining competitors who could effectively service customers in Ontario after the Acquisition would be St. Lawrence and Essroc.
Change and Innovation 39. The cement industry is not characterized by dramatic technological advances, but rather by gradual improvements in plant design, equipment and distribution systems.
(5) Relief Sought 40. The Commissioner concludes that the acquisition by Lafarge of Blue Circle's cement assets in Ontario would likely prevent or lessen competition substantially in the distribution and sale of cement in Ontario. It is submitted that this substantial lessening or prevention of competition will be eliminated by the implementation of the Draft Consent Order, as explained more fully in the Consent Order Impact Statement at Tab 3.
C. Ready-Mix Concrete ("RMC") (1) Overview of the Industry 41. Ready-mix concrete refers to concrete that has been pre-mixed at a concrete plant and then transported to the point of use in special mixer trucks (commonly incorrectly referred to as cement trucks). The essential part of the
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manufacture of ready-mix concrete is the mixing of the various components (including cement, water, aggregates and various additives) to the consistency and specification required by a particular customer. As RMC is prepared for the customer in advance, it must be transported to the customer quickly before the quality deteriorates and/ or the product begins to set. This limitation restricts the distance within which RMC can, in practice, be transported.
(2) Relevant Market Product Market 42. The Commissioner concludes that the relevant product market for this application is RMC.
Geographic Market 43. Markets for RMC are local, mainly due to the fact that the product deteriorates if transported for more than about an hour. Markets are also limited by transportation costs, which make up a significant part of the product's overall price. It is estimated that the outer boundary of the geographic areas regularly served by RMC operations is defined by a radius of approximately 50 to 100 kilometres around each plant, although this may vary, depending on roads, traffic and competitive conditions. For the purpose of this application the relevant geographic markets have been defined as approximately 50 to 100 kilometres around each Blue Circle RMC operation.
(3) Market Concentration 44. Blue Circle has 40 RMC operations in Ontario and 1 RMC operation in Quebec, with an approximately [ ] share of all RMC sales in Ontario in 2000. Each of Blue Circle's operations, except the operations at Orillia and Bracebridge, overlap with those of Lafarge and are listed in Schedule" A" to the Draft Consent Order.
45. Lafarge has 53 wholly-owned RMC operations in Ontario and 6 RMC operations in Ontario owned as part of a 50/50 joint venture in the GTA with Essroc. Lafarge had an approximately [ ] share of all RMC sales in Ontario in 2000.
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46. Lafarge and Blue Circle are leading firms in RMC in the overlapping markets. Each would generally have market shares in the range of [ ] percent and together their combined market share would exceed 35 percent. The overlapping markets are oligopolies with relatively small number of market participants and four-firm concentration ratios ("CR4s") in excess of 65 percent.
(4) Section 93 Factors Foreign Competition 47. Given that geographic markets are local and that RMC cannot be transported for long distances without damaging the quality of the product, it is unlikely that foreign competition would provide sufficient competitive discipline in a post-merger environment in the relevant geographic markets.
Acceptable substitutes 48. Aside from on-site mixing or pre-cast concrete neither of which is price competitive with RMC in most concrete applications, there are no acceptable substitutes for RMC.
Removal of a Vigorous and Effective Competitor 49. There has been significant price competition between Lafarge and Blue Circle in the supply of RMC in each of the local areas where Blue Circle operates (with the exception of Bracebridge and Orillia). The Commissioner concludes that the Proposed Transaction would remove a vigorous and effective competitor in each of these areas.
Barriers to Entry 50. Barriers to entry are relatively low for RMC operators that serve the low-rise residential segment as illustrated by the rise in market share held by independent RMC producers in the GTA. However, there are barriers to entry into RMC production at the higher strength levels used in industrial and commercial applications. In the latter applications, continuous pours and quality testing are more important and necessitate larger, more sophisticated operations. There also exist some strategic barriers to expansion of production of higher strength levels by RMC producers, where such expansion involves competition with vertically integrated competitors.
Effective Remaining Competition
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51. St. Lawrence and Essroc are the major integrated (i.e., cement and RMC) competitors of Lafarge and Blue Circle. There are, however, a few significant independent RMC producers in some of the affected markets. That said, about 60 percent of total cement sold in Ontario is sold through affiliated RMC producers, such that the majority of BCCYs affiliated RMC businesses are required to maintain the competitive viability of the cement business.
Change and Innovation 52. The RMC industry is not characterized by dramatic technological advances, but rather by gradual improvements in plant design, equipment and distribution systems.
(4) Relief Sought 53. The Commissioner concludes that the acquisition by Lafarge of Blue Circle's RMC business in (predominantly) Ontario is likely to prevent or lessen competition substantially in the provision of RMC in all relevant geographic markets listed in the draft Consent Order. Nevertheless it is submitted that such substantial lessening or prevention of competition will be eliminated by the implementation of the draft Consent Order, as explained more fully in the Consent Order Impact Statement at Tab 3.
D. Aggregates (1) Overview of Indushy 54. Aggregates are raw materials used in construction and civil engineering, for purposes such as road construction and the production of asphalt and concrete products.
55. Aggregates can be characterized as granular material, of mineral, natural or artificial origin, between 8 and 88 mm in size, originating either from alluvial deposits, or from larger rocks and other materials, such as slag, recycled asphalt, that have been processed to the desired size, and sand.
56. Aggregates are generally produced from quarries, sand and gravel pits and recycled concrete and asphalt. The choice of aggregate for a particular purpose depends largely upon the size and shape of the aggregate particle. Depending upon the local geology, the desired particle may occur naturally, or it may need to be crushed or ground from larger particles.
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(2) Relevant Market Product Market 57. While most raw aggregates can be processed to meet the requirements of a particular customer, on the basis of supply side substitutability, end-use and price, aggregates can be divided into three broad relevant product groups: (i) specification concrete and asphalt aggregate from quarries -- known as "washed granulars", "clears", or "stone"; (ii) granular aggregate from sand and gravel deposits, also known as "unwashed granulars", or "gravel"; and (iii) sands or "fines".
58. Specification concrete and asphalt aggregate from quarries generally differs from all other types of stone products in its physical composition, functional characteristics, customary uses, and, as just noted above, pricing. With regard to functional uses, it must meet the Ontario Ministry of Transportation or CSA specifications for the specific type of asphalt or RMC being produced. For example, the Ontario Ministry of Transportation formally has a Granular "A", 11 B", "M" and "Select'' subgrade material standard for use provincial roads. H the base aggregate is to be used in 400-series highway work it must meet the aggregate physicals test for Granular /1 A" and almost always be from a stone quarry. Granular /1 A" from a quarry is usually approximately 20 percent more expensive than Granular /1 A" from a sand and gravel deposit. The particle shape and absence of deleterious elements with Granular /1 A:' from a quarry enhances performance relative to Granular /1 A" from a sand and gravel deposit and justifies the price difference. In addition, manufacturers of asphalt and RMC in Ontario do not view other types of stone products as good substitutes for quarry stone.
59. Unwashed granular aggregate from sand and gravel deposits covers a wide range of materials used in road base and other fill applications. Granular aggregate from sand and gravel deposits generally differs from other types of stone products in its physical composition, functional characteristics, customary uses, and pricing. That said, both stone and gravel could be used in some specification mixes for concrete and asphalt. The choice in low-end specifications largely depends on the delivered cost of gravel and stone. Stone can generally be a functional substitute for gravel but gravel is not a substitute for stone. However, subject to these exceptions for some applications, the users of granular aggregates from sand and gravel pits in Ontario do not view other types of stone products as good substitutes.
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60. Finally, in addition to granular aggregates stone, sands or "fines" are also required for the production of concrete and asphalt Sand either occurs naturally or results from the crushing of larger stones down to specified sizes. Larger stones cannot be substituted for sand in its end-use application and, in any event, sell at a substantial premium to sand.
61. In general, most raw aggregates can be processed to meet the requirements of a particular customer. Producers can switch production among the various types and sizes of aggregates at little cost. In Ontario, most aggregates producers and many aggregates operations produce aggregates from at least two of the three groups of aggregates identified above. Thus, while different groups of aggregates identified above could comprise separate markets, the analysis of this acquisition does not change if these groups of aggregates are treated as a single product market.
Geographic Market 62. Aggregates are relatively heavy and expensive to transport compared to their value. Transportation costs generally limit the range within which aggregates can be economically shipped. In most cases, aggregates are usually sold within a radius of approximately 30 kilometres of the aggregates production operation, although this distance can be extended depending upon factors such as the local geology, quality of roads, location of customers and the possibility of backhaul opportunities.
63. Blue Circle has aggregates operations in a number of areas in Ontario and one small reserve in Wakefield, Quebec (near Ottawa-Hull). For the purpose of this application, the relevant geographic regions are those areas in which both Lafarge and Blue Circle have licensed aggregates reserves: GTA West, GTA East, Tri-City (Guelph/Kitchener-Waterloo/Cambridge), London, Brantford, Niagara Peninsula, Stratford, Cobourg/Belleville, and Ottawa-Hull. Blue Circle's aggregates operations in these areas are listed in Schedule "A" to the Draft Consent Order.
(3) Market Concentration GTA East and GTA West 64. In the GTA, Lafarge has seven aggregates operations with combined sales of approximately [ ] tonnes of aggregates per year in the GTA. Three of these operations are located in the GTA West and sell approximately [
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] of aggregates per year. The other four operations are located in the GTA East and sell approximately [ ] tonnes of aggregates per year. In addition, Lafarge brings approximately [ ] tonnes into the GTA from its Brechin operation in the Simcoe County region. Nelson Aggregates, is [ ] percent owned by LCI and sells approximately [ ] tonnes of aggregates in the GTA. All of Nelson's operations are located in the GTA West.
65. Blue Circle has four aggregates operations in the GTA: Acton and Caledon in the GTA West, and Bowmanv ille and Sunderland in the GTA East. In addition, Blue Circle brings significant volumes from its [ ] operation [ ] into the GTA West. In addition to these operations, Blue Circle also owns a licensed but non-operating aggregates property near Mosport (GTA East).
66. Total sales of aggregates in the GTA are estimated to be approximately [ ] tonnes per year [ ] tonnes in the GTA West and [ ] tonnes in the GTA East). Including aggregates from outside the GTA, Lafarge' s pre-merger share of sales is estimated to be approximately [ ] ([ ] percent in the GTA West and [ ] percent in the GTA East). Blue Circle's share of the sales in the GTA, is estimated to be approximately [ ] percent ([ ] percent in the GTA West and [ ] percent in the GTA East). Post-merger Lafarge would account for a share of approximately [ ] percent in the GTA (approximately [ ] percent in the GTA West and approximately [ ] percent in the GTA East.).
67. Other competitors with significant shares of aggregate sales in the GTA include Dufferin (St. Lawrence) ([ ] tonnes, or [ ] percent), James Dick ([ ] tonnes, or [ } percent), and Crupi ([ ] tonnes, or [ ] percent).
68. As for aggregates reserves, the Commissioner estimates that in the GTA West, Lafarge' s pre-merger share is approximately [ ] percent and Blue Circle's share is approximately [ ] percent. Absent a remedy, post-merger, Lafarge would account for an estimated share of approximately [ ] percent of the total licensed reserves in GTA West. The Bureau estimates that, in the GTA East, Lafarge's pre-merger share is approximately [ ] percent of total licensed reserves and Blue Circle's share is estimated to be approximately [ ] percent. Absent a remedy, post-merger, Lafarge would account for an estimated share of approximately [ ] percent of total licensed reserves in the GTA East
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Tri-City 69. Lafarge has four operations that together sell approximately [ ] tonnes of aggregates per year within the Tri-City area. Nelson Aggregates also has aggregates operations in the Tri-City area that ships approximately [ ] tonnes per year. 70. Blue Circle has two aggregates operations in the Tri-City area, located at Cambridge ([ ] tonnes sold in 2000) and Aberfoyle ([ ] tonnes sold in 2000). As stated above, Blue Circle exports significant volumes from its Aberfoyle operation into the GTA.
71. Total sales of aggregates in the Tri-City area are estimated to be approximately [ ] tonnes. Lafarge' s estimated pre-merger share of sales in the Tri-City area is approximately [ ] percent. Blue Circle's estimated share of aggregates shipped in the Tri-City area is approximately [ ] percent. Post-merger, Lafarge would account for approximately [ ] percent of aggregates shipped within the Tri-City area. This percentage would increase if shipments from Blue Circle's [ ] operation remained in the Tri-City area.
72. As for aggregates reserves, the Commissioner estimates that, in the Tri-City area, Lafarge' s pre-merger share is approximately [ ] percent of the total licensed reserves while Blue Circle's share is approximately [ ] percent. Absent a remedy, post-merger, Lafarge would account for a share of approximately [ ] percent of total licensed reserves in the Tri-City area.
London 73. Lafarge has a number of small aggregates operations in the London area, which sell approximately [ ] tonnes of aggregates per year within the London area.
74. Blue Circle has three aggregates operations in London: Byron ([ ] tonnes sold in 2000), North London ([ ] tonnes sold in 2000) and Putnam ([ ] tonnes sold in 2000). · 75. Total sales of aggregates in the London area are estimated to be approximately [ ] tonnes. Lafarge' s estimated pre-merger share of sales in London is approximately [ ] percent. Blue Circle's estimated share of aggregates sales in London is approximately [ ] percent. Post-merger, Lafarge' s share of aggregates in London would be approximately [ ] percent.
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76. As for aggregates reserves, the Commissioner estimates that, in London, Lafarge' s pre-merger share is approximately [ ] percent of total licensed reserves while Blue Circle's share is approximately [ ] percent Absent a remedy, post-merger, Lafarge would account for a share of approximately [ ] percent of total reserves in London.
Brantford 77. Lafarge has a number of aggregates operations in the Brantford area that sold approximately [ ] tonnes of aggregates in 2000. Nelson has an operation in this area which produces approximately [ ] tonnes of aggregates annually.
78. Blue Circle has a number of aggregates operations in the Brantford area which sold approximately [ ] tonnes in 2000. 79. Total sales of aggregates in the Brantford area were approximately [ ] tonnes in 2000. Lafarge's estimated pre-merger share in Brantford is approximately [ ] percent. Blue Circle's estimated share in Brantford is approximately [ ] percent. Post-merger, Lafarge would have a combined share of approximately [ ] percent in the Brantford area.
80. As for aggregates reserves, the Commissioner estimates that Lafarge' s premerger share of total licensed reserves is [ ] percent while Blue Circle's is [] percent. Post merger, Lafarge would account for a share of approximately [ ] percent of total reserves.
Niagara 81. In Niagara, Lafarge will acquire the Fonthill sand deposit from Blue Circle. Lafarge is not currently a supplier of sand in Niagara. With this acquisition, Lafarge replaces Blue Circle as the principal supplier of sand in Niagara, as the Fonthill deposit is the only licensed sand reserve in the Niagara Peninsula. The anti-competitive impact of this acquisition hinges on Lafarge' s ability to leverage it into other product lines.
Stratford 82. The single Blue Circle aggregates site in the Stratford area is to be divested with the St. Marys cement facility, eliminating that aggregates market as a concern for the Commissioner.
Cobourg/Belleville
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83. Lafarge' s aggregates operations in the Cobourg/Belleville area consist of operations in Point Anne ([ ]), Napanee ([ ]), and a number of other pits ([ ]). 84. Blue Circle has its Brighton operations in the Cobourg /Belleville area, which had sales of [ ] tonnes in 2000. 85. The total sales of aggregates in the Cobourg /Belleville area in 2000 are estimated to have been approximately [ ] tonnes. Lafarge' s estimated pre-merger share of sales in 2000 in this area is approximately [ ] percent. Blue Circle's estimated pre-merger share of sales in 2000 in this area is approximately [ ] percent. Accordingly, Lafarge would have a post-merger share of approximately [ ] percent.
86. As for aggregates reserves, the Commissioner estimates that, in Cobourg/Belleville, Lafarge's pre-merger share of reserves is approximately [ ] percent while Blue Circle has, effectively, no share of reserves in this area.
Ottawa-Hull 87. Blue Circle's Ottawa quarry has already been sold. However, Blue Circle still owns a sand deposit in Wakefield. This share of reserves is small, but as indicated above, Lafarge has the leading share of Ottawa-Hull reserves, and Lafarge's acquisition of Blue Circle's Wakefield reserve would only add to its leading position in this market.
(4) Section 93 Factors Foreign Competition 88. Given that transportation costs form a significant component of the price of aggregates, under current conditions, it is unlikely that foreign aggregates could effectively compete to discipline a price increase by a hypothetical monopolist within any of the geographic areas discussed above.
Acceptable Substitutes 89. Slag (when air cooled) can be crushed and used as aggregates in some applications such as road base and as backfill. However, slag aggregates are usually sold at a discount because there are environmental risks associated with their use. As a consequence, there are no competitively significant substitutes for aggregates.
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Removal of a Vigorous and Effective Competitor 90. In the relevant geographic areas, Blue Circle has been a vigorous competitor of Lafarge in aggregates. Where this is the case, the Proposed Transaction would result in the removal of a vigorous and effective competitor.
Barriers to Entry 91. Barriers to entry to develop a new greenfield aggregate operation are high, particularly close to urban areas where the time required to receive the necessary permits can be significant, and certainly exceed two years.
92. Barriers to expansion are not as high as barriers to de novo entry. Existing aggregates operations can increase licensed reserves within two to four years of getting the rights to the land adjacent to their property. Producers can increase production at a particular operation through the use of portable processing equipment. There are also a number of dormant or furloughed sites that could be reopened. Licensed reserves are a good measure of a firm's ability to employ these strategies.
Effective Remaining Competition 93. In the GTA, an umber of competitors would remain post-merger, the largest being St. Lawrence, Crupi and James Dick with, respectively, approximately [ ] percent, [ ] percent and [ ] percent of total sales.
94. In the Tri-City area, a number of competitors would remain post-merger, the largest being Dufferin, Preston and Forwell with, respectively approximately [ ] percent, [ ] percent and [ ] percent of total sales.
95. In London, a number of competitors would remain post-merger, including Aaroc, Johnson Bros. and Try Agg with, respectively, approximately [ ] percent, [ ] percent and [ ] percent of total sales.
96. In Brantford, a few competitors would remain post-merger, the two most notable competitors being Gurney approximately [ ] percent and [ ] percent of total sales. Furthermore, in addition to these competitors, Dufferin has a licensed deposit which could be brought into operation.
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97. In Cobourg/Belleville, a number of competitors remain post-merger, the largest being Cooney, Southfork and S. Danford with, respectively, approximately [ ] percent, [ ] percent and [ ] percent of total sales.
98. In the Ottawa/Hull region, a number of competitors would remain post-merger, the largest being Tomlinson, Karson and Cavanagh with, respectively [ ] percent, [ ] percent and [ ] percent of total sales.
Change and Innovation 99. The aggregates industry is not characterized by dramatic technological advances that will impact significantly on the competitive environment.
Other Factors 100. As a result of the merger, the Commissioner concludes that Lafarge will hold a disproportionate share of licensed aggregates reserves and, in some markets, of sales. The Commissioner concludes that market shares of licensed reserves are relevant in determining the ability of competitors to compete in the future.
(5) Relief Sought 101. The Commissioner concludes that the acquisition by Lafarge of Blue Circle's aggregates in the GTA West, GTA East, Tri-City, London, Brantford, Niagara, Stratford, Cobourg/Belleville and Ottawa-Hull is likely to prevent or lessen competition substantially in those areas. Nevertheless it is submitted that this substantial lessening or prevention of competition will be eliminated by the implementation of the draft Consent Order, as explained more fully in the Consent Order Impact Statement at Tab 3.
E. Asphalt/Paving (Road Construction) (1) Industry Overview 102. The asphalt and paving business involves the supply and installation of sand, gravel, stone chips and asphalt used in the building, surface treating, repair and resurfacing of provincial, county, township and municipal roads.
103. Paving essentially involves laying asphalt in road construction projects for provincial, municipal, and other governments, and private works for commercial entities (roads in new subdivisions, parking lots, and driveways).
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104. The asphalt used for paving is a mixture of both coarse and fine aggregates with liquid asphalt cement produced in hot mix plants which are either fixed or portable. Pavers produce asphalt primarily for their own needs and usually sell only marginally to third parties. Third party customers are generally smaller paving companies that do not have their own asphalt producing operations because it is more economical for them to purchase asphalt than to invest in their own equipment. Consequently, the third party sales generally consist of small volumes of relatively simple mixes used in commercial and residential applications. As a general rule, pavers generally use between 80-100 percent of the asphalt they produce. For this reason, asphalt production is an integral part of the paving.
105. Provincial or municipal governments, by way of public tenders, award approximately 70 percent of road construction contracts. The remaining part of the business, awarded by private commercial entities, is also very often tendered, with the result that 80 to 90 percent of road construction contracts are awarded as a result of a private or public tendering process.
106. There is an important vertical link between asphalt/ paving and aggregate production. Asphalt/paving tends to purchase well over half of the output of most quarries and sand and gravel operations.
(2) Relevant Market Product Market 107. Hot-mixed asphalt itself could form a separate product market, given it unique functional characteristics as compared to concrete, for example, and the fact that it is used internally and sold to third parties. However, given that Lafarge's own asphalt/paving (road construction) business (formerly Warren Paving, which it acquired in 2000) also produces asphalt for internal use as well as third party sales, it is unnecessary in the context of the Proposed Transaction to treat them separately.
Geographic Market 108. Asphalt laid by pavers is produced at both fixed and portable plants. Pavers with fixed plants generally operate on a regional basis, i.e. in a territory which can extend up to 150 kilometres from their plant. Hot-mixed asphalt can be transported for 2 to 4 hours without deteriorating. Portable plants are not limited to any particular region and can be moved depending upon where they are required and will source aggregates locally at that site.
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Approximately 20 to 25 percent of hot-mixed asphalt laid in Ontario is laid by portable plants, principally in rural areas. Given the nature of paving work and the necessity of having portable plants, the geographic markets for hot-mixed asphalt and paving are considerably larger than for aggregates.
(3) Market Concentration 109. Lafarge and Blue Circle overlap in two local markets, Brantford and London, in which they each have fixed hot-mixed asphalt plants and are each other's principal competition. Blue Circle's asphalt/paving business, known as TCG Asphalt and Construction Inc. ("TCG"), is located in Brantford and London, Ontario. It manufacturers and supplies hot-mixed asphalt for internal use, as part of the provision of paving (road construction) services, and, to some extent, for sale to third parties within an approximately, 100 km radius of its Brantford and London plants. In 2000, TCG' s operations in London produced approximately [ ] tonnes of asphalt and its Brantford plant produced approximately [ ] tonnes of asphalt Lafarge has asphalt/paving operations in both London and Brantford as well as in other areas in Ontario, which produced [ ] tonnes and [ ] tonnes in 2000 respectively. 110. While market shares fluctuate with major tenders won and lost, each would generally have a share of sales in the range of [ ] percent. CR4s in each of Brantford and London would be over [ ] percent. Accordingly, post-merger, Lafarge would account for more than [ ] percent of the asphalt laid in the London area, on a historical basis.
(4) Section 93 Factors Foreign Competition 111. There are no indications of foreign competition in the relevant markets. Acceptable Substitutes 112. There are generally no acceptable substitutes for asphalt/paving. Removal of a Vigorous and Effective Competitor 113. In the two relevant geographic areas, Blue Circle has been a vigorous competitor of Lafarge with respect to asphalt/paving.
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Barriers to Entry 114. There are some barriers to entry into the asphalt/paving business. Major expenditures are required for equipment, all of which is mobile, and for an asphalt production operation. The cost of a greenfield asphalt plant is approximately $2-3 million. The need to get zoning and environmental permits to commence operations can be costly.
Effective Remaining Competition 115. In the relevant geographic areas, the acquisition would result in there being few remaining asphalt/ paving competitors of the size of Lafarge and/ or Blue Circle. Moreover, those that remain are operating at high capacity utilization levels.
Change and Innovation 116. The asphalt/paving industry is not characterized by dramatic technological advances that will impact significantly on the competitive environment
(5) Relief Sought 117. The Commissioner concludes that the acquisition by Lafarge of Blue Circle's asphalt/ paving business is likely to prevent or lessen competition substantially in the London and Brantford areas. It is submitted that this substantial lessening or prevention of competition will be eliminated by the implementation of the draft Consent Order, as explained more fully in the Consent Order Impact Statement at Tab 3.
F. Cold Patch Asphalt "Cold patch" asphalt allows for the repair of potholes, significant cracks, ruts, etc. regardless of the weather outside. There are two types of cold patch asphalt, premium or high-performance (hereinafter "Premium") and regular. QPR Corp., a Blue Circle company, makes and sells Premium cold patch asphalt, in liquid and bulk forms in .Ontario, Quebec, New Brunswick and Nova Scotia. Lafarge Canada Inc. recently began selling a Premium bulk cold patch asphalt in Ontario, alone. Under any available estimate of market share, as a recent (and small) entrant, Lafarge Canada Inc. is not an effective or strong competitor to the market leaders in the Premium cold patch asphalt business in Ontario. Accordingly, the Commissioner concludes that the
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acquisition of QPR Corp. is not likely to prevent or lessen competition substantially in respect of this market
G. Pre-cast Concrete 118. Pre-cast concrete structures are used in large construction/ engineering projects such as high rise buildings, low and mid-rise apartment buildings, hotels, motels and nursing homes. Blue Circle's pre-cast concrete business (Pre-Con Inc.) involves the provision of specialized engineering and other technical expertise to a variety of customers who require customized pre-cast concrete structures. It has operations in Woodstock, Belleville and Brampton, Ontario. Lafarge competes with Blue Circle in the provision of some of these services. However, the Commissioner concluded that the extent of the competitive overlap between the parties is minimal. The Commissioner has therefore concluded that the acquisition is not likely to prevent or lessen competition in this market
H. Concrete Pipe 119. As with all concrete products, the basic materials of concrete pipe are cement, aggregates, and water. Concrete pipe serves as a conduit for irrigation, water supply lines, sanitary sewers, culverts, and storm drains. Lafarge and Blue Circle are already the 50/50 owners of Centennial Concrete and Pipe Products Inc. The acquisition simply results in Lafarge acquiring the remaining 50 percent share of this company. There are several effective competitors remaining in the Ontario concrete pipe market Accordingly, the Commissioner concludes that the acquisition is not likely to prevent or lessen competition substantially in respect of this market.
V. CONCLUSION 120. The Commissioner concludes that the acquisition would result in a likely substantial lessening or prevention of competition in a number of relevant markets. Nevertheless, it is submitted. that each likely substantial lessening or prevention of competition identified by the Commissioner will be eliminated by the implementation of the draft Consent Order, as explained more fully in the Consent Order Impact Statement at Tab 3.
121. The Commissioner therefore seeks, pursuant to subsections 92(1)(e) and section 105 of the Competition Act, the issuance of the draft Consent Order
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attached hereto to avoid any substantial prevention or lessening of competition in the relevant markets referred to herein.
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CT-01
IN THE MATTER OF an apphcation by the Commissioner pursuant to sections 92 and 105 of the Competition Act, R.S.C. 1985, c. C-34, as am.;
AND IN THE MATTER OF the proposed acquisition by Lafarge S.A. of Blue Circle Industries pk, a company engaged in the construction materials business.
BETWEEN: The Commissioner of Competition Applicant -and-Lafarge S.A. Respondent
STATEMENT OF GROUNDS AND MATERIAL
Andre Brantz John Symes Department of Justice Competition Law Division Place du Portage, Phase 1 50 Victoria Street, 22nd Floor Hull, Quebec K1AOC9
THE COMPETITION TRIBUNAL of Competition for an Order
FACTS