Hungarian Competition Authority

Vj-73/2001/65

VJ-73/2001

CEMENT CARTEL AND ABUSE OF COLLECTIVE DOMINANCE

(Restrictive agreements, Dominant position)

Summary

The Competition Council imposed a fine of HUF 150 million ( EUR 640.000) in total on Holcim Hungaria Rt. (Holcim), Duna-Dráva Cement Kft. (DDC), BÉCEM Cement és Mészipari Rt. (BÉCEM) and Magyar Cementipari Szövetség (MCSz) for concluding and implementing an illegal information agreement and abusing a dominant position.

The undertakings concerned

Holcim is the subsidiary of the Swiss multinational group Holcim/Holderbank, its main activity is the production of cement and lime. DDC is controlled by the German Schwenk and Heidelberg groups, while BÉCEM is under the joint control of the latter groups. MCSs was created as the trade association of the cement industry, representing the common interest of its members.

Relevant market

The Competition Council considered the grey cement market, as the relevant product market for the reasons that cement has no real substitutes. The possibility of sub-markets, like white and grey cement, or packaged and bulk cement has been examined, however the Competition Council considered the supply side substitution as a factor, which made unnecessary this division. Within grey cement several other classes and types could be classified sold in two forms, packages or bulky. Due to the high quality standards grey cement is a homogen product, there is no brand competition. In theory every factory can produce every kind of cement, switching from one product to another is only a question of additives, it could be easily done in a short period without extra costs. Supply substitution is almost perfect. Cement consumption was between 4.5-5.3 million t per year from 1975 to 1985, 3.9-4.5 from 1985-1990 reaching the lowest value in 1993 with 2.5 million. Since then consumption is steadily increasing. At the end of 2000 the national capacity was 5.2 million t.

As to the geographic dimensions of the market the Competition Council found that generally cement producers supply only a limited area around their plants however the particular areas overlap with each other and ultimately cover the whole country. 90 per cent of the cement is sold in a well established area and only 10 per cent is marketed outside this territory. The area surronding the capital is supplied by all producers while in other zones the local factory has a dominant position.

The cartel

In the Competition Council`s consideration the undertakings concerned adopted an information exchange system called `monthly database", operated in the ambit of MCSz. To evaluate this information exchange system the Competition Council examined the subject matter of the information exchange, the level of detail of that information, the "age" of the information as well as the market structure.

MCSz based on the data provided by its members prepares the monthly database indicating in a monthly and cumulated form the values for opening stocks and closing stocks concerning cement, klinker, lime, etc. as well as for production, own consumption, total sales. In addition domestic sales, export sales, the amount of packaged and bulk cement, sales according the particular quality classes.

In their defence the parties argued that MCSz collected and disseminated aggregated and comparative data that is necessary only for fulfilling its interest-representing task. MCSz collects only public data, which is available both in the databases of the Central Statistical Office and the Registry Court. The information referred to past transactions, prices or geographic dimension of sales are not included. DDC raised the argument that the information obtained through the system is not restrictive because it could be collected individually as well.

According to the Competition Council one of the main objectives of competition policy is that undertakings should make their business decisions free and independently. Business decisions inhere a certain amount of uncertainty, market players doesn`t necessarily possess all market information. Undertakings obviously strive to minimise the risk arising from independent decisions and the concomitant uncertainty. On several occasions trade associations take on activities which contribute to an increased market transparency and an improved knowledge of market conditions, thus allowing member undertakings to avoid risky decisions. Nevertheless the Competition Council stressed that not all information agreements have an anticompetitive effect, this depends largely on the economic context of the agreement. On markets with a considerable number of competitors the exchange of non-individualised, aggregated data can be definitely pro-competitive. Nevertheless information exchange systems having the object or effect of minimising risk originating form the uncertain behaviour of competitors are contrary to the above mentioned objective of competition policy.

The monthly data base provides the member undertakings with individualised data on production, sales, storage and other information in the nature of business secrets. The effects of the information exchange is to be judged by reference to the competition which would occur in the absence of that agreement. Through the information exchange the parties obtain, generally between competitors unknown data, like sales data broken down to factories in a very rapid way. Consequently they can monitor the market share and sales potential of competitors. Information of this kind cannot be obtained elsewhere, thus the information exchange system eliminates uncertainty on the market. Competitors notice very quickly any competitive initiative of the others and by knowing their data, they can react immediately and effectively. With the loss of hidden competition, moving first has no advantage which leads to the stabilization of market positions. In a situation like this the individual factories has no incentives to penetrate the traditional supply areas of competitors, provoking real competition. The Competition Council could hardly imagine any other explanation based on business logic for the exchange of information in such a high amount and detailness. The defence of the parties that they only tried to countervail the cyclical nature of the industry is not acceptable because they could have obtained data legally for these reasons.

The information exchange is obviously anticompetitive if it relates to future plans and data. However data related to the past can be dangerous as well if they are not historic consequently businessmen with great experience can forecast future behaviour of competitors out of it. In certain industries where demand is stable and predictable even past data can serve anticompetitive objects.

The Hungarian cement market is highly concentrated and transparent with huge capacity surpluses, furthermore leading officials know very well each other, as well as the technology, capacity, etc. of the others. The regular exhchange of confidential data has the object or at least the effect of promoting coordination of market conduct.

The Competition Council found that the information exchange system was suitable for restricting competition, they parties disseminated otherwise confidential information among them. The Competition Council stated that on oligopol markets the exchange of individualised information is suitable for lessening competition by elminating the inherent uncertainty of competition. Data relating to past transactions is equally useful under these market conditions for predicting the behaviour of others.

Abuse of dominant position

A collective dominant position shall be deemed to be held by two or more undertakings where they collectively have a position allowing them to pursue their market activity substantially without the need to take into account the reactions of their suppliers, competitors and customers. The existences of some kind of competition between undertakings does not exclude a collective dominance. The absence of price competition, does not rule out competition in other aspects, e.g. quality, supply conditions. First the Competition Council had to prove that in legal terms independent undertakings have a special connection among each other which induces them to avoid fierce competition and to adopt almost the same market conduct. If it is proved, the particular market shares can be added and the alleged dominance has to be examined.

Required connections creating collective dominance could be of different types however they have one in common, namely that as a result of them legally independent undertakings will act in a similar way on the market. Based on economic theory and the case law of the EC the following connections can be identified:

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  connections based on control;

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  structural links;

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  connections out of agreements;

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  connections based on oligopolistic interdependence;

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  other links.

Structural links could be having stake in the other company not resulting controlling rights, having joint control in other undertakings, overlap in leading officials or the close cooperation in trade associations. Other link could be a joint product promotion, joint action against import, joint marketing channels.

After all the Competition Council looked for factors inducing undertakings to act jointly, and factors enabling the undertakings to act independently on the market. Therefore the Competition Council examined supply concentration, producer homogeneity (including similarity in market shares, capacity, size, cost structure, etc.), barriers to entry and the role of potential competition, the transparency of the market (concerning output and prices), product homogenity, role of applied technology and R&D, demand elasticity, buyer power, maturity of the market (developing, stable, declining).

The two interest groups have a 100 per cent stake in the third significant undertaking on the market (BÉCEM). This reduces significantly the parties interest in competing intensively. Another forum of meeting is the MCSz of which all undertakings are active members. The Competition Council does not want to question the legitimacy of the parties´ trade association, just indicates that the association is an ideal forum of cooordination. The cement market is highly concentrated, the five Hungarian factories are in the hands of three interest groups. The parties have the same cost structure, namely fixed cost are very high. The relevant market shares are similar, all market players have low capacity utilisation rates. The market shares are relatively stable. Cement is a homogenous product, in addition demand is inelastic, due to the fact that cement presents only a small portion of the end product. For example at a construction customers will rather buy more expensive cement than close the construction, as the price of cement is relatively small to the price of a house. On the other hand cement has no real substitute. Market transparency is high due the limited numbers of competitors, product homogeneity and the MCSz.

Barriers to entry are relatively high for the following reasons:

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  market demand can be satisfied by the present undertakings;

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  there are high capacity surpluses;

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  high investments needed;

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  low profitability, long payback period;

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  limitied possibility os storage;

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  great dependence on mines.

Some kind of buyer power exists on the Hungarian market. In certain periods large companies constructing highways, shopping centers or bureaus have enough power to lower prices. However this activity combined with market transparency, supply concentration could induce cement producers to collude on prices and imlement price agreements.

The Competition Council evaluated as a factor indicating collective dominance the regular joint action against increasing import from East Europe. The parent undertakings have good relations as well as the decision of the EU Commission and the judgement of the CFI show when they condemned Europe wide cartels. The undertakings concerned have a market share of 94 per cent on the Hungarian market.

The Competition Council examined the effect of import as well. The results revealed that much of the imports came from subsidiaries of the same parent companies Holderbank and Heidelberger. Obviously these imports cannot be taken into account. Concerning the remaining ˝independent˝ import the Competition Council established the followings:

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  cement from Ukraine represents a lower quality;

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  on large constructions import cement is neglected due to its bad reputation;

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  import cement is packaged cement however demand is increasing for bulk cement;

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  high transport cost make import cement available only in the northeast regions only;

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  increasing standards could be a limit for imports;

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  with the development and European integration of these regions their price advantage will diminish.

For the above reasons import is only a limited constraint for Hungarian cement producers.

According to the Competition Council in the case of collective dominance, it is not necessary that all undertakings abuse this dominant position. Should this be the case, they would infringe Article 11 on cartels, thus emptying the concept of abusing a collective dominant position. Holcim abused the dominant position with his price and discount system. The other members of the oligopoly were not `forced` by eastern imports to pursue such commercial policy. Holcim provided distributors with a 4 per cent discount on bulk cement and 6 per cent discount on packaged cement if they undertake not to import from abroad. With this practice Holcim prevented market entry without any justification.

October 8, 2002. Budapest