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Fletcher Concrete Warned

Issued 12 August 2002

Fletcher Concrete Receives Commerce Commission Warning: Behaviour At Risk Of Breaching The Commerce Act

Following a Commerce Commission investigation, Fletcher Concrete and Infrastructure Limited (Fletcher Concrete), previously trading as Firth Industries Limited and The Golden Bay Cement Company Limited, has received a warning over its activities in the cement and ready-mixed concrete markets. The Commission warned Fletcher Concrete that below-cost pricing by Firth risked breaching the Commerce Act.

In issuing its warning, the Commission sends a broader message to all industries that last year's changes to the Commerce Act affect all firms with market power which attempt to use that power to deter or exclude competitors.

Commission Chair John Belgrave said that although the investigation concluded that there was no breach of the Act, the Commission did find evidence that Firth and Golden Bay had demonstrated an anti-competitive purpose that placed them at risk of breaching the Act. The behaviour of the companies raised serious concerns, and if the same behaviour were to be repeated today the Commission would probably prosecute them.

"This case is an important one for New Zealand competition law, because it illustrates the type of anti-competitive behaviour that may not have breached the former Act, but would be likely to breach the amended Act introduced in May 2001," said Mr Belgrave.

The Commission investigation followed information about excessive price-cutting in certain ready-mixed concrete markets in New Zealand in 1998 and 1999. The price-cutting was allegedly a response to the introduction into New Zealand at that time of imported cement, and was designed to protect Golden Bay's position within the cement industry from competition from imported cement. It was further alleged that Firth's pricing conduct was designed to send a message, both to the importer and to users (and to other potential importers and users) of imported cement, that any future imports would be met with similar deep price-cutting campaigns.

The Commission's investigation found that some independent cement users were discouraged from using imported cement when individual users of imported cement in Hawke's Bay and Taranaki had been the subject of price-cutting campaigns by Firth.

Mr Belgrave said that the investigation had involved an analysis as to when price-cutting can be seen as a normal and desirable competitive outcome in a market, and when it crosses the line into below-cost pricing designed to drive rivals out of the market.

"Exclusionary price-cutting designed to drive rivals out of the market can have undesirable consequences, as once competition is reduced, the firm or firms remaining in the market are likely to raise prices or reduce the quality of services offered. From a consumer's perspective, low prices in the short-term may appear attractive.

"However, if they result in competition being significantly damaged, they may result in a lack of competition and higher prices into the foreseeable future. Anti-competitive behaviour strikes at the heart of a process that leads to more choice and lower prices in the longer-term for consumers."

Background This case concerned two major, closely related markets - cement and ready-mixed concrete. Cement is the key ingredient in the production of ready-mix concrete ("concrete"). The market for cement is a New Zealand-wide market, whereas for concrete there are a series of local markets throughout the country. Two domestic companies have for many years manufactured all of the ordinary grey (Portland) cement used in New Zealand. These companies are Milburn New Zealand Limited ("Milburn") and The Golden Bay Cement Company Limited ("Golden Bay"). New Zealand has two major national concrete producers, Firth Industries Limited ("Firth")1, and Allied Concrete Limited/Allied Milburn Limited ("Allied"). At the relevant time, Golden Bay was a subsidiary of, and was vertically integrated with, Firth. Allied is a subsidiary of, and is vertically integrated with, Milburn. In 1997, as a consequence of the economic crisis in South-East Asia, the delivered price of imported cement to New Zealand fell dramatically. At about this time, a group of independent concrete producers set up a company to import cement for the first time since the industry was deregulated in 1986. In 1998 and 1999 the Commission received information about Firth's pricing behaviour in certain concrete markets. The information was from independent concrete producers in Hawke's Bay and Taranaki, alleging that Firth had reduced its concrete prices to very low levels such that its prices were below cost. The Commission's investigations led it to the view that Firth behaved in this way in order to lessen competition in the separate, upstream market for cement. The Commission considered that this pricing conduct was directed against certain independent concrete makers in order to discourage them and others from using imported cement, and the importer and others from importing cement in the future. By these means, imported cement was to be excluded from the markets. The other major concrete firm, Allied, was forced to follow Firth and reduce its prices, or lose market share, in the local concrete markets where the Firth price-cutting was taking place. The Commission believes that the underlying purpose for Firth's pricing behaviour was to preserve Golden Bay's profitable position in domestically manufactured cement, by protecting it from competition from lower-priced imported cement. Exclusionary conduct of this kind is usually assessed under section 36 of the Act which, prior to May 2001, prohibited a person from using a dominant position for the purpose of restricting the entry of a competitor, preventing or deterring competitive conduct, or eliminating a competitor. Section 36 of the Act was amended in May 2001, and now provides that a person may not take advantage of a substantial degree of market power for the purpose of restricting the entry of a competitor, preventing or deterring competitive conduct, or eliminating a competitor. However, at the time that the behaviour occurred, neither Golden Bay nor Milburn, with approximately half the cement market each, could be said to have been in a dominant position. Similarly, neither Firth nor Allied were likely to have been dominant in the relevant concrete markets. Therefore, the conduct was assessed against section 27 of the Act. This section is concerned with parties entering contracts, arrangements or understandings that contain provisions that have the purpose, or effect or likely effect, of substantially lessening competition in a market. The Commission concluded that although there was strong evidence that Firth did act to deter competition from imported cement, the Commission did not find that Firth's behaviour was in breach of the Act, partly because Firth/Golden Bay was not dominant in either the cement or ready-mixed concrete markets, and partly by reason of an exemption under section 44, which removed this behaviour from the scrutiny of sections 27 and 36 of the Act. The Commission considers that it is likely that following the amendments to sections 36and 44 of the Act, Firth and Golden Bay's conduct, if repeated, would be likely to breach the new section 36. The Commission issued a warning to Fletcher Concrete on 3 May 2002 that their market behaviour risked breaching the Act.


1Firth Industries Limited was the name of the company against which complaints were made in 1998 and 1999. At that time, Firth owned Golden Bay. Firth, in turn, was owned by Fletcher Challenge Limited. In an amalgamation , Golden Bay and Firth (along with other companies owned by Fletcher Challenge Limited), became divisions of Fletcher Concrete and Infrastructure Limited with effect from 15 August 2000.

Ends


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