The $13.5 mln net benefit of a wool scouring monopoly in NZ

The $13.5 mln net benefit of a wool scouring monopoly in New Zealand

By Jonathan Underhill

June 13 (BusinessDesk) - Allowing New Zealand's biggest wool scouring company to acquire its rival and create a monopoly would yield a $13.5 million net benefit to the country over five years, which is sufficient to win approval from the Commerce Commission, according to its detailed decision.

Cavalier Wool Holdings, which is 50% owned by carpet maker Cavalier Corp. and 25% apiece by Accident Compensation Corp. and private equity investor Direct Capital Investments, was last week granted clearance to acquire the scouring assets of rival NZ Wool Services International.

The regulator's decision shows the assessed benefits of the deal were valued at $29.6 million to $33.6 million, while the detriments were valued at anywhere from $1.4 million to $28.8 million. The mid-point is $31.6 million of benefits and $18.1 million of detriments.

New Zealand's total wool exports amounted to $703 million in the 12 months ended April 30, or 1.5% of the nation's total merchandise sales overseas. That ranks it as the 15th most-valuable export.

Cavalier Wool plans to close WSI's scours at Kaputone and Whakatu while mothballing its own plants at Clive and Timaru, reducing the total number of plants in New Zealand to two from six. At the same time it would divest WSI's wool trading operations. The transaction is strongly opposed by WSI's own board and by rival carpet maker Godfrey Hirst, which announced an appeal against the decision last Friday.

Helping sway the commission was the perceived threat of competition from lower-cost scouring plants in China, which has already decimated the Australian scouring industry. Between 1995 and 2009, scours in Australia reduced to three from 25, while the volume of greasy wool processed dropped to 54,000 tonnes a year from 600,000 tonnes.

China is the biggest market for New Zealand wool as well as the biggest threat. It took 32% of the nation's wool clip in the year to June 2010. Of that, 57% was shipped as greasy wool, to be scoured in China and 14% was scoured in New Zealand.

The commission says in its decision that the ability of exporters to divert more greasy wool to China for scouring is unlikely in itself to make up for the loss of competition at home.

Still, "the commission does recognise that the Chinese scouring industry poses a significant long-term competitive threat to the domestic industry in New Zealand."

More likely to constrain price gouging by a monopolistic Cavalier Wool is the cost to new entrants to the New Zealand industry, which the commission assessed at $20 million for a new 3-metre line and $10 million for a 2.4 metre second-hand line.

Godfrey Hirst is among potential players that could re-enter the scouring market and in its submission the carpet maker says it has scouted sites with limited success.

The commission noted that New Zealand has "a long history of exit and rationalisation" in wool scouring, while the national flock has dwindled to its current size of about 32 million. Wool traders have expressed no interest in entering the scour market, it said.

The transaction also failed the commission's so-called LET test, which considers whether a new entrant to the market is likely in commercial terms, sufficient to cause a significant change in behaviour and timely, coming within two years of market power being exercised.

To pass the LET test, scouring prices would need to rise 5% to 10%, the commission concludes.

Wool merchants operate in "an extremely competitive environment and with tight margins amounting to 15 cents to 20 cents a kilogram of greasy wool, it said. Scouring accounts for only 8% of the current value of wool.

Wool has accounted for just 11% of annual revenue for sheep and beef farmers, on average, over the past five years and makes up 18% of farmers' sheep alone revenue, according to Ministry of Agriculture and Forestry figures from 2010.

WSI didn't provide profit figures for the operations at its two scours and the commission accepted the figures provided by Cavalier, which put WSI's wool scouring profit at $4 million in 2009 and $8 million in 2010. In those two years, WSI's scouring property, plant and equipment assets were valued at $18 million and $16.6 million respectively.

"This suggests that a new entrant could be profitable if it had sufficient wool volumes, similar cost structures to WSI and could achieve the current market price," the commission said.

The $40 million acquisition has arisen because WSI's two biggest shareholders, Plum Duff Ltd. and Woolpak Holdings with a combined 64% holding, are in receivership.

Both companies have ties to Timaru businessman Allan Hubbard, and went into receivership last December.

Last year wool prices recovered from a decades-long slump as Chinese manufacturers needed more raw materials in the expectation carpet-makers will be restocking inventories this year.

(BusinessDesk)

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