Al Ezz Steel Rebars (EZZ Steel)
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COMPETITION COMPLIANCE
THE EGYPTIAN STEEL REBAR MARKET
INVESTIGATION UNDER EGYPTIAN COMPETITION LAW

In 2009 the Egyptian Competition Authority cleared ezzsteel of any violation of the Egyptian Competition Law, dispelling the myth that ezzsteel had unfairly monopolised the steel rebar market.

In July 2006, Egypt's Minister of Trade and Industry made a formal request to the Egyptian Competition Authority to investigate the reasons for rising steel rebar prices in Egypt - which had almost doubled in the preceding four years - and to explore whether this resulted from any violation of the Egyptian Competition Law.

ezzsteel cleared
After what was a wide-ranging and in-depth investigation, including a comprehensive review of ezzsteel's commercial operations, the Egyptian Competition Authority issued its final report in July 2009. The report concluded that the rise in rebar prices was caused predominantly by a significant increase in production costs over which rebar producers in Egypt had little control. It also cleared ezzsteel and other rebar producers of any violation of the Egyptian Competition Law.

Background to the Egyptian long steel (rebar) market
ezzsteel is a leading producer of long and flat steel in Egypt, its domestic market, where it competes with other Egyptian steel producers and numerous foreign importers. Long steel products consist of steel reinforcing bars (‘rebar’) used in construction.

While demand for long steel products in Egypt increased only marginally between 2002 and 2006, the same period experienced a significant increase in raw material costs and hence long steel prices. Since then, demand for long steel in Egypt has grown dramatically, driven by strong local house building demand and infrastructure projects, almost doubling in size to over 7.3m tonnes in 2009.

The impact of imports on long steel supply in Egypt: recent history
The intensity of competition in Egypt from rebar imports has increased dramatically in recent years. As the following chart demonstrates, at their height in 2009 rebar imports accounted for 33% of total long steel supply in Egypt, reducing ezzsteel’s share of supply significantly. Although this figure fell somewhat in the first half of 2010, the prospect of further imports continues to impose significant constraints on the commercial behaviour of Egyptian rebar producers, including ezzsteel.


ezzsteel’s approach to long steel pricing in Egypt

ezzsteel’s business philosophy is driven by a commitment to offer customers high quality products at competitive prices, and in so doing to remain the preferred supplier in its domestic market. To maintain that reputation it endeavours– subject always to full compliance with the Egyptian Competition Law – to set prices below international levels. As the following chart demonstrates, even where increasing raw material costs have forced significant price increases, ezzsteel’s long steel prices in Egypt have remained, for the most part, below the average in all other international markets.


The Egyptian Competition Authority’s investigation into the steel rebar market

Following the request from the Minister of Trade and Industry in 2006, the Egyptian Competition Authority (referred to in the remainder of this summary as ‘the ECA’) launched an investigation under the Egyptian Competition Law (referred to in the remainder of this summary as ‘the Law’).

The ECA’s investigation was extensive and thorough. In addition to analysing significant quantities of data, it held meetings and obtained information from a range of third parties, including steel rebar producers, raw material suppliers, consultants, contracting companies and distributers.

The ECA issued its final report in July 2009.

In summary, the ECA concluded that:
  1. The increase in rebar prices was predominantly caused by increases in raw material and hence production costs (over which rebar producers had little control);

  2. Rebar prices in Egypt were lower than global prices throughout the period of the ECA’s study;

  3. No violation of the Law by any rebar producer, including ezzsteel, had taken place.

With regard to ezzsteel in particular, the ECA concluded that:
  1. ezzsteel’s business units involved in the production of rebar – namely ezzsteel (formerly: Al Ezz Steel Rebars Company), Al Ezz Dekheila Steel Company and Al Ezz Rolling Mills – are to be regarded as one decision-making group for the purposes of the Law. Among other things, this means that the commercial dealings between each of those business units are not subject to the Law;

  2. ezzsteel held a dominant position under the Law, and was therefore subject to additional legal prohibitions curtailing its conduct. However, ezzsteel had not violated any of those prohibitions. In particular, ezzsteel’s distribution policy (which was comprehensively reviewed by the ECA) was fully compliant with the Law.

Set out below are the key findings from the ECA’s report. Where appropriate, ezzsteel also makes a number of observations on them.

Scope of the ‘relevant market’ (Article 3 of the Law)

In order to properly assess the conditions of competition in the market, the ECA was required to identify the scope of the relevant product and geographic markets. As for the relevant product market, the ECA concluded that this was limited to rebar, given that buyers could not easily switch their purchases to other products. As for the geographic market, the ECA concluded that this was limited to Egypt.

Agreements harming the freedom of competition between rebar producers (Article 6 of the Law)

Agreements between competitors that restrict competition in a market are prohibited under the Law. Following examination of various aspects of rebar producers’ behaviour, the ECA concluded that no rebar producer, including ezzsteel, had entered into any agreement with any other in violation of the Law.

Agreements harming the freedom of competition between rebar producers and their suppliers or customers (Article 7 of the Law)

Agreements between a firm and any of its suppliers or customers that restrict competition in a market are prohibited under the Law. Following examination of rebar producers’ dealings with raw material suppliers and distributors, the ECA concluded that no steel rebar producer, including ezzsteel, had entered into any agreement with any supplier or customer in violation of the Law.

Abuse of a dominant position in a market (Article 8 of the Law)

The Law imposes additional obligations on firms with significant power in a market (so-called ‘dominant firms’) to prevent them from abusing their dominant position to the detriment of competition. However, the fact that a firm holds such a position in a market is not in itself illegal. Many fair dealing firms around the world fall into this category.

The ECA concluded that ezzsteel held a dominant position in the relevant market as defined in its report. It then proceeded to consider whether ezzsteel had done anything in violation of the specific prohibitions in the Law applying to dominant firms. In summary, these prohibit dominant firms from:
  1. Doing anything which leads to the non-manufacturing, non-production or non-distribution of a product;
  2. Refraining from entering into sales or purchase transactions with anyone, or ceasing to deal with anyone, where this restricts that person’s freedom to access or exit the market;
  3. Limiting the distribution of a product on the basis of geographic areas, distribution centres, clients, seasons or time periods;
  4. Imposing selling or purchasing conditions which are not related by their nature or by commercial custom to the transaction or agreement;
  5. Discriminating between sellers or buyers in similar contractual positions in relation to prices or the terms of transactions;
  6. Refusing to produce or provide a scarce product where it is economically possible to do so;
  7. Requiring someone not to allow a competitor access to that person’s utilities or services;
  8. Selling products below their marginal or average variable cost;
  9. Obliging a supplier not to deal with a competitor.

The ECA examined ezzsteel’s conduct against each of the above prohibitions. It concluded that none had been violated.

The ECA’s assessment of ezzsteel’s distribution policy

During the course of its investigation, the ECA analysed in some detail the effect of ezzsteel’s distribution policy on the freedom of competition in the Egyptian rebar market.

In particular, the ECA reviewed the impact of ezzsteel’s policy of reserving the right to reduce the monthly amount supplied to any distributor if, for reasons other than a general fall in market demand, the distributor had failed to purchase its agreed monthly supply from ezzsteel by an amount exceeding 10% for two consecutive months. The ECA wanted to satisfy itself that such a policy did not lead to an unjustified limitation of supply by ezzsteel, or unfairly limit the competitive opportunities of other local producers, or give rise to exclusive relationships between ezzsteel and its distributors.

In concluding that ezzsteel’s distribution policy did not violate the Law, the ECA noted that:
  1. ezzsteel had established its distribution policy in order to maintain the efficiency of its distribution operation;
  2. Competing producers had not been adversely affected by ezzsteel’s distribution arrangements – indeed, the ECA’s investigation revealed that other rebar producers had experienced an increase in sales;
  3. Distributors purchasing exclusively from ezzsteel accounted for only 8.6% of total rebar supplies into the relevant market. ezzsteel notes that the ECA’s report does not in any way suggest that such exclusive relationships resulted from its distribution policy. ezzsteel confirms that its distributors have always been and remain free to purchase rebar from any other producer or producers, whenever they so desire;
  4. A number of distributors informed the ECA that their dealings with ezzsteel were guided in the first instance by the quality of ezzsteel rebar, which results in high demand from end users. This conclusion is consistent with ezzsteel’s own market experience, which confirms that distributors’ demand for ezzsteel rebar is influenced not by the terms of its distribution policy but rather by the quality and price of its product;
  5. ezzsteel redistributed any rebar not drawn down by distributers in accordance with their monthly agreements either to new distributors or to existing distributors wishing to sell additional quantities. ezzsteel notes that this conclusion is entirely consistent with the group’s general policy of seeking to sell its full production on a monthly basis.

Monopolisation claims

The ECA’s findings demonstrate that, even if this had been feasible, ezzsteel did not unfairly monopolise steel rebar supply in Egypt. Furthermore, the ECA’s findings remain consistent with ezzsteel’s continuing approach to doing business: that is, providing customers with the highest quality products at competitive prices in full compliance with the Law, often in circumstances of intense competition from other rebar suppliers.

ezzsteel’s commitment to compliance with the Egyptian Competition Law

ezzsteel’s chairman, Ahmed Ezz, was an active supporter of the introduction of competition law in Egypt. He was instrumental in ensuring that ezzsteel took early steps to establish a dedicated and effective competition law compliance programme. Indeed, ezzsteel believes it was the first to establish such a programme in Egypt and, consistent with its approach to-date, remains committed to ensuring that its conduct complies fully with the Egyptian Competition Law.