April 18, 2023 – Gatineau, QC – On December 28, 2022, the Commissioner of Competition and Domtar Corporation (Domtar), an affiliate of Paper Excellence, registered a consent agreement with the Competition Tribunal requiring it to sell its pulp mill in Dryden (ON) and the pulp and paper mill of Resolute Forest Products Inc. (Resolute) in Thunder Bay (ON) to address competition issues arising from its acquisition of Resolute. The Commissioner is satisfied that with the sales of the Dryden and Thunder Bay mills, the Canadian market will remain competitive for northern bleached softwood kraft pulp and for the purchase of wood fibre from the northwestern region of Ontario.
On this page:
- Background
- Competitive effects – Purchase of wood fibre
- Competitive effects – Sale of pulp
- Remedial action
Background
Before the transaction closed, Paper Excellence and Resolute were two of the largest pulp and paper manufacturers in Canada. On July 5, 2022, Domtar and Resolute entered into an agreement whereby Domtar would acquire 100% of the issued and outstanding shares of Resolute for US$20.50/share in cash, representing a total enterprise value of approximately US$2.7 billion. The transaction closed on March 1, 2023. As Domtar is wholly-owned by Paper Excellence, through this transaction, Resolute is now an affiliate of Paper Excellence. The relationship between Paper Excellence and Asia Pulp & Paper, in particular whether there is a significant interest between them, was discussed in the Bureau’s review of Paper Excellence’s acquisition of Domtar.
In its review of the Resolute transaction, the Bureau carefully considered the transaction’s impact on competition in several markets in Canada, particularly in the following:
- the purchase of wood fibre, particularly in northwestern Ontario; and
- the sale of pulp to third parties.
Competitive effects – Purchase of wood fibre
Wood fibre is composed of wood chips that is either produced as a by-product of lumber production at sawmills, or through the process of chipping whole logs. It is the most critical input into the manufacturing of pulp, and the qualities of the pulp being produced are largely dependent on the species and qualities of wood fibre that is consumed. In order to operate a pulp mill, pulp mill owners must therefore secure a supply of wood fibre, a process which can differ depending on the location of the pulp mill.
In Ontario, the majority of forest lands from which pulp mills source wood fibre are owned by the Province of Ontario (Crown lands). Crown lands are managed pursuant to sustainable forest licences granted under the Crown Forest Sustainability Act. Through affiliates, both Paper Excellence and Resolute hold sustainable forest licences close to the Dryden mill and the Thunder Bay mill, respectively, through which they source a portion of their respective wood fibre requirements for pulp production. In addition to these sustainable forest licences, Paper Excellence and Resolute are also able to source wood fibre from third-party sustainable forest licence holders and from private landowners, as well as source residual chips from other sawmills. Private landowners are not subject to the same sustainable forest licensing framework that governs Crown lands.
Prior to the closing of the transaction, the Bureau determined that private landowners in northwestern Ontario benefited directly from competition between Paper Excellence’s Dryden mill and Resolute’s Thunder Bay mill. Accordingly, if these purchases of wood fibre were made by a sole entity because of the transaction, it would create a monopsony.
Monopsony power is essentially a mirror image of monopoly power. A monopolist leverages market power to maintain prices above competitive levels of a product it sells, resulting in reduced output. A monopsonist leverages market power to maintain prices below competitive levels of a product it purchases, also resulting in reduced output.
Without the implementation of the consent agreement, private landowners in northwestern Ontario would likely be harmed by Paper Excellence’s monopsony power. The Bureau concluded that the transaction would therefore be likely to substantially lessen competition in this market.
The sale of both the Dryden and Thunder Bay mills to a single independent purchaser would not address the Commissioner’s monopsony concerns. The consent agreement therefore requires that the mills be sold to two separate and independent purchasers, ensuring that private landowners in northwestern Ontario will continue to have two options for the sale of their wood fibre.
Competitive effects – Sale of pulp
The Bureau also carefully considered the impact of the transaction on downstream pulp and related paper markets. The primary overlap between Paper Excellence and Resolute relates to the production and sale of northern bleached softwood kraft pulp (NBSK).
Canada is a major producer of NBSK globally, with over 6 million tonnes of NBSK capacity in 2021. The vast majority of NBSK produced in Canada is exported around the world.
Market definition
The qualities of any kraft pulp product are based largely on the wood fibre used to manufacture it. NBSK pulp is made from softwood fibre in northern climates. It is produced mainly in Canada, northern Europe and the northern United States. NBSK generally has a longer fibre length than other pulps, which provides certain qualities not found in other pulps, such as southern softwood kraft pulp or various hardwood kraft pulps. Specifically, throughout the Bureau’s review, it was common to hear that tissue products obtain strength from NBSK, absorbency from southern softwood pulp and softness from hardwood pulp. This means there is generally no substitute for NBSK.
Consistent with its previous review of Paper Excellence’s acquisition of Domtar in 2021, the Bureau found that NBSK likely constitutes a separate product market from other forms of kraft pulp. Further, the relevant geographic market for NBSK is likely regional, with eastern and central Canada and western Canada in distinct geographic markets. Eastern and central Canadian customers of NBSK who were contacted said that eastern and central Canadian producers are their primary source of NBSK through annual supply contracts. Pulp mills in western Canada are generally not viewed as competitive suppliers for large quantities and regular volumes, primarily because of logistical costs.
Pulp manufacturers generally view the pulp market as global. NBSK producers in Canada compete with NBSK producers around the world. As a result of this competition and the mobility of pulp, NBSK prices tend to move together around the world, as sellers react to supply and demand in global markets. However, the Bureau defines relevant markets around customers’ ability to substitute across products and geographies. For Canadian customers of NBSK, the geographic range of options is much smaller. Canadian customers are able to take advantage of the shorter distance between their facilities and NBSK mills, and negotiate local adjustments to prevailing price indices based on short-haul transportation costs and competitive dynamics in the region. The Bureau found that Canadian customers generally do not view import options from northern Europe as being price competitive with this localized pricing.
The Bureau ultimately concluded that the eastern and central Canadian geographic market for NBSK was appropriate for assessing the transaction. Based on the qualitative evidence gathered in its investigation, the Bureau concluded that a hypothetical monopolist with control of all NBSK mills in eastern and central Canada would likely be able to increase prices to customers in eastern and central Canada profitably, even if its ability to impose a price increase on customers outside of eastern and central Canada would be more limited.
Competitive analysis
Paper Excellence operates NBSK mills across the country, but Resolute’s NBSK mills are limited to Ontario and Quebec. In this market, Domtar has NBSK mills in Dryden (ON) and Espanola (ON), and Resolute has NBSK mills in Thunder Bay (ON) and Saint-Félicien (QC). The Bureau also considered Paper Excellence’s currently inactive NBSK mills in Pictou (NS) and Prince Albert (SK) for their impact on the NBSK market should they reopen.
Without the terms of the consent agreement, the increase in Paper Excellence’s production capacity would have meant it controlled over 50% of the NBSK production capacity in eastern and central Canada. This is well above the 35% threshold outlined in the Merger Enforcement Guidelines. Further, this percentage does not include the currently inactive production capacity.
During its review of the transaction, the Bureau contacted more than 50 market participants. Many of them expressed concern with the supply of NBSK, particularly the very high concentration of production that would be owned by Paper Excellence/Domtar if the transaction proceeded as proposed. NBSK customers also feared the loss of a competitor that would materially weaken their leverage position in price negotiations with potential suppliers.
The Bureau also determined that barriers to entry to and expansion in the NBSK market in eastern and central Canada are likely very high. The Bureau determined that entry or expansion is not likely to be timely or sufficient to prevent competition from being substantially lessened if the transaction had gone through as planned. With a transaction that would result in market shares exceeding 50% in the relevant market, the market’s substantial barriers to entry, and serious concerns expressed by multiple market participants, the Bureau concluded that the transaction is likely to substantially lessen competition for the supply of NBSK in eastern and central Canada.
Remedial action
Under the consent agreement, registered with the Competition Tribunal on December 28, 2022, Domtar is required to sell both its Dryden pulp mill and Resolute’s Thunder Bay pulp and paper mill. The mills must be sold to two separate and independent purchasers to be approved by the Commissioner.
The consent agreement also requires Domtar to hold the Thunder Bay pulp and paper mill separate from the rest of its organization and to maintain the economic viability, marketability and competitiveness of the Dryden pulp mill until the sale of the mills has been completed.
The Commissioner is satisfied that the sale of these mills to independent purchasers will preserve competition for the purchase of wood fibre from private lands in northwestern Ontario, as well as the supply of NBSK pulp in eastern and central Canada.
This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.
However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case-by-case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.
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