Competition Bureau statement regarding its review of Paper Excellence’s acquisition of Domtar

Position Statement

See the news release that corresponds to this position statement.

December 8, 2021 – Gatineau, QC – On November 19, 2021, the Commissioner of Competition entered into a Consent Agreement with Karta Halten B.V. (Paper Excellence) requiring it to sell Domtar Corp’s (Domtar) pulp mill in Kamloops, British Columbia (the Kamloops Mill). The Commissioner is satisfied that the sale of the Kamloops Mill will maintain competition in the southern interior and coastal region of British Columbia for the purchase of wood fibre from the Thompson/Okanagan region of British Columbia.

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Paper Excellence and Domtar are two of the largest pulp and paper manufacturers in Canada. On May 11, 2021, Paper Excellence and Domtar entered into a definitive agreement whereby Paper Excellence would purchase Domtar for $55.50 per share, a consideration of approximately $3 billion.

During an in-depth review, the Bureau carefully considered the proposed transaction’s impact on competition, particularly as it relates to:

  1. the purchase of wood fibre, a key input to the manufacture of pulp; and
  2. the sale of pulp and paper.

1. Competitive Effects – Purchase of Wood Fibre

Wood fibre is a primary input for the production of pulp. Wood fibre used for pulp production generally falls into one of two categories: residual woodchips (a byproduct of lumber production at sawmills and plywood mills), and whole log chips (woodchips generated by consuming logs that are not fit for lumber or plywood production, generally called pulp logs). These woodchips are sold to pulp mills by sawmills, plywood mills or third party wood-chipping companies, or processed internally through a pulp mill’s own chipping facilities.

Wood fibre markets in British Columbia are regional. Wood fibre is generally purchased on a free on board (FOB) origin Footnote 1 basis – meaning that the pulp mill directly incurs the transportation costs. As a result, pulp mills prioritize purchasing wood fibre from their nearest sources. Typically, this results in pulp mills purchasing wood fibre from sources within a few hundred kilometres, although the exact range in any direction depends on the availability of wood fibre and the number of competing pulp mills in that direction.

For Paper Excellence, wood fibre generated on the coast of British Columbia has not been sufficient to meet the needs of its four coastal pulp mills. As a result, it purchases wood fibre from other regions, including the Thompson/Okanagan region in the southern interior of British Columbia. This places Paper Excellence in direct competition with Domtar’s Kamloops mill, which is located in the Thompson/Okanagan region and has significant locational advantages as a purchaser of the region’s wood fibre as a result.

The other pulp mills in the southern interior and coastal region of British Columbia that compete with Paper Excellence and Domtar for the purchase of wood fibre from the Thompson/Okanagan are Harmac Pacific’s Nanaimo pulp mill and Mercer’s Celgar pulp mill in Castlegar; however, neither mill relies on wood fibre from this region to the same extent as Paper Excellence or Domtar. Further, neither mill has the locational cost advantages that would allow them to replicate the competitive influence of the Domtar Kamloops Mill prior to the transaction or to mitigate an exercise of market power by Paper Excellence post-merger.

The other competing pulp mills in BC, specifically: Canfor’s pulp mills in Prince George and Taylor; West Fraser’s Quesnel River Pulp in Quesnel; and Cariboo Pulp and Paper, jointly owned by Mercer and West Fraser, located in Quesnel, can rely on wood fibre sources in closer proximity to their locations. Accordingly, they were not considered in the Bureau’s analysis to be effective options for suppliers of wood fibre from the Thompson/Okanagan region. Paper Excellence’s pulp mill in Skookumchuck was also not considered to be in the market.

The Bureau also found that barriers to entry or expansion for a pulp mill in southern BC are likely to be substantial. The entry or expansion of such a mill would not be likely, timely or sufficient to counteract the market power of Paper Excellence if it acquired the Kamloops Mill.

Ultimately, Paper Excellence and Domtar are, by far, the two largest purchasers of Thompson/Okanagan wood fibre, with a combined market share that likely exceeds 70%. As a result of this market structure combined with high barriers to entry and the competitive advantages held by Domtar and Paper Excellence making them each other’s closest competitors, the Bureau concluded that the proposed transaction would likely lessen competition substantially in the southern interior and coastal region of British Columbia through the creation of monopsony power for Paper Excellence for the purchase of wood fibre from the Thompson/Okanagan region. Absent a remedy, this would enable Paper Excellence to pay prices to sawmills and other suppliers of wood fibre below competitive levels.

Monopsony power is essentially a ‘mirror image’ of monopoly power. Where a monopolist leverages market power to maintain prices of a product it sells above competitive levels resulting in reduced output, a monopsonist leverages market power to maintain prices of a product it purchases below competitive levels, resulting in reduced output.

2. Competitive Effects – Sale of pulp and paper

The Bureau also considered the impact of the proposed transaction on downstream pulp and related paper markets. Paper Excellence and Domtar overlap in the production and sale of Northern Bleached Softwood Kraft pulp (NBSK); however, they have limited direct overlap in the production and sale of paper products in Canada.

a. Market Definition

The Bureau’s review found that NBSK likely constitutes a separate product market from other forms of kraft pulp, such as Southern Bleached Softwood Kraft pulp (SBSK), and northern and southern hardwood kraft pulps. NBSK, being produced from northern wood fibre, contains fibres that are stronger and shorter than SBSK, making it better suited to certain paper-based applications than SBSK. Market participants consulted by the Bureau unanimously indicated that NBSK and SBSK are not true substitutes for one another, although certain paper products require a blend of NBSK and SBSK.

Canada is a main producer of NBSK globally, with over 6 million tonnes of NBSK capacity in 2021. Outside of Canada, NBSK is produced in large quantities in northern Europe (specifically Scandinavia), and in smaller quantities in the northern United States. The southern United States primarily produces SBSK, due to climate differences between north and south.

The vast majority of NBSK produced in Canada is exported. Mills located in eastern Canada generally sell their NBSK in eastern Canada or export it to the United States. Mills in western Canada export the majority of their NBSK to Asia, with the remainder being sold in western Canada or exported to the United States.

From the suppliers’ perspective, the pulp market is at least continental in nature, if not global; 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. Typically, customers in eastern Canada are not able to obtain competitive prices from pulp mills outside of eastern Canada, due to transportation costs. Similarly, customers in western Canada are not able to obtain competitive prices from pulp mills outside of western Canada. Accordingly, the relevant geographic market for NBSK is regional in nature, likely including both eastern Canada and western Canada as distinct geographic markets.

b. Competitive Analysis

Paper Excellence and Domtar’s geographic footprint of NBSK mills differs substantially. Paper Excellence has active NBSK mills in BC and idled NBSK mills in BC, Saskatchewan and Nova Scotia. The Bureau considered these idled mills, along with the likelihood of operations resuming at each, in its analysis. Due in part to the geographic locations of Paper Excellence’s mills, it exports most of its NBSK to Asia. Prior to being idled, the mill in Pictou, NS was not particularly active in selling NBSK to Canadian customers.

Apart from the Kamloops Mill, Domtar’s Canadian pulp mills are located in Dryden and Espanola, ON, and Windsor, QC. Domtar’s Canadian NBSK customers are primarily supplied from the Dryden and Espanola pulp mills.

Competing NBSK suppliers in eastern Canada include Aditya Berla’s Terrace Bay mill, Resolute’s NBSK mills in St-Félicien, QC and Thunder Bay, ON, as well as Nordic Kraft’s mill in Lébel-sur-Quévillon, QC.  In western Canada, remaining competitors include West Fraser, Mercer, Canfor, and Harmac Pacific.

Ultimately, the Bureau concluded that Paper Excellence and Domtar are not particularly close competitors for Canadian customers in either western Canada or eastern Canada. There are remaining competitors in each respective region such that the proposed transaction is not likely to lessen or prevent competition substantially for the supply of NBSK.

Additionally, to determine whether Paper Excellence would have market power following its acquisition of Domtar, the Bureau extensively considered the potential existence of a significant interest between Paper Excellence and Asia Pulp & Paper (APP), which is owned by family members of the owner of Paper Excellence. APP is a major global producer of pulp and paper, and is one of the largest consumers of NBSK in the world.

Throughout the review of the Proposed Transaction, the Bureau learned that many industry participants view Paper Excellence and APP as sharing a significant relationship. Due to the size and scope of APP’s business, as well as the widespread belief in the industry of a significant link between the two companies, the Bureau sought to determine whether a significant interest exists and, if so, whether the ability of APP to materially influence Paper Excellence could potentially result in the Proposed Transaction substantially lessening or preventing competition in the sale of pulp and/or paper in Canada.

In considering whether there exists a significant interest, the Bureau relied on information from third parties, from the Parties in connection with the Proposed Transaction, as well as information from past representations made to the Bureau in connection with previous acquisitions. While a number of market participants alleged that Paper Excellence’s relationship with APP would incentivize it to act in an anti-competitive manner, even when such actions would not be profitable for a fully independent entity,  the Bureau determined that there is insufficient evidence to conclude that the Proposed Transaction would  likely substantially lessen or prevent competition in the sale of pulp and/or paper in Canada, even under a scenario where a significant interest is found to exist.

What is a significant interest?

The Act does not define what constitutes a significant interest; however, the Merger Enforcement Guidelines (MEGs) qualitatively define significant interest as the ability to materially influence the economic behaviour of another entity.

Typically, the Bureau considers significant interest in the context of partial cross-ownership; however, partial cross-ownership is not necessary for a significant interest to exist. Other considerations include, for example, supply and distribution arrangements that are not ordinary course transactions and that confer the ability to materially influence the economic behaviour of another company’s business.

3. Remedial Action

To address the harm to competition that would arise from the Proposed Transaction, pursuant to the Consent Agreement registered with the Competition Tribunal on November 19, 2021, Paper Excellence is required to sell the Kamloops Mill to an independent purchaser to be approved by the Commissioner. The Kamloops Mill is a state of the art NBSK and unbleached softwood kraft pulp production facility. It has an annual rated capacity of 408,000 air dried metric tons of pulp production and employs approximately 350 people.

The Consent Agreement also requires that Paper Excellence hold the Kamloops Mill separate from the rest of its organization until the sale of the mill has been completed.

The Commissioner is satisfied that the sale of the Kamloops Mill to an independent purchaser will resolve the substantial lessening of competition for the purchase of wood fibre from the Thompson/Okanagan region.

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 proposed 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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