1. Background of the Study
For every nation, the steel industry is a fundamental industry that is both capital- and technology-intensive. It is a cornerstone in promotion of national construction. Its relations with other industries are deep and wide. Machinery, electrical engineering, transportation, construction and national defense are all built on the steel industry. It not only can propel the development of other industries but also plays an indispensable role in such development. It is a key industry to be promoted for economic progress and often regarded a token of the power of a country. Hence, both developed and developing countries all make active efforts to improve their steel industry. In consequence, when the design of the trade policy of a country is more politically oriented than out of the intention to improve economy, or, it is designed after more protective model than after liberal model, it is likely to cause imbalance to the supply and demand of steel products and the industry will become difficult to manage because of unpredictable price fluctuations.
Due to scarce natural resources, Chinese Taipei relies on imports for iron sand and coking coal required for steel refinement. 50% of the scrap steel supply needed is purchased in the country, about 10% comes from the steel production of domestic steel mills, and the rest has to be imported. Therefore, the prices of steel products are subject to international raw material cost fluctuations (for example, the costs of iron sand, coking coal and scrap steel.). Meanwhile, as the domestic market of Chinese Taipei is limited, the processed steel produced by businesses in the midstream and downstream of the steel industry has far exceeded the demand inside the country. Oversupply is obvious and the surplus production has to be exported. In other words, the raw materials needed for steel refinement (either with blast or electric furnaces) in the upstream of the domestic steel industry have to be imported while the processed steel products from the downstream require exportation to help digest their productivity. Apparently, the domestic steel industry finds itself unable to ignore the ups and downs in the global economy.
The structure of the domestic steel industry is rather complete. Besides steel billet shortages in the upstream and the inability to provide a small number of special steel products, the domestic steel industry has sufficient capacity to meet the domestic demand. Since the industry is not protected and the import duty on steel products was removed in 2004, market competition is without any restrictions. Steel mills not only must face domestic competitors but also have to cope with imports from all over the world to claim a share of the domestic market. In fact, the fierce competition on the global steel market makes steel business management a rather tough task. As a result, steel mills have begun to consolidate and set up alliances to boost competitiveness. For example, Arcellor was jointly set up by Usinor Steel Corp. of France, Arbed Group of Luxemburg and Aceralia Steel Co. of Spain in Nov. 2001 and became the largest crude steel manufacturer at the time. In 2004, LNM Holdings and Ispat International merged to become Mittal Steel which purchased American ISG in 2005 and became the largest steel group in the world. In the following year, it also bought up Arcelor, the second largest group, and the company’s crude steel productivity reached 110 million tons per year.
The steel industry is a fundamental industry that is closely related to a large number of other industries. The Fair Trade Commission (hereinafter referred to as the FTC) has always kept a close eye on the market and taken action against violations of the Fair Trade Law such as unreasonable price escalations, speculative hoarding, joint price increases, and monopolization. Domestic steel businesses have been unable to stay out of the tendency of mergers in the industry across the globe. However, investigation and punishment of concerted price increases and approval and rejection of merger applications have to be carried out according to the developments in the industry in and out of the country and the regulations and enforcement criteria in major countries with a competition law. Therefore, in addition to collection and compilation of related information on the steel industry, the steel business merger cases handled and decided both domestically and overseas are also analyzed in order to establish a better understanding of the current development and competition in the steel industry to provide references for the FTC in future law enforcement.
2. Scope and Methodology of the Study
(1) Scope of the study
The steel produced domestically is mainly divided into ordinary steel and special steel. The former makes up 90% of the total production and the latter only 10%. Ordinary steel includes steel rails, steel coils, coated steel coils, bar steel, shaped steel and steel pipes. The steel coils are again divided into hot rolled and cold rolled steel sheets while special steel includes stainless steel, other special steel and alloy steel, with stainless steel products constituting the largest proportion, 98.9% last year (2010), for example. Hence, the section in this study involving special steel mostly focuses on stainless steel. Due to the extensiveness of the impact of the steel industry, this paper begins with an analysis of the structure of the ordinary steel and stainless steel markets and current situation of the competition on the markets. In the second part, the regulations on the steel industry in each major country under the architecture of competition law are sorted out and the competition law enforcement measures are examined and the cases processed in these countries are analyzed. Furthermore, in the third part the cases concerning the steel industry that the FTC has dealt with over the years are sorted out and compiled, including the investigations conducted on concerted price adjustments, the corresponding sanctions, as well as its review of merger applications and cases involving competition restriction and the administrative measures adopted, in order to identify and analyze the controversies. Finally, in the last part, the results of the aforementioned analysis are applied with the purpose of reexamining the competition in the domestic steel industry and establish both the criteria and mechanism according to which the FTC can monitor and determine whether domestic steel businesses have violated competition regulations.
(2) Methodology of the study
This study is conducted by inspecting the experience accumulated from investigations, interviewing the principal steel businesses, and visiting steel mills to observe their production process. Also, the information provided on Chinese websites about the steeling industry and steel product prices and the Taiwan Steel and Steel Information published by the Taiwan Steel and Iron Industries Association and the Steel Almanac released by the Metal Industries Research and Development Centre are studied for the purpose of understanding the structure of the steel industry and the tendencies. At the same time, the cases involving the steel industries processed in different countries and by the FTC are collected. According to their types, time of occurrence, how they were handled, and the industrial structure, in-depth analysis is performed on related documents to establish the foundation of empirical study and draw the conclusions. The methods adopted are as follows:
- In-depth interview: People from the steel industry are interviewed to understand their recognition, feelings and opinions toward certain issues or events to establish a better picture of the current market structure, steel product items, technical limitations, and the upstream-downstream relations in the industry.
- Case study: A large number of cases processed in western countries and by the FTC are categorized, compared and scrutinized to understand the correlation between the behavior patterns and developments in the steel industry.
- Document analysis: Related documents are gathered, sorted out and compiled to compare old and new data and market evolvements to understand the mid- and long-term tendencies.
3. Main Suggestions
By combining the law enforcement practices, the knowledge on the steel industry structure, and understanding of steel market competition in each country, the following conclusions are achieved:
(1) Market competition in the steel industry related to the stage of economic development and growth
The development of the steel industry is closely related to the market demand and economic development in each country. As the upstream investment in the steel industry has to be of certain magnitude, the structure of the industry in each country is unbalanced. It is either monopolistic or oligopolistic in the upstream and increasingly competitive toward the downstream. Due to the magnitude of the scale of operation and investment of the steel mills in the upstream, government assistance is often involved. Examples include China's Baosteel and Chinese Taipei's China Steel. A lot of government efforts were pumped in to help start the business and boost production and sales. In some other cases, powerful steel groups purchased smaller operations and built up business trusts, such as the European Steel and Coal Community, the forerunner of the EU, and the United States Steel Corporation. These upstream steel enterprises were not only economically powerful but also highly associated with political maneuvers. However, the attention these businesses drew for themselves because of their role and influence in politics made it difficult for them to become monopolies or abuse their dominance. The record of competition law enforcement in each country indicates that there has been no monopolization or market power abuse in the steel industry.
(2) Preliminary merger review to prevent unreasonable expansion of the market power of steel businesses
Undeniably, steel mills in the upstream try to increase their market power through purchases and annexations. As a consequence, competition law authorities usually adopt stricter standards when reviewing merger applications from upstream steel mills. Narrow definition of product market has been applied and more restrictions imposed when the businesses involved in the applications are closer toward the top of the production chain. For example, when Japan reviewed the merger between Nippon Steel Corporation and Sumitomo Metal Industries Ltd. last year (2010), despite that Sumitomo was not a major steel mill, the details of the product items Japan's Fair Trade Commission looked into for definition of the scope of impact clearly showed the government's concern about the likely growth of market power. The merger was approved in the end because the participating businesses came up with certain corrective measures and promised to fulfill them. Back in Chinese Taipei, the merger between Yieh United Steel Corporation and Tang Eng Ironworks Co., Ltd. was prohibited due to the likelihood of unilateral effects from high concentration and difficulty for new market competitors to participate in the upstream stainless steel market. The regulations the competition law authorities in different countries imposed on steel businesses show that structural review normally takes place before behavioral investigation to prevent growth of upstream steel businesses' market power from jeopardizing the overall development of the steel industry.
(3) Relatively fewer competition law violation cases involving steel businesses in every country
The findings of this study indicate that the pricing and production and marketing arrangements of the upstream businesses in the steel industry normally gave rise to more concerns owing to the magnitude of their operation scales and monopolization or abuse of market dominance is therefore less likely. However, as the steel production and market order is closely related to the economic cycle, price fluctuations can also be periodic. Therefore, when periodic fluctuations are inconsistent with international economic tendencies, concerted action is highly possible and the principal violation patterns include price or quantity control or market share allocation. Nevertheless, such concerted action is easy to detect based on the periodicity of the general environment and the probability that it can happen is small. Hence, the record of competition law enforcement in each country shows the ratio of competition law violations involving steel businesses is relatively low.
(4) Upper midstream steel businesses unlikely to monopolize or abuse their market dominance but concerted action possibilities not ruled out, especially in areas where steel businesses can reach into
Steel products produced in the upper midstream are large in volume or difficult to move. Therefore, steel transactions are normally conducted in certain areas. At the same time, international concerted action, especially the types that span across countries, is also unlikely. Hence, concerted action mostly occurs domestically. In addition, the structure of the steel industry is usually unbalanced, as mentioned earlier. Besides in Chinese Taipei where China Steel is the sole operation in the upstream, there are normally two or more steel mills in the upstream in other countries. The ones in the EU, Japan, China and the US are similar in scale whereas in Korea the scale difference is rather large and the possibility of concerted action between upstream steel mills is naturally higher than in the EU, Japan, or the US. When comparing the concerted action in the steel industry in the EU and Japan, it shows that it occurred as a result of market deterioration and excessive productivity. This coincides with the causes of many other types of concerted action. Although concerted action is impossible in the upstream of the steel industry in Chinese Taipei, it did happen before in the downstream of the industry when the FTC was first established officially. It must have been the result of the business culture in the country and, after public education on competition regulations in recent years, businesses have learned about the illegality of concerted action. Therefore, in addition to the cases in 1993 and 1995, illegal concerted action has not happened again. Moreover, as economic reversion was reaching its climax in the past years, the FTC requested trade unions to forward the warnings to remind their members to abide by the Fair Trade Law. Such actions have their preventive deterring effects to a certain extent. Nonetheless, based on their history of cooperation, the steel businesses of different countries have set up regional steel business associations and regular meetings are held. The FTC ought to keep close eyes on whether China Steel establishes cooperative relations with its Japanese or Korean counterparts because of geographic proximity and exchange production and marketing information.
(5) Deep impact from international raw material price fluctuations on domestic steel price changes
With the establishment of China Steel, the steel refinement system the domestic became complete. Later, as private steel mills were set up one after another in the 1970s, the domestic steel industry started to mature and the production targets gradually changed from meeting domestic demands to exporting to other countries. However, limited by Chinese Taipei's scarce natural resources, raw materials needed for steel refinement have to be imported. On top of this, the domestic market scale and productivity are unable to cope with the major players across the globe and Chinese Taipei's businesses find it difficult to determine their own prices. The prices of the steel products from China Steel or the reinforcement steel bars produced by domestic manufacturers are affected by the supply and demand of raw materials. The cases the FTC handled before 2001 appeared to involve more diverse behavior patterns. Most of them took place between 1992 and 1995, probably as a result of the businesses' unfamiliarity with the Fair Trade law. The cases handled after 2001 were mostly related to price fluctuations and the investigations revealed the tendency had its periodicity, apparently a consequence of the economic cycle.