December 2, 2010 at 1:19 am #2444
JUSTICE DEPARTMENT REQUIRES GRAFTECH INTERNATIONAL TO MAKE KEY CHANGES TO SUPPLY CONTRACTS IN ORDER TO PROCEED WITH ITS ACQUISITION OF SEADRIFT LP
Removal of Audit Rights and Most Favored Nation Pricing Provision Along with Reporting And Firewall Requirements Will Preserve Competition in the Production and Sale of a Critical Petroleum Product
WASHINGTON – The Department of Justice announced today that it has reached a settlement that will require GrafTech International Ltd., a major producer of graphite electrodes, to make significant modifications to its supply agreement with ConocoPhillips Company, along with reporting and firewall obligations, in order to proceed with its proposed acquisition of Seadrift Coke LP.
The department said, in its current form, the GrafTech-Conoco supply agreement and intended ongoing supply arrangements could encourage the exchange of pricing and output information or enable coordination between competitors -Conoco and Seadrift –for the production and sale of a critical petroleum product used in the production of graphite electrodes. The department said that requiring GrafTech to remove certain provisions from the GrafTech-Conoco supply agreement along with providing reports on demand and capacity utilization and implementing firewalls removes the ability and incentive for GrafTech and Conoco to coordinate on price and output post-acquisition.
The Department of Justice’s Antitrust Division filed a civil antitrust lawsuit today in U.S. District Court for the District of Columbia to prevent the proposed acquisition from extending the audit and most favored nation (MFN) provisions under the Conoco supply agreement to Seadrift and imposing conditions as a result of the ongoing supply arrangement. At the same time, the department filed a proposed settlement that, if approved by the court, would resolve the competitive concerns alleged in the lawsuit.
Graphite electrodes are used by steel manufacturers to conduct electricity into electric arc furnaces, which melt steel for a variety of applications. The supply agreement involves a critical petroleum product, called petroleum needle coke, which is an important input into the production of graphite electrodes. Seadrift makes petroleum needle coke.
“The proposed settlement removes a means for potential price and output coordination that otherwise likely would result in higher prices and reduced supply for consumers of this critical petroleum product,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “At the same time, the settlement will permit quality improvements by GrafTech in Seadrift’s equipment and processes, benefiting consumers.”
The department’s complaint alleges that the GrafTech-Conoco supply agreement includes provisions such as MFN pricing which, combined with a right for GrafTech to audit the books, records and documents of Conoco, could incentivize the exchange of contemporaneous, customer-specific pricing information between competitors Conoco and Seadrift post-acquisition. In this case, the MFN provision would have required that Conoco guarantee that no other customer can receive a lower price than GrafTech. Reporting and firewall obligations reduce the possibility of coordination on price or output as a result of ongoing supply arrangements.
The inclusion of reporting and firewall requirements in the terms of the proposed settlement, provides an important tool in the Antitrust Division’s efforts to ensure competition remains in this industry, Varney added.
The proposed settlement requires GrafTech to remove the audit rights and MFN pricing from its supply agreement with Conoco, and agree not to include similar provisions in future supply agreements for the 10-year term of the consent decree. During that time, GrafTech also must provide the department with copies of all supply agreements with Conoco, as well as copies of business documents relating to production, capacity and sales. The settlement also sets up firewalls that protect confidential and valuable competitor data. The reporting and firewall requirements will ensure that GrafTech will be precluded from sharing confidential Conoco information with Seadrift employees, that GrafTech will not share certain Seadrift information with Conoco, and Seadrift may not share confidential customer information with GrafTech.
December 2, 2010 at 1:31 am #5380
Here is update on Graftech (former UCAR Graphite Electrode producer) purchase of remaining portion (Graftech owns ~19% & trying purchase remaining 81%) Seadrift Needle coke producer a competitor to COP who supplies a large portion of needle coke Graftech has buy for electrodes (~80%) on long term contract.
DOJ has hold Graftech purchase of Seadrift until COP Needle coke contract is cleaned up & firewalls put in.
Could be nice out for COP because I am sure Graftech would have used purchased supply from Seadrift to hammer down price & details on existing (on evergreen basis now?) contract.
Other details on Seadrift sale ~ Confirmed that Seadrift only sold ~39kmt 2009 vs 148kmt 2008 (~cap 160 kmtpy). List of DOJ requirements on SEC reports – sale will likely happen since changes are not major. One Graftech SEC reports (Aug 10) has most details on DOJ requirements & sales number above – so no wonder Graftech pounced on them.
Others should object to the “firewall” as not being strong enough. If goes ahead the cosy COP-Graftech link firewall or no; has another overlooked aspect in COP-Phillips merger was that Phillips had essentially dominant position of all CBO preminum & Needle coker feedstock producers – became even more so with COP’s refineries…..
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