London (Platts)--22Nov2012/746 am EST/1246 GMT

The European Commission has cleared under EU merger regulations the proposed merger of Xstrata, the world's fifth-largest metals and mining group, and Glencore, the world's leading metals and thermal coal trader, the EC said Thursday.

The clearance is conditional on the termination of Glencore's offtake arrangements for zinc metal in the European Economic Area with Nyrstar, the world's largest zinc metal producer, and the divestiture of Glencore's minority shareholding in Nyrstar, which currently stands at around 7.79%.

The EC said it had "concerns that the merged entity would have the ability and incentive to raise prices for zinc metal, an important input for many EU industries," adding: "The commitments address these concerns."

The proposed remedy "ensures that competition in the European zinc metal market is preserved, so that European customers such as steel galvanizers and car makers can continue to produce valuable consumer goods at low prices and good quality," said the EC vice president in charge of competition policy, Joaquin Almunia, in a statement.

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Currently, Glencore is the largest supplier of zinc metal in the EEA on the basis of an exclusive offtake agreement with Nyrstar, an offtake relation for some of Xstrata's EEA output, production from Glencore's own smelter in Italy and imports, the EC noted.

Glencore and Nyrstar signed an offtake deal in November 2008, under which Glencore purchases commodity-grade zinc and lead metal produced by Nyrstar, whilst Nyrstar focuses on developing its sales within the higher-margin value-added zinc and lead alloys markets. Last year the two companies extended the agreement until 2018.

Nyrstar's smelters produced 803,000 mt of zinc metal in the first nine months of 2012, and are expected to produce around 1.1 million mt for the full year.

Glencore also controls warehousing group Pacorini, which owns a number of London Metal Exchange-approved warehouses notably in New Orleans, where a large amount of zinc metal is stored, and a large amount of exports and storage of EEA-produced zinc metal, the EC noted.

Xstrata is the second-largest producer of zinc metal in the EEA, owning the large San Juan de Nieva smelter in Spain and the smaller Nordenham plant in Germany. "Together Glencore and Xstrata are the world's largest supplier of upstream zinc concentrate," the EC said.

"Following the merger the merged entity would have even more than today the ability and incentive to control the level of zinc metal supplies in the EEA, for example by exporting material to LME-certified warehouses outside the EEA or otherwise withholding supplies from the EEA market," the EC added. "Reaction from competitors, including imports, would not be sufficient to prevent the risk of a significant price increase for zinc metal."

In order to remove these concerns, the EC said, Glencore committed: to terminate its exclusive long-term offtake agreement with Nyrstar in so far as the agreement relates to commodity zinc products produced by Nyrstar in the EEA; not to buy directly or indirectly any EEA zinc metal quantities from Nyrstar for a period of 10 years; not to engage, for 10 years, "in any other practices which have the effect of materially restricting Nyrstar's ability or incentive to compete effectively with Glencore in zinc metal in the EEA;" and to divest Glencore's minority shareholding in Nyrstar of around.

The EC concluded that the transaction, as modified by the commitments, would not raise competition concerns anymore, though it added that this decision is conditional upon the full implementation of the commitments.

The EC said its investigation found that the proposed transaction was unlikely to raise competition concerns as regards the production or supply of zinc concentrate, thermal coal and coking coal, copper and copper concentrate, lead and lead concentrate, nickel and nickel intermediates, cobalt and cobalt intermediates, ferrochrome and other "non-core" products (gold, molybdenum, platinum, palladium, sulfuric acid, vanadium, ferrovanadium, and silver).

Shareholders of Xstrata and Glencore voted Tuesday in favor of the $31 billion combination of the two Switzerland-based commodities heavyweights, but Xstrata shareholders rejected a controversial retention bonus plan for the company's senior management.

--Andy Blamey, andy_blamey@platts.com

--Edited by Maurice Geller, maurice_geller@platts.com

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