Thursday 14th April 2011
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The nation's watchdog on anti-trust issues, the Commerce Commission says it would be willing to hand Cavalier Wool Holdings a virtual monopoly on wool scouring by allowing it to buy up to 100% of New Zealand Wool Services International's woolscour assets.
"The proposed acquisition would substantially lessen competition in the North and South Island wool scouring markets," the commission said today in a draft determination. "Cavalier Wool Holdings would essentially have a monopoly on the supply of wool scouring services."
It would re-locate Wool Services' scouring plants from Kaputone (near Belfast, north of Christchurch) to Timaru and from Whakatu to Cavalier's nearby plant at Awatoto, between Napier and Hastings. Cavalier would also mothball scour lines at its own Clive and Timaru plants.
But Commerce Commission chairman Mark Berry said there would be benefits to the public that would outweigh the loss of competition.
"The rationalisation is likely to lead to lower production and administration costs, the freeing up of industrial sites, and lower ongoing capital expenditure requirements in the future," he said.
While Cavalier Wool Holdings could raise prices once it had control of the scouring sector, the risk would be a limited by the longterm competitive threat of the Chinese wool scouring industry and the potential for new wool scours in New Zealand, said Berry.
Cavalier chief operating officer Colin McKenzie, said the acquisition was essential to making structural changes necessary to restore profitability to the strong wool sector.
Cavalier applied for approval of the takeover on February 8, so that it can merge the two companies' scouring operations in Cavalier's existing scours at Napier and Timaru.
There had been a sustained decline in prices and volumes for wool exported from New Zealand over the past four decades and the current supply chain for greasy wool from farm to wool scour was overly complex, wasteful and costly, McKenzie said.
Rationalisation could increase productivity and deliver better results for growers, merchants, brokers and exporters.
By setting up purpose-built "independent" greasy wool superstores adjacent to woolscours, the new business could improve efficiency - without owning or trading wool - to service existing wool brokers and private merchants.
The scour rationalisation could drive efficiency, reduce costs and retain wool scouring and scoured wool blending capability onshore and under New Zealand ownership, while offering benefits to wool farmers, merchants, brokers and exporters.
"We are playing on the global stage," McKenzie said. "The competition is very real."
The wool industry in China now represented half of the world's wool imports, and China dominated world scouring with 20 times more scour lines than in New Zealand and a lower tariff price.
He said 20% of New Zealand's greasy wool was scoured offshore along with 80% of Australian and the majority of European greasy wool: the Australian and Western European scouring industries were now virtually non-existent.
But about 30% of New Zealand's traded strong wool was processed in Australasia so it made sense to retaining scouring capability onshore.
An economic consultant working for Cavalier, Nera, told the commission that Cavalier was expecting to pay redundancy costs, but the figure was edited from the draft. The commission said it regarded redundancy payments as a "social cost" because they were compensation to employees for the loss of human capital in the form of on-the-job experience.
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