Evaluation of Activities in the Paper Industry in View of the Competition Board Decisions

Overview of the Industry

Paper production decreased globally in both 2019 and 2020 due to production cuts and quarantine limitations caused by the pandemic, which started in China and spread to the rest of the world. The pandemic also resulted in a decline in in the demand for paper and printing with the transition to remote work and online learning.

With the decreasing impact of the pandemic and the rapid growth of e-commerce, the industry has begun to recover. The production growth is mainly attributed to cardboard, with the growing popularity of e-commerce thought to be the main driver of the need for it. As a result of the rise in e-commerce sales, cardboard constituted two-thirds of the world’s paper production at the end of 2022.

The production of paper and cardboard increased by 1.4 percent in 2021 compared to 2020, reaching 408.6 million tonnes, and it rose to 416 million tonnes in 2022.

Evaluation of the Competition Board’s decision no. 18-44/695-340 (file no. 2018-3-64) of 22.11.2018

The preliminary inquiry initiated ex officio by the Competition Board (“Board”) primarily concerns the ex officio examination of the presence of practices contrary to Act on the Protection of Competition no. 4054 (“Act”), such as overpricing, refusal to supply goods from raw materials and products in stock, and abuse of dominance.

This inquiry was initiated based on recent news about the paper and paper packaging industry in the press and media, including the following:

• Two basic raw materials are used in the paper industry, with problems in the supply of both.
• The first of them is obtained from recycled wastepaper while the second is cellulose, a raw material obtained from a variety of trees.
• The problem with recycled paper is the country’s inefficient collection system, resulting in the import of wastepaper.
• Due to reliance on foreign countries for the supply of cellulose, paper prices are uncontrollable.
• Paper is crucial for corrugated cardboard production, accounting for approximately 80% of the cost items.
• The domestic market’s paper prices have increased by approximately 70% since the beginning of the year.
• The rise in foreign currency-based prices caused the prices of imported products to rise significantly, nearly 100%.

The Board initiated a thorough examination about the industry before proceeding with a legal review to identify the undertakings, the subject of the file, the relevant product market and the relevant geographical market to be examined. The purpose of the examination was to acquire information about the products of the industry, raw materials used in production, the diversity of products and their usage, and the undertakings operating in the industry (their products, market shares, and potential dominance).

The examination to get information regarding these issues was followed by the Examination and Evaluation stage.

Inquiry into Dominant Position

Article 3 in the Act defines the dominant position as follows: “The power of one or more undertakings in a particular market to determine economic parameters such as price, supply, the amount of production and distribution, by acting independently of their competitors and customers.” Thus, the inquiry aimed to determine the presence of any undertaking(s) with a dominant position in the relevant industry.

The three factors to be considered to identify a dominant position are (i) the market positions of the relevant undertaking and its competitors, (ii) the pressure on the relevant undertaking due to the growth of current competitors or the entry of potential competitors into the market, and (iii) the countervailing powers of the customers of the relevant undertaking.

“It was determined that: as of 2017, there were approximately 2,570 undertakings operating in the paper industry; the subgroup with the highest number of undertakings among the paper industries was the corrugated cardboard industry, with 1,310 undertakings; the corrugated cardboard industry was followed by the subgroup of other products from paper and cardboard, with 450 undertakings; and the number of undertakings in the corrugated cardboard industry had increased since 2010. Moreover, it was understood that in the context of the industry of packaging papers and corrugated cardboard and in view of the estimated market shares of MODERN KARTON and MODEN OLUKLU (…..)%, KİPAŞ (…..)%, KMK (…..)%, and DENTAŞ (…..)%, other undertakings constituted approximately 37-56% of the market, and that many undertakings operated in the industry… This finding is supported by the fact that OMÜD, which serves as a trade association in the corrugated cardboard industry, has 74 members. Moreover, based on the information provided by OMÜD, there are 52 corrugated cardboard manufacturers that are not members of the association. No market share data are available for the cardboard packaging industry; however, this market still accommodates many undertakings since KASAD, which is also a trade association, has 45 members. Therefore, we conclude that none of the industries examined now have a structure that would support an undertaking holding a dominant position.”

The decision shows that all factors have been considered, including the diversity of the market and the multiplicity of market players as well as the ratio of the undertakings’ market shares to the general situation, resulting in the conclusion that there is no structure to create a dominant position.

Inquiry into Anti-Competitive Practices

CASE 1:

As a result of the Board’s on-the-spot inspection, expressions such as ‘cooperation’, ‘partnership’ and ‘agreement’ in the correspondence between the two undertakings were considered to indicate a concerted practice. Therefore, the Board requested information from the undertakings and directly questioned the parties to shed light on the situation in accordance with article 14 of the Act.

As part of the Board’s examination, answers to the following issues were important to identify the presence of any concerted practice in the relevant case:

• The availability of a written agreement between the undertakings regarding operational processes,
• The occurrence of any acquisition and/or sale that would result in expansion or downsizing in the relevant industry, including the transfer of shares/businesses as well as the purchase and sale of machinery,
• The extent of the commercial relationship between the undertakings,
• The undertakings’ shareholding statuses,
• Investment strategies

“… Evidence no. 1, 2 and 3 are crucial to prove that the parties have shared possible cooperation plans, the capacity information of plants, and industry-specific investment strategies, all of which may constitute trade secrets and affect competition, and used words such as ‘cooperation’, ‘partnership’, and ‘agreement’ in their correspondence… Information was requested from MONDİ and KİPAŞ to eliminate the question of whether their agreement could be considered a violation of article 4 in Act no. 4054… According to the response letters revealing that the commercial relationship between the undertakings was of a vertical nature, it was reported that KİPAŞ did not purchase any products from MONDİ, but that MONDİ purchased test liners, especially fluting papers, and a handful of craft items from KİPAŞ… Questions about shareholding were asked to find out whether there was any relationship between the parties that could result in a common interest and/or coordination motivation in this vertical relationship. The responses stated that: Mondi Group Companies did not have any shares in KİPAŞ or the group companies of KİPAŞ; MONDİ was a public company with changeable shareholders; and MONDİ did not know in which other undertakings the holders of public shares had shares. Moreover, KİPAŞ stated that no shareholder of the group containing KİPAŞ had a share in MONDİ or the group companies of MONDİ… Finally, explanations were requested from MONDİ and KİPAŞ about their investments in the paper market and the recycled paper market (RCB), other than corrugated cardboard production, in the last three years to understand whether they guided their investment strategies in line with the issues addressed in Evidence 1, 2 and 3 containing the correspondence between them. Based on the documents sent for that purpose, it was concluded that the investment plans of MONDİ and KİPAŞ did not show any significant changes after the period from December 2017 to July 2018, when the correspondence in the Evidence was made. The correspondence shows that KİPAŞ will maintain its investments in corrugated cardboard production, which MONDİ intends to focus on, despite MONDİ’s offer. In other words, KİPAŞ will continue to invest in the corrugated cardboard industry, contrary to MONDİ’s offer. Therefore, it is possible to say that there is no anti-competitive collusive relationship in this case.”

CASE 2:

With the on-the-spot inspection carried out at KASAD, documents titled “Meeting Details”, containing the issues discussed at KASAD’s ordinary board of directors meeting on 19.04.2018, were reviewed. The purpose of the review was to determine whether the statements in these documents indicated concerted practices violating article 4 of the Act.

The issues reviewed to that end were as follows:

• Whether there was a board decision to set prices in a way to influence undertakings,
• Whether there was an oppressive attitude towards undertakings in the determination of prices,
• Whether the undertakings changed their prices based on the suggestions in the meeting,

“On the other hand, during the on-the-spot inspection carried out at KASAD, which is an association of undertakings established by 45 members operating in the cardboard packaging industry, no evidence was discovered to support the allegations in the file regarding an anti-competitive agreement, a concerted practice or a decision or action of the association of undertakings in the industry. However, based on the correspondence contained in evidence no. 4 and 5, there were questions over the availability of a decision made by KASAD’s board of directors to use foreign money while making offers to customers for cardboard packaging products made from Bristol cardboard. Therefore, information and documents were requested from KASAD’s board members to eliminate such questions. Based on Table 4, which was created with the data presented in return and showed the monthly ratio of sales made in foreign currency to cardboard packaging sales made each month since January 2018, and as a result of the meeting with CÖMERTLER, represented by one of the board members, it was concluded that the undertakings represented on the board did not change their sales terms based on KASAD’s board meetings on 19.04.2018 and 13.08.2018… Thus, there was no information, document or finding showing that these undertakings violated Act no. 4054.”

CASE 3:

Finally, a Price, Cost, and Stock Analysis was made for the products manufactured by the undertakings. Documents covering the last 3 years were requested to evaluate this issue. Following the evaluation, it was decided that the undertakings’ stock amounts fluctuated significantly, with no notable increase in these amounts.

As a result of its inquiries, the Board concluded that:

• Article 6 of Act no. 4054 was not violated with overpricing, refusal to supply goods from raw materials and products in stock, and abuse of dominance since no dominant position was discovered in the paper and paper packaging industries as a result of their multi-player structures,
• The on-the-spot inspections as well as the information and documents obtained as part of the file did not suggest that the price increases in these industries were the result of a collusive relationship in violation of article 4 of the Act,

As such, investigation was unnecessary as per article 41 of Act no. 4054 for the undertakings and associations of undertakings on which a preliminary examination was carried out ex officio.

Our opinion:

• As the Board performs a thorough inquiry into the relevant industry before legally reviewing disputes, thus having information about the industry, it reaches a more reliable and fairer conclusion about the case while analyzing a dispute. We approve the Board’s attitude in this direction, given the diversity of industries/businesses and the severity of penalties.
• The Board initiated an ex officio investigation with its authority under article 27 of the Act, based on the news about the industry in the press and media. Thus, we understand that the Board is not only a judicial authority in disputes brought before it but also actively monitors industries and markets, taking into consideration any unusual changes.