Aug-2023

Industrial clustering and avoiding anti-trust issues

How can competitive facilities within a single cluster ensure they steer clear of anti-competitive behaviour?

Patrick Smith, RBB Economics
Duncan Micklem, Yokogawa

Article Summary

Why bother with clustering? Industrial clusters constitute concentrations of related industries or several industrial sites that are grouped within proximity to one another. They represent major collective net zero and circular economy opportunities and are key for delivering further triple bottom line performance gains. For example, the World Economic Forum’s ‘Decarbonization of Industrial Clusters’ initiative seeks to connect 100 industrial clusters globally to reduce 1.6 billion metric tonnes of CO2 emissions, retain and create 18 million jobs, and contribute $2.5 trillion to global GDP.

Status quo
Two industrial cluster typologies are appearing across industry: ‘Formed’ and ‘Forming’. Opportunities for greater economies of scope and scale from clustering exist across both:
υ Formed. These principally comprise large onshore integrated chemical parks, which at some point in time were owned by a single owner. Therefore, individual facilities already benefit from some level of pre-existing integration and shared services, such as raw materials, utilities networks, transportation infrastructure, safety & security, and in some cases operation & maintenance (O&M). Over time, through changes in corporate strategies, individual facilities within these integrated chemical parks have been divested to new owners, resulting in a ‘patchwork’ of ownership across the chemical parks, albeit with all still benefiting from historic facility integrations. While these clusters are mostly formed, they continue to expand and incorporate new neighbouring facilities, such as process facilities, data centres, and hydrogen and steam networks.
ϖ Forming. These comprise large industrialised areas with multiple, often diverse businesses and production processes under different ownership. In many respects, these facilities are complementary to each other; however, they do not benefit from the same smart integration, physical connections, and common shared services. Examples include decarbonisation clusters with carbon capture, utilisation and storage (CCUS), hydrogen, steam, and other material flows. The creation of such smart integrations, physical connections, and common shared services remains the subject of feasibility studies to evaluate beneficial linkages. Areas of clustering opportunity may also be offshore, comprising clusters of adjacent oilfield production assets, wind, or solar arrays.

Across both cluster typologies, individual occupier sites typically optimise their own operations to satisfy their respective operational priorities and corporate business objectives. This is usually done in isolation from neighbouring facilities. It comprises some form of ad hoc/static or real-time optimisation of their operations, such as raw materials/feedstocks, process/products, workforce/people, energy, maintenance, utilities, emissions, inventory, and supply chain.

Maybe cluster-wide optimisation was undertaken in the past. However, it was likely a one-off, ad-hoc static optimisation representing a snapshot in time, in many cases 10+ years ago, as part of complex-wide master-planning activities. Since then, facilities have been changed, debottlenecked, expanded, upgraded, revamped, shut down, or divested. Where representative models of on-site assets exist, these models are principally used for one-off capital investment analyses and decisions but not ongoing monthly, weekly, or intra-day optimisation.

Why the reluctance?
Why has it taken so long for industry to embrace deeper cross-party optimisation between complementary facilities under different ownership when optimisation across single entity-owned complementary facilities has been ongoing for decades?
For example, large individual companies create opportunities to optimise across multiple sites to boost economies of scope and/or scale. Or a chemical manufacturer might operate multiple sites as a connected complex, pursuing opportunities to optimise across them. Similarly, large single-owned Verbund-type sites with a diverse array of on-site processes and highly interlinked product flows may also create opportunities to optimise within.

There has been a reluctance to synchronise more elements of operations across separately owned third-party facilities for a variety of reasons. First and foremost, in bringing independent businesses together, there needs to be a fundamental element of trust.

Thereafter, key questions to answer include:
υ    Economics Is integration beneficial (sustainably and financially)? What high-level objectives, such as decarbonisation, can individual businesses align on?
ϖ    Business model Can we make it work between businesses?
ω    Operations Can we operate in an orchestrated manner?
ξ    Technology How can technology support closer integration?

An often overlooked factor is one of competition policy or antitrust. Pooling resources or capabilities should make the underlying businesses more efficient and more capable competitors. However, if competitors are engaged in clustering activities, can it be claimed that competition in a market is being prevented or reduced? How can competitive facilities within a single cluster ensure they steer clear of anti-competitive behaviour?

Antitrust issues in clustering
The threat of scrutiny under relevant provisions of local competition policy (or ‘antitrust’) laws can be a deterrent for considering or implementing greater synchronisation across operations of separately owned third-party facilities. The most common target of antitrust regulations is co-ordination among horizontal competitors, meaning firms supplying similar products or services. Although, some provisions also limit arrangements between vertically related firms in supplier-customer relationships.

For horizontal competitors (such as two refineries or two plants supplying similar chemicals), the most obvious infringements to be avoided would be agreements on pricing of feeds or products (for example, agreements to set the same prices or to not cut prices of a particular product or service) or market allocation, thereby restricting one firm to some products and the other to different products.

For example, in 2020, the European Commission concluded an investigation into four chemical companies that were found to have participated in a cartel concerning purchases on the ethylene merchant market between December 2011 and March 2017. They colluded to buy ethylene for the lowest possible price under supply agreements, which made reference to an industry price reference, or ‘Monthly Contract Price’ (MCP), resulting from individual negotiations between ethylene buyers and sellers. This was to the detriment of ethylene sellers. The companies were found to have colluded and exchanged information on purchase pricing.

In particular, the companies co-ordinated their price negotiation strategies before and during the bilateral MCP ‘settlement’ negotiations with ethylene sellers to push the MCP down to their advantage. The companies were fined a total of €260 million.