A proposed merger of the two largest suppliers of hot water heaters in Australia risks creating something close to an effective monopoly in the domestic market for the type of hot water heater systems used in most households and commercial premises, the national competition regulator has warned.

Releasing a statement of issues surrounding the proposed sale of the Dux hot water business currently owned by GWA to Rheem, the ACCC said the proposed transaction would leave the latter company as the only domestic manufacturer of the enamel storage heaters commonly used as large storage heaters on residential and commercial property in a market where little exists in the way of import competition.

“The ACCC is concerned that the proposed acquisition is likely to substantially lessen competition in the supply of storage water heaters,” ACCC chairman Rod Sims said.

Announced earlier this year, the proposed sale followed a stated intent by GWA to hive off its hot water business – it is the second largest manufacturer and supplier of water heaters in the country behind Rheem – describing it as ‘non-core’ to GWA’s operations and ‘extremely challenging’ in terms of market conditions.

In its statement, the ACCC acknowledged that gas powered continuous flow water heaters are becoming more popular as an option to the storage water heater market Rheem would effectively control if the transaction does go ahead, but added that these were a viable alternative only in areas where reticulated gas is readily available.

Furthermore, in cases of replacing an existing system (70 to 80 per cent of customers), customers typically purchase one of the same type as this allows for faster and cheaper replacement, the regulator said.

Unlike storage-based systems where water is heated and stored in a tank prior to use, the continuous flow water heaters are wall mounted and heat water only as needed.

These, however, are not typically able to provide sufficient volumes of hot water for most household or commercial applications.

Sims said the ACCC will explore whether or not imports could provide a sufficient constraint on Rheem post acquisition.

“Dux is currently a major competitor to Rheem in the supply of storage water heaters,” he said. “The acquisition of the Dux business will give Rheem the vast majority of sales, particularly for large storage units.”

“Market participants raised concerns (during ACCC consultations) that the proposed acquisition may enable Rheem to raise prices or decrease service or quality in the supply of electric and gas storage water heaters in Australia.”

Should the transaction be disallowed, the ACCC believes Dux would be sold to an alternative party which does not currently have significant hot water heater manufacturing capability in Australia – a scenario in which competition would most likely not be reduced.

It says this party may be Japanese outfit Rinnai, which has already indicated an intention to bid for the assets, or another as yet undisclosed bidder.

The Commission is seeking further submissions and will issue its final decision on November 20.