https://www.engineeringnews.co.za

Sasol subsidiary fined R534m for excessive polymers pricing

Sasol subsidiary fined R534m for excessive polymers pricing

Photo by Bloomberg

5th June 2014

By: Natalie Greve

Creamer Media Contributing Editor Online

  

Font size: - +

The Competition Tribunal has imposed a R534-million penalty on energy and petrochemicals group Sasol's subsidiary Sasol Chemical Industries (SCI) for charging domestic customers excessive prices for purified propylene and polypropylene between January 2004 and December 2007.

The tribunal said in a statement on Thursday that the price SCI had charged Safripol, SCI’s only external customer for purified propylene and a downstream competitor of SCI, was to Safripol’s detriment and inhibited its ability to effectively compete with SCI.

In addition, the tribunal said SCI’s locally charged polypropylene prices had had a “significant adverse effect” on local plastic converters, causing them harm during the complaint period. 

The tribunal imposed a penalty of R205.2-million in the case of purified propylene and R328.8-million in respect of polypropylene.

It further imposed remedies for determining SCI’s future pricing of both purified propylene and polypropylene that would see the prices it charged its local customers drop. 

Purified propylene, produced from feedstock propylene, is an input in the production of polypropylene, which is a key component for plastic converter firms, which manufacture industrial and household plastic products.

“Hence, the price of both purified propylene and polypropylene, as intermediate products, would have significant relevance to the price of household plastic goods such as buckets, brooms, storage containers and industrial products, such as motor car parts, water tanks and the like,” stated the tribunal.

In a statement published on the JSE's Sens news service, Sasol said it was reviewing the tribunal's decision and considering the options available to it. This would include engaging "with relevant stakeholders on the way forward".

The tribunal’s finding came after a lengthy hearing into allegations of excessive pricing brought by the Competition Commission against SCI.

The hearing ran over several months, starting on May 13, 2013, with final submissions in the case being made on May 9, 2014.

In its complaint, the commission alleged that SCI was a dominant market player and that, between 2004 and 2007, it had charged excessive prices for purified propylene and polypropylene to the detriment of consumers and in contravention of the Competition Act.

SCI denied the allegations.

During the proceedings, the tribunal heard the evidence and testimony of 13 witnesses, including eight industry, financial and economic experts. 

Much of the tribunal’s judgment focused on the historical context within which Sasol was established, its significant State support and the protection received by Sasol over several years.

“These measures contributed to Sasol Synfuels becoming one of the lowest cost producers of feedstock propylene, a by-product of Sasol’s fuel production.

“Because of Sasol Synfuels’ low feedstock propylene costs, SCI is a low-cost producer of purified propylene and one of the lowest cost polypropylene producers in the world,” the tribunal noted.

SCI argued in the hearing that the tribunal should ignore this cost advantage in arriving at its decision, while the commission argued that the cost advantage should be taken into account.

The tribunal ultimately decided to take the cost advantage into account, finding that SCI’s market position was not the result of its own risk-taking and innovation, since it had not engaged in any significant innovation in the production of either purified propylene or polypropylene, but rather benefitted from past exclusive or special rights, in particular, “very significant” historical State support for a considerable period of time. 

During the period covered by the complaint, SCI charged Safripol two purified propylene prices – a higher Tier 2 price and a lower Tier 1 price.

Applying a price-cost test, the tribunal found that SCI’s mark-ups of its purified propylene prices over actual costs during the complaint period were in the range of between 39.9% and 41.5% for Tier 2 sales to Safripol and in the range of between 25.1% and 26.5% for Tier 1 sales to Safripol. 

For polypropylene, the tribunal found that SCI’s mark-up of its polypropylene prices over actual costs during the complaint period were in the range of between 26.9% and 36.5%. 

It further found that, when comparing the average export netback price for deep-sea exports of polypropylene – excluding exports into Southern Africa – with SCI’s local prices, that SCI’s local prices for polypropylene over the relevant cycle were, on average, 23% higher than average deep-sea export prices. 

The tribunal also found that, during the complaint period, SCI’s domestic prices for polypropylene had been 41% and 47% higher for homopolymer and raffia-grade polypropylene respectively than the discounted prices in Western Europe.

“After having regard to the nature of the products, their importance as intermediate inputs in industrial development, market characteristics and circumstances, the objects of our Act understood in the context of the South African economy, the history of the dominant firm and how it acquired its dominance, we find that the purified propylene and polypropylene prices charged by SCI during the relevant period bear no reasonable relation to the economic value of these products,” the tribunal said in its judgment.

Rather than imposing only an administrative penalty, it opted for a reduced monetary penalty together with a forward-looking remedy that would directly change SCI’s pricing behaviour, as this was expected to provide both relief and certainty to SCI and its customers.

“The tribunal has thus imposed a method for determining SCI’s future pricing of both purified propylene and polypropylene and concluded that SCI’s exercise of market power and its excessive prices have resulted in a missed opportunity for innovation and development for the domestic manufacture of downstream plastic goods,” it noted.

Cheaper polypropylene prices for local plastic converter firms could enhance local production, thereby enabling them to compete more effectively with imported final plastic products.

Law firm Cliffe Dekker Hofmeyr senior competition associate Leana Engelbrecht commented that the tribunal had always been reticent to act as a price regulator when exercising its functions and had clearly stated that its role was to safeguard competition in markets and not to interfere with competitive decisions made by independent actors in markets. 

"While, in this instance, the tribunal has not gone as far as to regulate the prices in the market, it has imposed a behavioural remedy requiring SCI to submit a proposed pricing remedy. This, however, does not constitute price regulation but indicates the difficulties faced by competition regulators in imposing remedies for conduct such as excessive pricing," she noted.

MARKET RESPONSE

The Manufacturing Circle on Thursday welcomed the penalty imposed by the tribunal, saying the ruling was in favour of the productive side of the economy and would benefit downstream competition in plastics. 

"We regret the monopolistic behaviour, as it clearly undermines the competitiveness of the manufacturing sector. We unfortunately believe that there are other areas, such as in the pricing of natural piped gas, in which the regulatory framework is too soft to ensure Sasol offers cost-reflective prices in an area where it has a monopoly.

"It is simply not acceptable for any player to use its upstream dominance to shelter its downstream activities at the cost of economic growth, job creation and affordability to the consumer," the organisation stated.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

Comments

Showroom

Weir Minerals Africa and Middle East
Weir Minerals Africa and Middle East

Weir Minerals Europe, Middle East and Africa is a global supplier of excellent minerals solutions, including pumps, valves, hydrocyclones,...

VISIT SHOWROOM 
Yale Lifting Solutions
Yale Lifting Solutions

Yale Lifting Solutions is a leading supplier of lifting and material handling equipment in Southern Africa. Yale offers a wide range of quality...

VISIT SHOWROOM 

Latest Multimedia

sponsored by

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION







sq:0.077 0.133s - 160pq - 6rq
Subscribe Now