The Competition Tribunal (Tribunal), earlier today (5 June 2014), released an executive summary of its decision, in finding that Sasol Chemical Industries Limited (SCI), as a dominant firm in the supply of purified propylene and polypropylene, had engaged in excessive pricing in contravention of the Competition Act (the Act). This is according to Leana Engelbrecht, Senior Associate in the Competition Practice, at CliffeDekker Hofmeyr .
Engelbrecht explains, “The Competition Commission (Commission) alleged excessive pricing by SCI in respect of its pricing of purified propylene and polypropylene to domestic customers - being key inputs in the manufacture of industrial and household plastic products. SCI supplies polypropylene to domestic customers at import parity pricing (ie the price which a customer would pay for the goods should it have been imported from another country) and also exports polypropylene. Purified polypropylene, on the other hand, is not exported and is only supplied to one domestic customer.
“In terms of section 8(a) excessive pricing by a dominant firm is prohibited. Excessive pricing is defined as a price for a good or service which bears no reasonable relation to the economic value of that good or service and is higher than that economic value,” she says.
Engelbrecht notes that in determining whether excessive pricing in contravention of section 8(a) of the Act has, in fact, taken place, the actual price of the goods must be weighed up against the economic value of the goods and the difference between the two must be analysed, on a value judgment, to determine whether, firstly, the excessive price is unreasonable and, secondly, whether the charging of the excessive price is to the detriment of consumers.
“The Tribunal engaged in various economic exercises to determine the difference between the actual price and the economic value of the goods. The Tribunal ultimately found that in the light of SCI's history in becoming a dominant firm, the extensive support received from the State (previously being a State-owned entity) and the importance of the goods as intermediate inputs, the price charged by SCI for purified propylene and polypropylene was excessive. Furthermore, the Tribunal concluded that the prices charged by SCI have a detrimental effect on its customers, in substantially increasing their input costs, and the conduct lead to consumer harm,” she explains.
The Tribunal commented, in the interest of consumer protection, that the excessive prices charged and maintained by SCI resulted in a "missed opportunity for innovation and development for domestic manufacture of downstream plastic goods" and, in the absence, of such high input prices local plastic goods manufacturers would have been able to compete more competitively with imported goods, improve manufacturing capability, increase employment opportunities and ultimately benefited consumer through greater choice and innovation.
“The Tribunal imposed a staggering R500 million administrative penalty and certain behavioural remedies. The Tribunal did not opt to impose and administrative penalty up to the maximum of 10% of total turnover and concluded that such a stringent penalty would not be appropriate in the circumstances and in the light of the market in which the conduct occurred,” Engelbrecht says.
She says that the Tribunal has always been reticent to act as a price regulator when exercising its functions and has clearly stated that its role is to safeguard competition in markets (through promoting and defending competitive market structures and to guard against conduct in the market which undermine the competitive structures) and not to interfere with competitive decisions made by independent actors in markets. Although, in this instance, the Tribunal has not gone as far as to regulate the prices in the market the Tribunal has imposed a behavioural remedy requiring SCI to submit a proposed pricing remedy based on a price formulation linked to price charged in regions in the world with the lowest prices for purified polypropylene.
“The remedies imposed by the Tribunal do not constitute price regulation but it indicates the difficulties faced by competition regulators in imposing remedies for conduct such as excessive pricing, where it would be necessary to address the failings in the existing competitive structures that enabled excessive pricing conduct to occur but not go as far as outright regulating the prices charged in such markets,” Engelbrecht adds.