Sasol Cases: Competition Commission investigations briefing

Economic Development

23 February 2016
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Competition Commission (CC) briefed the Committee on its investigations into Sasol Chemical Industries Limited (Sasol). A brief history of Sasol was given by way of background, and the CC emphasised the firm’s move from a public entity to the private sector, and the results that this had had on downstream development. It was particularly emphasised that regulatory measures were put into place to ensure that Sasol remained sustainable and profitable in the private sector. Mr Bonakele illustrated these measures by noting the rail tariff and Sasol’s utilisation of the pipeline network, which were state-funded infrastructure. The Competition Commission had particularly focused on Sasol Chemical Industries, which was separate from Sasol Oil. Sasol Chemical Industries houses key chemical inputs that are used in other processes further down the value chain. It had five sub-industries, but the bulk of the investigations took place within the fertiliser sector, in Sasol Nitro, and within the Sasol Polymer sector. The majority of these investigations concerned excessive pricing. The CC aimed to prevent low-cost production being mis-matched with unusually high pricing, because of a monopolistic situation, to the detriment of the South African worker/buyer. Such pricing would cause economic activity within the sector to decline and ultimately this could lead to sector employment losses. In this case, unemployment to rise.

Mr Bonakele then said that investigation into Polymers was key to the CC’s investigation into Sasol overall, and Sasol was managing to produce low-cost polymers, due to the abundance of coal coupled with the technology that Sasol had to produce fuel. This had led to South African buyers spending more than competing countries, which was an import parity price problem, and it was particularly significant because South Africa is already geographically disadvantaged. The matter was taken on appeals to the Competition Appeal Court, and unfortunately the CC lost the case. The CC stressed that the real impact of this pricing was seen in the downstream industries, and this remained a problem. The polymer sector had been in decline since 2001. Because of the high price, some firms had been forced to close and this had a major impact on the automotive sector. The CC had urged stakeholders to keep a watchful eye on this sector and was continuing to investigate other incidents and trying to reach pricing agreements.

In its fertiliser sector, Sasol had admitted to being a member of a cartel and paid an administrative penalty of R250 million, and also agreed to stop supply of ammonia and sales of fertiliser and derivative products at the retail level. This had allowed for new investment in the sector, which was impossible whilst the cartel still existed. There has been down-streaming activity and profit growth, entry of smaller players into the market and better choice for farmers. Work in this and other sectors was ongoing.

Members commended the CC on its efforts and wondered if there would be any opportunity for the CC to take the case further, but heard that the CC still had an existing investigation which might hinge on similar facts but at different times. A Member tried to enquire about the SAB Miller / Coca Cola merger but the Chairperson ruled that since this was not on the agenda, it would not be entertained. The point was made that fertiliser companies who had appeared to be satisfied with the outcome were usually larger firms and asked how many new and small players had been able to enter the market and the answer emphasised that the CC was able to investigate and create a platform for diversity but could not determine who would be involved in the sector. The Committee wondered if there were policy or legislative gaps, and asked whether there is current research into firms with a similar structure to Sasol.
 

Meeting report

Competition Commission’s Investigations of Sasol Chemical Industries Limited: Competition Commission briefing
The Chairperson outlined a brief history of Sasol Chemical Industries Limited (Sasol), and explained the importance of understanding and monitoring its behaviour.

Mr Thembinkosi Bonakele, Commissioner, Competition Commission, gave a brief overview of the Competition Commission (CC or the Commission) and the cases that had been brought to the Competition Appeal Court (CAC) by the CC.

Mr Bonakele set out the background to the CC’s investigation into Sasol Chemical Industries Limited (Sasol), describing the firm’s startup, development, and privatisation in the 1990s, as well as the legislative and regulatory measures put into place to ensure that Sasol remained sustainable and profitable in the private sector. Mr Bonakele illustrated these measures using the rail tariff and Sasol’s utilisation of the pipeline network, which was state-funded infrastructure. A detailed breakdown of Sasol’s development and activities was provided (see attached document for more details).

Mr Bonakele then indicated that he was going to discuss Sasol Chemical Industries, which was separate from Sasol Oil. Sasol Chemical Industries houses key chemical inputs that are used in other processes further down the value chain. He then described the five separately managed divisions of Sasol Chemical Industries: Sasol Polymers, Sasol Nitro, Sasol Wax, Sasol Solvents and Infrachem. Mr Bonakele indicated that Sasol Nitro houses the Sasol Fertiliser sector, which is an important business within the sector. Ammonia nitrate is a product in this sector, and used mainly as an input to fertiliser product used in staple foods such as maize.

The Commission has conducted various inquiries into Sasol’s excessive pricing and collusion in some sectors, which can be found in the presentation (see attached document for details). A large part of the investigation was conducted within the fertiliser sector.

Mr Bonakele also discussed the ongoing market inquiry, which began in 2014, into the demand and supply of Liquid Petroleum Gas (LPG) in the fuel sector. This is an important gas that is a byproduct of the refinery process. Sasol owns the refineries, and is thus impacted by the investigation. Mr Bonakele said that this indicates the Commission’s breadth of work.

Mr Bonakele then said that investigation into Polymers was key to the CC’s investigation into Sasol overall. The CC’s role is to combat the unfairness of a producer such as Sasol producing low-cost polymers, due to the abundance of coal combined with the technology the company has, to produce fuel from coal. This was the basis for its low-cost structure. This leads the South African buyer to spend more than competing countries, and Mr Bonakele said that this was an import parity price problem. He pointed out that South Africa is already disadvantaged due to its geographic location, in comparison to competitors in Asia. Import parity is not a smokescreen, but a real disadvantage to people who use this product as an input. In the end result the CC had applied for leave to appeal against the dismissal of the fine to the Constitutional Court but this was not granted apparently because that Court did not discuss the problem fully or regard it as problematic.

Mr Bonakele stressed that the real impact of pricing was on the downstream industries. Whether the Commission loses or wins the case, the negative impact of import parity on downstream industries still remains.

Mr Bonakele noted that more information of the decline of the Polymer sector since 2001 can be found in the presentation (see attached document for details). Mr Bonakele indicated that this debate is not reserved simply for Parliament, but has been conducted with Sasol and other stakeholders on numerous cases. This is the real issue for the CC.

Mr Bonakele then used the automotive sector as a case study. Polypropylene is mainly used to produce vehicle components. Some firms have been forced to close down due to higher polypropylene prices and jobs were lost as a result. Mr Bonakele used the automotive sector to illustrate how the Competition Appeal Court did not have much impact. Because many appeals are unsuccessful, he CC has appealed to various stakeholders including government to keep a watchful eye on the sector, on competition within the sector and the industrial policy. The CC continues the investigation into the sector and its attempts at reaching agreements on prices.

In the fertiliser sector, there had been a more positive outcome. In 2009, Sasol admitted itself to be a member of a fertiliser cartel with Omnia and Kynich (Yara). It paid an administrative penalty of R250 million.  Sasol also entered into an agreement with the Competition Commission, admitting that it had engaged in excessive pricing, and as a result stopped supply of ammonia and sales of fertiliser and derivative products at the retail level. Mr Bonakele equated the Sasol fertiliser sector case to the position of oligopoly in the telecommunications market. Here, Telkom owns the infrastructure, but the objective is to allow everybody to buy infrastructure on non-discriminatory terms.

The key features of the settlement between the Commission and Sasol was listed in the presentation (see attached document for details). Mr Bonakele said the results are encouraging. There has been new investment in the sector, which was impossible whilst the cartel still existed. There has been down-streaming activity and profit growth of GWK. There has been entry of smaller blenders and traders into the market, and Mr Bonakele said the market has become fairly competitive and it is on the right path. This fact has been confirmed by farmers, who say that they have more choice, through improved access to products in the market as a result of increased participation. For example, Omnia has increased its imports of ammonia.

Mr Bonakele concluded the presentation by saying that the work on fertilisers is not over, and there are many other sectors that require investigation.

Discussion
Mr S Tleane (ANC) said that Sasol was founded using state resources, and now it seemed to be using these resources to abuse its power over the citizens of South Africa. However, he commended the Commission’s continual fight and representation of the interests of the people, regardless of Sasol’s state manipulation. Mr Tleane asked if there was any legal opportunity for the Commission to re-start the case at the Constitutional Court. He asked whether all appeal possibilities had been exhausted.

Mr Bonakele said that the CC has an existing investigation, and sometimes it is lucky enough to have more than one investigation occurring at a time. This means that the facts will be similar across cases, but over different time periods. Mr Bonakele said that the Commission will be very careful in moving forward and investigating future cases. 

Dr J Cardo (DA) said that the Competition Act, No 89 of 1998, prohibits dominant firms from charging excessive prices to the detriment of consumers. Dr Cardo asked what were the reasons why the Commission had been unsuccessful in prosecuting the cases where firms do charge excessive prices. He mentioned the Mittal and Sasol case of 2008 as an example. Dr Cardo said that Judge Davis had called the ruling of excessive price cases “difficult” because there is no generally accepted criteria to determine correct pricing. If a firm is guilty of excessive pricing, it is difficult to find a remedy. Dr Cardo asked how the Commission is going to go “back to the drawing board” and tackle this matter of excessive pricing ruling.

Mr Bonakele said that “going back to the drawing board” essentially involves revisiting cases and deciding what the Commission can do about them. There is a continual need to look at the capacity of the competition authorities. Because of the complexity of the cases, the Commission and related bodies such as the Portfolio Committee will need to look at whether the Commission has adequate capacity to be able to undertake these types of prosecutions. Mr Bonakele believed that the Commission had done well with the current resources, but he had raised the concern about the a lack of resources with the Minister of Economic Development. The goal is not to match the resources of the private sector, but to gain some parity, in order to have a ‘fair fight’.

Dr Cardo wanted to take advantage of the fact that Mr Bonakele was before the Committee. He asked why it was taking the CC so long to investigate the merger between SAB Miller’s and Coca-Cola’s bottling assets, and the merger with Gucci family interests to create Coca-Cola Africa when the regulatory hurdles had been passed in other countries. Dr Cardo asked whether it was a result of intervention by the Minister.  He asked what were the projected timeframes in assessing this merger and what kind of conditions were likely to be imposed.

The Chairperson interjected at this point to ask that Mr Bonakele should not answer Dr Cardo’s question. The matter he had raised was not on the agenda and this meeting was called to discuss the Sasol case only.
Mr M Mbatha (EFF) noted that in the latter part of the Commission’s input into excessive pricing cases, it seemed that the affected parties were satisfied with the assessment, and that they were comfortable with the turn of events. This may not be the case in reality. Mr Mbatha said that the fertiliser companies were either big or middle sized, despite the CC’s downstream effect. He said that in the South African environment, it was important to create opportunities for new businesses to join easily and for the downstream effect to embrace diversity. Mr Mbatha asked how many new and small players, mostly of a different background to the current players, had been able to join in as a result of investigating the sector’s pricing. 

Mr Bonakele said that his presentation was referring specifically to ammonia in the fertiliser sector, and not to sectors in general. In the ammonia sector of fertiliser, a study was conducted to determine the dynamics of the competition since the Commission’s intervention and since Sasol’s exit from the retail sector. The study revealed that there has been significant change and the sector has indeed become much more dynamic and diverse. However, Mr Bonakele agreed that transformation is an issue in South Africa, and sectors are still dominated by a certain type of player, and this needs to be addressed. Mr Bonakele said that the problem with the CC is that it can investigate a sector and create the platform for diversity, but it cannot hand pick who gets involved in the sector. That is not the role of the CC.
 
The Chairperson asked if the Portfolio Committee can look at any policy gaps in the investigation of particular excessive pricing cases, as opposed to ordinary excessive pricing cases. The Chairperson asked if there are any ways in which the Portfolio Committee can ease the work of the CC and prevent legal obstacles

Mr Bonakele said that the Commission needs to look at interpretations of the law and the semantics of the law, and there is a possibility for reinterpretation. The Commission has raised this issue with the Minister of Economic Development, Mr Ebrahim Patel. Mr Bonakele believes the wording of the legislation can be improved. Mr Bonakele said that it is rare to prosecute people for excessive pricing, because people are free to charge the price they choose. Mr Bonakele said the CC only intervenes in cases where there is a very excessive price such that it induces a sense of shock, and where this also has a negative impact on the market. The CC has a few, well-chosen cases of excessive pricing. Mr Bonakele said that these cases tend to happen where there is a dominant supplier in a sector and that they also often involved a key industrial input like steel or plastics. This was not to suggest that there might not also be excessive pricing in other sectors, but he was trying to make the point that the CC chooses a few cases to take on.

Mr Bonakele said that this is not only a South African problem, since excessive pricing is a tool of competition authorities and it has been used in Europe. Mr Bonakele acknowledged that some of the wording in the Competition Act might need to change, but that would be something that the Minister and Department of Economic Development would have to deal with.

Mr Bonakele commented that there were some policy gaps, and there is a need to look at the way industrial policy works. Mr Bonakele mentioned the mining industry, where companies restrict exports and keep a portion of what they produce for local use, thereby using the natural endowments to promote a sector. That was the nature of industrial policy. Policy makers need to debate the key inputs. Sasol had the advantage not simply because of the government support that it received, but because coal was its natural endowment.

Mr Bonakele said that the key question was how the sector and the CC would beneficiate natural endowments such as coal? The refineries were old and there was a need for a new refinery. He also stated that the issue of regulation by the government should not be removed from the table. He used the example of regulation in the South African petrol prices, resulting in growth of the sector and protection of jobs. Mr Bonakele also drew comparisons to the plastics sector. He made the point that government needs to regulate sectors in order to maintain control over the private sectoral ownership. 

The Chairperson asked if Mr Bonakele and the Commission had looked at cases similar to Sasol, where a public company had turned private but, being established in the public sector, it also has some jurisdiction in the public sector. The Chairperson noted that if a company of this nature becomes destructive in the public sector, it may be worthwhile to look at it more closely. The Chairperson asked if there are any existing case studies, or if the Portfolio Committee should begin research into these cases. The National Development Plan clearly would benefit from such studies. 

Mr Bonakele admitted that the CC has not done much work into cases of public-turned-private companies as described by the Chairperson. He said that there is evidence of these companies in the telecommunications industry in the United Kingdom, where monopolies had been broken down to a smaller size. Also, in China, telecommunications monopolies are still formally state-owned and they receive large sums of money from the state, and in return the Chinese government imposes export duties so that firms can first meet the requirements locally and then move internationally, once the requirements are fulfilled. Mr Bonakele assured the Committee that the Commission will conduct research into similar cases in South Africa.

The meeting was adjourned.

 

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