Most Read Contributor in South Africa, September 2016
On Wednesday, 17 June 2015, the Competition Appeal Court (the
"CAC") absolved Sasol Chemical Industries
("SCI") of the excessive pricing complaint against it, in
its judgment in Sasol Chemical Industries v the Competition
Commission. In doing so, the CAC overturned the decision of
the Competition Tribunal (the "Tribunal").
The essence of the complaint made by the Competition Commission
("the Commission") was that SCI charged
excessive prices for purified propylene and polypropylene between
2004 and 2007.
By way of background, Sasol Synfuels, another subsidiary of
Sasol, produces feedstock propylene as a by‑product in the
fuel production process. Purified propylene, which is produced by
SCI from feedstock propylene, is used to produce polypropylene.
Polypropylene is, in turn, a key input for manufacturers of
industrial and household plastic products. Accordingly, the prices
of purified propylene and polypropylene have important knock-on
implications for producers in a wide variety of industries.
Section 8(a) of the Competition Act prohibits a dominant firm
from charging an excessive price that is to the detriment of
consumers. The Competition Act defines an excessive price as
"a price for a good or service which –
(a) bears no reasonable relation to the economic value of that
good or service; and
(b) is higher than the value referred to in (a)."
In June 2014, the Tribunal found that SCI had indeed charged
prices in excess of the economic value of the products during the
relevant period, and that such prices bore no reasonable relation
to the economic value of the products. Accordingly, it imposed a
R534-million penalty on SCI (R205.2-million in respect of purified
propylene and R328.8-million in respect of polypropylene), together
with various forward-looking behavioural remedies.
On appeal to the CAC, the dispute between the parties boiled
down to two fundamental debates. First, it concerned the correct
interpretation of "economic value" . In Mittal Steel
South Africa and others v Harmony Gold Mining Company and
others, the leading authority on excessive pricing to date,
the CAC understood "economic value" to mean "the
notional price of the good or service under assumed conditions of
long-run competitive equilibrium". On this basis, SCI argued
in the present case that, in calculating economic value, its
actual lower feedstock costs (which it enjoyed thanks to
its relationship with Synfuels) ought to be ignored in favour of
the higher feedstock costs that would be available to hypothetical
producers under notional conditions of long-run competitive
equilibrium. Second, the dispute concerned the proper assessment of
the reasonableness of the relation between price and economic
In a hard-hitting judgment by Judge President Dennis Davis, the
CAC criticised the Tribunal, describing its judgment as
"extremely difficult to understand",
"confusing" and as exhibiting a "piecemeal
reading" of case law that was "regrettable".
On the merits, the CAC rejected SCI's primary argument as
regards the feedstock price, and held instead that the ultimate
determination of economic value must be predicated on the price at
which Synfuels sold feedstock to SCI and not some hypothetical
price. However, it upheld SCI's arguments as regards the
evaluation of capital assets, the appropriate rate of return on
capital, the allocation of group costs and the allocation of common
costs. On the basis of these revised cost assumptions, and after
seeking revised calculations from the parties on this basis, the
CAC concluded that the price-cost mark-up was approximately 12% -
Notwithstanding that this mark-up is in addition to the
competitive return on capital (which is factored into the
calculation of economic value), the CAC held that returns above
economic value are not per se unreasonable. Indeed, the
judgment went further, and held that "[a] price which is
significantly less than 20% of the figure employed to determine
economic value falls short of justifying judicial interference in
this complex area".
Despite upholding SCI's appeal, the CAC was careful to
disavow any suggestion that excessive pricing cases can never
succeed before South African courts. The outcome of this case may
well have been different had the Commission provided expert
evidence that rebutted that of SCI's in respect of its costs of
The CAC concluded its judgment by sounding a further warning to
the Tribunal in respect of its treatment of expert witnesses. In
these concluding paragraphs, which highlight growing tension
between our two specialist competition adjudicators, the CAC set
out basic guidelines on the evaluation of expert evidence and drew
attention to the need for the Tribunal to ensure that experts do
not overreach by providing evidence outside of their areas of
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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