South Africa: Competition Appeal Court Upholds Excessive Pricing Appeal By Sasol Chemical Industries

Last Updated: 10 July 2015
Article by Lee Mendelsohn

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 value.

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% - 14%.

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 production.

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 expertise.

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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