This note summarizes the recent decision of the South African Competition Tribunal, which found Sasol Chemical Industries guilty of excessive pricing.

South Africa is one of the few competition law jurisdictions that actively pursues cases of ‘excessive pricing’ by dominant firms. The Competition Commission had alleged that Sasol had charged domestic customers excessive prices for purified propylene and polypropylene. The Tribunal upheld the Commission’s allegations, and ordered Sasol to pay an administrative penalty of R534 million. It also imposed a number of interventionist pricing remedies – effectively placing a cap on Sasol’s pricing of the products concerned.

A large part of the Tribunal’s decision is highly fact-specific and relates to the unique circumstances of Sasol and the South African propylene and polypropylene markets. These aspects are of limited interest or precedent value.  This note is therefore limited to the principles that might be of more general application to dominant firms, particularly those firms that owe their market position in the market to state support.

Feedstock propylene is  a bi-product of Sasol’s synfuels production process. This gives Sasol a unique cost advantage in the production or purified propylene and polypropylene.

Sasol’s synfuel production capacity was built and maintained with significant support from the South African government.  Sasol therefore ‘inherited’ this special cost advantage, rather than achieving it through investment and innovation.

The fact that Sasol had ‘paid for’ this advantage was considered irrelevant by the Tribunal because Sasol’s unassailable position of market power continues to exist because of that historical endowment.  The Tribunal said the history of the dominant firm and how it obtained its dominance must be considered in an excessive pricing enquiry, and so must the context and history of the country and the Act.

To determine the ‘excessiveness’ of Sasol’s prices, the Tribunal went on to compare Sasol’s actual cost of producing purified propylene and polypropylene (including the cost of capital) with the prices it charged for these two products to customers in South Africa. The Tribunal emphasized that there is no ‘hard and fast’ level by which price must exceed cost for the price to be excessive. The reasonableness of the relationship between price and economic value is a value judgment.

The Tribunal found price mark ups of up to 41.5% for sales of purified propylene to Sasol’s only domestic customer and up to 36.5% for sales of polypropylene. In addition, for polypropylene, the Tribunal found that Sasol’s pricing to domestic customers was on average 23% higher than the deep sea export price, and on average 41% and 47% higher than the prices in Western Europe for the two relevant grades of polypropylene.

Critical to the case was Sasol’s policy of import parity pricing. Sasol produces in excess of South African demand.  It sells product into the domestic market at the import parity price, and exports the balance at a lower export price.

In other words, Sasol set its prices to domestic customers at the opportunity cost of a unit of an imported substitute good.  Although there was no statement that import parity pricing should be considered automatically excessive, this was clearly at the forefront of the Tribunal’s mind. Firms should be aware of the high risks associated with this type of pricing strategy.

The Tribunal decided to reduce the administrative penalty which would normally apply, and to impose the following stronger behavioural remedies limiting Sasol’s future product pricing:

  • Sasol must not discriminate between the purified propylene price charged internally within Sasol and the price charged to domestic customers;
  • Sasol must agree with the Commission on a proposed pricing remedy that links Sasol’s purified propylene price to prices in a region(s) in the world with the lowest polypropylene prices;
  • Sasol must sell polypropylene on an ex-works basis without price discriminating no matter where customers are located.

These bold remedies will in effect place a cap on Sasol’s pricing of the products. The  remedies move away from the imposition of solitary fines towards strategic and competition-enhancing remedies. One view of the Tribunal’s findings would be that the Tribunal has simply ordered that Sasol should be required to pass-on its inherited cost advantage to South African consumers.

Sasol has appealed the decision to the Competition Appeal Court. The delay and legal uncertainty created by the on-going litigation is highly undesirable for all involved.

The case brings into sharp focus the need for constructive engagement between dominant companies, the competition authorities and government to find constructive overall solutions to excessive pricing matters, which are inherently complex. Otherwise there is a risk of resource-intensive litigation, large fines and unilateral imposition of pricing regulations becoming the norm.