China’s National Development and Reform Committee recently imposed the largest fine ever on a sodium hydrosulphite manufacturer for price fixing and other anticompetitive activities.

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On 23 February 2012 China’s antitrust regulator in charge of price-related breaches of antitrust rules, the National Development and Reform Committee (NDRC), with the assistance of its branch in Hubei Province, imposed a fine of RMB 10.12 million (approximately USD 1.6 million) on  Hubei Yihua Group LLC (Yihua Group) for its price cartel, as well as some other anticompetitive activity.  It is the largest fine the NDRC has ever imposed.

The product concerned is sodium hydrosulphite an important raw material for the medical industry and synthetic dyes.  Although there are six other major producers of the chemical, Yihua Group is reportedly the biggest manufacturer of sodium hydrosulphite in the world, and is said to be the largest market player in terms of production capacity and global sales.

Price Cartel

It is reported that Yihua Group, the parent company of Hubei Yihua Chemical Industry Co., Ltd (Hubei Yihua), which is listed on the Shenzhen Stock Exchange, directly or indirectly fixed the price of sodium hydrosulphite along with other companies either affiliated with Yihua Group or that manufacture sodium hydrosulphite.  Reports indicate these companies allegedly formed an industry alliance to hoard sodium hydrosulphite so the price would go up.

Production Restrictions

To make sure the price of sodium hydrosulphite was maintained at a high level, Yihua Group and other cartel members restricted the production of sodium hydrosulphite, with each manufacturer in rotation restricting their production or shortening their manufacturing period.

Abuse of Dominant Market Position

Local media reports did not mention if Yihua Group has a dominant market position on its own or jointly with its affiliated companies, however, it was disclosed that Yihua Group has a monopolistic position, or “final say”, on the price of sodium hydrosulphite and abused this position by imposing a price on customers.  For example Yihua Group forced buyers to enter into unwanted purchase agreements with Yihua Group or entities controlled by Yihua Group.

It was also reported Yihua Group imposed unreasonable conditions on suppliers of raw materials and equipment.  For example, Yihua Group would demand suppliers sign a letter undertaking to pay a “performance bond” of as much as 10 per cent of the total price of the material and equipment to be supplied.  However, Yihua Group would only refund 5 per cent to the supplier concerned, even if there was no reason for it to deduct anything from the bond money.  If  a supplier chose not to enter into such a letter of undertaking, Yihua Group would not refund anything.

As a result of these activities, the price of sodium hydrosulphite went up by nearly 300 per cent, from around RMB 3,000 per ton to approaching RMB 10,000 per ton within a single year from the beginning of 2011.

Taking into account the recent NDRC penalty on two pharmaceutical distributors in Shandong province (see China NDRC Fines Two Pharmaceutical Distributors for Monopolistic Practice for more information), it appears that the NDRC is becoming more active, and more willing to use the Anti-Monopoly Law (AML) as a regulatory weapon to crack down on anticompetitive activities of market players.  In addition, the NDRC is clearly not hesitating to impose significant fines on companies violating antitrust rules.  

Regarding the size of the fine, it is interesting to see the NDRC appears not to have strictly followed the range of fines the AML provides, which is from 1 per cent up to 10 per cent of the company’s revenues in the previous fiscal year.  According to Yihua Group’s official website, its revenue for 2010 is RMB 41 billion (approximately USD 6.5 billion), and the revenue for 2011 is expected to exceed RMB 50 billion (approximately US7.9 billion).  Therefore, a fine of RMB 10.12 million (approximately USD 1.6 million) would only account for 0.2 per cent of Yihua Group’s revenue in 2011.  It seems then, the NDRC might adjust the range of fines when implementing the AML.   

Alternatively, the NDRC might not have imposed a fine based on the revenue of all of Yihua Group’s products, or the fine was imposed on one or another of the group’s subsidiaries, without attributing the anticompetitive behaviour to the Yihua Group as a whole.  There is also the possibility the NDRC exercised some leniency under the leniency provisions of the AML, but there was no suggestion of this in any reports.  It remains to be seen how NDRC will justify any adjustment it has made to the fine, and its methodology for calculating the fine.