Gauteng motorists will be amazed to learn that a price war has been taking place at the fuel pumps, it’s just that discounts have not been passed on to the consumer.
The Competition Tribunal on Thursday blocked the proposed R12-billion merger of Sasol and Engen’s liquid fuels businesses into a new entity to be called Uhambo.
It rejected claims by Sasol that it would not be able to enter the retail market successfully without such a merger, noting that it had shown considerable success in this regard, in part through aggressive discounting of prices to service station operators.
The prices offered are so low that Sasol witnesses to the hearing last year described them as “dumping”.
Says the Tribunal, quoting Sasol Oil managing director Ernst Oberholtser: “Sasol has secured its sights and incentivised the retailers marketing its brands by the provision of generous discounting of that holy of holies, the wholesale price of petrol.”
The Tribunal’s refusal to give Uhambo the green light means Sasol will have to build or buy its own network of stations at a cost of more than R1-billion.
Since the wholesale margin is based on the asset base used in marketing fuel, this raises the prospect of further wholesale margin increases and higher prices for motorists.
The Competition Tribunal’s findings are a major setback for Sasol, which is used to getting its way in its dealings with authority.
Sasol’s share price was 1,8% lower on Thursday. It fell by 8% on Budget day last week after Finance Minister Trevor Manuel announced an investigation into a possible windfall tax on Sasol’s super profits.
Just five days earlier the share was worth 15% — R25-billion — more, suggesting that the coming bad news was already in the market.
The Competition Tribunal did not pull its punches in its findings, criticising the cosy oligopolistic structure of the industry, its monopoly rents and Sasol’s supra profits.
It finds that Sasol is highly competitive in its activities, but these are for the benefit of its shareholders, not the consumer: “These industrial policies, underpinned by vast historical subsidies, have established a highly competitive domestic producer of fuels and chemicals.”
Consumers are excluded from these benefits, the Tribunal said: “Sasol precisely ring fences this advantage, with the shareholders of Sasol Ltd inside the ring and those who consume the product — starting with Uhambo and ending with the consumers of fuel products — firmly on the outside.
“It is our finding that a principal objective of the transaction is to ensure that Sasol Ltd’s multiple sources of competitive advantage — technological and locational — are withheld from South African consumers.”
For Sasol, a key motivation for the merger was the chance to balance its strength in refining with Engen’s in retailing. The Tribunal found, though, that that Sasol was building a strong retail presence without the merger.
The Tribunal said that the near-monopoly of refinery capacity and retail market share in inland South Africa would increase the prospect of the merged entity withholding supplies from its competitors.
“It is our strongly held view that Uhambo’s power to foreclose will end, not necessarily in a massively increased retail market share over that that will be enjoyed immediately upon merger. Rather it will end in a reconstituted cartel under the clear leadership of Uhambo.”
South African Petroleum Industry Association director Colin McClelland did not want to comment. “Some of my members will be happy and others will be unhappy.”
Sasol and Engen described the ruling as a disappointment. They were considering all options.
In its own words
What the Tribunal said:
- Sasol pre-empted the promised era of re- and deregulation by giving, in 1998, the requisite five-year notice of its intention to terminate the Main Supply Agreement, which then duly terminated in 2003. In so doing Sasol allowed the genie of competition to escape, and escape it did.
- But Sasol had taken a calculated risk. It had gambled that a combination of, firstly, logistical constraints that prevented the easy conveyance of refined product from its competitors’ coastal refineries and, secondly, a merger with Engen, the country’s largest retailer, would swiftly return the genie to acceptable confines.
- Sasol complains that in the absence of the merger it is condemned to permanent exclusion from retail markets. But this averment is clearly at odds with the facts. Sasol has already made considerable inroads. And it has achieved this by means of robust competition on the merits, including the discounting of the wholesale price.
- Uhambo entreats us to view the interveners’ motives with deep suspicion, born of the knowledge that the OOCs (other oil companies) are no more likely friends of competition than are the merging parties, and that their true concern is to weaken the emergence of a more powerful competitor. This is wise counsel — the merging parties are quite correct that promoting competition is the least of the OOCs concerns.