Alleged cartel behaviour by the fertiliser industry could open the way for civil lawsuits against large industry players such as Sasol.
In an ongoing case with competition authorities, brought by small fertiliser company Nutri-Flo fertiliser in 2005, Sasol stands to get sued for R57.5-mllion for, among other things, alleged price-fixing and abuse of dominance through charging excessive prices and engaging in exclusionary conduct. This is according to an October 2008 disclosure by Sasol to the United States Securities and Exchange Commission.
While this sum is negligible for a company worth billions, it is feasible that other parties may also pursue such a course of action.
Alleged cartel activity in the R14-billion-a-year fertiliser industry has driven the cost of nitrogen-derived products, key ingredients in many fertilisers, up by at least 20% in recent years, says Bruce Lyle, the head of Nutri-Flo.
Earlier this year Sasol announced that after an audit of its business operations it found that some unlawful activity may have taken place, including in its chemicals and fertiliser division Sasol Nitro.
According to Nandi Mokoena, manager of strategy and stakeholder communications at the Competition Commission, the Competition Act allows for aggrieved parties to pursue civil action against a company, provided the Competition Tribunal rules that the company has broken the law and is liable for damages.
Price spikes that took place last year, increasing by as much as 200% in some instances, have caused such consternation among farmers that the Transvaal Agricultural Union (TAU) launched a private investigation into the fertiliser value chain.
The investigation is to be conducted by forensic auditors and is being funded by TAU members themselves who have donated as little as R400 each to pay costs.
The fertiliser industry is dominated by large firms such as Sasol, Omnia Fertiliser and Yara South Africa. Yara and Omnia are fellow respondents alongside Sasol in the Nutri-Flo case.
Sasol is in exploratory settlement discussions with the Competition Commission, regarding the Nutri-Flo case.
It is also involved in a second case brought by another fertiliser company, Profert, regarding alleged abuse of dominance. The commission may seek to have both cases heard together.
The impact of fertiliser prices on farmers and food prices has long been cause for concern. As an input cost fertiliser made up between 40% to 50% of farmers’ variable input costs last year.
As fertiliser prices increase, this impacts on farmers’ profitability. If farming becomes too expensive, they reduce their crop production, causing supply shortages, which drives up food prices.
But the fertiliser companies and industry bodies argue that international commodity prices, volatile rand exchange rates and increased global demand are the chief causes behind fertiliser price increases.
According to the Fertiliser Society of South Africa (FSSA), more than half of South Africa’s fertiliser ingredients are imported. They include nitrogen, phosphorous and potassium, says Gert van der Linde, director at the FSSA.
Members of the FSSA make up about 90% of the total market. Between them they sold about 2-million tons of fertiliser last year, at an average of about R7 000/ton.
Van der Linde argues that the rise in commodity prices seen last year is the sole reason for fertiliser prices rising.
”Its as simple as that,” he says.
Profert founder Abie van der Walt similarly argues that global forces, including increased demand and global shortages, saw fertiliser prices peaking.
Nevertheless, in an effort to dispel the view that the fertiliser industry is contributing to strain on farmers, Profert has committed R100 000 to the TAU investigation.
”If there is a question mark over the integrity of our business then we want to be rid of it and demonstrate Profert’s worth to our customers,” says Van der Walt.
He says that in the past few years the industry has been intensely competitive, regardless of the dominance of large firms such as Sasol.
Prices of fertilisers have decreased in recent months, in line with a drop in all commodities in the wake of the global financial crisis.
According to the latest figure from Grain South Africa (GrainSA) international prices for products such as ammonia have dropped off significantly.
During the high point of 2008 it peaked at R6 963 per ton, falling to R1 477/ton, or a decline of 79%. It recovered somewhat in February rising 28% to R1 892/ton.
Local prices have shown similar falls. Limestone Ammonium Nitrate (LAN), made up of ammonium nitrate and chiefly derived from ammonia, has fallen 39% locally. It peaked at R6 772/ton last year falling to R4 110/ton in February.
Despite these trends, head of GrainSA Kobus Laubscher admits that competition in the fertiliser industry has long been of concern to agriculture industries.
GrainSA was approached by TAU to fund its investigation but, says Laubscher, the organisation felt it would duplicate the work already being undertaken by the commission.
Laubscher noted: ”When you have a concentration of market power this allows for anti-competitive behaviour.”
Sasol declined to comment on the cases with the competition authorities, but argued that global trends are responsible for recent price hikes.
”In the 18-month period up to 2008 we have seen a totally abnormal increase in global fertiliser commodity prices on the back of very tight supply-demand conditions. As we have previously indicated within the Sasol Nitro matter, it is quite important to note the timing of the activities being investigated by the Competition Commission,” said Jacqui O’Sullivan, spokesperson for Sasol.
”To the best of our knowledge, the activities under review ceased some time ago. The global and local rise in fertiliser prices since 2007 was on the back of the abnormal surge in global commodity prices.”
She pointed out that in line with a drop in global fertiliser commodity prices, Sasol Nitro’s prices have dropped substantially from the highs reached in 2008.
Nutri-Flo vs Sasol
An affidavit regarding the Nutri-Flo case, and referred to competition authorities in 2005, offers a glimpse into how alleged cartel operations in the fertiliser industry worked. The respondents in the case are Sasol Nitro, Omnia Fertiliser and Yara South Africa, formerly known as Kynoch.
Ammonia is a chief ingredient in nitrogenous fertiliser products such as Limestone Ammonium Nitrate (LAN). Sasol supplies 90% of all ammonia to the local market. The affidavit states that LAN can be imported, but is unstable and difficult to transport. Sasol, with its access to ammonia, is well placed to be the main producer of LAN. Omnia — the only other manufacturer of LAN — produced fertiliser for Sasol under a tolling agreement, while Kynoch — the major supplier — procured most of its LAN from Sasol.
According to the document, Sasol preserved its dominance in the market for ammonia to ensure it could sell the product at a higher price.
This, in turn, ensured that Sasol retained decisive market power over the supply of LAN to the retailers and ultimately farmers, the consumers.
This and alleged anti-competitive behaviour took place through a network of agreements with the fellow respondents, the creation of collusive bodies such as the Import Planning Committee (IPC); and a range of exclusionary practices including differential pricing and contractions of supply to competitors.
Bodies such as the import planning committee also affected imported fertilisers such as urea. Urea is a possible substitute for LAN, but inadequate for certain crops and climatic conditions. Meetings of the IPC, however, saw to it that the respondents determined the prices at which they each sold imported fertilisers.
