Sasol's in the pooh
South Africa is on the brink of its first class action resulting from a Competition Commission case, as farmers look set to launch civil claims against Sasol, which admitted to participating in a fertiliser cartel earlier this year.
The Mail & Guardian understands that Sasol could face billion-rand claims from South African farmers, with initial estimates suggesting that the cartel could have resulted in a 30% to 40% mark-up on fertiliser products.
In a sector that is worth more than R10-billion a year the farmers’ damages claims would dwarf the R250-million fine Sasol had to fork out to government after settling with the Competition Commission.
Sasol admitted that it had been part of a fertiliser cartel that operated between 1996 and 2005, which means that farmers will be able to claim damages for all nine years that the cartel was in operation.
Shareholder activist Theo Botha says it is important for the farmers to claim damages because the R250-million fine equates to only R28-million for each year that the cartel was in operation. ‘Based on these figures you can draw the conclusion that collusive behaviour is highly profitable,” said Botha. ‘Especially in Sasol cases where they have admitted that they have been colluding for nine years.”
The Transvaal Agricultural Union (TAU), which is expected to facilitate the class action, has commissioned a forensic investigation into fertiliser prices in a bid to assess the impact of the cartel. A source close to the process told the M&G that after reviewing the preliminary report, the union’s lawyers had recommended that farmers proceed with civil claims for damages against Sasol.
But, the TAU’s chief executive, Benny van Zyl, told the M&G that it would meet its lawyers only this week and that their recommendation would have to be approved by the TAU’s executive committee when it meets early in November. If approved by the TAU executive, farmers would have to make their own independent decision on whether to join the class action or not. ‘Sasol took profits out of the farmers’ hands,” said Van Zyl.
Fertiliser is the single biggest expense in crop production, making up more than 50% of costs. This would suggest that the effect of the fertiliser cartel on food pricing would have been significant and would have contributed to concerns over food security in South Africa.
With such a significant impact on food pricing, it is plausible that South African consumer bodies and South Africa’s food retailers could also join the class action. At present none of South Africa’s other agricultural bodies has joined the TAU in its push for a class action.
Grain South Africa’s Nico Hawkins told the M&G this week that it had not made a final decision over civil claims against Sasol and was waiting for the commission to conclude its case against the other alleged cartel members, Omnia and Kynoch. Both Omnia and Kynoch have decided to contest the commission’s case and the Competition Tribunal hearing has been set for December.
Sasol has also not settled the abuse-of-dominance charges that were laid against it by the commission. The hearing for these charges is set for early next year. On top of this the commission suspects that collusion continued after 2005 and has launched a new investigation that will look at anti-competitive practices between 2005 and 2009.
‘It doesn’t make sense to go after one of the players at this time,” said Hawkins, who added that Grain South Africa would wait until all the matters were concluded.
One of the key difficulties the TAU faces is that, because Sasol settled the matter and it didn’t go to a hearing, key documents that would have helped the farmers prove their case have not been made public.
Philip Theunisen, who drew up the forensic report for TAU, said it would request access to the documents from the commission. ‘If we get these documents we will be able to calculate the effect of the cartel,” he said.
‘In my opinion justice was denied because the Competition Tribunal didn’t ask Sasol after it pleaded guilty to collusive behaviour if it had calculated how much extra profit it derived from this collusive behaviour,” said Botha. ‘In other words, how can the tribunal accept the guilty plea without obtaining the quantum of the damage done by Sasol, a ‘serial offender’, to the aggrieved stakeholders.” This is a ‘serious flaw” and needs to be addressed, Botha said.
‘The Competition Commission expects the aggrieved parties to take Sasol to court so that they can be compensated. Surely Sasol should provide this information willingly and not hide behind the fact that this information is confidential.” He said Sasol’s shareholders had benefited from its ‘ill-gotten gains” and should be the ones to force the company to settle with the farmers.
The commission’s chief legal counsel, Wendy Mkwananzi, said one of the benefits of settlement for Sasol was that all the documents were not made public. But she said because the other alleged cartel members were contesting the charges, many documents supplied by Sasol would be brought into the public domain.
Mkwananzi said the Competition Act did not require the commission to go into the issues of damages and that if it did have to, it would be a completely different legal standard.
Sasol’s spokesperson, Jacqui O’Sullivan, said it will consider claims linked to the fertiliser matter in a responsible and appropriate manner. ‘To date, no legal process for civil claims has been initiated against Sasol,” said O’Sullivan.
‘An appropriate response to potential claims can only be decided once the claims have been properly formulated. ‘Once we understand the nature of the claims and the causal link of the claims to the settled Sasol Nitro [a division of Sasol] matters we can respond responsibly and appropriately,” she said.
‘We will be able to reasonably quantify a potential impact of civil claims only after such claims have been formulated. We have disclosed potential civil claims as an unquantifiable contingent liability in our financial statements. ‘Quantifying profits that are causally linked to the fertiliser cartel is a complex process and requires intricate economic and legal analysis once potential claims have been lodged. We are not yet in a position to perform such an analysis.”
When asked about the response of Sasol’s shareholders to the potential of claims, O’Sullivan said that some shareholders had raised the issue. ‘It would be inappropriate to speculate on the views of our shareholders or for us to speak on their behalf,” she said.
‘But, we can assume our shareholders share our disappointment and anger that the actions of a few people in this business unit’s past have sullied the reputation of a proud and successful company. Our shareholders, like the people of Sasol, want to see transgressions of this nature rooted out and exposed to ensure Sasol’s future is one that can be built on a foundation of full compliance.”
What the forensic audit says
The Transvaal Agricultural Union’s forensic report states that the fertiliser cartel resulted in a ‘distortion of retail prices” in the local fertiliser market. The report alleges that this resulted in farmers paying ‘excessive prices” for their fertiliser for almost a decade.
According to the report, South Africa’s fertiliser market annually supplies about 2-million tons of fertiliser products locally, at an approximate value of R10-billion a year.
The report argues that because a substantial volume of fertiliser raw materials are produced in South Africa, the local market should feel the effects of increases in international fertiliser prices to a lesser extent. But the report finds that local prices spiked before international prices and increased by a larger margin than the international prices.
The report says the local price of ammonia sulphate was on average 39% higher than the import parity price and phosphates were 35% higher than the import parity price.
The report says that local fertiliser prices increased by 281% between 2005 and 2008. ‘This is an indication that local fertiliser manufacturers used the opportunity of rising international prices to determine local prices on much higher levels [than] what is reasonable and justifiable above their manufacturing cost,” says the report.