Plastics pricing meltdown

Polypropylene is a major determinant of the price of plastic.(Charles Platiau, Reuters)

Polypropylene is a major determinant of the price of plastic.(Charles Platiau, Reuters)

The battle between the Competition Commission and Sasol over whether South African plastics are too pricey has begun in earnest. Two plastics manufacturers have testified how high prices prejudice them when they are up against cheap imports, which has even led one major company to outsource its plastics production to China.

The four-week Competition Tribunal hearing kicked off in Pretoria on May 13 with the chemicals giant accused of producing propylene and polypropylene — chemical components vital for the manufacture of many plastic products — at possibly the lowest cost in the world but still marking up the domestic price of polypropylene 30% higher than the export price. It is also alleged to have engaged in fixing the price of polypropylene.

Sasol produces propylene, a plastics monomer (a molecule that can be bonded to other identical molecules to form a polymer), as part of its synthetic fuels process. Propylene is used in the production of polypropylene, which is commonly used in the manufacture of plastic goods such as bins, brooms and even car parts, such as door handles and bumpers.

In fact, it is such an important input in the manufacturing of plastics that the department of trade and industry has identified polypropylene conversion as a high priority sector of its industrial policy action plan.

But this week it emerged that manufacturers have struggled to remain competitive because of the high polypropylene prices, and the commission alleges that Sasol has abused a dominant position in the domestic market by restricting the supply to create an artificial scarcity so that it is able to raise polypropylene prices. But Sasol contends that this is far-fetched.

Low-cost imports
The commission also claims "Sasol's prices of propylene contribute directly to higher prices of polypropylene".

In his statement Julius Lebi, the purchasing director of Usabco (trading as Addis), said high polypropylene prices had made the company uncompetitive with international plasticware producers. "Low-cost imports have also affected Usabco's margins and profits and meant that it has not been able to invest in new product development to the extent that it wanted."

Miriam Jacobs, chief operating officer of SA Leisure and a factual witness brought in by the commission, said polypropylene prices are the single biggest component of the overall cost of the company's products and that "high polypropylene prices also have a significant impact on SA Leisure's competitiveness in export markets".

In her statement Jacobs said if local polypropylene prices were reduced by 20% SA Leisure could pass this saving on to customers to win more business.

Both witnesses said they could make a greater range of products if the polymer's price was lower. Lebi said Usabco would even be able to move products made in Chinese factories back to South Africa.

Following a long investigation the commission referred the complaint to the tribunal, alleging that Sasol's prices for propylene and polypropylene in the domestic market are excessive and detrimental to consumers. It also asked that an administrative penalty be imposed equivalent to 10% of Sasol's annual turnover in South Africa and exports from South Africa in the financial year of 2009.

Producing more than required
According to a founding affidavit from Itumeleng Lesofe, an investigator in the enforcement and exemption division of the commission, the only local producers of propylene are Sasol and the South African Petroleum Refinery and that Sasol and the plastics producer Safripol are also the only firms procuring polypropylene from them.

"Both Sasol and Safripol sell polypropylene in South Africa, primarily to plastics product manufacturers," Lesofe said. "However, Sasol and Safripol together produce more polypropylene than is required by customers in South Africa."

The commission submitted that Sasol produces exponentially more polypropylene that Safripol, while Safripol is also dependent on Sasol for additional supplies of propylene as an input product. Lesofe said domestic demand has remained constant since 2004 and Sasol and Safripol have exported significant quantities of polypropylene.

The commission alleges that, because of market dominance, Sasol is able to charge domestic prices for polypropylene based on import parity pricing, which is allegedly 30% higher than Sasol's export prices. In 2008 Sasol increased its capacity to produce propylene as part of a capacity expansion venture called Project Turbo. Lesofe claimed that polypropylene export prices were clearly profitable because Sasol had expanded its production on the back of them.

However, in its responding affidavit Sasol said propylene is also extracted for purification by the National Petroleum Refiners of South Africa, not only to make polypropylene. And the company denied that the price difference between local and export polypropylene is as high as 30%.

Competitive factors
In order to remain competitive, Sasol said the price-setting procedure takes into account a number of competitive factors and the company monitors polypropylene prices from the United States, Europe and the Far East and then selects the lowest of these for its price calculations. Sasol said Project Turbo is a part of major adjustments to the refining process in order to meet new and legislated clean fuel specifications, which require a massive investment.

The commission said that Sasol's domestic prices for polypropylene do not reflect its economic value as there is no competitive process and that Sasol's export prices for the product should rather be considered.

It said Sasol's domestic prices far exceed its costs and, "in its internal document, Sasol has stated that it anticipates being the lowest cost producer of polypropylene in the world".

Sasol countered that the export price is not sufficiently profitable to cover costs plus a reasonable rate of return, and that the approach of the commission to the economic value of propylene, as set out in the legal documents, is badly flawed.

No effective substitute
Lesofe said that there is no effective substitute for polypropylene in a vast number of applications for which it is used, and no substitutes for propylene as an input material for polypropylene. Sasol refuted this. Lesofe said the costs of importing polypropylene are prohibitively high and no such significant imports had come into the country in the past six years.

Jacob said SA Leisure had imported polypropylene in the past when it believed Sasol's pricing might have been above landed import prices. "However, there are significant disadvantages … such as lead times, logistics and working capital required."

Lebi said Usabco cross-checked the price Sasol charges with other sources "to ensure Sasol is not charging more than Usabco could theoretically import for".

However, Sasol denied that the costs of importing polypropylene are prohibitively high and that, in the past three years, 11% of the polypropylene consumed locally has been imported, some of it by Sasol Polymers, and that customers have regularly threatened to import more of the product during price negotiations with Sasol Polymers.

Few barriers to importers
In his responding affidavit, Adriaan Roland Janse van Rensburg, the general manager of the polyolefins business of Sasol Polymers, said there are few barriers to importers of polymer products achieving market penetration. Major players such as ExxonMobil and Sabic have set up warehousing and sales infrastructure in South Africa and have established logistics channels to service domestic customers, and many smaller importers and traders have established markets and services locally.

The commission also submitted that Sasol and Safripol have "reached an agreement or at least engaged in a concerted practice that, directly or indirectly, fixes the price of polypropylene".

It said the two firms' prices on comparable products do not differ much because of a supply agreement, although Sasol said price differences fluctuated between 5% and 10% over the relevant period.

The commission said a formula for the polypropylene selling price in the supply agreement between the two "incentivises both Sasol and Safripol to follow each other's price increases and ultimately to charge the highest possible prices for local sales of polypropylene, being IPP-based prices".

Unusually, the commission said, according to the supply agreement, if Safripol buys more than 55 000 tonnes of propylene, Sasol will charge it more for the additional amounts. Also Sasol will provide propylene to Safripol at a much lower price if it is used in the manufacture of polypropylene or a derivative that is exported. Consequently, Safripol will be unable to increase supply to the domestic market at prices that will undermine Sasol's import parity-based pricing.

Van Rensburg said the commission complaint pertaining to price-fixing was settled in an agreement with the commission in 2010, when Sasol admitted that the propylene pricing formula and related provisions of the supply agreement amounted to the indirect fixing of a price or trading condition.

He said the increased price for volumes above 55 000 tonnes is directly related to the higher costs associated with the production of the additional volumes.

The commission has asked the tribunal to rule that Sasol and Safripol must each pay an administrative penalty equivalent to 10% of their annual turnover in South Africa and exports from South Africa in 2009.

Lisa Steyn

Lisa Steyn

Lisa Steyn is a business reporter at the Mail & Guardian. She holds a master's degree in journalism and media studies from Wits University. Her areas of interest range from energy and mining to financial services and telecommunication. When she is not poring over annual reports, Lisa can usually be found pottering about the kitchen. Read more from Lisa Steyn

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