/ 17 July 2014

Sasol and state go head to head

Sasol may have shot itself in the foot by appealing the Competition Tribunal verdict.
The union sent a strike notice to the energy and chemical company early last week, but did not at the time say when the strike would start. (Madelene Cronje/M&G)

Sasol is playing a high-stakes game with its appeal against the Competition Tribunal decision on excessive pricing in the propylene and polypropylene markets.

The fuel and chemicals company is facing a fine of R534-million, pricing remedies to bring down the costs of polymers and a potential raft of civil damages claims from polymer competitors and plastics manufacturers.

But its problems might not end there. Competition law experts and senior sources in the department of trade and industry have indicated that the appeal may be the last straw in a long-running standoff between the state and Sasol over how polymers are priced.

A senior department official said this week that there was a growing perception in the government that Sasol was stringing it along.

“Regulation may not be restricted to polymers,” he said. “If there is an appetite for the regulation of polymers, government might develop an appetite to regulate a whole bunch of other things.”

Shareholder concerns
The official said Sasol had become wrapped up in the immediate concerns of its shareholders and was not acting in the interests of the country and the economy. He said that Sasol’s appeal was not guaranteed to be successful and could leave it exposed to a bigger fine, civil damages claims and government regulation.

The department asked the Compe­tition Commission to conduct an inquiry into polymer pricing, as it was getting nowhere with Sasol on the issue, and now that another lengthy legal battle is on the cards with the appeal, it seems the department’s patience is wearing thin.

Recent public statements by the commission have endorsed this. A competition commissioner, Temb­inkosi Bonakele, recently spoke out strongly about Sasol’s appeal and said that the issue of overpricing would be dealt with under competition law or by government policy.

“I can promise you this matter is not going to disappear,” Bonakele said. “Sasol is out of touch if it thinks it can win this matter on the basis of technical legal arguments. The solution to this situation lies not just in the courts but also in government’s policy response.”

He said the commission would seek an even bigger fine at the appeal.

Repeat offender
Sasol is a repeat offender, having previously been found guilty of anticompetitive practices both in South Africa and the European Union. Last week, Sasol had a R6.3-billion fine reduced to R2.2-billion by the EU’s general court. This related to Sasol’s role in a wax cartel that is said to have existed for 13 years.

In June, a subsidiary of the South African fuel and chemicals company was found guilty of the excessive pricing of purified propylene and polypropylene.

The Competition Tribunal said that Sasol Chemical Industries’ propylene and polypropylene were overpriced by as much as 41.5% in some markets, which caused “significant harm” to downstream manufacturers of plastic moulded goods.

In its judgment, the tribunal argued that it had “negative consequences” for South Africa’s emerging economy by causing local plastics manu­facturers to be uncompetitive against imported plastic goods. This, in turn, had stunted an increase in manufacturing capacity and job creation.

“Cheaper polypropylene prices for the local plastic converters could enhance local production, thereby enabling them to compete more effectively with imported final plastic products, manufacture locally rather than overseas and introduce new products to South African consumers,” the tribunal said.

Historical context
Much of its judgment focused on the historical context in which Sasol was established, and the “significant state support and the protection that Sasol received over the years”.

A competition law expert said the judgment stated that history matters – which meant that, because Sasol was built using state funding, it couldn’t just “keep all the rents to itself”.

The expert also said that the pricing remedy imposed by the tribunal was extremely damaging for Sasol. “They won’t like that at all,” he said.

He added that the appeal might be the push that the government needs to implement greater regulation of Sasol products. “Government may apply regulation to a whole number of products, not just propylene and polypropylene.”

The department official said there was an opportunity for Sasol and the government to move on from an “unproductive standoff”, which was all about “narrow self-interest”, to a dialogue to get the plastics manufacturing sector growing so jobs could be created. “It’s time for Sasol to stand up and show some corporate leadership,” he said.

Polymer pricing
Asked about the civil claims Sasol could face if its appeal fails, the official said that it was “not implausible” that the government, Sasol and the greater plastic manufacturing sector could agree on a “forward-looking approach”, in which a “developmental price” for polymers was agreed to and civil claims would be waived.

“We could create a model for how government and large corporates engage with each other. A settlement with Sasol could be a model for how to settle these long-term issues in a range of other industries.”

Sasol says it will continue to work with the department.

“Sasol remains a willing participant in all its activity and engagement with government, and [this] remains the case with the department of trade and industry. [The department] is a strategic player in enabling economic growth in South Africa and we value the relationship that Sasol has with the department across the various touch points of our business,” it said.