On 17 June 2015, the Competition Appeal Court of South Africa (CAC) overturned the Competition Tribunal’s decision which found Sasol Chemical Industries Limited (Sasol) guilty of excessive pricing.
The CAC’s judgment is thorough and the factual, legal, accounting and economic issues covered are complicated. Although redeeming for Sasol, the judgment may give rise to a number of significant implications for future enforcement action against excessive pricing South Africa.
We set out below a review of the questions raised in the decision as well as the potential implications of the CAC’s answers.
The feedstock debate – Actual costs or notional costs?1
The first and potentially most important question addressed by the CAC related to what the CAC referred to as the ‘feedstock debate’. According to the Competition Act2 , a price charged by a dominant firm is excessive and illegal if it has no reasonable relation to the economic value of the product in question.
In conditions of competition, prices will normally be driven down towards a firm’s costs of production (plus a reasonable return). A firm’s costs (including a reasonable return) therefore usually provide an insightful proxy for the price that would prevail under conditions of competition, and therefore a product’s ‘economic value’.
In the only previous excessive pricing case in South Africa, the Mittal case, the CAC held:
…economic value is a notional objective market standard, not one derived from circumstances peculiar to the particular firm… The criterion of economic value…recognizes only the costs that would be recovered in long run competitive equilibrium3.
Sasol has a peculiar cost advantage because it procures its feedstock propylene from its sister company – Sasol Synfuels – at a low internal transfer price. Feedstock propylene is a critical input in the production of purified propylene, which is then converted into polypropylene.
One of the key questions in the Sasol case was how
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