Briefing on the Competition Commission’s investigations of Sasol Chemical Industries Limited - PowerPoint Presentation

Briefing on the Competition Commission’s investigations of Sasol Chemical Industries Limited
Briefing on the Competition Commission’s investigations of Sasol Chemical Industries Limited

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23 February 2016 Tembinkosi Bonakele Commissioner tembinkosibcompcomcoza The development of Sasol Limited Sectors investigated by the Commission Polymers case Fertiliser impact assessment ID: 744993 Download Presentation


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Briefing on the Competition Commission’s investigations of Sasol Chemical Industries Limited

23 February 2016

Tembinkosi Bonakele


The development of Sasol LimitedSectors investigated by the Commission

Polymers caseFertiliser impact assessment


Sasol was supported, owned and controlled by the State since its establishment until its privatisation and to some extent beyond privatisation.Due to the strategic nature of the sector, the State ensured, through legislation and regulation, that Sasol was sustainable, profitable and would not fail.

The most significant legislative and regulatory measures imposed by the State to protect and benefit Sasol in particular are listed in the slides that follow.

Development of Sasol LimitedSlide4

the protection of the synthetic industry was made public policy;an arrangement that service stations would purchase Sasol’s fuel product and market it. This insulated Sasol from marketing risks as it did not have to invest in the retail network

;State also imposed fuel levies to fund the expansion of Sasol’s operations and obliged other oil companies to buy fuel produced from those expanded operations a

rail equivalent tariff which had the result of exempting Sasol from paying the higher transport costs resulting therefrom. The tariff had the further effect of raising the inland price, thus increased Sasol’s returns;

Development of Sasol Limited (Cont.)Slide5

Sasol’s utilisation of state funded infrastructure such as pipeline networks; minimal risk posed to investors when Sasol was privatised. For example, the price at which it was privatized was significantly discounted; regulation guaranteed profitability of each segment of the value chain; such as the significantly discounted price; the actual risk exposure of private investors in respect of Sasol 2 and 3 was limited, whilst the State, which was a minority shareholder, bore the majority of the risk.

Development of Sasol Limited (Cont.)Slide6

Sasol Chemical Industries comprises five divisions, namely Sasol

Polymers Sasol Nitro, Sasol Wax, Sasol Solvents and Infrachem. Each of these divisions is managed as a separate business


Polymers comprises two distinct South African operating businesses, namely: 1. the


business, which includes monomers, propylene and ethylene, and polymers, PP and polyethylene (“PE


2. the



business, which includes polyvinyl chloride, vinyl chloride monomers, chlor alkali chemicals and mining reagents.Sasol Nitro houses the Sasol fertilise business and its product range includes ammonia nitrate derivative products

Sasol Chemical IndustriesSlide7

Fuels and Oils Sector

 LPG gas

In 2014, the Commission initiated a market inquiry into LPG gas. The inquiry is still under investigation and is due to be finalised in March 2016.


produces LPG gas as a by product of its oil to gas operations





Commission investigated Sasol for excessive pricing of ammonia and for entering into a price fixing and market allocation arrangement with its competitors in the fertiliser market. Sasol paid a penalty of R250million for the price fixing allegations. It settled the abuse case by , inter alia, agreeing to divest of five of its plants. The outcomes of the case are discussed in the slide dealing with the Commission’s ex post impact assessment

Polymer Sector


(i) Ongoing investigation. Sasol is alleged to be in contravention of sections 8(a), 8(c), 8(d)(ii) and 9(1) of the Competition Act.



(ii) The CC referred a case of excessive pricing against SCI to Tribunal, which found SCI in contravention of section 8(a) of the Act in June 20414. (ii) SCI appealed the Tribunal decision to the CAC, which granted the appeal and concluded no excessive pricing conduct by SCI. (iii) The Constitutional Court dismissed the Commission’s request to appeal the CAC decision.




(methane gas and natural gas)

(i) In 2013, the Tribunal found, Sasol Gas and Spring Lights entered into an agreement, which had the effect of fixing the price of piped gas, in contravention of section 4(1)(b) of the Competition Act. Spring Lights was fined R10.8 million.

(ii) Sasol Gas and


Gas entered into a market allocation arrangement for piped gas in contravention of section 4(1)(b) of the Competition Act.


Gas was fined R1.6 million. In both cases, the Commission’s investigations were predicated on a leniency application made by Sasol Gas. Slide8

The Polymers Case

Background The

Competition Commission (“Commission”) received a request from the Department of Trade and Industries in August 2007 to investigate the pricing practices in the South African chemicals sector, particularly the polymers sector.

The Commission initiated a complaint against Sasol and at the conclusion of its investigation referred a case of excessive pricing of propylene, and polypropylene in the period 2004-2007 in contravention of section 8(a) against Sasol

. Slide9

Purified propylene, produced from feedstock propylene, is a monomer that is a by-product of fuel production and is used as a key input in the production of polypropylene.

Polypropylene is a polymer which is a key input for converters who manufacture household products like lunch boxes, plastic chairs and plastic cups; and industrial plastic products like motor car parts and water tanks.

Commission’s findingsSlide10

Sasol is the only significant producer of propylene. There is only one other producer of polypropylene in South Africa, Safripol (Pty) Ltd (“

Safripol”). However, Safripol obtains almost all its propylene from Sasol and is not able to place any competitive constraint on Sasol’s pricing of polypropylene.

Sasol produces far more propylene and polypropylene than is required in the South African market and exports approximately half of its polypropylene production.

The Commission referred its finding to the Competition Tribunal in August 2010 alleging excessive pricing by Sasol of propylene and polypropylene.

Commission’s findingsSlide11

The Commission found that polypropylene is the biggest input and cost component in the production of plastic products such as household plasticware (e.g. brooms and mops), kitchen products (e.g. food boxes, buckets and bins) and

gardenware.The effect of higher prices on manufacturers of these products is that they are able to sell fewer products because their costs of production are higher.

Cost increases affecting manufacturers are passed onto


Local plastic convertors lose sales to imported products; lower polypropylene prices would contribute to improving competitiveness against


Impact on plastic sectorSlide12

In the automotive sector, polypropylene is mainly used by automotive converters to produce vehicle components.Some of the firms manufacturing talc-filled polypropylene (which is sold to automotive convertors) have been forced to shut down due to higher polypropylene prices (e.g.


Impact on plastic

sector (cont.)Slide13

Outcome of the complaint referral

The Competition Tribunal found that Sasol had engaged in excessive pricing of propylene and polypropylene to the detriment of consumers such as plastic converters

The Tribunal

emphasised missed opportunities for innovation and development for the domestic manufacture of downstream plastic goods as a result of SCI’s pricing

It imposed

fine of R534 million and ordered SCI to price

in a manner that did not take into account the

location of the buyer

when determining the



The price charged by a dominant firm is excessive if it bears no reasonable relation to economic value of the good and to the detriment of consumersSlide14

Sasol appealed the

Tribunal’s decision to the Competition Appeal Court

On 17 June 2015 the CAC overturned the decision of the Tribunal, criticising its reasoning and evaluation of evidence


The CAC did not assess harm to consumers since it found that Sasol’s


were not unreasonable

It also did not regard Sasol’s historical state support and that it not acquire its dominance as a result of innovation or risk taking as material factors for arriving at its decision.

Outcome continuedSlide15

In July 2015, the Commission filed an application for leave to appeal to the Constitutional Court against the judgement of the CAC.

On 17 November 2015 the Constitutional Court refused to grant the Commission leave to appeal. Consequently,

the CAC

decision and its reasoning stand and are binding precedent on the evaluation of contraventions of section 8(a) of the Competition Act.

Appeal to the Constitutional CourtSlide16

The fundamental issue in the complaint before the Tribunal, and in the appeal, was whether section 8(a) should be interpreted and applied in a manner that permits SCI to continue charging maximum prices in perpetuity (in the process making extraordinary returns) or not.

This was particularly important in light of the conflicting precedent by the CAC in its decisions in the Arcelor Mittal case and in this case.

Central issue in the appealSlide17

Fertiliser Impact Assessment

BackgroundIn 2009, Sasol admitted that it was a member of the fertiliser cartel together with Omnia and




). It paid administrative penalty of R250 million

It also entered into an agreement with the Commission with regards to allegations that it had abused its dominant position by engaging in excessive pricing, refusal to supply and price discrimination in the supply of ammonia and


fertiliser products

Sasol did not admit that it had abused its dominance as alleged, however, entered it into settlement with the CommissionSlide18

Key features of settlement agreement

Sasol would divest of it downstream blending facilities in Durban, Bellville, Potschefstroom, Endicott and Kimberley

Sasol would sell its ammonium nitrate based fertilisers on an ex-works basis

It would not discriminate in its pricing to customers based on geographic location

It would be transparent regarding all discounts and allowances

It would separate its upstream ammonia operations from the downstream blending operations and would sell to it at arms length

It would stop importing ammonia on behalf of third parties

Fertiliser continuedSlide19

Market entry/expansionUpstreamOmnia invested R1.4 billion in a new nitric-acid

plant upstreamOverall, no greenfield entry due to significant capital requirementsDownstream


, GWK, and


entered the blending business through acquiring Sasol’s divested plants

Significant entry

of smaller

blenders and

traders evident


assessment findingsSlide20

Fertilizer supplyOmnia increased ammonia imports Although mostly for its internal use

, the supply of the final products increasedDue to downstream entry, supply of fertiliers increased

Farmers indicated that there is improved access to product

Increased participation by smaller blenders/traders

Farmers have choice and are obtaining competitive prices

Findings continuedSlide21

Thank you

Tembinkosi Bonakele012 394

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