Despite being called to testify against Sasol Chemical Industries (SCI) during the first week of the Competition Tribunal hearings into allegations of excessive pricing of propylene and polypropylene, Usabco purchasing director Julius Lebi indicated on Tuesday that the company was committed to work with SCI, which was its main supplier of the polymer.
Lebi said at the second day of the tribunal hearings that Usabco currently sourced all its polypropylene, which was a core input material in its Addis range of plastic products, from Sasol.
In 2010, the company once sourced a limited volume of polypropylene from SCI’s competition Safripol, when SCI did not have the right grade available. At the time, Safripol’s product had been markedly more expensive.
Lebi stated that high polypropylene prices impaired Usabco’s ability to successfully compete with international producers of plastic ware, as polypropylene was the biggest component of the overall cost of its household plastic ware products.
Lower polypropylene prices would place Usabco in the position of being more competitive compared with imported products in the local market. The company would also be able to move manufacturing from its China-based factories to its South African plant, while it would also improve its competitiveness in export markets.
SA Leisure CEO Miriam Jacob, who was also called to testify against SCI, put forward that her company purchased its virgin polypropylene, which was a core input material of all its products, from Sasol and Safripol.
She indicated that SA Leisure had previously imported polypropylene where it found that Sasol’s pricing might have been above landed import prices, but noted that this held significant disadvantages, including longer lead times, logistics and working capital.
Jacob stated that high polypropylene prices made it difficult for the company to compete in the local and export markets, as the price of imported products was cheaper than SA Leisure’s cost of production.
She emphasised that SA Leisure’s production costs would be reduced markedly if polypropylene prices were reduced by 20%, as compared with import-parity levels.
Jacob added that lower polypropylene prices would also enable the company to expand its product range, increase production, sales and capacity.
“Better margins would also enable SA Leisure to invest more in design and strengthen its ability to compete against the design development evident in imported products,” she noted.
Starting on Monday, the Competition Tribunal began a four-week hearing period, in Pretoria, into an excessive-pricing referral made by the Competition Commission in 2010 against SCI, regarding the sale of propylene and polypropylene to domestic plastic converters between 2004 and the end of 2007.
In 2007, the Department of Trade and Industry requested the commission to investigate companies operating in the polymer industry, which it suspected were charging excessively high prices to local consumers.
The commission found that Sasol had exerted its market power to charge prices to domestic consumers that were higher than, and bore no reasonable relation to, the economic value of either product.
It also determined that Sasol was deriving its domestic selling prices from an import-parity price calculation, which meant that local consumers were paying prices that were higher than Sasol’s export prices.
In addition, the commission found that the formula developed to calculate the price of propylene charged to Safripol, which uses it as a feedstock to produce polypropylene at its own facilities in Sasolburg, resulted, directly or indirectly, in the fixing of polypropylene selling prices.
Representing the commission’s case, Advocate Arnold Subel argued that domestic consumers were subjected to prices that were 30% higher than export prices and described the domestic prices as being excessive.
The commission was seeking an order stipulating that Sasol refrain from selling propylene and polypropylene at prices that discriminate on the basis of the buyer’s location. It also wants an order that includes a fine equivalent to a combined 10% of Sasol’s turnover inside South Africa, and exports from South Africa, for the 2009 financial year.
Meanwhile, Sasol indicated that it would, in the hearings, work to show that its pricing was not excessive and that the pricing formula it employed could be justified.
Leading the SCI’s case, Advocate Wim Trengove put forward that the production of polypropylene volumes that were beyond that which the domestic market could absorb was not a reflection that export prices represented economic value.
However, this was the consequence of a business optimisation decision taken to mitigate the negative financial effects that were expected to arise as a result of the upgrade of its refineries to produce unleaded fuel. This optimisation was undertaken under the banner of Project Turbo, which resulted in the reduction of petrol volumes and an increase in polypropylene output.
The net result was that, while the domestic market for polypropylene stood at around 280 000 t/y, Sasol and Safripol, together, had the capacity to produce about 650 000 t/y, with the surplus sold in markets outside of South Africa
However, Sasol indicated that it would argue that the decision to build a second polypropylene facility was not based on a view that export prices reflected economic value, but rather that it was less destructive of shareholder value than the production of unleaded petrol.
The group would also contest the proposition that its domestic selling prices were as much as 30% higher than those found in other markets.