Mittal history repeats itself
NEARLY 12 years ago, in September 2002, Harmony Gold filed a complaint against Mittal Steel South Africa (Mittal) with the Competition Commission, claiming that Mittal was abusing its dominance in the market for flat primary steel products by charging an excessive price.
The commission investigated, and in January 2004 concluded there was “no evidence” of a contravention of the Competition Act that would allow it to refer the case to the Competition Tribunal.
Nonetheless, a month later Harmony decided to pursue the complaint directly with the Competition Tribunal off its own bat.
It took three years, but in March 2007 the tribunal ruled in Harmony’s favour. Mittal then appealed to the Competition Appeal Court, which bounced it back to the tribunal. Then, before the tribunal could reconsider it, the matter was settled privately between Harmony and Mittal.
The Mittal case, which was the first excessive-pricing case to come before the tribunal, has many similarities with the Sasol case decided this week.
Both entities — Sasol and Mittal — enjoy positions of market dominance and are able to secure their excessive prices, which is tantamount to import parity pricing, by preventing the high volumes of product they sell into the foreign market from coming back into South Africa.
In Sasol’s case, it is done by selling polypropylene at the ‘‘delivered price” to its export customers. This means those customers would incur significant extra transport costs were they to re-export the product to South Africa.
Mittal did pretty much the same thing through its exclusive agreement with Macsteel International, a joint venture owned by Mittal and Macsteel Holdings, which has exclusive rights to market Mittal’s steel products in the international market. Conveniently, Macsteel is prohibited from trading in South Africa.
This isn’t where the similarities stop.
Sasol also mimicked Mittal’s main argument by claiming that far from making “excessive profits”, it was, in fact, making no profit at all from its sales into the South African market.
In his decision on Mittal, former tribunal chairman David Lewis described the testimony given by Mittal’s expert economist as “bizarre”.
That economist was “attempting to persuade the tribunal that [Mittal], far from profiting excessively from its pricing practices, is — the conventional wisdom of the investment community notwithstanding — a firm in dire commercial straits; indeed, is a firm whose very future existence is placed in doubt.”
What made this seem even more bizarre was that at the time Mittal was reporting impressive financial results, with its share price hitting unprecedented highs.
That was in 2006, and yet Sasol’s expert witness tried exactly the same tactic at the tribunal seven years later.
Sasol’s argument was that an ‘‘economic” rather than an ‘‘accounting” perspective of its polypropylene business showed a business that was, in fact, almost bankrupt. (Presumably, if the tribunal could be persuaded they weren’t earning excessive profits, then obviously they weren’t charging excessive prices.)
The attempt to get the tribunal members to swallow the ‘‘economic” versus the ‘‘accounting” interpretation of their performance was part of the avalanche of legal and economic argument that rained down on the tribunal.
The book ... provides an entertaining analysis of a complex issue
In his book Thieves at the Dinner Table , Lewis refers to the frustrations of dealing with this kind of argument.
Those wanting to get a useful insight into the issues behind the Mittal case — and by implication, the Sasol case — should read Lewis’s book. It provides an entertaining analysis of a complex issue made all the more complicated by politics and personalities.
It also highlights a key difference in the outcome of the two cases. In the Mittal case, Lewis imposed a fine of R692-million on Mittal but, much more critically, he ordered the Macsteel arrangement to be broken up.
The reasoning was that breaking up this arrangement would mean cheaper steel exports coming back into the local market and put downward pressure on local prices. So, he argued, the excessive pricing problem would be solved.
As Lewis saw it, any ruling other than this would have drawn the tribunal into the role of a price regulator.
He argued that the remedy requested by Harmony, which would oblige Mittal to charge the factory gate price on all its steel output, was not an efficient outcome. Nor was it the type of remedy a competition authority should impose, he wrote.