IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA
CT CASE NO: 48/CR/Aug10
CC CASE NO: 2007Nov3338 In the matter between: THE COMPETITION COMMISSION OF SOUTH AFRICA Applicant and SASOL CHEMICAL INDUSTRIES LIMITED First Respondent SAFRIPOL (PTY) LIMITED Second Respondent _________________________________________________________________
FIRST RESPONDENT’S ANSWERING AFFIDAVIT
NON-CONFIDENTIAL VERSION _________________________________________________________________ I, the undersigned,
ADRIAAN ROLAND JANSE VAN RENSBURG
do hereby make oath and state that:
1 I am the general manager of the Polyolefins business of Sasol Polymers,
a division of Sasol Chemical Industries Limited (“SCI”). SCI is the first
respondent in this matter. I am duly authorised to represent SCI in these
proceedings, and to depose to this affidavit on its behalf.
2
2 The facts contained herein are, save where the contrary appears from
the context, within my personal knowledge and are, to the best of my
belief, both true and correct.
2.1 Some of the facts contained herein I depose to for the sake of
convenience, and they are confirmed, where applicable, by Graham
Wells (Sasol Polymers‟ general manager of planning and
technology). I attach a copy of Graham Wells‟ confirmatory affidavit
as Annexure A.
2.2 Where I make legal submissions, I rely on advice that I have received
from SCI‟s legal representatives. I believe such submissions to be
correct.
3 I have read the complaint referral of the Competition Commission (the
“Commission”), including the founding affidavit of Itumeleng Lesofe, and I
wish to respond thereto as set out below.
4 I will first respond generally to the complaint referral, and thereafter
address the specific allegations contained in the founding affidavit to the
extent necessary. For convenience I attach as Annexure B a schedule
of the abbreviations used herein.
SETTLEMENT OF SECTION 4(1)(b)(i) COMPLAINT
5 The complaint referral contains three complaints against SCI, the first two
of which concern alleged excessive pricing (of polypropylene (“PP”) and
3
propylene) in contravention of section 8(a) of the Competition Act (89 of
1998) (“the Act”), and the third of which concerns alleged price-fixing of
PP prices in contravention of section 4(1)(b)(i) of the Act.
6 On 13 December 2010, the third complaint was settled in terms of a
settlement agreement between the Commission and SCI. In terms of
clause 5 of the settlement agreement, SCI admitted that the propylene
pricing formula and related provisions of the propylene supply agreement
between SCI and Safripol (Pty) Ltd (“Safripol”) (the second respondent in
this matter), dated 8 December 1994 (as amended), and its
implementation, amounted to the indirect fixing of a price or trading
condition, in contravention of section 4(1)(b)(i) of the Act.
7 The settlement agreement, upon confirmation by the Tribunal, is in full
and final settlement, between the Commission and SCI, of all
proceedings relating to section 4 and section 5(1) of the Act investigated
by the Commission under the Commission‟s case number 2007Nov3338
(clause 8.1 of the settlement agreement).
8 Given the settlement of the section 4(1)(b)(i) complaint, I have been
advised that it is not necessary for me to answer the allegations
contained in the complaint referral relating to that complaint save insofar
as they are also relevant to the remaining complaints against SCI in
terms of section 8(a) of the Act. My failure to do so should not be
4
regarded as an admission of those allegations save to the extent stated
in clause 5 of the settlement agreement.
SASOL POLYMERS’ BUSINESS
9 Sasol Polymers comprises two distinct South African operating
businesses, namely:
9.1 the Polyolefins business, which includes monomers, PP and
polyethylene (“PE”), and is the relevant business for purposes of this
matter;
9.2 the Chlor Vinyls business, which includes polyvinyl chloride (“PVC”),
vinyl chloride monomers, chlor alkali chemicals and mining reagents.
10 Sasol Polymers is in turn one of five separate divisions comprising SCI,
the other divisions being Sasol Nitro, Sasol Wax, Sasol Solvents and
Infrachem. Each of these divisions is managed as a separate business
with its own Managing Director, Divisional Board, management, financial
statements and the like.
11 SCI is a wholly-owned subsidiary of Sasol Limited, which is the holding
company of all the companies comprising the Sasol group of companies
(the “Sasol Group” or “Sasol”).
12 The Sasol Group comprises three distinct clusters, being the
International Energy cluster, the South African Energy cluster and the
Chemical cluster.
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13 The South African Energy cluster, which includes Sasol Synfuels (Pty)
Limited (“Sasol Synfuels”), mines and gasifies coal, and then converts
such gas in a Fischer Tropsch process into a range of hydrocarbons for
onward use in a range of fuels and chemicals.
14 Sasol Polymers is part of the Chemical cluster and purchases feedstock
for the production of monomers (propylene and ethylene) from Sasol
Synfuels. Sasol Polymers‟ Monomers business upgrades feedstock to
polymer-grade monomers and Sasol Polymers‟ polymers plants then
convert the monomers into polymers (PP and PE). Sasol Polymers also
operates chlorine, caustic soda, VCM/PVC and cyanide plants.
15 Sasol Polymers sells the polymers it produces to downstream plastics
converters which utilise various conversion processes to manufacture
end products for final goods manufacturers and consumers. Sasol
Polymers also sells monomers (ethylene and propylene).
PROPYLENE
16 Propylene (which, together with PP, forms the subject matter of the
present complaint referral) has a number of sources. Propylene is most
commonly sourced (as a co-product of ethylene) from the thermal
cracking of naphtha, a by-product of the conventional oil refinery process.
17 Propylene is also sourced directly from the conventional oil refinery
process. Through the use of a fluidised catalytic cracker (“FCC”),
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refinery gas is produced from crude oil and then depropanised to
produce a stream of propylene and propane. Polymer-grade propylene
is then extracted through the use of a propylene purification unit (“PPU”).
18 The process used by Sasol differs from the conventional oil refinery
process in that the feedstock gas is generated from coal using Fischer
Tropsch technology as indicated above.
19 Propylene can either be converted into petrol blend components or it can
be extracted, purified and converted into a wide range of chemical
products. The most common chemical usage of propylene is for the
production of PP. Other chemicals produced from propylene include
acrylonitrile, cumene, butyraldehyde, n-butanol, acrylic acid and a range
of acrylates.
20 Both in the case of a conventional oil refinery and of Sasol Synfuels,
propylene has a “fuel alternative value” (“FAV”) and the decision whether
or not to extract it and then purify it depends on the relative price of petrol
and polymer-grade propylene.
21 Prior to 1989, all the propylene produced by Sasol Synfuels was
converted into petrol blend components through CatPoly units. The only
local manufacturer of PP was Safripol. In the mid-1980s, Sasol decided
to enter the PP market and commenced building a PP plant and also a
PPU for the extraction of polymer-grade propylene. Sasol (at that time
7
through a subsidiary, Sasol Polymers (Pty) Ltd) commenced production
of PP in 1990.
22 Sasol Synfuels currently produces approximately 900 000 tons of
propylene-containing feedstock per year, of which Sasol Polymers
extracts and upgrades approximately 620 000 tons of propylene, which is
then converted into chemicals and polymers, and the balance is
converted into petrol by Sasol Synfuels. Of Sasol Synfuels‟ total
production of propylene:
22.1 approximately 30% is directly converted into petrol by Sasol
Synfuels;
22.2 approximately 42% is used for the production of PP and, to a much
lesser extent, low density polyethylene (“LDPE”) by Sasol Polymers;
22.3 approximately 16% is used by Sasol Solvents for the production of n-
butanol, acrylic acid and a range of acrylates; and
22.4 approximately 11% is sold to Safripol for the production of PP.
23 Sales of propylene by Sasol Polymers‟ Monomers business to Safripol (a
vertical relationship) have grown steadily over the years, from 8 000 tons
in 1989-90 (when Sasol Polymers (Pty) Ltd began producing polymer-
grade propylene) to just under 98 000 tons per annum in recent years.
The terms of the current propylene supply agreement between Sasol
8
Polymers‟ Monomers business and Safripol are discussed in more
detail further below in this affidavit.
24 The other sources of propylene in South Africa are PetroSA and the four
crude oil refineries, namely Sapref, Enref, Calref, and Natref. However,
to the best of my knowledge, only Sapref and Natref currently extract
propylene for purification.
25 Before Sasol Polymers started manufacturing polymer-grade propylene,
Safripol used to import propylene through Richards Bay. However, since
Sasol Polymers began producing propylene in South Africa, Safripol has
ceased to do so. To my knowledge, the importing facility can no longer
be used for this purpose.
POLYPROPYLENE
26 PP is a thermoplastic polymer made predominantly from propylene and
used in a wide variety of applications, including (without limitation)
packaging, textiles, stationery, plastic parts, reusable containers, toys
and furniture (e.g. chairs).
27 There are three basic grades of PP. The most common form is
homopolymer, which contains only propylene in the polymer molecules,
and accounts for approximately 70% of all PP produced globally. The
other two forms of PP are copolymers, which incorporate a different
9
monomer (usually ethylene) in the polymer molecules together with
propylene, namely:
27.1 impact copolymer, which has a higher impact strength than
homopolymer and is suitable for applications requiring low-
temperature performance capability or superior impact resistance;
and
27.2 random copolymer, which has physical properties similar to
homopolymer, but has high optical clarity and is accordingly used in
applications which have that property as a requirement.
28 The different grades of PP sell at different prices. Impact copolymer sells
at a higher price than homopolymer, and random copolymer in turn
usually sells at a higher price than impact copolymer.
29 PP is the fastest growing polymer both globally and in South Africa. The
global consumption of PP is expected to be approximately 48.51 million
tons in 2010. The global consumption of PP has grown at a compound
rate over a ten-year period of 6.4% per annum until the global recession
1 ATEC Data Base published by Parpinelli TECNON International Ltd (International Petroleum
and Petrochemical Consultants). Version date 3 August 2010.
10
struck in 2008, while the growth in South Africa over the comparable
period was 7.62%.
30 The largest PP consuming regions1 in the world are North East Asia
(33%), followed by Western Europe (15%), South East Asia (13%) and
the United States (“US”) (11%). Africa in total represents 3%, and South
Africa 0.5%, of the global market.
31 In 2009, 19.83 million tons of PP was traded across borders, representing
41% of total annual consumption, of which 7 million tons (approximately
15% of global production) represented extra-regional trade. Both extra-
and intra-regional deep-sea trade amounted to 11.2 million tons or 23%
of global sales.
32 PP is safe and non-hazardous and takes the form of non-volatile solid
granules or pellets that are normally packaged in 25 kg bags. These
bags are readily transported by road or in containers. No special
conditions such as refrigeration are required and PP is stable across a
wide range of temperatures. Global logistics channels, systems and
2 Sasol Polymers‟ estimates and calculations.
3 World Trade Annual Review 2009 International Trader Publications, Inc. New York.
11
facilities are readily available at competitive prices, resulting in a total
transport cost that is typically less than 10% of the value of PP4.
33 As indicated above, Sasol Polymers commenced producing PP in South
Africa in 1990. At that time, Safripol was the only domestic producer of
PP, with imports making up the difference between Safripol‟s production
and local demand. Sasol Polymers‟ sales of PP in South Africa have
grown at an annual compound growth rate of 8.2% per annum4 during
the period 1991 to 2009. Sasol Polymers‟ downstream polymers
business in respect of PP competes with Safripol and hence stands in a
horizontal relationship with Safripol.
34 The current demand for PP in South Africa is estimated at 224 000 tons,
after peaking at 237 000 tons in 2006 when it enjoyed annualised growth
of 8.3% per annum. Of these sales, Sasol Polymers‟ sales amounted to
approximately 55%.
35 In the past three years, 74 4785 tons of PP (approximately 11% of local
consumption) has been imported into South Africa, some of it by Sasol
Polymers, primarily from the Far East (Thailand, Korea and Singapore)
and Europe (Germany, France and Belgium), and customers regularly
4 Sasol Polymers‟ estimate.
5 DTI Trade Statistics.
12
threaten to import more PP during price negotiations with Sasol
Polymers.
36 The ease of importation of PP into South Africa is illustrated by the
events following the fire which damaged and resulted in a shutdown of
Sasol Polymers‟ PP plant in February 2000. Production was fully
restored only in November 2000. However, the shortfall of nearly 60 000
tons was readily, and at short notice, imported into South Africa both by
Sasol Polymers itself, its customers and traders.
37 PP production capacity in South Africa significantly exceeds local
demand, resulting in exports by both Sasol Polymers and Safripol. There
is a severe surplus of PP production capacity in the world at the moment
as a result of a downturn in global demand coinciding with aggressive
capacity growth in the Middle East based on advantaged feedstock
prices.
AD FOUNDING AFFIDAVIT
38 I now address the specific allegations contained in the Commission‟s
founding affidavit.
39 Ad paragraph 1
I have no knowledge of the allegations in this paragraph but do not
dispute them for purposes of these proceedings.
13
40 Ad paragraph 2
I deny that all the facts deposed to in the founding affidavit are within the
knowledge of Mr Lesofe or that all of such allegations are true and
correct.
41 Ad paragraph 3
The allegations in this paragraph are noted. I deny that SCl has engaged
in conduct prohibited in terms of section 8(a) of the Act as alleged. As
indicated above, the complaint against SCI in terms of section 4(1)(b)(i)
of the Act has been settled in terms of a settlement agreement between
the Commission and SCI and has been admitted to the extent stated in
clause 5 of that agreement.
42 Ad paragraph 4
I have no personal knowledge of the allegations in this paragraph and put
the Commission to the proof thereof.
43 Ad paragraph 5
The allegations in this paragraph are admitted.
44 Ad paragraph 6
The allegations in this paragraph are admitted.
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45 Ad paragraph 7
The allegations in this paragraph are admitted.
46 Ad paragraph 8
The allegations in this paragraph are noted.
47 Ad paragraph 9
47.1 The allegations in this paragraph are denied.
47.2 As explained above, Sasol‟s synthetic fuels process is owned and
operated by Sasol Synfuels, not SCI. I refer to what is stated above
regarding the other sources of propylene.
47.3 SCI‟s capacity to extract and purify propylene since 1989 is set out in
the table below.
PPU name and year of installation
Nameplate capacity (tons pa)
Operating capacity today (tons pa)
PPU1 (1989) 135 000 201 000
PPU2 (1992) 125 000 125 000
PPU3 (1996) 135 000 148 000
PPU5 (2006) 455 000 455 000
Total Sasol Polymers 929 000
47.4 It should be noted that, at present, there is insufficient extractable
propylene to operate all of the above PPUs.
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48 Ad paragraph 10
48.1 The allegations in this paragraph are denied.
48.2 The three crude oil refineries other than Sapref (namely Enref, Calref
and Natref), as well as PetroSA, are all sources of impure propylene,
although (to the best of Sasol‟s knowledge) propylene is currently
extracted for purification only at Sapref and Natref.
48.3 I refer to what is stated above regarding the use of propylene for the
production of fuel, and regarding the FAV of propylene.
48.4 I have no knowledge of Sapref‟s propylene production capacity,
which is in any event subject to a confidentiality claim by Sapref.
49 Ad paragraph 11
Save to state that propylene is also used for purposes of producing petrol
and a wide range of chemicals and polymers other than PP, the
allegations in this paragraph are admitted.
50 Ad paragraph 12
50.1 I admit that:
50.1.1 Sasol Polymers‟ monomers business sells the propylene it
produces to, inter alia, its downstream polymers business and to
Safripol for the purposes of producing PP;
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50.1.2 Sasol Polymers‟ polymers business and Safripol are the only
two producers of PP in South Africa; excluding PP imports.
50.2 Save as aforesaid, the allegations in this paragraph are denied. As
stated above, approximately:
50.2.1 30% is converted directly into petrol by Sasol Synfuels;
50.2.2 42% of Sasol Synfuels‟ total production of propylene is used for
the production of PP and, to a much lesser extent, LDPE by
Sasol Polymers;
50.2.3 16% is sold to Sasol Solvents for the production of n-butanol,
acrylic acid and a range of acrylates; and
50.2.4 11% is sold to Safripol for the production of PP.
51 Ad paragraph 13
51.1 To the best of SCI‟s knowledge, Sapref does not sell all of its
propylene production to Safripol, and it utilises a certain part thereof
within the refinery.
51.2 Save as aforesaid, I have no knowledge of the allegations in this
paragraph and put the Commission to the proof thereof.
52 Ad paragraph 14
52.1 The allegations in this paragraph are denied.
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52.2 SCI‟s capacity to produce PP since 1990 is set out in the table
below.
Investment Nameplate capacity (tons pa)
Total PP capacity (cumulative)
PP1 (1990) 120 000 120 000
PP1 (by ca. 1994) (capacity creep)
+20 000 140 000
PP1 (1998) (new catalyst system and debottlenecking)
+80 000 220 000
PP2 (2008) (new plant) 300 000 520 000
53 Ad paragraph 15
53.1 Safripol‟s alleged PP production capacity is subject to a
confidentiality claim and I am accordingly unable to comment on that
allegation.
53.2 To the best of Sasol Polymers‟ knowledge, Safripol has the capacity
to produce approximately 110 000 tonnes of PP per year.
53.3 Save as aforesaid, I have no knowledge of the allegations in this
paragraph and put the Commission to the proof thereof.
54 Ad paragraph 16
54.1 Domestic demand for PP has not been constant since 2004.
Demand increased to approximately 237 000 tons in 2006 and
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thereafter reduced to approximately 227 000 tons in 2007 and to
approximately 224 000 tons currently.
54.2 Save as aforesaid, the allegations in this paragraph are admitted.
55 Ad paragraph 17
55.1 The allegations in this paragraph are admitted.
55.2 China is the largest importer of PP in the world and serves as a
destination for a considerable portion of global deep sea export
volumes.
55.3 The terms upon which Sasol Polymers exports PP accord with global
polymer industry norms.
56 Ad paragraph 18
56.1 It is important to explain the rationale for Project Turbo.
56.2 Sasol initiated Project Turbo in order to meet anticipated changes to
fuel specifications in South Africa. These changes required the
removal of lead, the reduction in benzene and the reduction of olefins
in petrol. Changes in the octane grades of petrol were also foreseen.
Various changes to the diesel specifications were anticipated,
notably a reduction in the sulphur level.
56.3 The oil industry was given notice that legislation would be passed
stipulating that by 1 January 2006 South African oil companies could
19
no longer add lead to petrol, and that sulphur levels in diesel were
to be reduced. Under this legislation, three octane grades of
unleaded petrol, namely Research Octane Numbers (“RON”) 91, 93
and 95, could be sold in South Africa. Further, two octane grades of
Lead Replacement Petrol (“LRP”), namely LRP 93 and 95, could be
sold to vehicles that ran on leaded petrol (although it was envisaged
that LRP would ultimately be phased out).
56.4 These new specifications meant that the South African oil companies
had to alter their refining processes, incurring significant capital and
operating costs. To ensure compliance, the various oil companies
adjusted their refining processes in different ways (given the
particular characteristics of their refining operations). I understand,
for example, that the Engen refinery (Enref) opted to meet the
specifications by mainly changing its crude slate toward more
expensive, but lower sulphur, crude varieties and by reducing the
throughput rate of the refinery. Other refineries, such as Sapref,
made significant capital investment to reduce sulphur levels and
improve levels of octane in their fuel pool.
56.5 Although changes to the sulphur specification were not an issue for
Sasol, because of the already low levels of sulphur in its diesel,
Sasol Synfuels was materially affected by the other clean fuel
requirements. Traditionally in Sasol Synfuels‟ process the use of
tetraethyl lead formed a large part of the octane solution, due to the
20
presence of substantial low octane streams that responded very
well to lead addition. It was thus evident to Sasol that various major
adjustments to the refining process would have to be made to meet
the new clean fuel specifications. This would require massive
investment. It was also apparent that in terms of its liquid fuel sales
such an investment would not yield a positive return. Nevertheless, it
was imperative that the clean fuel requirements were met in order to
continue sustainable operations.
56.6 In the early 2000s Sasol therefore embarked on a process of
identifying the optimal path to achieve the clean fuel specifications.
This process and the subsequent investments are referred to within
Sasol as Project Turbo. In the initial stages of this project a variety of
technology options and solutions were considered, including:
56.6.1 investing in a steam cracker to crack the problematic low octane
streams into high octane components; this would also yield
additional monomer feedstocks;
56.6.2 investing in a combination of refinery units, e.g. Platformer units,
which would make high octane components but no chemicals;
56.6.3 investing in a novel Selective Catalytic Cracker (“SCC”) to
process the low octane streams to a combination of high octane
fuel streams and additional monomers: in terms of this
technology solution a relatively small portion of the fuel pool
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(roughly 14%) would be fed through the SCC of which
approximately half would be returned to the fuel pool in the form
of high octane fuel components with the remainder being
selectively converted into ethylene and propylene feedstocks or
consumed elsewhere in the production process. Thus, up to half
of the original fuel components required consumption in other
non-fuel outlets. Investing in an SCC thus called upon Sasol
Polymers to consider its options to convert increased propylene
and ethylene volumes into polymer products. This would provide
an additional revenue stream to Project Turbo but more
importantly would make the particular technical solution (i.e. the
SCC) feasible to enhance the quality of the fuel pool by providing
an outlet for the additional ethylene and propylene feedstock. In
this context the incremental PP2 investment was conceived.
56.7 Sasol ultimately made the decision that the SCC would be the
technology used as this was expected to erode the least amount of
value from a shareholder‟s perspective. It is important to note,
however, that all of the above options, including the SCC, were
expected to result in a negative net present value (“NPV”) to Sasol,
but the use of the SCC, including PE3 and the PP2 investment, was
expected to yield a lesser negative NPV than other options
considered. Although PP2 was not a standalone project, its
contribution to Project Turbo was expected to yield an internal rate of
22
return (“IRR”) above the internal investment hurdle rate but this in
itself did not justify making the total Project Turbo investment.
Accordingly, Project Turbo was ultimately designed around the use of
the SCC, which would allow Sasol Synfuels to produce 100%
unleaded petrol by 2006, at an octane mix which was expected to
increase to 40% 95 RON and 60% 93 RON and comply with the
specifications set out in legislation. The total cost of Project Turbo at
the point of its final approval was estimated to be just under R12
billion.
56.8 When considering the investment into the SCC technology, several
investment scenarios were scrutinised and evaluated by the Project
Turbo team. The scenarios were the following:
56.8.1 Minimum investment case (referred to as “Case D”)
(a) This scenario involved only the remediation of fuel to meet
the clean fuel specifications (with the minimum investment
required). There would be no major investments in other
chemical stream opportunities. This scenario entailed an
investment in an SCC, primarily to process alpha-olefin off-
cuts. This SCC was expected to result in additional
propylene and ethylene feedstocks which were seen to
potentially compromise the quality of the fuel pool and could
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ultimately result in the partial flaring of certain of these
streams.
(b) It was anticipated that additional ethylene production would
be accommodated through the up-rating of Sasol Polymer‟s
linear low density polyethylene (“LLDPE”) plant, cutting
back on all discretionary ethylene production, using
ethylene (rather than propylene) for benzene alkylation and
flaring of the residual product. Key product volumes for
Case D are shown below.
Tons/a Ethylene Propylene from PPUs
Fuels (m3/a)
Production 596 000 493 000
Consumption 522 000 493 000
Stochastic losses and flaring
74 000
Fuels (m3/a) 6 152 000
(c) In terms of this investment scenario, the additional
propylene streams would be converted into fuel
components and for blending into the fuel pool. Since these
fuel components are characterised by low levels of octane,
significant and costly additional processing would have
been required so as not to compromise the quality of the
overall fuel pool.
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(d) Without the use of lead in the refining process, and the
presence of the additional low-octane propylene streams, it
was difficult for Sasol Synfuels to obtain the desired levels
of octane in its fuel pool. This required that various refining
units (particularly the platinum reformers) be run at their
operating limits. As such the fuel pool quality under this
scenario was particularly sensitive, with any deviation from
optimal performance of refinery units and/or the presence of
excess propylene molecules putting extreme pressure on
Sasol‟s ability to achieve a viable fuel pool in terms of the
clean fuel specifications.
(e) The capital required for this case was anticipated to be
approximately R4.785 billion and it was expected to return
an NPV of a negative R3.902 billion.
56.8.2 PE investment case (referred to as “Case F”)
(a) In this scenario, the assumed size of the SCC was
increased by approximately 17% above that required to
meet the clean fuel specifications so as to generate
additional ethylene feedstock to enable economies of scale
in a downstream PE plant. This option thus included the
building of a new world-scale LDPE plant (known as PE3)
25
to make use of this additional ethylene feedstock. Key
product volumes for Case F are shown below.
Tons/a Ethylene Propylene from PPUs
Fuels (m3/a)
Production 674 000 495 000
Consumption 672 000 495 000
Stochastic losses
2 000
Fuels (m3/a) 6 002 000
(b) The larger SCC also resulted in the production of additional
propylene feedstock. In the Project Turbo mass balance for
Case F the additional propylene feedstock would be
converted into fuel components in the CatPoly units. But as
I have previously explained, this would lead to significant
additional processing costs given the low levels of octane of
the components produced from the propylene streams and
this was expected to put severe pressure on the overall
quality of the fuel pool.
(c) The additional capital required for this case (relative to
Case D) was anticipated to be approximately R3.564 billion
(including the additional spend on enlarging the SCC). The
NPV on the incremental investment of R3.564 billion was
expected to be R1.06 billion, with an IRR of some 20.7%.
26
(d) Overall, the entire investment under this scenario
(including the full Sasol Synfuels investment in clean fuels)
was anticipated to cost some R8.349 billion and yield an
NPV of a negative R2.841 billion i.e. an improvement of
R1.061 billion over the minimum investment case NPV.
56.8.3 PP investment case (referred to as “Case G”).
(a) This scenario entailed the investment in the same sized
SCC as for Case F to meet the clean fuels requirements; to
maximise the availability of ethylene feedstocks and to
additionally invest in the PP value chain.
Tons/a Ethylene Propylene via PPUs
Fuels (m3/a)
Production 674 000 810 000
Consumption 672 000 810 000
Stochastic losses
2 000
Fuels (m3/a) 5 590 000
(b) Under this investment scenario it was envisaged that the
additional propylene streams emanating from the SCC
process would not be channelled back into the fuel pool but
would rather be diverted to produce PP. As a result, slightly
less fuel was expected to be produced under this
investment case compared to the previous scenario. Under
27
the other scenarios it was envisaged that the “lost” fuel
(which in Case G was now to be diverted to PP production)
would have been exported (at least for the first eight years)
given that South Africa was, at that point in time, expected
to be long in petrol supply until FY2015.
(c) To utilise the additional propylene feedstock, this
investment scenario contemplated additional investment in
the PP value chain including: (i) a new polymer-grade
propylene purification column (known as PPU5) to
maximise propylene extraction from Sasol Synfuels and (ii)
the building of a world-scale PP plant (known as PP2).
(d) It was anticipated that additional PP volumes would need to
be exported (thereby fetching export prices) until FY2015,
by which time local demand was expected to have grown
sufficiently to absorb part of this new production capacity.
(e) The downstream investments in PP required a relatively
small amount of additional polymer-grade ethylene, and as
a result this scenario also posited that the size of the PE3
plant would be marginally reduced relative to Case F (i.e. by
some 4%).
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(f) This option also had the added appeal of providing an
outlet for additional low-octane propylene feedstock which
aided Sasol‟s ability to achieve the desired fuel pool quality.
(g) The additional capital required for this case (relative to
Case F) was anticipated to be approximately R3.598 billion
at final approval in November 2003. In effect, this capital
related only to the investments downstream of Sasol
Synfuels because no further investments were required at
Sasol Synfuels in this scenario (relative to Case F). This
incremental investment was anticipated to give an NPV of
some R1.197 billion and an IRR of some 21.6%. This NPV
calculation also took into account changes in anticipated
cash flows associated with the expected impact on liquid
fuel volumes, as well as the additional PP export sales.
(h) Nevertheless, overall the entire investment under this
scenario (i.e. including the full Synfuels investment in clean
fuels and the polyethylene investment) was anticipated to
cost, at final approval, some R11.947 billion and yield an
NPV of a negative R1.643 billion.
56.9 Ultimately, the third investment option (investment Case G) was
chosen given that it promised an attractive return for Sasol as a
whole. It should, however, be noted that this entire investment
29
option, although the most appealing, was still expected to result in
a negative NPV for Sasol. Without the new fuel specifications, there
was no financial justification for Sasol to make the Project Turbo
investment or to expand PP production.
56.10 The allegations in paragraph 18 relating to Sasol Polymers‟ capacity
have been addressed above.
56.11 The assumptions around future macroeconomics and oil prices as
well as high growth in PP demand and low growth in fuel demand
were made at a time of positive global outlook. Assumptions of high
GDP growth, higher diesel demand than petrol, low oil prices, a weak
R/$ exchange rate and normal capital equipment and construction
pricing set the scene for positive project economics. The following
table compares the Project Turbo assumptions and the current long-
term forecast:
Assumptions Project Turbo
(averaged annual values over
period July 2005 to June 2020)
Validity 2003
Today
(single year value)
Sasol’s long term view in 2010
(averaged annual values over
period July 2005 to June 2020)
R/US$ exchange rate
R13.58 R7.00 R9.32
Brent crude oil $21 $78 $92
SA GDP 3.5% 1.4% 3.5%
SA CPI 5% 3.8% 5%
US CPI 2.5% 1.1% 2.5%
30
Hurdle rate (1.3*WACC)
19.125% 17.225% 17.225%
PP Price (CFR Hong Kong)
$770 $1275 $1543
Ratio of PP price to oil
36.6 16.3 16.8
SA PP consumption in 2010
310 000 tons 224 000 tons
Petrol supply/ demand from 2005 to 2014
SA production in excess
SA production in deficit
57 Ad paragraph 19
57.1 As noted in paragraph 28 above, the different grades of PP sell at
different prices. Impact copolymer sells at a higher price than
homopolymer, and random copolymer in turn usually sells at a higher
price than impact copolymer. The largest price difference between
random copolymer PP and raffia grades can be up to $200/t (15%).
57.2 Sasol Polymers naturally needs to earn a return on its propylene and
PP investments. Sasol Polymers is, however, not free to unilaterally
set prices at a level that achieves this. Competition with Safripol and
the relative ease with which PP is imported into South Africa
constrain the price which Sasol Polymers can charge. Any sustained
pricing above the price at which PP can be imported will result in a
significant shift to imported PP. This constraint results in prices
31
which generally do not adequately reward investment in South
Africa, as I shall explain later.
57.3 In order to remain competitive, Sasol Polymers‟ price-setting
procedure takes into account a number of competitive forces, inter
alia, competition from imports, competitive offers from Safripol, price
movements in substitute products, the status of demand in the South
African economy at the time etc. Sasol Polymers monitors export PP
prices from the US, Europe, and the Far East (using Platts, ICIS
Pricing, CMAI, etc) and then selects the lowest of these for its PP
price calculations. In the past ten years, the lowest priced imports
and the threat of imports have mostly been from the Far East, South
Korea in particular. Using export prices from South Korea sets a low
base for Sasol Polymers‟ price calculations, because it is generally
known that these are marginal prices that often do not cover full
costs of production in that country.
57.4 Sasol Polymers calculates, from each of the three export sources,
what the delivered, duty-paid cost would be (in South African Rands)
to a coastal and inland converter in South Africa. It chooses the
lowest price source as a reference point for pricing and averages the
weekly prices to calculate a monthly average delivered price at the
coast and inland. It further weights the inland and coastal prices by
the volumes sold in each region to calculate a single monthly
indicative delivered price for PP in South Africa.
32
57.5 The prices quoted and used as described above are for PP raffia
grade. Typical margins are added to get indicative prices for other
homopolymer grades, impact copolymers, random copolymers and
specialised grades. A two-month lag between export prices and
South African domestic prices is assumed, based on a typical import
lead time of 6-8 weeks, although recently certain lead times have
been cut to days as importers have established on-shore
stockholding.
57.6 Sasol Polymers' pricing is, however, not mechanistically driven by
IPP. IPP is only one of the factors taken into account when
determining the actual price to customers. In most instances,
customers are aware of global price trends and indicative price offers
from competitive international suppliers in South Africa, and these
indications tend to drive Sasol Polymers' pricing considerations.
Competitive offers from Safripol and distributors of imported PP, as
well as other factors such as price movements in substitute products,
are considered.
57.7 We note the allegation that Sasol Polymers‟ prices for PP are up to
32% higher than export prices. The more appropriate measure
would be to compare the respective average weighted pricing levels,
given (among other considerations) timing differences of settling
deals and shipping product. On average, between January 2000 and
December 2009, the average ex-works netback (CFR price less
33
freight less port charges less inland delivery cost) for domestic
sales was only 16.3% higher, on a weighted basis, than the average
Sasol Polymers‟ ex-works export netback. It must further be borne in
mind that approximately 27% of all PP exports were supplied into
China through a Chinese distributor to whom a lower price than usual
was offered in return for a take-or-pay volume contract. Normalising
this position would reduce the 16.3% even further.
58 Ad paragraph 20
Sasol Polymers generally agrees prices with customers on the basis that
the product is delivered to a customer‟s site (i.e. the price includes the
delivery cost). Nevertheless, some customers prefer to collect their own
product from the Sasol Polymers‟ production facilities or regional
warehouses. In such instances, the customers are reimbursed with the
amounts of the costs which Sasol Polymers would incur in delivering the
product to the customers' sites.
59 Ad paragraph 21
59.1 The quarterly average historical PP prices of Sasol Polymers and
Safripol have differed throughout the relevant period, mostly by about
5% but sometimes by over 10%.
59.2 Whilst the parties attempt to differentiate their product offerings on
the basis of factors such as quality, delivery time, and reliability of
34
supply and inventory, the commoditised nature of PP means that
their PP prices for comparable products would not be expected to be
significantly different. In fact, this is entirely consistent with a
competitive outcome for similar products. I deny that this is the result
of any agreement or concerted practice between Sasol Polymers and
Safripol
59.3 I point out in this regard that there is a very considerable degree of
switching by customers between Sasol Polymers and Safripol on an
ongoing basis.
60 Ad paragraph 22
The allegations in this paragraph are admitted. The contents of the
supply agreement, and the circumstances surrounding its conclusion, are
addressed in more detail below in this affidavit insofar as they are
relevant to the excessive pricing complaints against SCI.
61 Ad paragraph 23
61.1 The allegations in this paragraph are admitted insofar as they
accurately reflect the express terms of the supply agreement.
61.2 Further details regarding origins and nature of the pricing formula
contained in the supply agreement, which was introduced at the
instance of Safripol and its shareholders in order to protect the gross
35
margins of Safripol, are set out below in this affidavit insofar as
they are relevant to the excessive pricing complaints against SCI.
62 Ad paragraph 24
62.1 Save to admit that, in terms of the supply agreement, a higher price
is paid for quantities above 55 000 tons but only up to 100 000 tons
per annum, the allegations in this paragraph are denied.
62.2 The increased price for volumes above 55 000 tons is directly related
to the higher costs associated with the production of the additional
volumes, including a higher feedstock price from Sasol Synfuels,
higher purification and operating costs due to the dilute nature of the
relevant condensate stream, and necessary investment in new plant
and equipment (PPU3).
62.3 I point out further that the increased price paid by Safripol for
volumes above 55 000 tons is also applicable to Sasol Polymers for
its additional volumes arising from the new investment (PPU3) and
accordingly is non-discriminatory.
63 Ad paragraph 25
63.1 The allegations in this paragraph are admitted insofar as they
accurately reflect the express terms of the supply agreement.
36
63.2 The pricing formula for propylene to be used for the manufacture
of PP for export is explained in more detail below, as is the reason
for the differential between export and domestic prices.
64 Ad paragraph 26
64.1 Save to admit that Sasol Polymers produces more propylene than is
required for the production and sale of PP domestically, the
allegations in this paragraph are denied.
64.2 As explained more fully below, the formula contained in the supply
agreement does not incentivise Sasol Polymers and Safripol to
increase the prices they charge for local sales of polypropylene to
IPP levels, nor does Sasol Polymers in fact charge IPP prices for
propylene. On average, the price paid by Safripol for propylene is
approximately 31% lower than IPP from the US Gulf Coast (a region
which has surplus propylene product).
64.3 The Commission‟s theory that the price formula in the supply
agreement incentivised the parties to follow each other‟s price
increases also overlooks the fact that, prior to the conclusion of the
supply agreement in 1994, prices for domestically produced PP were
already at IPP levels but were constrained from rising higher by
imports.
37
65 Ad paragraph 27
65.1 The allegations in this paragraph are noted.
65.2 For the reasons set out elsewhere in this affidavit, I deny that SCI‟s
conduct constitutes a contravention of section 8(a) of the Act as
alleged. As indicated above, the complaint against SCI in terms of
section 4(1)(b)(i) of the Act has been settled in terms of a settlement
agreement between the Commission and SCI and has been admitted
to the extent stated in clause 5 of that agreement.
66 Ad paragraph 28
The allegations in this paragraph are noted.
67 Ad paragraph 29
67.1 Save to admit that there are a number of different polymers that are
produced from propylene and that PP is a distinct product market,
the allegations in this paragraph are denied.
67.2 Whilst different polymers each have particular characteristics and
applications, there are numerous applications for which PP can be
substituted by different polymers (and other materials), as reflected in
the following table.
38
Application Sector Polymer Alternatives Other Material Alternatives
Non-wovens metallocene PP mini-random PP
natural fibres paper
Flooring nylon polyester
ceramic wood wool wood laminates
Domesticware and toys Polythene, PVC ABS / Polystyrene / HIPS
glass metal
Pipe HDPE PVC
concrete metal
Food containers HDPE, PET, PS Clear Impact-random PP (Clyrell)
metal glass paper
Cosmetic & Pharmaceutical Containers
PET, ABS, PS, HDPE, PVC
glass paper
Sheet PVC HDPE
Cardboard
Buckets HDPE PET
metal / tin
Automotive Nylon, ABS TPO (thermoplastic polyolefins)
Metal
Caps and Closures HDPE Metal
Fibres and Strapping PE nylon
natural fibres
Appliances ABS Metal
Crates & Boxes HDPE wood cardboard
BOPP BOPET Paper
Chairs and Furniture HDPE HIPS wood-plastics composites
cast iron wood concrete metal
Industrial & Custom Moulding
HDPE, PS, ABS, HIPS PET, nylon
glass metal
Film PE Paper
Woven Cloth HDPE Paper
39
67.3 Approximately 70%6 of the growth in PP consumption globally was
achieved as a result of substitution for other plastics, in particular
HDPE, polystyrene and engineering plastics. For example HDPE
and PP are both used in the manufacture of large injection-moulded
articles such as pallets, crates, movable bins and buckets. Similarly,
PP has made significant gains relative to nylon and other materials in
the carpet manufacturing industry.
67.4 Other materials such as paper, steel and glass also compete with PP
in a variety of applications. For example, in the packaging of paint,
PP containers can be used interchangeably with metal containers by
paint manufacturers.
68 Ad paragraph 30
Save to state that different monomers are used in the production of
different kinds of PP, the allegations in paragraph 30 are admitted.
69 Ad paragraph 31.1
69.1 The allegations in this paragraph are denied.
6 Family Conference of licencees with Novolen Technical Holdings C.V., a joint venture of ABB
and Equistar, the licensor of PP1 technology.
40
69.2 SCI contends that, as the Commission has previously indicated,
the market for the sale of PP is global.
69.3 I point out in this regard that when international PP prices started
dropping in May 2008 as a result of the global recession, Sasol
Polymers was forced by imports and the threat thereof to lower its
domestic PP prices to levels at which not only Sasol Polymers‟ PP
business but its business as a whole suffered significant financial
losses.
69.4 I further point out that PE, a polymer which is packed and transported
in a similar way to PP, and which has a similar price to PP, is
imported into South Africa on a large scale. In 2009 over 90 000
tons of LDPE and LLDPE were imported. This is estimated at about
30% of the total consumption.
69.5 I also refer in this regard to what is stated in paragraphs 29 to 36
above, and to what is stated below, in this regard.
70 Ad paragraph 31.2
70.1 The allegations in this paragraph are denied.
70.2 It is not only possible to import PP into South Africa but PP is in fact
imported in significant quantities. As indicated above, over the past
three years some 11% of the local consumption of PP has been
imported into South Africa.
41
70.3 I specifically deny that the costs of importing PP into South Africa
are prohibitively high having regard to the overall cost of PP. The
total transport cost typically ranges from 8% to 12% of the landed
value of PP.
70.4 I again refer to what is stated in paragraphs 29 to 36 above.
71 Ad paragraph 31.3
71.1 Save to admit that during the period 1994 to August 2009 the ad
valorem duty on polymers was 10% on FOB prices, the allegations in
this paragraph are denied.
71.2 In terms of the South Africa/European Union Trade Development Co-
Operation Agreement, which was implemented on 1 May 2004,
duties on polymer imports from the European Union have been
gradually reduced to 2.5% in 2010 and are to be eliminated in 20127.
71.3 On 14 August 2009 duties on polymers from all other countries were
reduced to 3.8% and further reduced to 2.5% on 1 January 2010. On
1 January 2011 polymer duties will be further reduced to 1.3% and
on 1 January 2012 they will be eliminated.
7 ITAC Report no. 282 dated 08/10/2008.
42
71.4 South Africa‟s tariffs on polymer imports are now amongst the
lowest in the world.
71.5 I furthermore deny that the customs duty on PP imports in any way
indicates that imported PP is not an effective substitute for PP
manufactured in South Africa.
72 Ad paragraph 31.4
72.1 Save to admit that there are imports of PP into South Africa, the
allegations in this paragraph are denied.
72.2 As set out above, imports account for approximately 10% of domestic
consumption of PP and have done so for the past three years.
72.3 I also deny that such imports are made up “almost entirely of grades
of polypropylene not produced by Sasol or Safripol”. SCI estimates
that approximately 80%8 of the PP imports into South Africa in the
past three years relate to grades that are or can be produced in
South Africa.
73 Ad paragraph 31.5
73.1 The allegations in this paragraph are denied.
8 Sasol Polymers‟ estimate.
43
73.2 As indicated above, SCI contends that the PP market is an
international one.
74 Ad paragraph 32
Save to state that prior to the commencement of production at Sasol‟s
PP business, Safripol used to import part of its propylene requirements
into South Africa through Richards Bay, the allegations in this paragraph
are not disputed for purposes of this matter.
75 Ad paragraph 33
The allegations in this paragraph are noted.
76 Ad paragraphs 34-36
76.1 I have dealt with these allegations above. I deny that Sasol
Polymers is either dominant or a quasi monopoly in a South African
market for PP.
76.2 As the Commission stated in its 14 December 2003 newsletter: “In
the cases of the aggregate polymers market, as well as PP, the
markets are considered global, implying that Sasol Polymers is not
dominant”.
76.3 As regards the Commission's contention that there is a domestic
market, and that such market is uncontested and incontestable, I
44
repeat my response to these allegations contained in
paragraphs 29 to 36 and paragraphs 57, 64, 69 and 70 above.
77 Ad paragraphs 37-38
77.1 The allegations in these paragraphs are denied.
77.2 To the best of my knowledge, Safripol is not capacity-constrained in
the sense that it cannot offer additional volumes of PP to South
African customers, as the Commission appears to suggest. Safripol
exports product. Its exports of PP could be diverted and offered to
local customers. To the best of Sasol Polymers‟ knowledge, it also
does not fully utilise the available propylene from Sapref.
77.3 As noted above, Sasol Polymers and Safripol compete (along with
importers) for South African customers. Normal competitive forces
are in play, as any material price reduction at a customer account by
either player will invoke a reaction from the other. Sasol Polymers'
PP prices are a result of negotiation with customers. As noted
above, most customers‟ purchasing behaviours are easily swayed by
the respective price offerings from other sources, as is evident in the
highly erratic monthly share of customers‟ sales percentages. It is a
widespread tactic amongst PP customers in South Africa to play
Sasol Polymers and Safripol off against each other (and to threaten
to purchase imported PP) and then to buy from the one who offers
the lowest price and/or better terms. The Commission‟s allegation
45
that Safripol‟s prices do not currently constrain those of Sasol
Polymers is, therefore, denied.
78 Ad paragraph 39
78.1 Safripol is not entirely dependent on Sasol Polymers for additional
volumes of propylene. All indications are that there is unutilised
capacity available at Sapref. Furthermore, additional propylene
could be made available at the coastal refineries, Enref and Calref,
as well as at PetroSA, which could be extracted and purified.
78.2 Safripol has not asked Sasol Polymers for any additional allocation of
propylene during the last six years. It has restricted its forward-
looking requirements to the 100 000 tons per annum contractual
volume. It should be noted that Safripol has not utilised its full
contractual volume allotment of 100 000 tons in any year since 2003.
Nevertheless, Safripol is from time to time offered, and does take on
a short-term basis, additional volumes of propylene when Sasol
Polymers experiences operating difficulties on its PP units.
78.3 Accordingly, the allegations in paragraph 39 are denied.
79 Ad paragraph 40
The reason that an additional tranche of propylene is more expensive is
explained above. I reiterate that Safripol exports PP, which could in
principle be made available to South African customers. In any event,
46
Sasol Polymers' prices are constrained by imports, by Safripol, and by
the ability of the downstream South African industry to switch to other
polymers or to substitute products.
80 Ad paragraph 41
I deny that the supply agreement disincentivises Safripol to cut its PP
prices. On the contrary, any price reduction by Safripol is subsidised via
the formula, a feature few other producers enjoy in other parts of the
world.
81 Ad paragraph 42
I am advised that pricing with reference to IPP does not indicate market
power. I am advised that demonstrating market power requires a
showing that prices have been raised substantially above the competitive
level. Export prices, or special export incentives for that matter, are not
reflective of a competitive price.
82 Ad paragraph 43
82.1 The allegations are denied. Sasol Polymers‟ entry into the market
resulted in a substantial benefit to the South African polymer
converting industry. Prior to 1990 Safripol was the only local supplier
of PP, accounting for approximately 40 000 tons per annum. The
substantial rate of growth of local PP sales post-1990 can be
ascribed primarily to Sasol Polymers. Not only did Sasol Polymers
47
introduce a further supply of PP to a stagnant market, but the
introduction of new grades as well as the benefits of offering
technical support and marketing and product development expertise
to South African customers clearly invigorated the plastics converting
industry. Over the period 1990 to the present, PP consumption has
grown at 2.5 times GDP9 in South Africa, exceeding growth
multipliers achieved in the developed world. Through Sasol
Polymers‟ product development and customer support initiatives,
above-average market growth of the domestic converting industry
has been achieved.
82.2 In these circumstances, the notion that Sasol Polymers has restricted
supply or created an artificial scarcity for South African customers of
PP is far-fetched. Sasol Polymers has always made sure that the
domestic customers are fully supplied prior to any product being
exported. PP demand is inelastic and a reduction in price will not
lead to a material increase in production. I address this further
below. The lack of uptake of Sasol Polymers‟ export incentives even
at relatively high rebates supports this notion.
9 Sasol Polymers‟ estimate.
48
83 Ad paragraphs 44-47
83.1 Because Sasol Polymers exports PP, it actively encourages its
customers to convert this PP into value-added intermediate or
finished goods and to export such converted goods, rather than
Sasol Polymers exporting PP polymer itself. Sasol Polymers offers
an incentive to all customers who wish to export finished products
fabricated from Sasol PP. This is aimed at improving the scale and
efficiency of these converters, thus making them more competitive
domestically and in exports, and thereby stimulating growth and
employment.
83.2 The incentive is offered in the form of a rebate on the selling price of
PP, which is credited to a customer upon receipt of a formal claim.
The claim must be accompanied by documentary proof that the
products manufactured from PP purchased from Sasol Polymers
were directly exported by the customer. Claims must reach Sasol
Polymers within a period of three months after the date the goods are
exported, though this is not strictly enforced. The criteria which
exporters need to fulfil are set out in the Customer Export Incentive
Policy (“the CEIP”), attached as Annexure C.
83.3 In terms of the CEIP, price rebates are communicated to customers
in advance (prior to exporting), as part of the monthly price offer.
The intention is to enable the customer enough time to evaluate the
49
viability of exporting based on the rebated price. Approximately
12% of the annual PP volumes supplied by Sasol Polymers to South
African customers are subject to an export rebate. The incentive
scheme does not set a maximum or a minimum volume of product
which any customer can purchase.
83.4 I deny that Sasol Polymers requires documentation to support a
claim under the CEIP, or pays the rebate “only in arrears”, in order to
prevent the lower prices it offers from affecting its IPP-based prices
as the Commission alleges in paragraph 46 of the complaint referral.
Rather, Sasol Polymers merely seeks to ensure that a claim is not
being made against it in circumstances where the PP may in fact
have been sourced from Safripol or an importer, or where the PP is
not being used for the purpose for which the rebate is offered. There
is nothing untoward about this.
83.5 The allegations in paragraph 47 are admitted. The table below
shows detail of export support provided.
50
Period 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10
Export rebate volumes (tons) 16 402 12 563 15 923 12 090 15 126 13 195 14 194 13 530
Export rebate annual support (Rand million) 17.1 14.1 18.8 16.5 31.3 32.6 29.4 16.7
Export rebate average (R/t) 1,042 1,122 1,179 1,363 2,069 2,473 2,072 1,234
Export rebate R/t as % of Average Price achieved 15% 17% 15% 16% 19% 21% 16% 11%
Total Sasol Polymers PP local sales volumes (tons) 112 126 118 288 114 735 119 684 122 319 116 458 110 096 125 230
Export rebate volumes as % of Sasol Polymers PP local sales 15% 11% 14% 10% 12% 11% 13% 11%
83.6 Even with export support at a rebate of 20% over an extended
period, there was minimal impact on customer up-take of PP
volumes for export.
83.7 I deny again that the export rebates create an artificial shortage.
84 Ad paragraph 48
84.1 The allegation is denied. Sasol Polymers sells exports at the price
needed to compete at the destination. The price basis is most
commonly CFR or CIF for deep-sea exports, but other terms are also
51
used. It is the industry norm worldwide for export sales to be
made on that basis.
84.2 The advantage of using CFR/CIF (delivered to destination port) is
that the exporter is able to handle the outbound logistics, relevant
documentation, and all the associated planning to target the sailing of
a certain vessel. A buyer in a foreign country is generally unable, or
even unwilling, to plan and execute an export order from the
producer‟s warehouse to the port in a foreign country, given the
unique conditions in each country. Factors such as container
availability, stack dates, sailing times and frequencies, inspection
requirements, and so forth, are more easily controlled from within the
exporting country by the producer/supplier than from overseas.
These practical considerations, which bring about efficiency in the
execution of an export order, are the reason that Sasol‟s exports are
based on these delivery terms.
85 Ad paragraphs 49-51
85.1 Barriers to entry into PP manufacturing in South Africa are high, as in
other countries. There are, however, no or at least very low barriers
to importing PP.
85.2 As noted above, global logistics channels, systems and facilities are
readily available at competitive prices. The costs of importing PP
into South Africa are not prohibitively high, having regard to the
52
overall cost of PP. The total transport cost typically ranges from
8% to 12% (on average less than 10%) of the landed value of PP to
which would also need to be added the customs duty (if any)
applicable. It is, therefore, not necessary for a new entrant to build a
PP plant in this country in order to compete for South African
customers.
85.3 It is clear from the current status of the overall polymer industry that
there are few barriers for importers of polymer product to achieve
market penetration. Major players such as ExxonMobil and Sabic
(on a global basis, occupying respectively the second and third
largest PP global manufacturing positions in 2009 according to data
in a 2009 CMAI report10) have set up warehousing and sales
infrastructure in South Africa and have established logistics channels
in place to service domestic customers. This will enable them to
match lead times of South African producers. There are numerous
smaller importers and traders that have established markets and
service offerings locally as shown in the table below. The advantage
that these importers have is that, because they are able to offer a far
broader range of polymer products to the South African market, their
costs can be amortized over this volume rather than merely over
10 CMAI Chemical Company Analysis on Sasol dated February 2010.
53
much smaller PP volumes alone. In addition, some of the bigger
customers import product directly. Most notable in PP importing
activity in South Africa are the following:
Importer / Trader List of Polymer Products traded
ExxonMobil LDPE, LLDPE, mPE, PP
Sabic LDPE, LLDPE, HDPE, PP
MBT South Africa HDPE, LDPE, LLDPE, PVC, PP, PET, PS, ABS
Protea Polymers HDPE, LDPE, LLDPE, PP
Plastomark Modified PP, ABS, PC, SAN, GPPS, HIPS, LLDPE, POM, PBT, UHMWPE, PET, PPS, PA, PVC, LDPE, PMMA, EVA
Samchem LLDPE, LDPE, PP, PA6, PA66, PC, PS, PVC, POM, HIPS, PEEK
Advance Polymers LDPE, LLDPE, HDPE, PVC, filled PP, PA, ABS, PMMA, PC, PBT, TPE, POM
Rawmac PS, EPS, HIPS, ABS, SAN, PVC, POM, PA, PBT, PET, PC, HDPE, LDPE, EVA, PP
West African Group HDPE, LDPE, LLDPE, Metallocene, PP, HIPS, GPPS, PIB, EVA, others
85.4 South Africa is certainly not insulated from imports.
86 Ad paragraphs 52-53
86.1 International data indicates that most new entrants to the polymer
industry position their production facilities close to low-cost and
abundant feedstock sources (e.g. in the Middle East) or close to
large and developing polymer markets (e.g. in China or India). Sasol
Polymers does not have sufficient spare propylene capacity to supply
a new local producer. Indeed, Sasol Polymers currently does not
54
have enough propylene available from internal sources to run its
own PP plants at design capacity.
86.2 For these reasons, and those given above, it is unlikely that a new
entrant would invest in a new PP plant in South Africa (save to say
that there could be additional propylene in coastal refineries for
modest expansion of capacity).
86.3 The remaining allegations in this paragraph are denied.
87 Ad paragraph 54
87.1 The allegation that Sasol Polymers has a dominant position in a
domestic market for PP is not admitted. The allegation that its
position in South Africa is not due to innovation or risk-taking, but
rather to past exclusive or special rights, and in particular a history of
state support, is denied.
87.2 While Government support was a factor in the establishment of Sasol
many years ago, State investment was fully repaid before Sasol
commenced producing PP. Sasol has been a privately owned and
listed company for 30 years. During this time, shareholders in the
company have made significant investments entailing technological,
market and political risk that has contributed to large efficiency
improvements. Government support subsequent to the company‟s
privatisation, mostly in the form of tariff protection, has been relatively
55
modest and in line with protection provided to many industries in
South Africa.
88 Ad paragraphs 55-57
88.1 Save to the extent that the Commission has accurately summarised
the test for economic value in paragraph 55, all of the allegations in
these paragraphs are denied.
88.2 I am advised that the Act prohibits excessive pricing by a dominant
firm, where an excessive price is defined as “a price for a good or
service which bears no reasonable relation to the economic value of
that good or service”.
88.3 I am also advised that the Competition Appeal Court ("the CAC") has
held that the legislature must have intended the “economic value” of
a product to be “the notional price of the good or service under
assumed conditions of long-run competitive equilibrium.” The CAC
held that the price under conditions of long-run competitive
equilibrium, and hence “economic value”, would in effect equal the
total cost of providing the product in a competitive market. It
stressed, however, that the total cost would include a “normal rate of
return” to providers of capital, without which the industry would not be
sustainable in the long run. I am advised that it follows that an
empirical enquiry into the costs actually incurred, and the returns on
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assets required by debt and equity holders, is at the heart of the
determination of economic value.
88.4 The CAC also pointed out that the calculation of the economic value
of a good or service is not necessarily “derived from circumstances
peculiar to the particular firm”. It held that while the allegedly
dominant firm‟s costs may form an important evidential ingredient in
such an inquiry, they will not in and of themselves provide a measure
for arriving at economic value unless they can be shown to
correspond to the competitive norm. It follows, I am advised, that
when determining economic value, “any special advantage”
(including cost savings resulting from a subsidised loan or lower than
market rental or other advantage), which serves to reduce the
particular firm‟s costs below “the notional competitive norm”) ought to
be disregarded, while conversely the effects of material inefficiency
(if any) may require adjustment.
88.5 In summary, economic value is reflected by the long run competitive
outcome of a market which allows for a firm to cover costs and earn
a reasonable return on capital. Therefore, the primary test for
excessive pricing is to show that prices are unreasonably above unit
costs plus a reasonable return. An alternative application of the test
is to show that revenue derived does not unreasonably exceed total
costs plus a reasonable return. On both these bases Sasol Polymers‟
prices have not exceeded economic value.
57
88.6 This analysis can be carried out by comparing Sasol‟s returns on
capital to Sasol‟s weighted average cost of capital (“WACC”). WACC
is a good proxy for a normal profit or reasonable return.
88.7 I am advised that when calculating economic returns for the
purposes of assessing the excessiveness of prices, the CAC has
recognised long-run competitive equilibrium as a yardstick with its
implication of the appropriate capital cost of assets, and not the
historical cost, particularly for certain assets that have been acquired
many years earlier (as is the case with Sasol Polymers‟ assets).
88.8 Replacement cost represents the level of investment that a new
entrant would incur and which allows the industry to grow and renew
where competitive feedstock is available. Firms would be reluctant to
enter a market if returns derived over a period of time are insufficient
to cover the replacement costs of assets. This is supported by the
Commission‟s own complaint referral, which recognises in
paragraphs 49 to 51 that the high cost of establishing a production
facility is a barrier to entry. The fact that entry has not occurred may
suggest that prices are insufficient to allow an entrant to earn a
suitable reward for the investment risk where economies of scale
dictate a plant size which necessitates exports.
88.9 In order to apply correctly the core test on excessive pricing as
outlined by the CAC, economic returns for Sasol‟s PP business were
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calculated assuming five different business combinations (refer to
the table set out below):
88.9.1 a separate Sasol PP business (PP1 and PP2) that includes in its
operating costs the actual price of propylene from Sasol‟s
propylene business as per the supply agreement (“Standalone
PP”);
88.9.2 a vertically integrated Sasol business (PPUs, PP1 and PP2) that
eliminates inter-company payments for propylene but includes
the underlying costs of producing propylene and PP
(“Integrated”);
88.9.3 a vertically integrated Sasol business (as per ”Integrated”)
excluding the newly constructed PP2 plant (“Integrated PP1”);
88.9.4 a vertically integrated Sasol business (as per ”Integrated PP1”)
but that assumes all volumes were sold at prevailing export
prices (“Integrated PP1 export prices”);
88.9.5 a vertically integrated Sasol business (as per ”Integrated PP1”)
but that assumes all volumes were sold at prevailing domestic
prices (“Integrated PP1 domestic prices”).
88.10 In keeping with the approach outlined by the CAC, adjustments were
made to the cost base in the above calculations, which eliminated the
special cost advantages derived from having access to low cost
59
propylene feedstock, and also eliminated any possible
inefficiencies. This was done to estimate notional competitive
propylene and PP operating costs. Fifteen years of revenues and
cost (i.e. all the historical financial data available) were analysed
when calculating returns in order to ensure that the full economic
cycle was taken into account.
88.11 The depreciated replacement cost of assets for each year of the
analysis was estimated with reference to book values of individual
propylene and PP assets adjusted for movements to the construction
price index over the period. This index provides a reasonable proxy
for the changes in the underlying value of the PP assets.
88.12 The South African PP environment is such that in order to reach
scale efficiencies it is necessary to build a plant that produces
volumes in excess of what can be sold domestically. Netbacks for
export volumes, while exceeding variable or marginal cost, may not
necessarily cover total average cost per unit of production (i.e. all
costs plus a reasonable return). Therefore, when considering the
return earned by Sasol in this environment it is appropriate to
consider the average return across both domestic and export sales.
Without the export sales it would not be possible for Sasol to achieve
current scale economies.
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88.13 The table below summarises the results of the economic returns
analysis, using both the return on capital employed (ROCE) and IRR
profitability measures. I am advised that these two measures are
extensively used by UK competition authorities when undertaking
market investigations.
per cent
Ave ROCE IRR
Stand-alone PP 2.7 8.3
Integrated PP 1.8 6.5
Integrated PP1 3.6 9.0 Integrated PP1 export prices -2.1 1.8 Integrated PP1 domestic prices 7.3 13.9
Average WACC 15.0
1995 to 2009
88.14 The above table shows that under all five business scenarios Sasol‟s
PP prices over the 15-year period were below economic value.
88.15 Over the period 1995 to 2009, average ROCE and IRR for Sasol‟s
stand-alone PP business were well below Sasol‟s WACC. This is
also the case for the integrated business where the underlying
economic costs of propylene are taken into account. ROCE and IRR
were below the WACC benchmark even if the relatively high capital
costs of the PP2 plant are excluded, as per the integrated PP1
scenario.
88.16 If export prices on all volumes are assumed (“Integrated PP1 export
prices”), the ROCE and IRR would have been extremely low and well
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below the WACC in each year of the analysis. Even if all volumes
were sold at domestic prices (“Integrated PP1 domestic prices”),
returns would have been insufficient to provide Sasol an adequate
reward for capital invested. These results are consistent with the
view that PP prices, particularly export prices, were below economic
value.
88.17 The figures in the above table were calculated using an approach
that is likely to over-estimate the economic returns currently derived
by Sasol‟s PP business. First, a 15-year period was used, which is (I
am advised) well beyond the period range typically adopted by UK
competition authorities in their investigations into economic
profitability, and includes certain years (1995 to 1998) where
relatively high annual returns were observed. Average returns over
the most recent 10 years were materially lower than those shown
above. Second, Sasol‟s PP operating costs were adjusted marginally
to reflect the level of efficiency realised by leading PP operators
around the world. Adopting Sasol‟s actual PP costs would result in
lower economic return estimates than those shown above.
88.18 In any event, the logic of the Commission‟s allegations in
paragraph 57 is unsound. Where substantial fixed or capital costs
exist, a firm would be willing to export incremental volumes at prices
which cover marginal or variable cost but not necessarily full costs.
This is particularly the case if most of the capital costs are sunk, as in
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the case for Project Turbo. However, the pricing of all volumes
(domestic and export) at this incremental level would not be
sustainable and would not allow for a reasonable return.
89 Ad paragraph 58
89.1 In this paragraph the Commission submits that export prices are
“clearly profitable prices for Sasol”, because it has decided to expand
production based on them. In this regard, the Commission refers to
Sasol's decision “to expand polypropylene capacity through Project
Turbo”.
89.2 It would not be appropriate to conclude that export prices represent
the economic value for PP produced in South Africa on the basis of
the fact that Sasol made the Project Turbo SCC, PPU5 and PP2
investments, for several reasons:
89.2.1 First, PP2 was not a stand-alone investment. As set out above,
the investment case for PP2 (including PPU5) was calculated
from a Sasol Group point of view and the expected benefit of
lower fuel exports was accrued to the PP2 investment;
89.2.2 Second, this investment decision was made on the basis that
PP2 would be characterised by comparatively low production
costs of propylene and PP (i.e. when compared to the production
costs of PP1 or a hypothetical stand-alone facility). This was
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largely occasioned by the once-off legislated clean fuels
investment. Expansion of capacity may be considered if the
increased costs incurred in doing so are less than the increased
revenues from doing so. The fact that a particular expansion is
considered “profitable” on this basis, however, does not mean
that the price at which the additional output will be sold is above
the average cost of production for the whole business. Since
economic value must be determined with reference to the total
cost of production (indeed, total cost for the industry, rather than
for one specific business) PP2 cannot be used as a reliable
indicator that export prices reflect economic value. PP2 is not
representative of overall costs of production, inter alia, for the
following reasons:
(a) PP2 was a brownfield investment (i.e. on an established
site with existing infrastructure and an adjacent plant where
facilities e.g. workshops could be shared) in that it added an
additional PP plant to Sasol‟s existing PP production
capability. PP2 was able to make use of existing
infrastructure and services, and thus only incremental
capital and operating costs were considered in the
investment decision. As such the PP2 investment required
less capital and lower operating costs than a stand-alone
plant;
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(b) PP2 also has a substantially larger capacity than PP1.
Capital and operating costs per ton of output decrease with
increased plant size. Typically a plant may be doubled in
size with an increase in capital of only about 60%. Fixed
costs will similarly increase well below direct proportion to
the output. The same number of staff may run a double-
size plant, and maintenance costs will rise in proportion to
the capital. Consequently, the average cost per ton of
output (including the required return) will come down. Thus
PP2 could be expected to benefit from additional scale
economies compared to the PP1;
(c) The feedstock price for both PP1 and PP2 is based on the
opportunity cost to Sasol Synfuels of providing this
feedstock stream to Sasol Polymers. However, the tranche
of feedstock identified for PP2 was anticipated (at time of
investment) to have a lower opportunity cost, and therefore
lower transfer price, compared to feedstock used for PP1.
In particular, the opportunity cost of feedstock to be used in
PP2 was anticipated to be based on export FAV whilst PP1
feedstock was based on local FAV. In other words for PP2
the basis of the feedstock cost was distressed fuel netbacks
as opposed to domestic FAVs in the case of PP1. This
meant that the underlying production costs of PP2 were
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anticipated to be significantly lower than those of PP1 (or
a stand-alone PP producer for that matter);
(d) If PP2 was a standalone investment, the propylene
feedstock would need to be at its economic value and
considerable additional capital investment and operating
costs would need to be added in, as indicated in the table
below.
Capital investment Extra 20% +/- R1 billion extra
Operating costs + R74 million pa (people, spares, infrastructure)
+/- R250 per ton or 25% increase
Working capital (product stock)
32 000 tons extra to cater for own grades
+ R302 million
89.2.3 Finally, in the Project Turbo model PP2's feedstock is valued at
the opportunity cost to Sasol Synfuels. As set out in greater
detail below, this is well below a competitive price for such
feedstock. In line with the CAC‟s directive that any special cost
advantages should not be included in the calculation of economic
value it follows that the construction of PP2 therefore cannot be
accepted as an indication that export prices are a proxy for
economic value.
89.3 In summary, PP2 was based on a specific set of circumstances
which are distinct from a stand-alone PP plant and PP1. The fact
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that PP capacity was expanded as a consequence of the
investment in PP2 does not establish that export prices represent the
economic value of PP. Accordingly, even if PP2 had been profitable,
it could not be used as a measure of the economic value of PP1.
89.4 In any event, it is not correct that export prices sufficiently reward a
stand-alone investment in PP in South Africa. This is demonstrated
above in the case of PP1 and below in the case of PP2.
89.5 The return expected to be earned by Sasol from potential
investments is weighed up against Sasol‟s internal investment hurdle
rate. Only if investments are anticipated to exceed this hurdle rate
are they undertaken. Sasol‟s internal investment hurdle rate for new
projects is 30% higher than WACC as counterbalance for projects
that are based on sustenance and statutory requirements that yield
returns below WACC. In this way the average return on all projects
is intended to meet at least WACC, thus avoiding the erosion of
shareholder value.
89.6 As noted above, the design of Project Turbo ultimately incorporated
investment in the PP value chain including: (1) the PPU5 propylene
purification column; and (2) the building of the PP2 facility for the
production of PP. The table below shows the anticipated return to
Sasol as a whole, as reflected in board meeting papers over time,
which was expected to be achieved from this incremental investment
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(relative to Case F to which I have referred above). The figures for
November 2003 are those which I mentioned earlier.
Nov 2003 Nov 2006 May 2007 July 2010
IRR 21.60% 11.1% 10.00%
Not determinable i.e. negative
NPV R1197m -R152m -R430m -R2492m
Capital cost R3598m R5363 R5691m R6354m
WACC 14.75% 11.75% 11.75% 13.25%
Sasol hurdle rate 19.18% 15.28% 15.28% 17.23%
89.7 At the time of final approval (November 2003) incremental
investment in the PP value chain was expected to achieve a return of
21.60%, which was in excess of Sasol‟s WACC and internal hurdle
rate, and therefore seen as a viable incremental investment within
the context of the legislative dictate to produce unleaded fuel. The
base case for the PP2 investment was low grade petrol components
and petrol volumes in excess of sales within South Africa.
89.8 The initial projections of profitability anticipated from the PP
investment were based on the best available information at that time.
However, as investment cost and expected cash flow assumptions
became more certain and were updated, Sasol‟s projected IRR
dropped below WACC (and the internal investment hurdle) by 2006.
By the end of 2006, projections indicated that the PP2 investment
68
was not going to be commercially feasible (yielding a negative
NPV). Based on the 2006 projections the PP investment would not
have been made by Sasol.
89.9 However, by that stage the investment decision could not be viably
reversed due to the sunk costs already incurred (i.e. stopping the
project was deemed to be more costly than its continuation). Even
by Sasol‟s own internal estimates based on updated investment
information it is apparent that the export price of PP was insufficient
to justify the PP2 investment. Sasol‟s decision to continue with the
PP2 investment despite its revised economics does not indicate that
export prices cover economic value, but rather that this path was
assumed to be less costly than the alternative of ceasing the project
completely, given the costs already sunk.
89.10 It should be emphasised that these internal projections of inadequate
returns associated with PP2 were made by Sasol before any
competition investigation was initiated and were presented to various
Sasol board meetings as part of its internal management and
decision-making process. Accordingly, these updated profitability
assessments should be regarded as a more direct and reliable
indication of PP2‟s viability than the original investment decision
itself, which was based on economic assumptions and engineering
cost estimates. It would be incorrect to assume, as the Commission
appears to do, that because Sasol made the PP2 investment
69
decision, export PP prices are sufficient to cover costs and provide
a reasonable return on investment.
89.11 Profitability calculations for projects of this nature are done using a
DCF (discounted cash flow) model spanning a fifteen-year plant life.
Assumptions must be made about capital costs, feedstock costs,
exchange rate fluctuations, product price fluctuations, inflation rates
and many other matters over the full period of 15 years. By their
nature, these assumptions invariably differ, often substantially, from
reality. This is the risk that a business takes when embarking on a
new project of this nature. Reality has shown that Sasol Polymers'
key project assumptions did differ from reality and that the PP2
investment was not profitable as anticipated.
90 Ad paragraph 59
90.1 The allegations are denied.
90.2 If Sasol Polymers‟ own costs are used as a starting point, then in
order to arrive at the “notional objective competitive-market standard”
it is necessary to envisage a competitive market (not a perfectly
competitive one, but rather competitive enough to eliminate “pure
profit”, over the long run) within which Sasol Polymers operates. To
determine the economic value, I am advised that every cost or
saving, not incurred or enjoyed by other firms operating within that
market, ought to be excluded from the calculation. This would
70
include any cost saving enjoyed by virtue of Sasol Polymers‟
operating processes, or its bargaining power. Benefits or constraints
applicable, as a norm, to other firms within the hypothetical market,
such as low electricity costs, or high labour costs, would not,
however, constitute special circumstances and need not be excluded
to arrive at the notional objective competitive-market standard.
90.3 Sasol Polymers enjoys a special advantage from propylene
feedstock costs, which are lower than the notional competitive norm
due to the refining process which is part of Sasol‟s unique coal-to-
liquids technology. I refer to what is stated later in this affidavit in
paragraph 107 below. I emphasise that I am referring here to the
propylene feedstock from Synfuels – this should not be confused with
polymer-grade propylene extracted, purified and sold by Sasol
Polymers‟ Monomers business.
91 Ad paragraph 60
91.1 The Commission alleges that the prices of PP in a net surplus region,
such as South Korea, “which are in turn based on CFR Hong Kong
prices”, may be used as a reliable indicator of the economic value of
PP. Empirical evidence from numerous sources indicates otherwise.
The allegation is denied.
91.2 Sasol Polymers has not been able to obtain any data on domestic PP
prices in South Korea. CFR Hong Kong prices are, in and of
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themselves, not an appropriate indicator of the economic value of
PP. The CFR Hong Kong PP price is the price of the polymer on the
ship in Hong Kong and excludes all the costs to deliver the polymers
from the ship to the buyer. Moreover, CFR Hong Kong prices reflect
excess production supplied primarily into China at prices that must
overcome tariffs of 6.5% in addition to the costs referred to above.
This often results in producers earning negative cash margins. The
Middle East has emerged as a large producer of PP based on the
discounted price of propane that is recovered from its oil fields.
Again, there is not a well-established and visible local merchant price
for PP in the Middle East. One sees prices quoted as CFR GCC
(Gulf Co-operation Countries) – e.g. by ICIS Pricing. The export-
alternatives for Middle Eastern producers depend on where the best
netbacks can be earned.
91.3 It is important to note that Sasol Polymers‟ South African prices are
fully delivered (FD) domestic prices which include technical service.
Typically order sizes are smaller on average than those for which
prices are quoted internationally by marketing consultancies. To
compare like-with-like, Sasol Polymers‟ prices and any foreign
comparator prices should be on the same basis. This would mean
isolating the larger customer prices on Sasol Polymers‟ side and
building up prices in, say, China or Korea from CFR Hong Kong
prices, which exclude part of the cost build-up present in FD prices.
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Additional costs incurred in delivering products to final customers,
not included in CFR prices, include:
91.3.1 possible net additional costs to transport goods to another
harbour;
91.3.2 unloading costs;
91.3.3 costs associated with customs clearing;
91.3.4 handling costs;
91.3.5 warehousing;
91.3.6 transport costs to final destination;
91.3.7 import tariffs and local taxes; and
91.3.8 distributor margin.
91.4 I am advised that the CAC has held that prices charged by other
firms with broadly comparable cost structures as the dominant firm at
comparable levels of output may serve as a measure of the
economic value of the same good or service in the South African
market, if the other markets are shown to be, or can be assumed to
be, characterised by effective competition in the long run. The
Commission has made no attempt to demonstrate, indeed it has not
even alleged, that prices of PP in South Korea or the CFR Hong
Kong prices, on which it relies, are prices offered by firms with
73
broadly comparable cost structures at comparable levels of output
as Sasol Polymers.
92 Ad paragraphs 61-62
92.1 As noted above, Hong Kong CFR and export prices are not reliable
indicators of economic value.
92.2 In any event, it appears that the Commission‟s calculations are
incorrect. For example for the period indicated by the Commission
(2005-2007) ex-works domestic prices for homopolymer grade PP
were on average 15% above the CFR Hong Kong price, not 20% as
alleged by the Commission.
92.3 As noted above, between January 2000 and December 2009, the
average ex-works netback for domestic sales was only 16.3% higher
(on a weighted basis) than the average Sasol Polymers‟ ex-works
export netback.
92.4 Accordingly, the allegations in these paragraphs are denied.
93 Ad paragraphs 63-65
These allegations have been dealt with above. Cost of production on its
own is not a valid measure for economic value.
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94 Ad paragraph 66
94.1 As noted above, the calculation of economic value requires an
assessment of the competitive level of operating costs, meaning that
any unique cost advantages experienced by a firm should be added
to that firm‟s operating costs.
94.2 There is no reason why the reasonable relationship assessment
should be stricter (i.e. allow a smaller difference between price and
economic value) for those firms that have unique cost advantages,
which is what the Commission appears to be arguing in this
paragraph. As economic value is a notional concept applicable to all
firms, whether they have cost advantages or not, the assessment of
whether the relationship between prices and economic value is
reasonable should be applied equally to all firms in a market. A more
lenient test for firms with a higher cost base is not consistent with the
promotion of efficiency in a market, and punishes those firms that
have invested in improving operating efficiencies and practices.
95 Ad paragraph 67
The allegation is denied. The Commission's complaint that Sasol
Polymers' PP prices in South Africa are excessive should be dismissed.
96 Ad paragraphs 68-73
96.1 The allegations in these paragraphs are denied.
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96.2 I am advised that according to research by Professor Fedderke on
the elasticity of polymers, the demand for PP is inelastic. For as
much as 80% of application types11, PP constitutes such a small
proportion of the end-price of the product that it cannot impact on the
demand elasticity for the final product. Accordingly, the
Commission‟s view that higher input prices for manufacturers using
PP suppress sales is incorrect.
96.3 The automotive industry, referred to by the Commission in
paragraph 72 of its referral, is a good example of where the PP
content is so small that it cannot possibly influence the final product
price. It is estimated that the average car contains between 30 kg
and 46 kg of PP. At a domestic PP price of around R10/kg the PP in
the car will cost no more than R460, compared to the price of a car of
several hundred thousand rand. Even at a greatly reduced price it
would make minimal, if any, difference to the price of cars.
96.4 A car bumper cover typically weighs 3.7 kg. This is a mineral-filled
PP compound which contains roughly 3 kg of PP. At R10/kg the
polymer cost is R30 per bumper. Bumpers sell for R5 000 to R6 000
11 Study of the impact of upstream pricing practices in the chemical sector on the development
of the South African Chemical sector as a whole. Ozone Business consulting, CMCS, Terry le
Roux and Conningarth Economists.
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each. Some examples in the packaging industry further illustrate
the point that the polymer cost is a small fraction of the final product
price. A woven cloth bag for the cement or maize industry contains
about 80 grams of PP i.e. the cost is R0.80 per bag. Cement sells
for approximately R80 per bag. A 5-litre paint container contains 240
grams of PP and thus the polymer cost is R2.40 per container which
sells for R400 when filled with paint. A litre yoghurt cup weighs 40
grams and thus costs R0.40 in polymer. Yoghurt sells for roughly
R20 per litre. An HTH bucket weighs 750 grams and thus costs
R9.00 for the PP while the product is sold at R250 in the shops. In
PP carpeting the weight of PP fibre and backing is approximately 770
grams per m2. The PP cost is thus between R7.70 and R8.50 per
m2. Carpeting sells for anything between R140 to R380 per m2.
97 Ad paragraphs 74-76
There are a number of oil refineries in South Africa which operate an
FCC and hence produce propylene-containing streams, totalling an
estimated 348 000 tons. This puts Sasol at 72% of the country‟s
propylene capacity. To Sasol Polymer‟s knowledge, it is only at Sapref
and Natref where PPUs have been built. Sasol Synfuels is the largest
producer of propylene-containing feedstock in South Africa, and Sasol
Polymers has access to a portion of this feedstock. It is denied that the
market is uncontested and incontestable since it is suspected that not all
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of the propylene is extracted at Sapref and none at Enref, Calref and
PetroSA.
98 Ad paragraph 77
98.1 Sasol Polymers has no knowledge of the prices paid by Safripol for
the tranche of propylene that it sources from Sapref.
98.2 Nevertheless, it should be noted that in the early 2000s Safripol
readily accepted Sasol Polymers‟ offer to deliver propylene by
pipeline as opposed to rail-tankers, which had been the mode of
supply for many years. This appears to indicate that the delivered
price of propylene from Sapref was higher than the Sasol Polymers'
propylene price determined via the price formula.
98.3 Accordingly, the allegations in this paragraph are denied.
99 Ad paragraph 78
99.1 The allegations are denied. Sasol Polymers' propylene prices are
not IPP-based. The mechanism by which Safripol's propylene price
is set will be addressed later in this affidavit.
99.2 The weighted-average actual price for propylene paid by Safripol
compares favourably with the actual contract prices for propylene in
the US and Western Europe. Over the period 1997 to 2009, the
difference in the weighted average local propylene prices to the
contract prices in these two regions was less than 0.5%. This direct
78
comparison indicates that the local propylene price is not IPP-
based. (See the graph provided under paragraph 110 below).
99.3 Moreover, the price paid by Safripol for propylene is on average 31%
lower than IPP from the US Gulf Coast (a region which has surplus
propylene product).
100 Ad paragraph 79
I have no knowledge of Sapref's capacity. Sasol Polymers' best estimate
is that Sapref has a PPU capable of extracting up to 35 000 tons per
annum. Based on our understanding of Sapref‟s FCC capacity it can
produce up to 50 000 tons per annum of propylene molecules. If so, it is
indeed capable of offering additional volumes of propylene to Safripol. It
has long been Sasol Polymers' understanding that Safripol is not
consuming anywhere near the 35 000 tons per annum that it could
procure from Sapref (based on our sales of propylene relative to our
understanding of Safripol‟s installed PP capacity). Also, Safripol
continues to claim export rebates and hence has additional product for
sales into South Africa. Safripol has taken its full allocation of propylene
from Sasol Polymers over the past seven years. Accordingly, the
allegations in this paragraph are denied.
101 Ad paragraph 80
For the reasons set out above, the allegations are denied.
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102 Ad paragraphs 81-83
Save to say that there are other sources of propylene in SA, the
allegations in these paragraphs are not denied.
103 Ad paragraph 84
The Commission says that there is no shortage of supply of propylene in
South Africa. This contradicts allegations in other paragraphs of the
complaint referral. To the extent that the Commission indeed contends
that there is surplus capacity of propylene in South Africa, this is denied.
104 Ad paragraph 85
The allegations are denied. Sasol Polymers' position in the local
propylene market and its ability to provide Safripol with propylene that is
competitively priced, measured by world standards, is largely (if not
entirely) due to innovation and risk-taking, and to some extent asset
efficiency. It is through innovation and risk-taking that Sasol has become
the world‟s only producer of propylene from coal. In addition, Sasol has
been able to extend the use of its propylene assets well beyond their
installed lifetimes with upgrades and renovations costing a fraction of the
new replacement cost of these assets.
105 Ad paragraph 86
The allegations are denied.
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106 Ad paragraph 87
As noted above, Sasol Polymers' export prices for PP are not reflective
of the price in a competitive market. The export price is not sufficiently
profitable to cover costs plus a reasonable rate of return. It follows that
the approach of the Commission to the economic value of propylene,
reflected in this paragraph, is fatally flawed.
107 Ad paragraph 88
107.1 Refinery-grade or impure propylene may be extracted, purified and
sold, or alternatively it may be converted by further processing into
fuel. This is so for both Sasol Synfuels and for conventional oil
refineries. The price at which a propylene producer is financially
indifferent as to whether the propylene is extracted or converted to
fuel is known as the “fuel alternate value”, or FAV, of the propylene.
107.2 Sasol Polymers benefits from cost advantages in its production of
propylene. This is due to the relatively lower alternative fuel value of
propylene converted via the CatPoly process as a starting point for
fuels production. In most countries petrol trades at a premium to the
oil price. This puts the propylene FAV (due to its octane gain in
alkylation and hence its higher value in petrol) at a price of „petrol
plus‟.
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107.3 In Sasol‟s case, because of the relatively higher volume of
propylene feedstock produced in its synthetic fuels process, a
CatPoly process is used for converting propylene into fuel blend
components. These products have a lower octane value than
equivalent alkylation products. For this reason the propylene FAV
has a lesser value in petrol through lower octane gain and is thus
priced at „petrol minus‟. This sets the transfer price of the propylene
feedstock to Sasol Polymers which comprises 85% of variable
production costs of polymer-grade propylene after purification in a
PPU. In other markets, propylene is mostly made from steam
cracking of naphtha and refining of petroleum with very different
costs of production. Sasol Synfuels‟ synthetic fuels process allows
Sasol Polymers to acquire feedstock at a cost lower than the normal
cost of feedstock from oil refineries – either naphtha or refinery-grade
propylene.
107.4 A comparison between Sasol‟s propylene feedstock costs and two
alternative proxy market valuations of feedstock produced from oil
refineries shows that over the period 1994 to 2009:
107.4.1 The proxy South African refinery floor value for propylene
feedstock (which is the notional indifference price for a refiner to
extract propylene) was calculated for Sapref based on well-
known refinery models. This was on average 24.5% higher than
Sasol Polymers‟ feedstock price from Sasol Synfuels.
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107.4.2 The quoted refinery-grade propylene prices in the US Gulf
which a propylene splitter operator would pay for feedstock were
on average 28.4% higher.
107.5 As noted above, I am advised that the CAC has indicated that it is
necessary to disregard any special advantage that results in costs
lower than the “notional competitive norm”. The calculated South
African refinery floor prices provide a fair proxy for the notional
competitive norm of the feedstock used for propylene production:
107.5.1 The proxy price was modelled using quoted refinery-grade
propylene prices in the US market, which is heavily traded with a
number of competitors and therefore likely to be competitive.
107.5.2 Sasol is the only known producer of propylene feedstock from a
synthetic fuels process based on coal.
107.6 In summary, the above cost comparisons show that Sasol Polymers
incurs feedstock costs which are much lower than the notional
competitive norm due to its parent company‟s unique synthetic fuels
technology. The Commission's claim that Sasol does not enjoy any
special cost advantages in its production of propylene is thus
incorrect.
107.7 Accordingly, when calculating the economic value of propylene, it is
necessary to make adjustments to Sasol Polymers' cost base to
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reflect the notional competitive norm, i.e. to reflect the market
prices that would be incurred by other propylene operators not
benefiting from Sasol‟s low-cost synthetic fuels feedstock.
108 Ad paragraph 89
The allegations in this paragraph are too vague for me to provide a
meaningful response. The Commission does not identify the price
allegedly used by Sasol in its own internal calculations, which it contends
can be used as a reliable indicator of economic value of propylene.
Sasol Polymers does not internally value propylene any differently from
what it charges Safripol for propylene as per the supply agreement.
109 Ad paragraphs 90-92
109.1 The allegations in these paragraphs are denied. I do not know the
source of the Commission‟s figures or how it calculated the
differences for these calculations. To the best of Sasol Polymers'
knowledge the claims are simply incorrect.
109.2 It should also be noted that to the extent the Commission's figures
have been taken from Project Turbo illustrations, a number of
assumptions regarding oil and feedstock prices are unsound.
110 Ad paragraph 93
110.1 Again, cost of production on its own is not a valid measure for
economic value. As noted above, I am advised that the primary test
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for excessive pricing is to enquire whether prices are unreasonably
above costs (adjusted for efficiency or unique cost advantage) plus
some reasonable return.
110.2 Accordingly, economic returns were calculated for the propylene
business for the 1995 to 2009 period. As per the approach adopted
for calculating PP returns, adjustments were made to the operating
cost base of the propylene business to take into account unique
operating advantages such as access to low cost refinery grade
propylene feedstock. Also, the replacement cost of the propylene
assets was calculated with reference to book values of individual
propylene assets adjusted for movements to the construction price
index over the period. This index provides a reasonable proxy for the
changes in the underlying value of the propylene assets.
110.3 Assuming that operating costs are adjusted to take into account
access to low cost refinery grade propylene feedstock, Sasol‟s
propylene‟s returns, disclosed in the table below, show that the
average ROCE and IRR were well below Sasol‟s WACC over the
1995 to 2009 period. Our adjustment to the feedstock cost is
conservative as it does not include any margin on top of operating
costs that would be incurred by a hypothetical provider of refinery
grade propylene.
85
per cent
Ave ROCE IRR
Propylene 5.3 12.8
Average WACC 15.0
1995 to 2009
110.4 Another useful measure to assess Sasol Polymers‟ propylene
profitability is Economic Value Added (EVA), which measures the
extent to which revenues have exceed economic costs, including a
reasonable return on assets. EVA can be calculated by deducting
the post-tax cost of capital on assets from post-tax operating profit.
Sasol Polymer‟s EVA estimate for its propylene business was
negative R711 million during the 1995 to 2009 period, meaning that
operating profits were insufficient to cover the opportunity costs
arising from the investments in propylene assets. Accordingly, the
prices of Sasol Polymers' propylene were not in excess of
propylene‟s economic value.
110.5 As per the PP analysis, the estimates of propylene returns were
calculated taking into account years (1995 to 1998) where economic
returns were relatively high compared to the returns currently derived
by Sasol‟s propylene business. In addition, Sasol‟s propylene assets
have been largely depreciated (i.e. operating well beyond the useful
lives of the assets), and therefore the asset values assumed in the
returns analysis, particularly for the U70 and U288 propylene plants,
are very low. Accordingly, the average ROCE estimate shown above
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is likely to be an over-estimate of the long-term returns available
from Sasol‟s propylene business.
110.6 Moreover, South African propylene prices are in line with actual
contract propylene prices in the US and Western Europe. The
average percentage difference between South Africa and US and
Western Europe prices is less than 0.5%. The data used for this
calculation includes quarterly average selling prices for propylene.
These represent delivered prices (ex-pipeline). For the US and
Europe, ICIS Pricing contract prices were used. These are delivered
prices (ex-pipeline). Pipeline costs are unknown but are assumed to
be small as a proportion of prices.
-
200
400
600
800
1,000
1,200
1,400
1,600
1997199819992000200120022003200420052006200720082009
USD
Weighted local price USA Western Europe
111 Ad paragraph 94
I repeat the allegations in paragraph 94 above (Ad paragraph 66).
87
112 Ad paragraph 95
Propylene is not sold to consumers. Thus the Commission bases its
case on the notion that excessive propylene prices lead to excessive PP
prices to the detriment of the consumer. I repeat the allegations in
paragraph 95 above (Ad paragraph 67).
113 Ad paragraphs 96-105 (generally)
113.1 As indicated above, the complaint against SCI in terms of
section 4(1)(b)(i) of the Act has been settled in terms of a settlement
agreement between the Commission and SCI and has been admitted
to the extent stated in clause 5 of that agreement. I have been
advised that, in the circumstances, it is not necessary for me to
answer the allegations in paragraphs 96 to 105 save insofar as they
are relevant to the complaints against SCI in terms of section 8(a) of
the Act (Ad paragraphs 96-98)
Background to conclusion of propylene supply agreement
113.2 To the best of SCI‟s knowledge:
113.2.1 Safripol was established in 1972 as a joint venture between
Sentrachem Limited (“Sentrachem”) and Hoechst South Africa
(Pty) Limited (“Hoechst”), a subsidiary of Hoechst AG (one of the
world‟s largest chemical manufacturers at the time);
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113.2.2 Safripol commenced producing polypropylene in 1978 using
propylene from Sapref and imports through Richards Bay.
113.3 As indicated above, Sasol Polymers (Pty) Ltd, a member of the Sasol
Group, entered the PP market in 1990 with the establishment of a PP
plant and a PPU for the extraction of polymer-grade propylene from
Sasol Synfuels‟ feedstocks. Sasol Polymers (Pty) Ltd began to
supply propylene to Safripol in the period 1989/90.
113.4 In 1993 Sasol Ltd and AECI agreed to merge their respective
monomer, polymer and certain other chemicals operations in a joint
venture called Polifin (Pty) Ltd, later to become Polifin Ltd (“Polifin”).
In terms of the proposed merger, Sasol‟s ethylene, propylene and PP
operations were combined in Polifin with AECI‟s PVC, LDPE and
LLDPE operations (inter alia).
113.5 The origin of the current propylene supply agreement between Sasol
Polymers and Safripol lies in concerns raised by the shareholders of
Safripol (i.e., Sentrachem and Hoechst) with the Competition Board
regarding the above merger. Their principal concern was that the
vertical integration brought about by the merger would enable the
merged entity (Polifin) to control the scope of the growth and viability
of Safripol‟s polymer business. At the time, Sasol was the only
producer of ethylene in South Africa and was also responsible for
over 80% of the propylene produced in the country.
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113.6 In its assessment of the proposed merger dated 4 October 1993
(“the Competition Board report”), the Competition Board found that
the merger would enhance the possibility of anti-competitive conduct
by the merged entity, and in particular the possibility that “the merged
entity could foreclose Sentrachem/Hoechst from adequate supplies
of monomer feedstocks or discriminate against them in other ways,
thereby placing them in an untenable competitive position”
(paragraph 73).
113.7 One of the proposals made by Sentrachem and Hoechst to address
their concerns was the conclusion of enhanced long-term
agreements between the merged entity and Safripol for the supply of
propylene and ethylene which would protect Safripol against any
anti-competitive conduct by the merged entity. The merger parties
agreed to this proposal and also assured the Competition Board that
the merged entity would undertake to honour all objectively justifiable
claims by Safripol to a portion of any growth in Polifin‟s monomer
feedstocks, and also to supply such feedstocks to Safripol on a non-
discriminatory basis (see paragraph 75).
113.8 Another factor that protected the competitive position of Safripol, and
which is reflected in the Competition Board report, was that the
ethylene price would be based on the international market price ratio
of ethylene/PE and local PE selling prices (paragraph 21(3)(d)). This
pricing formula was introduced at the instance of Safripol and its
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shareholders in order to protect Safripol‟s gross margins
throughout the price cycle. The parties also agreed to conclude a
propylene supply agreement on the same formula basis.
113.9 The effect of the above formula was to ensure that the price paid by
Safripol for ethylene and propylene in South Africa was related to the
price relationship between those monomers and the respective
polymers (PE and PP) in international markets where (unlike South
Africa) monomers were actively traded as applied to the selling price
of such polymers in South Africa.
113.10 Because Polifin and Safripol accounted for most of the domestic
sales of PE and PP, the pricing formula inevitably required the
parties to disclose information about their polymer prices so that the
monomer prices could be calculated. I explain this in greater detail
below.
113.11 On the basis of the undertakings made by the merger parties, the
Competition Board concluded that it was not necessary to launch a
formal investigation into the proposed merger (paragraph 76), and
the parties proceeded to negotiate and conclude the propylene and
ethylene supply agreements on 8 December 1994.
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Propylene supply agreement
113.12 A copy of the propylene supply agreement concluded between Polifin
and Safripol on 8 December 1994 is attached to the Commission‟s
founding affidavit marked “IL5”.
113.13 In terms of clause 5 of the supply agreement, Polifin undertook to
supply to Safripol up to 55 000 tons of propylene out of its total
propylene production capacity at that time of 200 000 tons. If Polifin
expanded its production capacity, Polifin would have sole entitlement
to the next 20 000 tons, but thereafter Safripol would have the option
to purchase “an objectively justifiable portion of such propylene on a
non-discriminatory basis” as referred to in paragraph 75 of the
Competition Board report referred to above.
113.14 The pricing provisions relating to the supply of propylene to Safripol
are contained in clause 10 of the agreement. As appears therefrom,
clause 10 contains different pricing formulae for propylene purchased
for the production and sale of PP in South Africa on the one hand,
and for exports on the other. Within each category, there are also
different pricing models for the first three years after the
commencement date (26 June 1994) and for the period thereafter.
113.15 Sasol Polymers has not been able to locate a copy of the propylene
supply agreement that was in place between Sasol Polymers (Pty)
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Ltd and Safripol prior to 1994, and which the existing agreement
replaced. However, it is believed that:
113.15.1 the pricing formula for the first three years of the new agreement
was the same formula that had applied in the previous
agreement; and
113.15.2 the reason for the retention of the previous formula for the first
three years of the new agreement was that the new formula was
based on a three-year rolling average of international
propylene/PP price ratios which first needed to be calculated
before the new formula could be applied.
113.16 It is a common feature of commodity trading (including polymers) that
export prices are, on average, significantly below domestic prices.12
This reflects the economic reality that it is beneficial for producers to
run their plants at full rates, provided that the income from the
marginal sale of product exceeds the variable cost (raw material plus
utilities plus catalyst and chemicals) of manufacture. In this way,
export sales still make a contribution to the fixed costs of the
operations, thereby improving overall profitability.
12 By export price is meant the FOB (Free on Board) price at the port of dispatch of the product,
and not the delivered price paid by the customer who is purchasing (importing) the polymer. The true price of the export for delivered polymer paid for by the customer (which is then comparable to the domestic price) will include the freight, duty, insurance and other transport costs to take receipt of the polymer at the customer‟s gate.
93
113.17 Capital intensive plants have high fixed costs, whether or not they
are running. Running plants at high rates also has the added benefit
of increasing efficiencies and staying above turn-down limits of
plants. If these limits are not maintained, plants could be forced to
operate intermittently, thereby incurring additional costs.
113.18 Consequently, countries that have excess capacity typically export
product at a lower FOB price than the delivered domestic price of
such product.
113.19 As a result, regions in deficit attract marginal exports and often serve
as a dumping ground for “excess” product, leading to prices dropping
to levels that are unsustainable, particularly at the bottom of the
economic cycle. Because Sasol Polymers and Safripol were (and
are) price-takers for their exports, the parties developed and agreed
to a different pricing formula for propylene used in polypropylene that
made it economically viable for them to sell product into, and to
compete effectively in, export destinations.
Domestic pricing formulae
113.20 As regards the domestic pricing formula (set out in clause 10.1 of the
agreement), the formula used for the first three years of the new
supply agreement reflected an import parity pricing model. It was
based on:
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113.20.1 the average monthly North-West European and US Gulf
delivered contract and spot prices for propylene converted into
Rand; plus
113.20.2 the current average seafreight rate paid by Safripol on propylene
imports; plus
113.20.3 the actual contract railage rate granted to Safripol by Spoornet
for the transport of propylene from Richards Bay to Safripol‟s
plant in Sasolburg.
113.21 The average of the North-West European and US Gulf prices for
propylene was used as the basis for the pricing formulae because
those were markets in which propylene was (and continues to be)
heavily traded. Indeed, North-West Europe and the US were at the
time of setting up the agreement the major markets in which
propylene and ethylene were actively traded, and prices for the
monomers in those areas was therefore used as a reference point for
monomer prices in various other parts of the world. These included
South Africa, where there were no local merchant monomer sales
from which domestic prices for propylene or ethylene could be
determined. Significantly, Safripol‟s shareholder Hoechst was one of
the largest ethylene suppliers in Europe at the time and evidently
regarded the use of an international benchmark as an equitable basis
for determining South African monomer prices. It continues to be
95
common practice for regional monomer prices to be determined by
reference to prices in North-West Europe and the USA and an
appropriate adjustment factor.
113.22 In terms of the supply agreement, this import parity pricing model fell
away after the first three years. Sasol Polymers believes that the
parties may have agreed to do so for the reason that propylene is
expensive to transport, and consequently the model could have
resulted in the payment of monomer prices that were at times
prohibitively high relative to the prices that Safripol (and Polifin) could
achieve for their PP products domestically.
113.23 The domestic pricing formula that the parties agreed to apply after
the first three years of the new agreement addressed these
considerations. It was no longer based on import parity pricing
principles as before but rather on the principle that the domestic price
of propylene should be derived from an international price ratio
between propylene and PP as applied to the domestic price of PP.
This ensured that the price Safripol paid for propylene was based on
an international benchmark as applied to the domestic price of PP.
113.24 The relationship between the price of propylene and PP in the
domestic pricing formula was based on a three-year rolling average
of the international propylene/PP price ratio, which in turn was
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derived from the average of the average monthly North-West
European and US propylene and PP contract prices.
113.25 As previously indicated, contract prices in North-West Europe and
the US were used as the basis for this calculation because they were
large markets with substantial trade in monomers and polymers, and
were therefore regarded as providing an accurate reflection of the
price relationship between propylene and PP prices in an efficient
market.
113.26 The use in the pricing formula of a three-year rolling average of the
international propylene/PP price ratio smoothes the effects of the
significant volatility in international propylene and PP prices which
can be problematic for smaller operations such as those of Safripol.
113.27 This average price ratio was then applied to the average of the net
weighted average packed delivered prices for PP produced and sold
domestically by both Polifin and Safripol in order to derive the price of
propylene for the production thereof. Polifin and Safripol accounted
for most of the PP sold in South Africa, and the average of their
domestic prices was therefore seen as an accurate reflection of the
prevailing price for PP in South Africa.
113.28 Clause 10.1 provided further that in the event that the above
formulae no longer provided an equitable basis for determining the
price of PP, the parties would renegotiate them in good faith.
97
113.29 In November 1997 the parties concluded a letter of understanding
regarding the method for determining the propylene database in
order to derive the price ratios on which the propylene prices would
be calculated. A copy of that letter of understanding, which is stated
to be effective as of the commencement date of the main agreement,
is included in annexure “IL5” to the Commission‟s founding affidavit
as “Letter of understanding 2”. As appears therefrom, it was agreed
that the source document for monomer prices would be the Tecnon
Monomer Report and the source document for polymer prices would
be the Tecnon Polyolefin Report.
113.30 The methodology initially agreed for implementing the domestic
pricing formula in terms of clause 10.1 was that, not less than
30 days prior to the commencement of each accounting quarter,
Polifin would inform Safripol of a provisional price for that quarter
based on both parties‟ best estimates of their respective net weighted
average prices for domestic PP sales for that quarter (“PP” for Polifin
and “PP1” for Safripol). This gave both parties (i.e. Safripol and
Polifin‟s downstream polymers business) an indication of the price
they would be paying for propylene for the following quarter for
purposes of their advance negotiation of PP sales.
113.31 Then, within four weeks after the end of each accounting quarter, the
parties would provide to each other their actual net weighted average
packed delivered prices for domestic PP sales during that quarter.
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On that basis, the final price of propylene would be calculated and
the necessary price adjustments would be made, and debit or credit
notes issued, within 14 days thereafter.
113.32 The methodology initially agreed in terms of clause 10.1 thus
contemplated an exchange of provisional average quarterly prices at
least 30 days before the commencement of each accounting quarter,
and then an exchange of actual average quarterly prices within four
weeks after the end of that quarter.
113.33 In this manner, the parties sought to obtain as accurate an indication
as possible of the prices that would be invoiced for propylene in
respect of any given quarter, and to minimize the price adjustments
that would need to be made after the end of each quarter.
113.34 As set out further below, this methodology has been revised
somewhat in recent years.
Export pricing formulae
113.35 As reflected in clause 10.2, there was also a difference in the export
pricing formula for the first three years after the effective date of the
agreement and for the period thereafter. The reason for this
difference has been set out above.
113.36 As regards the first three-year period, the price for propylene used to
produce PP for exports was simply a fixed percentage (0.56) of the
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weighted average of Safripol‟s packed ex-works price for
polypropylene produced in South Africa for export sales in the
relevant quarter. Sasol Polymers believes that the fixed percentage
was based on an established European price ratio13 at the time of the
previous agreement, and it was accordingly insensitive to significant
movements in the relation between propylene and PP prices in
different international markets over time.
113.37 For this reason, the export formula that the parties agreed to apply
after the first three years of the new agreement was, like the
domestic pricing formula, based on a three-year rolling average of
the international propylene/PP price ratio.
113.38 In addition, a minimum floor price was provided for in the formula
based on the FAV of the relevant feedstock. This protected Polifin in
the event that the international price of PP dropped to a level which
made it uneconomic for Polifin to continue supplying propylene to
Safripol in terms of the export formula.
113.39 As regards the manner of implementing the export formula, it was
agreed that Safripol would initially pay Polifin the full provisional local
13 Sasol Polymers does not know whether this particular price ratio (which is also reflected in the
ethylene supply agreement) reflected the price ratio between propylene and polypropylene, or between ethylene and polyethylene, or indeed a more general price relationship between monomers and polymers in the European market.
100
propylene price as per clause 10.1 of the agreement. Safripol
would then submit its (actual) historical weighted average ex-works
price for PP exports to Polifin within four weeks after the end of the
accounting quarter, on which basis the final price would be calculated
and the necessary price adjustments would be made, and debit or
credit notes issued, within 14 days thereafter.
113.40 In November 1998 the parties concluded a letter of understanding
relating to the methodology for calculating export prices as
contemplated in clause 10.2 of the propylene supply agreement. A
copy of that letter of understanding, which is stated to be effective
from 26 June 1996, is included in annexure “IL5” to the
Commission‟s founding affidavit as “Letter of understanding 3”.
June 2000 addendum
113.41 In June 2000 the parties signed an addendum to the propylene
supply agreement in terms of which the second last paragraph of
clause 10.1(b) (dealing with the provisional pricing) was deleted and
substituted with effect from 26 June 1999 by the following:
“Safripol shall be informed of an estimated and a provisional price for each Accounting Quarter. Both prices shall be based on the above formula and Polifin’s best estimate of the values of PP and PP1 during the Accounting Quarter for which the prices are being determined. The estimated price shall be advised by Polifin to Safripol not less than thirty (30) days prior to the commencement of each Accounting Quarter. The provisional price shall be given by Polifin to Safripol not less than four (4) days prior to the
101
commencement of each Accounting Quarter. The final price for each Accounting Quarter shall be calculated within four (4) weeks of the end of each Accounting Quarter. Price adjustments shall be made, and the necessary debit or credit notes shall be issued, within fourteen (14) days of the date on which the final price was calculated.”
113.42 A copy of that addendum is included in annexure “IL5” to the
Commission‟s founding affidavit as “Addendum 12”.
113.43 It is apparent from the above addendum that the major change
brought about thereby was to remove the requirement that Safripol
provide its best estimates of its average domestic sales to Polifin in
advance of each accounting quarter. Instead, the addendum
provided that the propylene price for the next accounting quarter
would henceforth be based on Polifin‟s best estimate of both its own
price (PP) and Safripol‟s price (PP1). Polifin then communicated to
Safripol an estimated price of propylene not less than 30 days and a
provisional price of propylene not less than 4 days before the
commencement of the next accounting quarter.
113.44 In recent years, Sasol Polymers has estimated (Safripol‟s) PP1 price
as being 95% of Sasol Polymers‟ (own) PP forecast quarterly price.
This figure represented an approximation of the observed
relationship between Sasol Polymers‟ and Safripol‟s domestic PP
prices (across all grades) over time. Safripol is provided only with
the estimated and provisional propylene prices. Safripol is not
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informed of the breakdown of the variables or of the basis on
which the latter is calculated.
113.45 Also, Sasol Polymers within each quarter conducts a monthly review
of the provisional price for that quarter based on its own PP, and
Safripol‟s derived PP1, for the past months, and its more accurate
estimated prices for the remaining months, in that quarter. In the
event that there is a material difference between the original and the
refined provisional price calculated in this manner, Sasol Polymers
will invoice Safripol on the basis of the refined provisional price. In
this way, the price adjustments that need to be made after the end of
each quarter are further reduced.
December 2006 addendum
113.46 In December 2006 the parties agreed to a further amendment to
clause 10 of the agreement, a copy of which is included in annexure
“IL5” to the Commission‟s founding affidavit as “Addendum 25”.
113.47 As appears therefrom, this amendment incorporated the changes
contained in the previous addendum and also provided for an
increase in the ratio applicable to sales of propylene between the
contractual amount of 55 000 tons per annum and the amount of
100 000 tons per annum. This formalised the practice that had been
in place since 1998.
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113.48 As explained above, the basis for the additional price charged to
Safripol (and Polifin‟s downstream polymers business) for these
additional quantities was the fact that both the feedstock and the
operating costs of the new splitter (PPU3) used to produce the
additional volumes were significantly higher than those associated
with Polifin‟s existing splitter (PPU1).
Cessions
113.49 Subsequent to the conclusion of the propylene supply agreement in
1994, there have been changes in the identities of the parties to the
agreement and in Safripol‟s controlling companies.
113.50 During or about 1997 Sentrachem, one of the shareholders in
Safripol, was purchased by Dow Chemical Company, a major
international science and technology company, through its subsidiary
Dow Plastics Southern Africa (Pty) Ltd (“Dow”), although that did not
result in any change in the parties to the supply agreement itself.
113.51 During or about March 1999 Sentrachem purchased Hoechst‟s
shareholding in Safripol, with the result that Dow became the
(indirect) controlling company of Safripol.
113.52 In March 2001 Polifin ceded all its right, title and interest, and
delegated all its obligations, in and to the propylene supply
agreement to Sasol Polymers with effect from 1 September 2000.
104
113.53 In July 2001 Safripol likewise ceded all its right, title and interest,
and delegated all its obligations, in and to the propylene supply
agreement to Sentrachem.
113.54 More recently, in December 2006, and pursuant to Dow‟s sale of its
shareholding in Sentrachem, Sasol Polymers consented to the
cession and delegation of the rights and obligations of Sentrachem
under the propylene supply agreement to Main Street 415 (Pty)
Limited (which has since changed its name to Safripol (Pty) Limited).
To the best of SCI‟s knowledge, ABSA Capital, a division of ABSA
Bank Limited, is the major (indirect) shareholder in the “new” Safripol.
Settlement agreement
113.55 As indicated above, SCI has admitted in terms of clause 5 of the
settlement agreement that the propylene pricing formula and related
provisions of the supply agreement, and its implementation, amount
to the indirect fixing of a price or a trading condition, in contravention
of section 4(1)(b)(i) of the Act.
113.56 In terms of clause 6.1.3 of the settlement agreement, SCI has agreed
to use its best endeavours to reach agreement with Safripol
regarding the amendment of the pricing and volume restriction
provisions contained in the supply agreement within a defined time
period so as to ensure that the supply agreement, as amended, does
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not result in a contravention of the Act. In particular, SCI has
undertaken to use its best endeavours to ensure that:
113.56.1 the price of propylene will be set independently from that of
polypropylene and any requirement to exchange any information
relating to polypropylene prices and volumes will be removed;
and
113.56.2 the second tranche of propylene purchased by Safripol for the
domestic market will no longer be sold at a higher price.
114 Ad paragraph 99
114.1 As stated above, the polypropylene prices of Sasol Polymers and
Safripol have differed throughout the relevant period, mostly by
approximately 5% but sometimes by over 10%.
114.2 Whilst the parties attempt to differentiate their product offerings on
the basis of factors such as quality, delivery time, and reliability of
supply and inventory, the commoditised nature of PP means that
their PP prices for comparable products would not be expected to be
significantly different. In fact, this is entirely consistent with a
competitive outcome for similar products and is not the result of any
agreement or concerted practice between the parties.
106
115 Ad paragraph 100
Save as stated in clause 5 of the settlement agreement, the allegations in
this paragraph are denied for the reasons set out below.
116 Ad paragraphs 101 to 102
116.1 I am advised that the theory advanced in this paragraph is, upon
analysis, an overly simplistic one. In particular, the theory is based
on an incorrect assumption that either party has an incentive to raise
their PP prices as a result of the price formula.
116.2 In setting their respective PP prices, both parties will seek the
optimum balance between price and volume. The pricing formula in
the supply agreement does not shift this balance in favour of higher
prices as the Commission contends.
116.3 The Commission‟s theory is also misconceived in the light of what I
have said in response to paragraph 26 of the founding affidavit.
117 Ad paragraph 103
117.1 Save to admit that in terms of the supply agreement a higher price is
paid for quantities above 55 000 tons but only up to 100 000 tons per
annum, the allegations in this paragraph are denied.
117.2 As explained more fully above, the increased price for volumes
above 55 000 tons is directly related to the higher cost associated
107
with their production, including a higher material price from Sasol
Synfuels, higher purification and operating costs due to the dilute
nature of the relevant condensate stream, and required investment in
new plant and equipment.
118 Ad paragraph 104
118.1 The allegations in this paragraph are vague and are denied.
118.2 I refer to what is stated above regarding the nature and purpose of
the pricing information exchanged between the parties pursuant to
the implementation of the pricing formula in the supply agreement.
119 Ad paragraph 105
Save as stated in clause 5 of the settlement agreement, the allegations in
this paragraph are denied for the reasons set out above.
120 Ad paragraphs 106 to 107
For the reasons set out above, the Commission is not entitled to the relief
sought in these paragraphs.
121 Ad paragraph 108
121.1 As indicated above, SCI has admitted in terms of clause 5 of the
settlement agreement that the propylene pricing formula and related
provisions of the supply agreement, and its implementation, amount
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to the indirect fixing of a price or a trading condition, in
contravention of section 4(1)(b)(i) of the Act.
121.2 The settlement agreement, upon confirmation by the Tribunal, is in
full and final settlement, between the Commission and SCI, of all
proceedings relating to section 4 and section 5(1) of the Act
investigated by the Commission under the Commission‟s case
number 2007Nov3338 (clause 8.1).
W H E R E F O R E I respectfully request that the Commission‟s complaint
referral in respect of the section 8(a) complaints against the first respondent be
dismissed.
_______________________ DEPONENT
I certify that the Deponent has acknowledged that he knows and understands the contents of this declaration. This declaration was sworn to before me and after the Deponent had answered to the prescribed questions and the Deponent‟s signature was placed thereon in my presence at on this day of 2010.
__________________________ COMMISSIONER OF OATHS
109
ANNEXURE A
IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA
CT CASE NO: 48/CR/Aug10
CC CASE NO: 2007Nov3338 In the matter between: THE COMPETITION COMMISSION OF SOUTH AFRICA Applicant and SASOL CHEMICAL INDUSTRIES LIMITED First Respondent SAFRIPOL (PTY) LIMITED Second Respondent _________________________________________________________________
CONFIRMATORY AFFIDAVIT _________________________________________________________________ I, the undersigned,
GRAHAM LESLIE WELLS
do hereby make oath and state that:
1 I am the general manager, planning and technology, of Sasol Polymers,
a division of Sasol Chemical Industries Limited (“SCI”). SCI is the first
110
respondent in this matter. I am duly authorised to represent SCI in
these proceedings, and to depose to this affidavit on its behalf.
2 I have personal knowledge of the facts referred to in the affidavit of
Adriaan Roland janse van Rensburg insofar as they relate to SCI and/or
Sasol Polymers, as the case may be.
3 I have read the affidavit of Adriaan Roland janse van Rensburg and
confirm, in particular, the content of its paragraphs 17 to 21, 24, 47.4,
48.2, 48.3, 51.1, 56, 57.3, 57.7, 64.2, 64.3, 78.1, 81, 87.1, 89.2.3, 99,
100, 107, 110.6 and 113.12 to 113.54.
_______________________ DEPONENT
I certify that the Deponent has acknowledged that he knows and understands the contents of this declaration. This declaration was sworn to before me and after the Deponent had answered to the prescribed questions and the Deponent‟s signature was placed thereon in my presence at on this day of 2010.
__________________________ COMMISSIONER OF OATHS
111
ANNEXURE B
LIST OF ABBREVIATIONS
ABS Acrylonitrile-butadiene-styrene
BOPET Biaxially oriented polyethylene terephthalate
C3= propylene monomer
CAC Competition Appeal Court
CatPoly Oil refinery unit operation in which fuel blend components
are produced
CEIP Customer Export Incentive Policy
CFR Incoterm “Cost and Freight”
CIF Incoterm “Cost, Insurance and Freight”
COD Conversion of Olefins to Diesel Unit
DCF Discounted Cash Flow
DDP Delivered, Duty Paid
DDU Delivered, Duty Unpaid
112
DTI Department of Trade and Industry
EPDM Ethylene Propylene Diene Monomer Rubber
EPS Expanded Polystyrene
EVA Ethylene vinyl acetate
FAS Incoterm “Free Alongside Ship”
FAV Fuel Alternative Value
FCA Incoterm “Free Carrier”
FCC Fluidised Catalytic Cracker as used in an oil refinery
FD Fully Delivered
FOB Incoterm “Free on Board”
FRIDGE Fund for Rapid Industrial Growth and Equity
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
GPPS General Purpose Polystyrene
HDPE High Density Polyethylene
HIPS High Impact Polystyrene
IRR Internal Rate of Return
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LDPE Low Density Polyethylene
LLDPE Linear Low Density Polyethylene
mPE Metallocene Polyethylene
NPV Net Present Value
OEM Original Equipment Manufacturer
OICA International Organisation of Motor Vehicle Manufacturers
PA6 Polyamide 6 (nylon)
PA66 Polyamide 66 (nylon)
PBT Polybutylene terephthalate
PC Polycarbonate
PDH Propane Dehydrogenation Unit
PE Polyethylene
PEEK Polyetheretherketone
PET Polyethylene terephthalate
PIB Polyisobutylene
Platformer Oil refinery unit operation for upgrading fuel blend
components
114
PMMA Polymethylmethacrylate (acrylic)
POM Polyoxymethylene (acetal)
PP Polypropylene (generic term for the suite of polymers that
include homopolymer, impact copolymers and random
copolymers)
PPS Polyphenylene sulfide
PPU Propylene Purification Unit
PS Polystyrene
PVC Poly Vinyl Chloride
ROCE Return on Capital Employed
RON Research Octane Number
SAN Styrene-acrylonitrile
SCC Selective Catalytic Cracker
SCI Sasol Chemical Industries
TPE Thermoplastic Elastomer
TPO Thermoplastic Polyolefins
UHMWPE Ultra High Molecular Weight Polyethylene
115
US United States of America
VCM Vinyl Chloride Monomer
WACC Weighted Average Cost of Capital
WE Western Europe
WTO World Trade Organisation
116
ANNEXURE C
117