|
|
[Home]
[Databases]
[WorldLII]
[Search]
[Feedback]
South Africa: Competition Tribunal |
[Database Search] [Name Search] [Recent Decisions] [Noteup] [Help]
THE COMPETITION TRIBUNAL OF SOUTH AFRICA
CASE NO: 13/CR/FEB04
In the matter between:
HARMONY GOLD MINING COMPANY LTD First Complainant
DURBAN ROODEPOORT DEEP LTD Second Complainant
and
MITTAL STEEL SOUTH AFRICA LTD First Respondent
MACSTEEL INTERNATIONAL BV Second Respondent
Panel: D Lewis (Presiding Member), N Manoim (Tribunal Member), and M
Holden (Tribunal Member)
Heard on: 15 March – 25 April 2006, with argument heard on 29-30 November
2006
Delivered on: 27 March 2007
REASONS
LEWIS PM:
The Complaint
[1] Harmony Gold Mining Company Ltd and Durban Roodepoort Deep Ltd (henceforth ‘the complainants’ or ‘Harmony’) have filed a complaint against Mittal Steel South Africa Ltd (“Mittal SA”) and Macsteel International Holdings BV (“Macsteel International”) (‘the respondents’) relating to the respondents’ conduct in the manufacture and distribution of flat steel products in South Africa.
[2] Harmony alleges that Mittal SA is a dominant firm in the domestic market for flat primary steel products and that it has abused this dominance by charging, in contravention of Section 8(a) of the Competition Act, excessive prices for its flat steel products.
[3] The complainants also allege that Mittal SA has contravened section 8(d)(i) of the Act, in that it requires or induces customers to not deal with a competitor.1
[4] The complaint was lodged with the Competition Commission (“the Commission”) in terms of section 49B of the Act on 19 September 2002.
[5] The Commission, in addition to investigating the alleged contraventions of Sections 8(a) and 8(d)(i), also considered a possible contravention of Section 9(1) of the Act, which proscribes price discrimination. This investigation centred around the question of whether the differentiation by Mittal SA in its pricing of flat steel products sold locally relative to the price it charged for these products on the export market, as well as Mittal SA’s practice of granting incentives to promote the export of its steel in value added form and additional rebates to certain industries, constituted price discrimination.
[6] The Commission concluded that there was no evidence of a contravention by Mittal SA of either sections 8(a), 8(d)(i) or 9(1) of the Act. On 6 January 2004, the Commission subsequently issued a ‘notice of non-referral of complaint’.2
[7] On 27 February 2004 the complainants then lodged the current complaint with the Tribunal.
The Hearing
[8] After an extensive discovery process, the hearing of evidence concerning the present complaint commenced on 15 March 2006 and concluded on 25 April 2006.
[9] The hearing heard oral evidence from the following witnesses called by the complainants: Mr Gerhard Nicolaus;3 Mr Bernard Swanepoel;4 Mr Alistair Lang;5 Mr Gary Bell;6 Mr Stephen Leatherbarrow;7 Mr Roy Cohen;8 Mr Neil Senior;9 Mr Peter Fish;10 Mr Errol Classen;11 Mr Henry Pretorius;12 Mr Gavin Jacobsen;13 Dr Zavareh Rustomjee;14 Professor Harvey Wainer;15 and Professor Simon Roberts.16
[10] The respondents’ witnesses were Mr Marthinus Schoeman;17 Mr Phillip Tomlinson;18 Mr Charles Dednam;19 Mr Rudolph Torlage;20 and Dr Mike Walker.21
[11] A number of additional witness statements were filed by both parties.
[12] On 26 April 2006 and 8 May 2006, the complainants served Notice of Application to Amend the relief sought. The application to amend was opposed by both respondents on various grounds. The Tribunal heard the amendment application on 31 May 2006, and subsequently delivered its judgment on 19 June 2006.22 This application to amend is discussed when we consider the remedies to be imposed.
[13] The Tribunal heard argument concerning the present complaint, on 29 and 30 November 2006.
The Complainants
[14] The complainants are listed gold mining companies, registered and incorporated in terms of the company laws of the Republic of South Africa (“RSA”). They are consumers of a range of flat steel products manufactured by Mittal SA and sold by Mittal SA through a number of steel merchants from whom the complainants source their steel requirements. The flat steel products purchased by the complainants are shaped or pressed into items such as hoppers or skips, and used in the complainants’ gold mines. According to the complainants, the prices at which the merchants sell to the complainants are determined by the prices quoted by the steel mills, to which the merchants add a small trading margin. It appears that the merchants also perform several value-adding functions – for example, cutting the steel received from Mittal into sizes required by their customers – for which they naturally levy a charge.23
The Respondents
[15] The South African Iron and Steel Corporation (“Iscor”) was incorporated on 5 June 1928 in terms of the Iron and Steel Industry Act 11 of 1928. It was owned by the South African state and was converted into a public company under the Companies Act 61 of 1973 by the Conversion of Iscor Limited Act 7 of 1989. Iscor was selected to lead the then South African government’s privatisation programme, ushering in a new era in the company’s history with its listing on the Johannesburg Securities Exchange (“JSE”) on 8 November 1989.
[16] On 1 March 2001, Iscor announced the restructuring of the company which was completed on the 26 November 2001 with the separate listing on the JSE of Kumba, which contained the mining assets previously owned by Iscor, leaving Iscor as a focused steel company.24
[17] On 23 November 2001, the Iscor board announced that it had concluded a Business Assistance Agreement (“BAA”) with LNM Holdings B.V. (“LNM”), then the world’s second largest steel producer (with worldwide steel making operations). In addition, LNM bought 34,81% of Iscor’s issued share capital. At the end of November 2002, the IDC held 39 167 364 shares in Iscor, representing 8,79% of the number of Iscor shares in issue. Iscor shareholders approved the BAA on 15 January 2002, that is, at the time of the unbundling of Iscor.25 The BAA was concluded with a view to assisting Iscor in improving efficiencies and cost-savings. By receiving new technology and skills from a global partner it was believed that Iscor could participate more effectively in the global steel industry. LNM, in terms of the BAA, provided business, technical, purchasing and marketing assistance to Iscor. As part of the BAA, LNM undertook to invest in Iscor shares and in February 2003, LNM increased its shareholding to 47%, following an offer to minority shareholders. In terms of the BAA, Iscor remunerated LNM at the end of 2003 for its technical assistance in ensuring that Iscor achieved the specified threshold cost saving levels.26 Pursuant to this remuneration LNM, in terms of the BAA, acquired a further shareholding in Iscor, which resulted in LNM holding 50% of Iscor’s issued share capital. It is through this transaction that LNM gained control over Iscor, a transaction which was approved by the Tribunal on 8 June 2004.27 Subsequent to the Tribunal’s approval of this transaction, Iscor changed its name to Ispat Iscor and then to Mittal Steel SA.
[18] The Mittal multinational subsequently merged its interests with those of Arcelor, then the world’s largest steel producer. Since 16 August 2006 Mittal Steel SA has been controlled by Arcelor Mittal, the world’s leading steel producer.28
[19] Mittal Steel SA is a listed iron and steel manufacturing company registered and incorporated in terms of the company laws of the RSA. Mittal SA is the primary producer of both long and flat steel products in South Africa with four production facilities, viz., Vanderbijlpark Steel, Saldanha Steel, Newcastle, and Vereeniging Steel. The former two plants – Vanderbijlpark and Saldanha - produce flat finished steel products whilst the latter two plants produce long finished steel products.
[20] The current product range of Vanderbijlpark Works consists of a variety of flat steel products including hot rolled sheet, hot rolled plate, hot rolled strip, cold rolled sheet, electro-galvanised sheet, tinplate, hot dip galvanized sheet and colour coated sheet, all of which are available in a wide variety of sizes and specifications. These products are sold locally and are also exported to global destinations in Europe, the Middle and Far East, North and South America, Canada, Australia and Africa.
[21] The Saldanha plant is located at the deep-sea port of Saldanha Bay on the west coast of South Africa and is largely focused on the export market. The plant commissioned its first hot rolled coil (HRC) in late 1998 and is currently producing at its designed nameplate capacity of 1,2 million tonnes per annum. In addition, the plant is distinguished by merging leading edge technologies to produce high quality ultra thin hot rolled coil (UTHRC).
[22] The Saldanha plant was initially controlled by a Joint Venture in which Mittal SA (or Iscor, as it was then known) held a 50% share with the remainder held by the Industrial Development Corporation (‘IDC’), a state-owned financial institution which provides loan and equity capital in support of industrial development. The IDC’s 50% share was purchased by Mittal SA in 2002. This transaction is fully described and assessed in the Tribunal’s previous decision in the merger of Iscor Limited and Saldanha Steel (Pty) Ltd.29 Suffice for the present to note – and the significance of this observation will become apparent – that during the period in which Saldanha was controlled by the JV, an agreement between Iscor and the JV provided that all Saldanha output was to be exported. In other words, a market sharing agreement provided that Saldanha output would not compete with Iscor in the domestic market for flat steel products. Note too that the Tribunal’s approval of this merger was conditional upon the termination of an arrangement whereby Duferco, a firm also located at Saldanha and which performed certain value-adding functions on flat steel product purchased from Saldanha Steel, also undertook not to market its output in South Africa.
[23] Mittal SA’s website describes its production activities:
The flat steel operations at Vanderbijlpark and Saldanha together produce 5.1 million tonnes of liquid steel per annum making it the largest supplier of these commodities in Africa.
Vanderbijlpark produces 3.8 million tonnes of liquid steel per annum, which constitutes some 81% of South Africa’s flat steel requirements. Saldanha is one of the world’s most technologically advanced and environmentally friendly steel mills, producing ultra thin hot rolled coil for stringent applications in the domestic and select export markets. The state-of-the-art plant produces 1.2 million tonnes of steel per annum.
The company's Newcastle and Vereeniging operations, services some 50% of the local market for long steel products, while maintaining a firm footing internationally.
The two mills account for total annual sales of 1.9 million tonnes, half of which is exported due to the limited demand of the RSA market: 1,57 million tonnes is rolled profile products, 90 000 tonnes is seamless tube and 20 000 tonnes is forged products.”
[24] It concludes that Mittal SA is
‘… the largest steel producer on the African continent, producing 7,3 million tonnes of liquid steel per annum.
[25] The website also notes that Mittal SA is
a modern, highly competitive supplier of steel products to the domestic and global markets.
[26] And that it enjoys
an industrial presence in 27 countries across Europe, the Americas, Asia and Africa, Arcelor Mittal has a balanced geographic diversity within all the key steel markets, both developing and developed.
[27] It further avers that
The company’s ability to generate profits and cash throughout the fluctuations of the steel cycle is testimony to the success of years of intensive business re-engineering and the cultivation of a continuous improvement culture that has embedded Mittal Steel South Africa’s position among the world’s lowest cash cost producers of steel.”30
[28] Macsteel International, the second Respondent, is a joint venture company owned in equal parts by Mittal SA and Macsteel Holdings (Pty) Ltd (“Macsteel Holdings”). Macsteel International was established in the Netherlands pursuant to an agreement concluded on 27 June 1995 between Mittal SA and Macsteel Holdings. Macsteel International conducts all of the export sales of Mittal SA and deals with other international transactions.31 Macsteel Holdings also wholly owns a steel merchant that operates in the domestic market.
[29] Note that the joint venture is not confined to trading in Mittal SA’s steel which apparently constitutes roughly half of its business. Nor is the joint venture trivial from Mittal SA’s point of view - approximately 40% of its flat steel is traded through the joint venture.32
[30] The agreement between the first and second respondents is described and analysed in some considerable detail below.
The excessive pricing complaint
[31] The complainants allege that Mittal SA is in contravention of Section 8(a) of the Competition Act by charging an excessive price to South African consumers of its flat steel products. Much of this decision is naturally concerned with an interrogation of the difficult concept of an ‘excessive price’. It is fair to say that our conceptual approach, and so the evidence used to prove or disprove an alleged contravention of Section 8(a), parts company in crucial respects with those of both the complainants and the respondents. It is thus important that we summarise briefly the approaches of the adversaries in what has become a trial of fairly mammoth proportions.
[32] The complainants’ approach has relied upon a series of comparisons of prices in different markets. Hence they have compared the list price for Mittal SA’s flat steel products, the price which the complainants and most other South African consumers of these products are charged, with
Prices charged for the same flat steel products to a select number of Mittal SA’s domestic customers who receive varying degrees of rebate off the list price;
Prices charged for Mittal SA’s long steel products;
Prices charged by Mittal SA for flat steel products to its export customers;
Prices charged by other steel producers of flat steel products in a variety of markets across the world, and with
Mittal SA’s costs of production.
[33] The complainants have sought to use these comparisons to demonstrate that those South African consumers who are charged the Mittal SA list price pay a price that is relatively excessive in relation to the prices charged to the other purchasers of steel listed above. As may easily be imagined this approach has entailed the presentation of massive quantities of empirical evidence regarding steel prices across the globe and in every conceivable market segment in which flat steel products are consumed. This approach – the use of comparators in other markets – finds echo in a number of decisions of the courts of the European Union and those of its member states. Many of these decisions are referred to below.
[34] Mittal SA, for its part, has not engaged much with the approach of its adversaries and, hence, with much of the voluminous evidence presented in support of the price comparison approach. It has taken a quite different approach to the question of excessive pricing. In essence Mittal SA has argued that a charge of excessive pricing can only be sustained if the complainants can demonstrate that this is reflected in excessive profits. This has entailed a detailed excursion into the complex world of profit measurement, a concept which has different meanings for economists, on the one hand, and, on the other, for the accountants and auditors who are charged with preparing the accounts of companies. We have heard the deeply contending views of a spiraling group of learned academicians and practitioners on, inter alia, the measurement of profit and the cost of capital and on the correct approach to the question of depreciation. This too has entailed the presentation of reams of empirical data.
[35] This, as may be imagined, has given rise to some rather bizarre testimony, with Mittal SA’s expert economist, Dr. Mike Walker, attempting to persuade the Tribunal that, his client, far from profiting excessively from its pricing practices, is, the conventional wisdom of the investment community notwithstanding, a firm in dire commercial straits, indeed is a firm whose very future existence is placed in doubt. This judgment is rendered all the more peculiar because it is contradicted by Mittal SA’s current performance and its own bullish, public assessments of its future prospects. Counsel for the complainants lost little time in pointing out that were Dr. Walker’s criteria to be applied to other companies, most of the blue chip companies listed on the Johannesburg Securities Exchange would suffer from a similarly negative assessment.
[36] Moreover, because Dr. Walker rightly conceded at the outset that his contentions regarding profit assumed the ‘efficiency’ of the firm in question – an inefficient firm may charge excessive prices and still not show exceptional profits – we have also had to consider the question of efficiency and its various measurements, also an issue that has necessitated the presentation of volumes of empirical evidence and much conceptual debate. This has also meant that because of Dr. Walker’s concession regarding efficiency, he was forced to argue that his client was simultaneously efficient and commercially unsuccessful.
[37] We, for our part, have taken a quite different view of the question of excessive pricing. We will not attempt a summary of our decision here – that is the subject matter of the pages that follow. We will simply emphasise that, in our view, the arguments of both the complainants and Mittal SA would effectively have the competition authorities adopt, by virtue of Section 8(a), the methodologies of price regulation. This is not our approach. While, as will be seen, we do not shy away from the responsibility imposed on us by Section 8(a) to pass judgment on the pricing practices of monopolies or, what we have termed, ‘super-dominant’ firms, we do so using principles and methodologies firmly rooted in the practice of competition law and economics. Although we have found that Mittal SA is indeed charging excessive prices, and is thereby in contravention of Section 8(a), we have not reached this conclusion by assuming the mantle of a price regulator.
Mittal SA’s price setting methodology
[38] We set out below the basis upon which Mittal SA establishes the price that it charges for flat steel products in the domestic market. We note that until 1984 Mittal – or Iscor as it then was- was subject to price control with prices determined on a ‘cost-plus’ basis. From 1984 until about 1992 Iscor’s prices simply followed the domestic inflation rate. Mr. Dednam testified that by 1992 this pricing policy resulted in ‘imports coming into the country’ (presumably because of a relatively high domestic inflation rate) and so from then on the import parity price principle was applied.33
[39] Mr Dednam further testified in his evidence-in-chief that the import parity price had formed the basis of Mittal SA’s price formation until the end of November 2005 at which time the pricing basis changed from import parity price to one based upon a basket of domestic prices prevailing in selected domestic markets. We comment on this claim below.
[40] In brief, since about 1992 and, on Mr. Dednam’s version, until late 2005, Mittal SA had arrived at its domestic price by establishing an FOB price based on one or other European price ( the prevailing Black Sea price was often referred to), adding on the relevant logistical costs of transporting the product to South Africa, such as the shipping, the stevedoring, the handling, and the port costs, as well as a commission of 2.5% onto the price, and an import duty of 5% to the price itself, and finally adding on to that the South African logistical cost for port and railage delivered into the Gauteng region and converting the price from a dollar price to a rand price based on the prevailing exchange rate. It is worth recounting at some length Mr Dednam’s version of this methodology:
“MR DEDNAM: The calculation of the international price parity discounts was done as follows. We determining (sic) the FOB global price for a specific commodity and we basically benchmarked 3 basic commodities in the steel range. We benchmark against the prices that we achieve in the international market ourselves. We look at what are the published prices through CRU, Metro Bulletin research and World Steel Dynamics and what they are saying. We are also engaging into an in-house weekly conference call on Mondays where we learn from the other Mittal companies in the group what are the international prices doing in the different regions.
So out of the intelligence that we actually gather from all these sources, we arrive at a FOB global price for a specific commodity. We do it for hot rolled coil, for cold rolled coil and for galvanised products. Then we add on the relevant logistical costs such as the shipping, the stevedoring, the handling, and the port cost. When we did these import parity calculations then, we added in a commission of 2.5% onto the price, we added in an import duty of 5% to the price itself. We added onto that the South African logistical cost for port and railage delivered into the Gauteng region.
We converted this US Dollar price at the latest exchange spot rate to a Rand price and we compared this price with the actual prices in the pricelist itself and then we determine from that the discounts applicable to the marketplace to reflect the difference in the international price and the price in the pricelist.
[41] In summary, then, in the import parity pricing regime Mittal SA sets its base prices for flat steel products in the domestic market by calculating the notional cost of importing those products. It then adds a 5% ‘hassle factor’, essentially a reflection of the additional costs or ‘hassle’ entailed in importing over the advantage of utilising a domestic supplier. The import parity price is determined monthly by Mittal SA and is conveyed to customers as a discount or surcharge off a list price that is published every three months.
[42] According to Mittal SA IPPD is calculated as follows:34
|
MITTAL STEEL SA’S CALCULATION OF IPPD |
|
|
|
The FOB overseas price is determined for the specific commodity, by looking at a basket of prices, including Iscor’s own export price, import price information and published international prices for the different international regions; |
|
|
Relevant logistical costs, such as shipping, stevedoring, handling and harbour costs are added; |
|
|
Agents commission of 2,5% is added; |
|
|
The SA import duty has historically been added; |
|
|
The South Africa fob costs, such as harbor and railage are then added; |
|
|
This US dollar price is converted with the latest exchange spot rate to a rand price; and |
|
|
The rand price is compared with the list price and the difference is the IPPD. |
[43] The complainants allege that as a rule Mittal SA charges its large customers precisely the IPP it has calculated for basic or standard products. In fact the evidence suggests that in certain periods – sometimes quite lengthy periods of some 8 months - Mittal has charged those of its domestic customers who are not members of any of the rebated schemes (discussed later in this decision) above import parity while at other times it has charged slightly less than import parity.35 The complainants submit that the IPP is an artificially established price rather than a price determined through effective competition in the domestic market. We note – and the significance of this will become apparent – customers who received a price below import parity, be this the rate charged in the international market or the rates charged to those who qualify for one or other of the rebate schemes, were contractually prevented from redirecting this discounted product into the higher priced domestic market. At very least they were, before receiving the rebate, obliged to prove that the rebated steel had been used precisely for its intended purpose, largely for exporting or competing against imports, and no other purpose.
[44] In his opening address, Mr Loxton – senior counsel for Mittal SA – indicated that the terrain has changed because
“Mittal [SA] no longer employs either import parity pricing, nor even international parity pricing insofar as it resembles import parity pricing and instead has moved to and is moving to as a result of its discussions with government, to a position where it bases its prices upon a basket of domestic prices of net export in countries”.36
[45] Mr. Dednam further testified:
This methodology, as I said just now, changed as we’ve also indicated in December last year where we’ve implemented the basket of domestic prices to be the determinator (sic) for the level of pricing that we are actually doing for the domestic market. And the difference is basically that we look at the domestic prices in comparable countries elsewhere in the world. We look at the absolute price level that we are charging the domestic customers in South Africa. And we point blank put that price at that particular level without taking into consideration any of these notional costs that’s been illustrated in these bullet points over here.”37
[46] A lengthy debate ensued between the complainants’ counsel and Mr. Dednam regarding this claimed change in Mittal SA’s pricing basis, an argument that, in our view, the complainants had much the better of.38 Suffice to say that in response to a direct question from the Tribunal regarding the claimed change in the pricing basis Mr. Dednam averred that the new pricing regime had been announced in mid-December 2005 and had been implemented from January 2006. The hollowness of this claim was thoroughly exposed under cross-examination - indeed it appears that it had not been part of the announcement of 15 December 2005. On further examination and questioning from the Tribunal Mr. Dednam acknowledged that the claimed shift in the pricing basis had had no discernible impact on the actual price charged. Indeed it is disappointing that a witness who we generally found to be helpful and, on some important points, candid – we note particularly his honest responses to the role of the anti-arbitrage provisions in Mittal SA’s agreements with its discount customers and its export merchant, Macsteel International – was prepared to blatantly mislead the Tribunal on this point. That it appears to form part of Mittal SA’s ‘offer’ to the Department of Trade and Industry suggests that it is willing to mislead the public as well.
[47] In any event the point is of no great moment. The argument that will be developed in this decision holds that a non-excessive price is one that is determined by competitive conditions in the relevant market. The manner in which the IPPD pricing basis works is to determine the price of flat steel products in South Africa by reference to demand and supply conditions that prevail in an arbitrarily selected market abroad (for example, the ‘Black Sea price’) markets and then to add to that price the notional costs of ‘importing’ the product to South Africa. The ‘basket’ approach that Mittal SA now claims to have adopted effectively uses demand and supply conditions – that is, competitive conditions - in an arbitrary array of other selected national markets to determine prices in the South African domestic market. It falls foul then of the same argument that we will use to condemn the targeting of import parity as the basis for setting the domestic price. We have no idea of what competitive conditions prevail in the arbitrarily selected and diverse range of countries that Mittal SA claims to place in its basket. Suffice to say that it is a very peculiar way of settling on a price in our market which, we will insist, must, in order to be non-excessive, be set by reference to competitive conditions in the relevant market which is the South African market for flat steel products. As we will show the key competitive conditions in our market are Mittal SA’s structural super-dominance plus ancillary conduct aimed at maintaining the segmentation of differently priced markets, the cumulative effect of which is to produce a price that is not influenced by any competition considerations whatsoever and is, because of this, adjudged to be excessive.
The relevant market
[48] The complainants contend that the relevant product market is that for flat steel products.
[49] Mittal SA has been less clear in its identification of the relevant product market. At the outset of the case, Mr Dednam argued that defining the relevant product market as that for primary flat steel products is an oversimplification.39 He averred that the relevant product market for the purposes of this complaint is for steel products utilised in the gold mining sector. He argued that within the broad category of flat steel products Mittal SA produces thousands of different products, which for purposes of this complaint, are limited to seven different broad classes, namely, slabs, plates, hot rolled, cold rolled, galvanized, tinplate, and colour coated.40 He averred that each of these seven categories predominantly attracted different buyers from different industries with Mittal SA’s customers in the mining industry purchasing plates and hot rolled steel. He further claimed that in each of the broad categories to which he referred there is a different degree of beneficiation and value-add. He argued that in the different categories different possibilities of substitution apply. For example, galvanized steel supplied to the building industry competes with, inter alia, roofing tiles as a possible substitute. For hoppers and skips utilised in the mining industry, the stainless steel product known as 3CR12 or aluminium could be a substitute. He contended that Mittal SA monitors its sales to specific industries, and takes cognizance of signs of declining sales due to competition from the use of substitutes or the importation of steel.
[50] Harmony however averred that there is a basic distinction at the production stage between flat and long steel products, which are typically produced in different types of plants.41 Mittal SA recognises this distinction in a number of its internal documents, including in documents dealing with pricing policies and sales reports and when it reports its annual results.
[51] With the exception of the arguments advanced by Mr Dednam, nowhere did Mittal SA or any of its witnesses challenge the classification of the product market as that for flat steel products. Indeed much of Mittal SA’s analysis appears to be premised on the existence of a market for flat steel products. Mr Dednam himself confirmed this distinction in his evidence-in-chief when he testified about the production process of flat steel products at Vanderbijlpark.42 Dr Mike Walker, an expert witness called by Mittal SA, based his analysis on a market for flat steel products.43 Mr Tomlinson – one of Mittal SA’s witnesses - referred frequently in his evidence-in-chief to flat steel products as the relevant product category when assessing Mittal SA’s prices. His testimony relied on defining flat steel - with hot rolled coil as the base product – as a relevant product market for a number of conclusions he sought to draw. When discussing pricing Mr Tomlinson noted:
“The prices I will quote today are for hot rolled coil. Flat products account for around 50% of world production of all steel products, the remainder being divided amongst so-called long products such as concrete reinforcing bar, wire rod and merchant bar and structurals. Of that 50%, 40% of the total is in former sheet products, which pass through a hot rolled coil production stage”.44
[52] Dr. Simon Roberts, an economic expert retained by Harmony, testified that while a number of different end products may be made from flat steel products there is extensive supply side substitutability.45 This was not challenged by Mittal SA.
[53] Mittal SA’s counsel did not indicate in his opening address that the product market was in dispute. Nor is this indicated in Mittal SA’s heads of argument. Indeed in Mittal SA’s ‘concise heads’ handed up on the first day of argument, there is repeated reference to the product market for flat steel products. In emphasising Mittal SA’s position on the geographic market, counsel stated
.
“It is clear that the conditions prevailing in one regional market, including price, will affect other regional markets. Consequently the answer to the question what the relevant market is for Mittal’s flat steel products is: it depends upon the prevailing domestic and regional and upon the domestic demand/supply equation, but it is not an exclusively South African market. It is certainly not clear that it will be so in the future”.46
[54] In our view the complainants have correctly identified the relevant product market as that for flat steel products.
[55] There is however clear contention surrounding the identification of the relevant geographic market. Harmony contends for a national geographic market. While Mittal SA has generally avoided pinning its colours to any clearly delineated geographic market – its expert simply decried, for reasons that are elaborated below, any attempt to delineate the relevant geographic market as a ‘mugs game’ – its insistence, which is a cornerstone of its case, that the prospect of import competition constrains its pricing power, suggests that it views the relevant geographic market as an international market. However this implicit identification of the relevant market is substantially undermined by Mittal SA’s own description of its South African market as one that is ‘naturally protected’ – and by this is meant protection by dint of its distance from competing producers of steel and the high cost of transportation and is thus geographic in nature – and by explicit concessions in the heads of argument of Mittal SA’s counsel which concede Mittal SA’s market power.47
[56] The reason why Dr. Walker, Mittal SA’s expert, refused to get drawn into the ‘mugs game’ of defining the relevant geographic market for flat steel products in a situation – which no-one contests – where a regional (that is, a South African) monopoly operates is, of course, because of the operation of the ‘cellophane fallacy’. This important analytical contribution to the identification of relevant markets is outlined with characteristic clarity in the book co-authored by Simon Bishop and Dr. Walker himself.48 In essence the application of the hypothetical monopolist test – the standard test utilised in identifying anti-trust markets in merger cases – is substantially complicated when applied to abuse of dominance cases because the dominant firm in question may already be charging the monopoly price. Hence it is widely accepted that in the case of United States v E.I. du Pont de Nemours and Co.49 the US Supreme Court erred in basing its judgement of the relevant market on evidence submitted by the respondent purporting to show that cellophane competed with other flexible packaging material because were the price of cellophane to be increased beyond the prevailing price it would be substituted for by other packaging materials. As Bishop and Walker explain:
The key implication of the cellophane fallacy is that the identification of substitutes at existing prices does not necessarily identify those products that are effective substitutes at the competitive price, which is the relevant benchmark for defining markets in most non-merger cases. Evidence that products are effective substitutes at current prices merely identifies those competitors that constrain the prices of the firm or firms under investigation from increasing above the current level. It does not necessarily provide information on whether those products are constraining prices to the competitive level.50
[57] Bishop and Walker cite the relevant notice of the European Commission:
Generally and particularly for the analysis of merger cases, the price to take into account will be the prevailing market price. This might not be the case where the prevailing prices have been determined in the absence of sufficient competition. In particular for investigation of abuses of dominant positions, the fact that the prevailing price might already have been substantially increased will be taken into account.51
[58] Bishop and Walker note that, while the cellophane fallacy does not completely eliminate the value of the hypothetical monopolist test, in these cases:
Certainly, it would be incorrect to ignore the implications of the cellophane fallacy when defining markets in non-merger cases since this will tend to lead to markets being defined too widely.52
[59] Of course in this instance the consequence of ignoring the implications of the cellophane fallacy is to widen the market from a national to an international market. The arguments for ignoring the cellophane fallacy are frankly risible. Consider the following:
The scale of transport costs involved in the importation of a commodity like steel. One estimate is that transport costs may constitute as much as 47% of the cost of flat steel products imported into South Africa;53
That there is no ‘international’ price for steel. While the existence of an international market does not depend on the existence of a single quoted world price, the regional variations are, as conceded by Mr. Tomlinson for Mittal SA, ‘very considerable’.54 Indeed it seems that the most that can be said is that the prices of steel in the various geographic markets tend to ‘harden’ or ‘soften’ in tandem with each other;55
The fact that there are significant periods in which Mittal SA has, managed to sustain prices above the import parity price without encountering significant importation of steel;56
That in its calculation of its import parity price Mittal SA explicitly incorporates a 5% premium – which recall is the bottom limit used by the US Department of Justice in its application of the hypothetical monopolist test - for the ‘hassle’ of importing, thereby acknowledging in the most material of terms that it is able to raise its price by at least as much as 5% above what it claims to be the competitive price without encountering a threat from its claimed competitors;
That there is no evidence of importation of steel on any discernible scale except in the case of products not produced by Mittal SA. Where a South African firm, Bell Equipment, did attempt to engage in importation of steel, Mittal SA dropped its price after Bell had secured, as it was obliged to, a significant quantity of steel, not so much as an attempt to meet the import price, but as an apparently punitive or retributive – Mittal SA’s counsel described it as ‘spiteful’ - response to anyone who had the temerity to consider importation;57
That customers consistently testified that but for the most exceptional sustained increase in prices above the import price they would not consider importation of flat steel products;58
That Mittal SA itself acknowledged that the considerable matter of exchange rate volatility and cash drain posed ‘difficulties’ for importers;
Notably, GRS already imports product. It has an established relationship with a foreign producer. While there are undoubtedly difficulties associated with importing, such as the fluctuating exchange rate and the cash drain associated with importing, we submit that Mr. Jacobsen’s evidence was ultimately not that imports were not an option for his company.59
That South African importers of steel would inevitably be small customers of very large producers located in distant markets whose reliability as suppliers of an absolutely vital input would therefore be questionable.60
That although several of the witnesses at these hearings testified that, if requested, local agents were willing to procure steel on the international market for importation into South Africa, we also note that 3 out of 7 of Mittal SA’s largest customers are steel merchants and we observe that it would be a brave local trading agent who chose to stand up to a Mittal SA intent upon preventing importation of competing products into South Africa.61
[60] It is indeed remarkable how frequently the efforts of Mittal SA to establish the ease with which local fabricators are able to import portray precisely the converse. A local steel fabricator, Mr. Stephen Leatherbarrow testified:
We don’t see any reason to import steel. We can buy a good quality product, at a good price, well not a good price but a price that we can pass onto our customers and the delivery is fine. So there’s no need for us to look at importing raw material.62
[61] Given this we understand perfectly well why Dr. Walker would not have wished to compromise his expertise and independence by actually arguing for an international rather than a national market. If the notion of a relevant geographic market is to have any meaning in anti-trust, then the market in which the complainants and the vast majority of other consumers procure flat steel products is the South African market.63 The import parity price is not the competitive price in this geographic market. It is simply the price that Mittal SA has selected because of its close approximation to its profit maximising monopolist’s price. However, as we will show, in order to realise this pre-selected price Mittal SA is forced to deploy its super-dominance in order to restrict the supply of domestically produced steel to its domestic market.
[62] It is then difficult to disagree with Harmony’s counsel’s summary of the evidence adduced by Mittal SA concerning the constraining influence of imports:
So, we do submit that it’s very difficult on a conspectus of the facts of this case to look at the fragments of evidence around imports, simply to suggest that that is really going to discipline the market, because all that we are really examining is one or other permutations of the cellophane fallacy. And therefore we suggest and submit to you that as far as imports are concerned, they are not a significant constraint upon the pricing power of Mittal.64
[63] It is our view then that the geographic market in which the complainant, Harmony, engages with Mittal SA is indeed the national South African market for flat steel products, the market in which a great many of its customers meet Mittal SA and in which its pricing power is effectively unconstrained by any competing suppliers, either in another country or from a product that could substitute for steel. This is consistent with the decisions made by the panels of the Tribunal on several previous occasions.
[64] These are conceivably not the only markets in which Mittal SA participates as a supplier of flat steel products. There are particular uses, and this will be further elaborated below, in which flat steel products are substitutable by other products – for example, it appears that plastic is substitutable for metal in the production of cans for liquid products. And there are certain purchasers of flat steel products who are allegedly capable of sourcing, without incurring significantly onerous transactions costs, the end product for which steel is an essential input from producers in other geographies – for example, the auto industry with its well established international network of suppliers is allegedly capable of sourcing its steel panels from suppliers located elsewhere.
[65] In the first instance cited – the case of metal cans – the product market may, on closer examination, be that for materials used in the production of containers for liquid products and it may include producers of flat steel products as well as certain plastic products. In the latter case, the product market may be that for the supply of flat steel products to the auto industry and the geographic market may extend beyond South Africa’s borders because, of the relative ease with which South African based auto producers may allegedly source from alternative, non-South African based suppliers of auto panels.65
[66] That Mittal SA is confronted by distinctive structural conditions in these market segments is suggested by the fact that it is precisely customers in these markets who receive discounts off Mittal SA’s list price.
[67] It may well be established that while Mittal SA is dominant as per the Act’s definition within these market segments – as we shall elaborate, the manner in which it establishes its discounts is certainly strongly suggestive of considerable market power – the degree of its dominance in these sub-markets may fall short of the exceptional degree of dominance that we consider necessary to engage in excessive pricing. We will however argue later that, for the purposes of this decision, the interest in these market segments derives from the lengths to which Mittal SA is prepared to go to maintain the segmentation, to immunise from the general domestic market the consequences of any discount granted to these producers.
[68] We note that in the present matter it has never been suggested that the complainant or any other customers, other than those that receive rebates, are capable of substituting their steel purchased from Mittal SA with alternative product. The insistence that steel imports restrain Mittal SA’s pricing is only at the point where Mittal SA’s domestic price exceeds the landed price of imported steel in South Africa. If Mittal SA’s domestic price were, for a sustained period, to exceed, by a significant margin, the landed cost of imported flat steel products plus ‘add-ons’ like the 5% ‘hassle’ factor, then, and only then, would the incentive to import become a realistic one for domestic consumers of these products. This is, in effect, the point at which the proverbial customers of cellophane would consider substituting other packaging materials. It is the sole basis for Mittal SA’s contention that despite the ‘natural protection’ which it concedes that it enjoys, the geographic market is a seamless, borderless international market.
[69] Note too that it appears that the share of Mittal SA’s sales of flat steel products that are sold at the list price significantly exceeds sales at rebated prices.
The panel’s approach to allegations of excessive pricing
[70] There are few practices condemned by the Competition Act in terms as unambiguous as that identified in Section 8(a) which, in language of crystal clarity, provides that
It is prohibited for a dominant firm to –
Charge an excessive price to the detriment of consumers
[71] An overly fastidious defence counsel may wish to make something of the subordinate phrase ‘to the detriment of consumers’ though none have attempted to do so here. What, after all, could more clearly inure to the detriment of consumers than an ‘excessive price’? We will, without further consideration, as, implicitly, have the defence counsel, treat this phrase as simply a superfluous description of an excessive price rather than a qualifier of its likely effects.
[72] Although, as shall be elaborated at length, the hurdles, particularly regarding the extent of dominance, that must be cleared by a complainant in order to prove excessive pricing are, in our view, exceptional, the repugnance attached to this offence is reinforced by the fact that an administrative penalty can be levied for a first time contravention.
[73] However, although this is frequently misunderstood by the broad public which, rightly, views excessive prices as the most likely and egregious consequence of monopoly, the theory and practice of competition law and economics is dominated by an equally unambiguous maxim that asserts that the task of a competition regulator does not extend to the determination and fixing of prices.
[74] The reluctance of competition practitioners to assume a price regulating function does not only derive from the truly massive technical difficulties entailed in determining the ‘right’ or, for that matter, the ‘wrong’ price, but from the founding principle underpinning the world view of the practice of competition law and economics that holds that price determination is best left to the interplay of independent actors engaging with each other in the market place. The fundamental task of competition regulators is then to promote and defend competitive market structures and to guard against conduct on the part of market participants which seeks to undermine the promise of those competitive structures to deliver quality goods and services at competitive prices.
[75] Core to competition enforcement is the recognition that the promise held out by competitively structured markets may be denied by co-operation between notional competitors. It is additionally recognised that a number of factors ranging from the acquisition of market share by pro-competitive means through to past or present governmental support and subsidy, may result in single firm domination of markets. Faced by single firm domination the principal function of competition enforcers is to guard against ‘exclusionary conduct’, that is, unilateral conduct of the dominant firm that has as its objective the reproduction of this dominance through the exclusion of actual or would-be competitors from the market.
[76] Price determination is thus not characteristically part of the armoury of competition enforcement. And yet Section 8(a)’s proscription of the charging of an excessive price appears, on the face of it, to assign us a role that precisely requires us to determine whether existing price levels are ‘right’ or ‘wrong’ (non-excessive or excessive) and, if ‘wrong’ (excessive) to determine and impose the ‘right’ (non-excessive) price.
[77] Confronted by these two unambiguous, but manifestly contradictory, requirements – the one which appears to condemn a particular price level and require us to impose another lower price, the other which resists the administrative determination of a price – one might predict that attempts to enforce Section 8(a) would immediately run into serious conceptual difficulties. And this is indeed the case. Notwithstanding the linguistic clarity of Section 8(a), the interface of price regulation with the approaches and principles of competition law and economics is complex, to say the least.
[78] Although these difficulties are widely acknowledged, they do not permit us to ignore a clear legislative injunction against excessive pricing. As the United Kingdom Competition Appeals Tribunal (CAT) observed when it too was faced with adjudicating an excessive pricing allegation ‘the fact that the exercise may be difficult is not, however, a reason for not attempting it.’66
[79] But by the same token, nor, however, does the prohibition of excessive pricing in a competition statute provide the competition authority with the license – or the powers and resources – to convert itself into a regulator of steel or any other prices. If excessive pricing is to be identified and remedied by a competition authority rather than a duly empowered and appropriately resourced price regulator, then it must do so by recourse to its standard approaches and instruments.
[80] The proscription of excessive pricing is but one of the abuses of dominance described in the Act. Though often distinguished in the anti-trust literature as an ‘exploitative’ abuse by contrast with the ‘exclusionary’ abuses otherwise described in Section 8 of the Act, the requirement to enforce the proscription of excessive pricing is not accompanied by the sort of powers and practices normally associated with price regulation. If the legislature had intended Section 8(a) to convert a competition authority into a price regulator then it would surely have provided us with the powers and resources appropriate to that considerable task. Consider the process by which the sector regulators – each with their own statutory foundation and specialist powers and resources – determine and police pricing in the telecommunications and electricity markets and then consider whether the legislature can possibly have intended that this be replicated in the steel or any other industry by way of the insertion of a single nine word clause in the Competition Act. This cannot be so and this is why we insist that our approach to Section 8(a) allegations should employ the analytical framework and instruments that govern competition enforcement generally.
[81] The standard approaches and instruments of competition enforcement comprise interventions in the structure of the affected markets and in the conduct of its participants so as to produce outcomes that are, as far as possible, unsullied by the possession or, rather, the abuse, of market power. As already noted, there are compelling conceptual and practical reasons why a competition authority should eschew a price regulation role and if it is possible – and we believe in this instance it is - to prove and remedy excessive pricing without resort to the methodologies of price regulation, then this is the approach that must be favoured. 67
[82] It is a fair generalisation that in that branch of competition law and practice where the competition authority functions as an ex ante regulator – namely merger control – the preferred remedies in the face of a likely lessening of competition are structural although conduct remedies are, on occasion, employed when the decision maker is persuaded that they are sufficient in order to protect and promote pro-competitive outcomes. By contrast, in that branch of competition law where the enforcement and adjudicative powers of the competition authorities are invoked ex post – namely in the event of conduct or ‘restrictive practices’ that produce anti-competitive outcomes – the remedies most commonly employed seek to regulate behaviour except in those instances in which only a structural intervention is thought capable of producing the desired outcomes. It is instructive to note that although our power to impose structural remedies in order to cure anti-competitive conduct is generally limited, a proven allegation of excessive pricing is one of the few instances in which we are empowered to impose structural remedies in the case of a first offence.
[83] How then do we, as a competition authority, approach this allegation of excessive pricing?
[84] If we are to approach this allegation in the manner of a competition authority, we must first ask ourselves whether the structure of the market in question enables those who participate in it to charge excessive prices. As we will indicate, we believe this to be a significantly higher hurdle than those that must be cleared in order to establish ‘mere’ dominance. It requires ‘super-dominance’, a structural condition the characteristics of which are elaborated below. If that higher hurdle is cleared, we must then ask ourselves whether Mittal SA has engaged in conduct designed to take advantage of – to ‘abuse’ – those structural opportunities by imposing excessive prices on its customers. If the second question is also answered in the affirmative, the excessive pricing must be proscribed by imposing a remedy which addresses the underlying structural basis for the offending conduct and/or any ancillary conduct arising from the structural advantage that enables the firm in question to charge a price in excess of that which would have prevailed in the absence of the anti-competitive structure and/or the ancillary conduct.68 Only if both forms of these remedies are impossible to devise should an actual price level be specified. In short, we treat excessive pricing as a phenomenon that may arise from a particular structure and that itself may be the basis for ancillary conduct that is utilised in order to sustain supra-competitive prices, to sustain, as per the definition of the Act,
‘a price for a good or service which (aa) bears no reasonable relation to the economic value of that good or service; and (bb) is higher than the value referred to in subparagraph (aa)’.69
[85] This definition appears to be drawn directly from the court’s decision in the leading European case of United Brands.70 Its elements are dissected in considerable detail later in this decision.
[86] However, for present purposes, we note the considerable similarities between the manner in which the problem of excessive pricing is characterised in United Brands, on the one hand, and, on the other, our approach outlined above. In the oft-cited words of the court in United Brands:
It is advisable therefore to ascertain whether the dominant undertaking has made use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition.71
[87] This – the cumulative impact of structure and practices - is the standard approach for dealing with allegations of abuse of dominance. However, although a species of abuse of dominance, this approach has, in certain critical aspects, not always been carefully followed through by the European competition authorities when dealing with allegations of excessive pricing, particularly, although not exclusively, in the manner in which the Europeans approach the question of remedying excessive pricing. Faced by allegations of excessive pricing the European authorities, particularly the various national authorities, have, possibly because of their overriding emphasis on the creation of a single market and their concomitant focus on the elimination of intra-European price discrimination, too readily assumed the role of price regulator both in their analysis of the very existence of excessive pricing, but particularly in the remedies that they have constructed in order to cure it. This price regulation methodology has effectively been advocated by Mittal SA, the first respondent in this matter, who appears, at one stage, to insist that we are somehow obliged to follow European jurisprudence.72 The tenor of much of the complainant’s evidence also effectively assumes that we will take on the methodologies and role of a price regulator although they – the complainants – do evidence a considerably deeper appreciation and elaboration of the underlying structural conditions and ancillary conduct that underpin excessive pricing.
[88] In consequence of the assumption – by the complainant and, though to a lesser extent, the respondent alike – that we will follow Europe and adopt the methodologies of price regulation, we have been presented with reams of evidence of prices in a myriad of markets and of costs of production in the manufacture of steel in every corner of the globe. We have been introduced to the arcane – and thoroughly unresolved – debates surrounding the question of profitability and its measure. This mimics the approach of litigants before the European authorities and courts who, when confronted by allegations of excessive pricing, have been willing to engage with this evidence precisely because their competition enforcers and adjudicators have been willing to assume the methodologies of price regulation.
[89] However, for the reasons outlined above, we eschew the role of price regulator, and so the vast quantum of the evidence and much of the argument submitted to us is simply irrelevant. This is not to suggest that our enquiry is any less fact-based than the approach of those competition authorities willing, if not necessarily able, to transform themselves into effective price regulators. However, the facts with which we engage go to the question of structure and conduct, traditional fare in the working life of competition enforcers and adjudicators. They do not go to questions of price regulation which effectively use analytical tools intended to simulate competition in order to arrive at the outcomes that that idealised state would putatively dictate. In short our response to proven allegations of excessive pricing is, wherever possible, to remove those structural and behavioural conditions that inhibit competition and so generate excessive prices; it is not, in contrast with the approach taken in many of the European cases, to simulate an alternative structure and then to impose outcomes associated with that ‘virtual’ alternative.73
Dominance
[90] The charging of an excessive price is a contravention of the Act when it is levied by a dominant firm.
[91] The criteria for establishing dominance are stipulated in Section 7 of the Act which provides:
A firm is dominant in a market if –
it has at least 45% of that market;
it has at least 35% but less than 45%, of that market, unless it can show that it does not have market power; or
it has less than 35% of that market but has market power
.PDF of original document
.RTF of original document