In May 2014, the Competition Tribunal imposed a staggering R500 million administrative penalty on Sasol Chemical Industries Limited (SCI), as a dominant firm in the supply of purified propylene and polypropylene, for charging excessive prices in contravention of s8(a) of the Competition Act, No 89 of 1998 (Act). The Tribunal further imposed behavioural remedies requiring SCI to submit a proposed pricing remedy based on a price formulation linked to prices charged in regions in the world with the lowest prices for purified polypropylene.

SCI appealed the decision of the Tribunal to the Competition Appeal Court (CAC). The CAC released its judgment in this matter on 17 June 2015 and overturned the decision of the Tribunal.

In terms of s8(a) excessive pricing by a dominant firm is prohibited. Excessive pricing is defined as charging a price for a good or service which bears no reasonable relation to the economic value of that good or service and is higher than that economic value.

In determining whether excessive pricing in contravention of s8(a) of the Act has, in fact, taken place the actual price of the goods must be weighed up against the economic value of the goods and the difference between the two must be analysed, on a value judgment, to determine whether, firstly, the excessive price is unreasonable and, secondly, whether the charging of the excessive price is to the detriment of consumers.

The CAC considered what the appropriate interpretation of s8(a) is in respect of determining the economic value of the goods in question. The primary question was whether a cost advantage must be taken into account in determining the economic value of the goods and the CAC stated that "if the cost of an essential component of product/s, whose prices are under scrutiny, can be justified on rational grounds, that should be the yardstick employed in the primary inquiry with which the Court is engaged. The complexity of price assessment dictates that some deference is required". The CAC concluded that the economic value must be determined with reference to the price at which SCI's supplier of propylene feedstock (Synfuels – a company in the Sasol group) supplied propylene feedstock to SCI and that there is no need to adopt a hypothetical price as conceded by SCI.

The CAC further considered whether the price charged was unreasonable so as to render it excessive. The CAC concluded that the price charged by SCI was between 12% and 14% higher than the economic value of the product and determined that this higher price was not unreasonable so as to render the price excessive and in contravention of s8(a) of the Act. It was, accordingly, not necessary for the CAC to consider whether the price led to consumer harm and SCI's appeal was upheld.

Written by Leana Engelbrecht, Senior Associate, Competition, Cliffe Dekker Hofmeyr