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 2930 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
1
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 nonreferral 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.
1 We will for purposes of this judgment also refer to these two alleged abuses as the ‘section 8(a)
complaint’ or the ‘excessive pricing abuse/complaint’, and to the ‘section 8(d)(i) complaint’ as the
‘inducement abuse’.
2 See Pleadings File, pages 114117.
2
[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.
3 Senior Manager of the Metals Directorate at the Department of Trade and Industry (“the DTI”).
4 Chief Executive Officer (CEO) of Harmony.
5 Director of Nampak Ltd
6 CEO of Bell Equipment (Pty) Ltd.
7 Planning Director, Barloworld Robor Tube (Pty) Ltd.
8 Director, Conveyor Manufacturers Association (“the CMA”).
9 Joint Managing Director of SENET cc (“SENET”).
10 An independent expert. Managing Director of a consulting firm, MEPS International Ltd (MEPS”).
11 Export Purchasing Manager of Volkswagen South Africa (“VW South Africa”).
12 Senior VicePresident for Product Development and Procurement of Toyota SA.
13 Financial Director, Global Roofing Solutions (Pty) Ltd.
14 Independent Consultant. He was previously the Director General of the DTI.
15 An Independent Expert.
15 An Independent Expert.
16 An Independent Expert from Johannesburg Economics.
17 General Manager: Technology of Mittal Steel SA.
18 An Independent Consultant of the consultancy group, CRU Strategies.
19 Mittal SA’s Manager: Market Strategy and New Business Development.
20 Mittal SA’s General Manager: Company Controlling.
21 An independent expert, Vice President at CRA International, an economic consultancy group.
22 See our amendment application judgment, Harmony Gold Mining Company Ltd and Another vs
Mittal Steel SA Ltd and Another , Tribunal Case Number: 13/CR/FEB04.
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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 valueadding 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
23 See the Pleadings Bundle, page 10, paragraph 10.4.
as a focused steel company. 24
23 See the Pleadings Bundle, page 10, paragraph 10.4.
24 In terms of the restructuring: Iscor would transfer its mining companies and interests to Kumba or
subsidiaries of Kumba, save for ownership of 6,25 million tons per annum of iron ore produced by
Sishen, which was to be retained by Iscor; the Kumba shares would be distributed to the Iscor
shareholders pro rata to their existing holdings in terms of the unbundling legislation; the IDC would
inject additional equity into Saldanha Steel equivalent to 50% of its net debt; the IDC’s shareholding in
Saldanha Steel would be acquired by Iscor; the IDC would contribute half of the anticipated operating
funding requirements of Saldanha Steel for the financial year ending 30 June 2002; and post the
4
[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 costsavings. 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
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
Kumba unbundling Iscor would undertake a rights issue of R1,67 billion, to be fully underwritten by
the IDC.
25 By the end of April 2002, the R1,67 billion rights issue was successfully completed.
26 LNM was initially remunerated in the form of Iscor shares but this was amended in December 2003
to provide for payment in either shares or cash. See Iscor Limited Group report 2003, page 98.
27 See LNM Holdings N V / Iscor Ltd [2004] 2 CPLR 311 (CT).
28 See our decision, Mittal Steel Company N.V. and Arcelor SA , Case No.: 53/LM/Jun06.
5
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, electrogalvanised 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 deepsea 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 stateowned 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
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 valueadding functions on flat steel
product purchased from Saldanha Steel, also undertook not to market its output in
29 Case No.: 67/LM/Dec01 .
6
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 stateoftheart 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.
7
[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
reengineering 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
30 See Mittal SA’s website, under ‘company overview’. Last visited on 19 January 2007.
30 See Mittal SA’s website, under ‘company overview’. Last visited on 19 January 2007.
31 See the Amendment Application Bundle, i.e., Mr Peter Jones’ Answering Affidavit, pages 5964.
32 The precise proportion of Mittal SA steel traded internationally varies with the South African
economic cycle and consequent level of domestic demand for steel at the domestic price stipulated by
Mittal SA .
8
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
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
9
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
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
10
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, ‘superdominant’ 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
‘costplus’ 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 evidenceinchief 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,
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
33 Mittal SA Heads of Argument, para 11.10 citing Mr. Dednam’s testimony at transcript page 2112.
11
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 inhouse 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
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
12
every three months.
[42] According to Mittal SA IPPD is calculated as follows: 34
MITTAL STEEL SA’S CALCULATION OF IPPD
1. 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;
2.
Relevant logistical costs, such as shipping, stevedoring, handling and
harbour costs are added;
3. Agents commission of 2,5% is added;
4. The SA import duty has historically been added;
5. The South Africa fob costs, such as harbor and railage are then added;
6. This US dollar price is converted with the latest exchange spot rate to a
rand price; and
7. 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
34 See Mittal Steel SA’s heads of argument, pages 8081, paragraph 11.16.
35 These deviations from the import parity price are partly explained by exchange rate volatility.
However, they may also be explained by Mittal SA’s efforts to fine tune its domestic price in order to
achieve a level as close as possible to its profit maximising price in the relevant geographic market –
the domestic market – in which it is superdominant or, expressed otherwise, an effective monopolist.
We will show – and this is the core of our argument – that Mittal SA has deployed its superdominant
position to engage in ancillary conduct which effectively allow it to restrict domestic supply, that is,
which,enable it to move its domestic supply curve leftwards along a downward sloping demand curve.
In other words, given domestic demand, supply is determined by price, rather than price being
determined by the supply conditions by what we will term ‘cognisable competition considerations’ –
that prevail in the relevant geographic market, the domestic market. Hence the outcome is a pre
selected target price labelled the’ import parity price’ or, as discussed immediately below, what Mittal
SA now claims, is the price determined by compiling the average of a basket of prices in a range of
other national domestic markets. The point is that both the import parity price or the basket of
international commodities are targeted because of their close approximation to the monopolist’s profit
maximising price.
13
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,
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
36 See Mr Loxton’s opening address, transcript of 15 March 2006, page 40.
37 See transcript, pages 16531654. See also Mittal SA’s heads of argument, pages 8081.
38 See Mr Dednam’s evidenceinchief, transcript of 5 April 2006, page 1654. See transcript of Mr.
14
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 midDecember 2005 and had been implemented from January 2006. The
hollowness of this claim was thoroughly exposed under crossexamination 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 antiarbitrage 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 nonexcessive 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
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 nonexcessive, 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 superdominance
Dednam’s cross examination on this point from page 1744 to 1889.
15
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 valueadd. 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
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
39 See page 132, 145147 of the Pleadings Bundle, paragraph 1.6. and 6.4 of Mr Dednam’s answering
affidavit.
40 See Annexure “CD2”, page 216 of the Pleadings Bundle.
16
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 evidenceinchief 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
evidenceinchief 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 socalled 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
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
41 As we have already pointed out Mittal SA produces flat steel products at Vanderbijlpark and
Saldanha whilst its long steel products are produced at Newcastle and Vereeniging. See also, Prof.
Roberts’ Interim Report, pages 1516.
42 See transcript, pages 16411647.
43 See Dr Walker’s Final Report, at 224240, [53] – [78].
44 See transcript, pages 14701471.
45 See Prof. Roberts’ testimony, transcript of 30 March 2006, pages 11221124.
17
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
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
46 See Mittal SA’s Concise Heads, page 18, paragraph 3.14. Our emphasis.
47 Mittal HOA para 2.7 ‘While Mittal may have market power in an economic sense…’ Note too Mr
Dednam’s concession to the effect that Mittal enjoys a ‘naturally protected’ domestic market. See the
transcript of 6 April 2006, page 1810.
18
situation – which noone 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 coauthored by Simon Bishop and Dr.
Walker himself. 48 In essence the application of the hypothetical monopolist test –
the standard test utilised in identifying antitrust 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 nonmerger 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
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,
48 Simon Bishop and Mike Walker The Economics of EC Competition Law (Sweet and Maxwell,
2002).
49 1956 351 U.S. 377; 76 S. Ct 994
50 Bishop and Walker para 4.37, page 99 (our emphasis).
19
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 nonmerger 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
51 Bishop and Walker para 4.39, page 100 (emphasis in the original).
52 Bishop and Walker para 4.40, page 101.
53 See Harmony Heads of Argument, para 85. Reference is also made to Mr. Tomlinson’s concession
that for flat steel products ‘transport costs are relatively high in relation to value.’ We note that in the
ISCOR/Saldanha Steel merger the merging parties argued that the scale of transport costs from the west
coast of South Africa to its inland industrial heartland would even prevent Saldanha Steel from
competing with Iscor in the lion’s share of the domestic market although it still chose to ensure this by
means of an agreement that prevented Saldanha Steel from competing in the domestic market.
54 Transcript, page 1557.
55 We note parenthetically that much of the recent hardening in the steel market and the forecast that
this will continue into the future is a consequence of the escalating price of iron ore, from which Mittal
SA is largely immunised thanks to its agreement with Kumba.
20
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
option for his company. 59
• That South African importers of steel would inevitably be small customers of
56 See in this regard, Mr Dednam’s concession on this point during crossexamination by Harmony
Counsel. That is, transcript of 10 April 2006, page 2043. See also, Professor Roberts’ final report of 3
March 2006, paginated page 105.
57 See transcript of 17 March 2006, page 326. See also Mr Gotz’s cross examination of Mr Bell,
transcript page 334.
58 For example, see Mr Bell’s evidenceinchief, page 317.
59 Mittal SA Heads of Argument, para 11.32 (our emphasis). These admitted difficulties are
presumably the effective basis for the 5% ‘hassle factor’ added to the import parity price formulation.
21
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 antitrust, then the market in which the
60 Note Mittal SA’s averment that ‘ most of the firms that export flat steel, or could plausibly export
flat steel, to South Africa are large companies for whom exports to South Africa could only ever
account for a small proportion of their production.’ (Para 11.33). While this appears intended to
portray easy access on the part of South African steel consumers to international steel supplies it of
course simply serves to portray the precise opposite, viz., that these South African purchasers would be
minute players in the international market and their custom and hence requirements will figure very
small in the calculations and custom of steel surplus countries and firms.
61 Reference was made in the papers filed in the hostile merger between Mittal/Arcelor to ‘ exclusivity
agreements that exist between locally based steel mills and the three largest steel merchants in South
Africa (being Macsteel, Trident and Kulungile)’ . These agreements were cited by Arcelor in order to
support their contention that it was difficult for Arcelor to serve South African customers from their
plants located overseas. When the hearing took place the merger had become friendly, that is, Arcelor
was no longer opposed to merging with Mittal. Its attorneys then denied the veracity of the statements
that they themselves had made. We did not have to get to the bottom of this and the matter was not
raised in these hearings and so is accorded no weight in this decision. We simply observe that in a
market where, as we shall elaborate below, the imposition of conditions by the steel producer on
merchants is a common occurrence, the possibility that traders would easily become import conduits in
the face of a resistant Mittal SA would have to be investigated carefully before much reliance was
placed on it either way.
62 Mittal SA Heads of Argument, para 12.8 (our emphasis).
22
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 preselected 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
a supplier of flat steel products. There are particular uses, and this will be further
63 As we note below, there are distinct segments in the domestic market because in selected
applications steel is substitutable by other products such as aluminium, cement and plastics. Moreover,
in one market – the auto manufacturing market – it is alleged that the existence of international supply
chains enables the auto multinationals to import finished steelintensive components for local
assembly. As we shall elaborate at length these are the market segment to which Mittal SA grants
varying degrees of rebate off the IPPD list price. Effectively these markets are delineated by demand
elasticities somewhat greater than that applicable in respect of the majority of South African steel
consumers who pay Mittal SA’s full target price. We examine below, in considerable detail, the
mechanisms employed by Mittal SA to maintain the segmentation of its various markets.
64 Transcript, page 2344.
23
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, nonSouth 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
65 Note however that in the Trident Steel/Dorbyl Limited merger, which was precisely concerned with
the supply of steel panels to the auto OEMs, the Tribunal, which explicitly considered the ability of
local auto assemblers to source through their international supply chains and the impact that this factor
had on the geographic market, cast considerable doubt on the Commission and the merging parties’
contention that this factor rendered this an international market. It noted
1) Imports were not always clearly substitutable.
2) Customer preference based on considerations other than price influence the degree of
substitutability between domestic and foreign supply.
3) Considerable customer scepticism regarding the potential for foreign competition to constrain
domestic producers.
The barriers to entry created by tariff and incentive schemes undermine the competitive position of
foreign competitors.
24
it establishes its discounts is certainly strongly suggestive of considerable market
power – the degree of its dominance in these submarkets 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 ‘addons’ 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.
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 –
a) Charge an excessive price to the detriment of consumers
25
[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
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 cooperation between notional
competitors. It is additionally recognised that a number of factors ranging from the
acquisition of market share by procompetitive means through to past or present
26
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 wouldbe 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’ (nonexcessive 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
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
66 See Napp Pharmaceutical Holdings Limited and Subsidiaries and Director General of Fair
Trading, Case No. 1001/1/1/01, paragraph 392.
27
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 antitrust 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
67 A competition authority may conceivably be called upon to act as a as a price regulator in instances
that may be characterized as price ‘gouging’. For example were Section 8(a) to be invoked in the event
of a natural disaster which had given rise to a temporary monopoly in some or other unregulated
product or service that was vital to the life of the affected community, say ambulance services or fuel
for heating, and this was exploited to effect a significant temporary price rise, the competition authority
could easily assume the role of a temporary price setter. This would not only demand urgent action but
it would also be a relatively simple technical task – the excess would simply be determined by
reference to the price that prevailed immediately prior to the disaster and the ‘nonexcessive’ price
would be set accordingly. However where excessive pricing is alleged to flow from a systematic and
systemic abuse of dominance in a complex market, the price setting task becomes infinitely more
complex and unsuited to the powers and resources of a competition authority. We stress that where, in
these latter cases, it is possible to isolate underlying structural conditions and ancillary behavior that
28
[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 anticompetitive 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 ‘superdominance’, 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
enables the setting of a price in excess of that which would prevail in the absence of that anti
competitive structure and conduct, then, in the first instance at least, this is what should be addressed
by the competition authority. Of course if a competition authority is not able to carry out its excessive
pricing mandate in this manner then it may have to resort to the fixing of a price but, we stress, in our
view this should only be done as a final resort.
29
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 supracompetitive 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
species of abuse of dominance, this approach has, in certain critical aspects, not
68 As will be elaborated at length, in this case Mittal SA does rely on its superdominant structural
position as well as on ancillary conduct in setting the price that it charges.
69 Competition Act Section 1(1)(ix).
70 See United Brands Company and United Brands Continentaal BV v Commission of the European
Communities [1978] 1 CMLR 429, at paragraph 250 where the Court held that “…charging a price
which is excessive because it has no reasonable relation to the economic value of the product would be
such an abuse” .
71 Ibid para 249
30
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 intraEuropean 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
factbased than the approach of those competition authorities willing, if not
72 By this we do not, of course, mean that Mittal SA has actually asked for its prices to be regulated.
However, the approach that it advocates we that we adopt in deciding whether or not its prices are
excessive is effectively a methodology adopted by price regulators.
31
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 –
a) it has at least 45% of that market;
b) it has at least 35% but less than 45%, of that market, unless it can show
that it does not have market power; or
c) it has less than 35% of that market but has market power
[92] The section 7 enquiry requires a definition of the relevant market and then the
computation of market shares. If the market share of the respondent is found to be
less than 45% the level at which dominance is presumed – we must ask whether
the respondent is nevertheless dominant by virtue of its possession of market power
73 Not least of the difficulties of assuming a price regulator’s role, is that if the price is determined
without intervening in either the underlying structural conditions and the ancillary conduct which
cumulatively gives rise to the excessive price, the competition authority will have to maintain its
regulatory role because the administratively determined price cannot be ‘right’ for all time. This, of
course, precisely describes the modus operandi of an ex ante price regulator but is antithetical to that
of an ex post regulator that responds to conduct that is allegedly in breach of a statutory obligation.
32
which is, in turn, defined by Section 1(1)(xiv) of the Act as the
‘the power of a firm to control prices, or to exclude competition or to behave
to an appreciable extent independently of its competitors, customers or
suppliers’.
[93] The identification of the relevant market and the determination of market
shares and the presence or absence of market power, though often complex and
controversial, is standard fare in competition analysis and is aided by a wealth of
international and domestic jurisprudence and scholarship. However the importance
of these enquiries should not be underestimated. In particular, they are critical in
determining the extent of dominance, in our view a critical factor in the assessment of
the complaint presently before us. As we shall elaborate below, while a firm that is
presumed dominant by virtue of a market share that exceeds 45% presumptively also
possesses market power and hence the ability to control prices, a dominant firm’s
ability to unilaterally fix a price, its market power, is rarely devoid of all constraint.
Market power, in other words, is seldom absolute. However, these limitations on
market power do not prevent a dominant firm from enjoying and exercising a degree
of pricing power, power, that is, that enables it to price at a level above that which
would prevail in a perfectly competitive equilibrium.
[94] The Act clearly contemplates the continued existence of dominant firms, of
firms possessed of market power. And thus, by extension, it contemplates a measure
of private pricing power in those markets in which there is a dominant firm. Indeed,
the ability of a dominant firm to exercise pricing power is the critical incentive to
compete robustly for market share. Hence interference with that ability, with that
power, runs the considerable risk of restraining competition. This consideration then
power, runs the considerable risk of restraining competition. This consideration then
accounts for antitrust’s preoccupation with ‘exclusionary conduct’, conduct that is
designed to preserve dominance by securing the exclusion of competitors through
mechanisms other than ‘competition on the merits’. Hence we must, at the outset,
agree with Mittal SA that, because the Act clearly contemplates the continued
existence of dominant firms, it also contemplates the existence of the pricing power
that accompanies dominance. There is, in other words, statutory recognition of the
existence and legitimacy of prices that exceed marginal cost, that point that would
33
manifest the complete absence of pricing power. 74
[95] However while the Act clearly contemplates the existence of pricing power, it
effectively proscribes the exercise of ‘excessive’ pricing power as manifest in the
clear prohibition of the charging of ‘excessive prices’. But while Section 7 and the
relevant statutory definitions specify the conditions under which a firm is (permissibly)
dominant and thus possessed of a degree of pricing power, it is silent on the
standard that would permit us to identify ‘excessive’ dominance which, following the
Act’s schema for dealing with exclusionary conduct, would produce ‘excessive’
pricing power and the possibility of an ‘excessive price’. This requires a close
examination of the structure of the market and an examination of the scholarly
literature that has grappled with the question of excessive pricing.
[96] In summary then our approach is to follow the schema of the Act and the
standard approach to allegations of abuse of dominance which, as we have seen,
derives dominance from specified market shares and the possession of market
power. Following this approach, it reasonably holds that the power to price
‘excessively’ is the preserve of firms of overwhelming size relative to the market in
which they are located and which are, in addition, markets characterised by
unusually high entry barriers. That is, the market share enjoyed by the firm in
question should approximate 100% and there should be no realistic prospect of entry
– in other words the market should be both uncontested and incontestable . The
concept of ‘super dominance’ and the special responsibilities that attach to this
privileged status is well recognised in scholarly work 75 and in the decisions of
competition adjudicators. In Napp Pharmaceuticals the UK Competitions Tribunal
held:
‘We for our part accept and follow the opinion of Mr. Advocate General
George Fennelly in Compagnie Maritime Belge , cited above, that the special
responsibility of a dominant undertaking is particularly onerous where it is a
case of a quasimonopolist enjoying ‘dominance approaching monopoly’,
74 We cite again the well known statements of the United Brands court and the Napp Pharmaceutical
tribunal where equally the phrases ‘ normal and sufficiently effective competition’ (United Brands) and
‘prices higher than would be expected in a competitive market’ (Napp) similarly do not in any way
appear to connote perfect competition as the appropriate norm or comparator.
75 See Richard Whish Competition Law 5 th Edition (LexisNexis, London 2003), pages 189190.
34
‘superdominance’ or ‘overwhelming dominance verging on monopoly’ [2000]
ECR 11356 at paragraphs 132 and 137. In our view Napp’s high and
persistent market shares put Napp into the category of ‘dominance
approaching monopoly’ – i.e. superdominance – and the issue of abuse in
this case has to be addressed in that specific context’ 76
[97] Our approach is also consistent with that taken by a number of scholars who
have examined the question of excessive pricing. Although different standards are
proposed by the various writers, it is generally accepted that mere dominance is an
insufficient structural basis for the charging of excessive prices. Hence Evans and
Padilla in their article ‘ Excessive Prices: Using Economics to Define Administrable
Legal Rules’ suggest that firms should, as a general rule, be free to charge prices
above cost and the only exception to this rule should be
‘…situations where the dominant firm enjoys a legal monopoly and the
excessive prices charged by the goods and services offered by the legal
monopolist are likely to prevent the launching of new products or the
emergence of adjacent markets’ 77
[98] Motto and de Streel write
With regard to exploitative excessive prices, we suggest that the Commission
intervenes in cases of very strong dominance (confined to a monopoly or
near monopoly) that are caused by past or current legal entry barriers,
whenever market forces alone are unlikely to lead to competitive results. 78
[99] Motto and de Streel continue
Competition rules cannot be applied in newly liberalised markets in exactly
the same way as they have been applied in ‘normal’ sectors because the
76 Napp Pharmaceuticals at para 219.
77David S. Evans and A. Jorge Padilla, “Excessive Prices: Using Economics to Define Administrative
Legal Rules” , CEMFI Working Paper No. 0416 (September 2004), page 5.
78 M Motta and A de Streel, “Exploitative and Exclusionary Prices in EU Law” , Paper presented in
the 8 th annual European Union Competition Workshop, Florence (June 2003), page 27.
35
market structures and the risks for competition are substantially different’ 79
[100] Evans and Padilla are, understandably, particularly wary of excessive pricing
rules that rely on the establishment of competitive benchmarks
‘…in dynamic industries where investment and innovation play a paramount
role’80
[101] Mittal SA has taken up this latter theme by its reference to the right of a
patent holder to extract a monopoly price:
‘...the patented price is always higher than the economic value of the product
for good reason. Nevertheless, a patent holder has a legal right to the
exclusive economic exploitation of an innovation (and the market power
which that brings), for a limited period. Accordingly, it is not unreasonable for
a patent holder to charge a price which bears no relation to the economic
value of the product for the economic duration of the patent.’ 81
[102] How does our test stack up against those proposed here? We agree with
Evans and Padilla that excessive pricing allegations should be particularly carefully
scrutinised in dynamic industries characterised by investment and innovation. 82
However this dynamism, as Mittal SA’s expert, Dr. Walker, conceded, does not
characterise the production of flat steel products. Nor is Mittal SA’s invocation of the
rents earned on patents of assistance in the matter before us. Again there is no
claim that Mittal SA’s pricing is rooted in the extraction of any innovation rents or
patent rights. 83
79 Ibid, page 28.
80 See Evans and Padilla, page 7.
81 See Mittal SA Heads of Argument, para 9.3. We deal with the question of innovation and the extent
to which it is reflected in ‘excessive prices’ below. Suffice for the moment to note that where a
monopoly is temporarily granted by patent in to promote the innovative process, a critical element of
the competitive process itself, this may provide the necessary ‘reasonableness’ in the relationship
between a monopoly price and the goods economic value, although, as effectively suggested in Napp,
‘patent abuse’, rather than the patent itself may, in certain circumstances, be found.
82 Although note that the Tribunal in Napp Pharmaceuticals , a case which did concern a dynamic
‘innovation market’ and patent issues, was able to take account of these issues and apply an excessive
pricing rule with coherence and relative ease.
83 Transcript, at page 2321.
36
[103] While the Mittal SA monopoly is not a legal monopoly and has, to our
knowledge, never operated under exclusive license, it was capitalised by the state
and between its establishment in 1928 and its privatisation in 1989, it was owned and
controlled by the state. It must also be borne in mind that until as recently as 1984
the state saw fit to regulate the price of steel. Moreover its privileges did not
terminate with its privatisation. It is worth reciting at some length the following
exchange between Harmony’s counsel and Dr. Zavareh Rustomjee, a previous
director general of the Department of Trade and Industry and industry expert:
“ADV UNTERHALTER : Yes. Now if I could refer you to paragraph 12 of your
witness statement, you refer to a range of Government incentives and
support measures, which were offered to industry over the decade. I wonder
if you could just briefly indicate what they were and what the point of these
benefits was.
DR RUSTOMJEE : Yes, some of these schemes were in place from 1994, at
the start of my tenure as DirectorGeneral and some of them were instituted
later and some were adapted over the period. These schemes that I’ve
highlighted here were mainly relating to support for investment. So they were
investment promotion schemes.
The philosophy behind all of them did underpin that cleavage between
upstream and downstream. So wherever incentives were given on the
upstream, and I will elaborate in a minute on some of these, the intention was
and it was sometimes translated into commitments by the parties who
received these benefits, that they link the upstream to the downstream.
So, if we take the General Export Incentive Scheme, this was an
inherited scheme that was started in 1992. It was extremely wasteful in my
inherited scheme that was started in 1992. It was extremely wasteful in my
view. We terminated it prematurely. I have no doubt if the current Auditor
General were around at the time he would have indicted us for wasteful
expenditure for continuing this scheme for as long as we did, but that’s not
be. R21 billion were absorbed over a period of 5 years. That was essentially
a scheme, which gave a cash payout to anybody who exported anything,
whether it be upstream steel or finished complex manufacture on a sliding
37
scale. So you got more if it was a complex manufacture.
Then there was the accelerated depreciation allowance under Section
37E of the Income Tax Act. Now this scheme essentially allowed for a capital
intensive product and it’s very useful for capital intensive product. It allowed a
writeoff of capital expenditure earlier. So effectively it’s the time value of
money that you save here, but during the difficult period of a startup of a
project it’s quite important. That was offered between 1991 and 1993. I
believe only 13 firms received that benefit, including Iscor. I can’t remember
exactly on which projects, but I know Saldanha was one of the major
recipients of this.
Now in all of those 13 recipients, all of them committed to in terms of
the agreements that were struck at the time to making available the products
of those investments to downstream users who would use that to export at a
price, if I remember the wording, at a price that did not give the supplier of
that product a greater benefit, a greater profit than they would have obtained
on their exports. So that applied … I stand to be corrected, but I’m almost
certain it applied to all 13 of the recipients of that one.
Then we had the regional industrial development program, which was
inherited and effectively ends at the downstream side of the industry, smaller
investments, more labour intensive investments. In some cases there were
certain additional benefits to be gained, if the project was more labour
intensive. And that was modified over the years. It became the small and
medium manufacturing development program. That was then extended to
nonmanufacturing enterprises through the small medium enterprise
development program and I think that still is in existence today.
Then more recently, between 2000 and 2004, there was a strategic
Then more recently, between 2000 and 2004, there was a strategic
investment program scheme that was offered, which, as I understand it, it
was different from 37E in that it was almost a tax writeoff. It allowed you a
tax writeoff. It was kept at 3 billion and it was absorbed by projects, which
mainly confine themselves to the metal and chemicals sectors.
ADV UNTERHALTER : Yes.
DR RUSTOMJEE : The same for 37E incidentally. Most of those projects
38
were in the metals and chemical sectors.” 84
[104] Mittal SA has sought to question the relevance of this evidence. While it
certainly does not dispose of the complex question that we are here required to deal
with, it is enlightening from two points of view. First, while this firm may not have
been a legal, licensed monopoly, it enjoyed, even after it was privatised, a degree of
public largesse that would, in the assessment of the scholars cited above, qualify it
for membership of that small universe of companies in whose pricing practices the
state is entitled to take an active interest. And again we stress that until 1984 the
state’s interest in Iscor extended to actual price regulation. Certainly Motta and de
Streel should have little difficulty – particularly given the extent of postprivatisation
subsidy testified to, without challenge, by Rustomjee characterising this as a ‘ newly
liberalised market’ in which ‘competition rules’ could not be easily applied and in
which ‘the risks for competition are substantially different’. Secondly, it is also
instructive that, as testified by Dr. Rustomjee, public policy was clearly concerned
that the considerable subsidies it provided translated, not into the improved bottom
lines of the direct recipients, but were rather used to support consumers of the vital
intermediate products, the producers of which received public support.
[105] While a licensed or legal monopoly is undoubtedly sheltered behind very high
entry barriers indeed, there are clearly circumstances where the entry barriers
established by historical circumstance and technological and commercial
considerations are, in effect, at least as insurmountable as those that are constituted
by law or license. Just as legal monopolies are established by statute or by
administrative fiat, so too can their monopoly status be undermined by the same
process. Hence while an exclusive license to collect garbage in Johannesburg may
conclusively prevent the entry of others into the protected market, were a second
84 See the transcript dated 24 March 2006, pages 773775 (our emphasis). Note that of course one of
Mittal SA’s most significant advantages is the price at which it receives a large proportion of its iron
ore, a price that, it appears, was agreed in the process of restructuring the erstwhile Iscor into a separate
steel company and an iron ore company. While this may not necessarily be a subsidy conferred by the
state it certainly, as we note below, sets up a considerable barrier in the way of a new company that
may wish to enter the South African market and that will have to pay the prevailing international price
for iron ore rather than the low price at which Mittal SA receives this vital input. This too is outlined
in Dr. Rustomjee’s witness statement. Harmony also points to the low price – relative, that is, to
international prices – of Mittal SA’s electricity and natural gas costs. (See Harmony Heads of
Argument, para 62). This does not appear to have been challenged by Mittal SA. Again it is not clear
whether this arises from relatively low electricity and natural gas prices in South Africa or whether
Mittal SA has, for some or other reason, managed to extract a particularly low price for these inputs.
39
license to be issued the erstwhile monopolist may have little left by way of entry
barriers in order to sustain its monopoly. On the other hand, a long established,
licensed fixed line telephone monopoly may find itself as effectively protected by
commercial and technological barriers as by its license – a telecommunications
regulator may issue a new operator’s licence at the stroke of a pen, but the newly
licensed operator may nevertheless experience considerable difficulties in
overcoming the advantages that the incumbent derives from its established network.
[106] We should of course add that the question of excessive pricing – or, at least,
the possibility of challenging pricing conduct – is unlikely to arise in the case of a
legal monopoly precisely because, in the current economic policy environment, such
an institution will, invariably, be subject to regulation. As already noted, it is our
view that Section 8(a) is precisely intended to apply to those rare markets that
are uncontested (monopolised or ‘superdominated’), incontestable (subject to
insurmountable entry barriers) and unregulated (not subject to price
regulation). The South African market for flat steel products is, the evidence shows,
just such a market, and this is why the proposal of Evans and Padilla and other
writers that the powers of competition authorities to intervene in pricing conduct be
reserved for the most exceptional circumstances is, in our view, strictly adhered to in
this decision even though we do not require it to be restricted to a case of a legal
monopoly.
[107] In the present case, dominance of the relevant market is indeed absolute, that
is, there are, within the boundaries of the relevant market, no meaningful constraints
on the first respondent’s ability to unilaterally determine price – its market share is
on the first respondent’s ability to unilaterally determine price – its market share is
persistently vast and there is no prospect of new entry at all, and certainly not within
any timeframe that antitrust jurisprudence and enforcement practice would regard
as constituting an effective competitive constraint. Moreover, the firm in question
was owned by the state, for much of its life its prices were regulated by the state, and
certain of its current advantages derive from advantages accrued from the period of
state ownership as well as subsequent subsidisation.
[108] In short, the first respondent, Mittal SA, is no mere ‘dominant firm’ – it is
‘super dominant’, a ‘monopoly’ in the parlance of US antitrust law. It is, to all
40
intents and purposes, an uncontested firm in an incontestable market . This is a
market structure that is rarely encountered in competition analysis, possibly as rare
as its opposite number, a market that meets the conditions of perfect competition. As
already noted, while even a superdominant firm, a monopolist pure and simple,
remains constrained by the existence of a ceiling in the price that it may charge, this
limitation is not imposed by, indeed is in no way influenced by, the pricing practices
of competitors, actual or potential, in the relevant market, or, even as a last resort, by
the ability of the customers, to forego use of the product in question.
[109] Mittal SA’s overall share of sales of flat steel products in the South African
market clearly establishes its overwhelming dominance. Below are the target market
shares of total flat steel products, which are computed by Mittal SA. We have also
extracted from the table provided by Mittal SA the actual market share that they
managed to sustain. These resemble market share figures of Mittal SA from the
second quarter of 2002 to the second quarter of 2005.
Source: Exhibit 2: The market share figures computed by Mittal SA on a productbyproduct,
categorybycategory basis .
[110] Mittal SA’s market share clearly establishes its dominant position and, hence,
the jurisdictional basis for a Section 8 complaint. Indeed, the overwhelming market
share and its striking stability over time establish that this is effectively an
uncontested market. This was confirmed by the candid reflections of Mr. Dednam, a
leading Mittal SA witness, on the negligible extent of competition offered by Highveld
Steel, the second largest participant in the South African market for flat steel
41
Quart
er
2Q
20
02
3Q
20
02
4Q
20
02
1Q
20
03
2Q
20
03
3Q
20
03
4Q
20
03
1Q
20
04
2Q
20
04
3Q
20
04
4Q
20
04
1Q
4Q
20
02
1Q
20
03
2Q
20
03
3Q
20
03
4Q
20
03
1Q
20
04
2Q
20
04
3Q
20
04
4Q
20
04
1Q
20
05
2Q
20
05
Flat
Produ
cts
Marke
t
Share
%
84.
1
85.
9
85.
1
83.
1
81.
8
80.
1
77.
9
79.
9
81.
8
79.
5
82.
7
82.
6
79.
0
Targe
t
Marke
t
Share
%
81.
0
81.
0
81.
0
81.
0
81.
0
81.
0
81.
0
81.
0
81.
0
81.
0
81.
0
81.
0
81.
0
products:
“ADV UNTERHALTER : Yes. Just one other issue on that Mr Dednam, you
are exporting considerable amounts of product at prices that are considerably
less than what you are obtaining in the domestic market.
MR DEDNAM : We do.
ADV UNTERHALTER : Yes, and so to an extent the market share that
Highveld sustains at present pricing levels, should be an opportunity for you,
because if you were trying to grab market share from them, then you would
be offering prices, which may be better than Highveld’s, but are certainly a lot
better that your export prices.
MR DEDNAM : Mr Unterhalter that particular proposition we think about every
time in all the marketing discussions that I have with the team. We talk about
it.
ADV UNTERHALTER : Yes and why don’t you…
MR DEDNAM : And I think that Mittal Steel South Africa, being the dominant
player in the market, has the muscle and the power to take out those guys
[Highveld Steel] in the market place. ”85
[111] Dednam’s remarks clearly suggest not merely that Highveld offers negligible
competition to Mittal SA, but that it only participates in the market at all at the
pleasure of Mittal SA. 86 Mittal SA has, for whatever reason, been prepared to allow
Highveld to retain a certain small market share. 87 The evidence shows clearly that
Highveld’s pricing simply follows Mittal SA’s lead. Indeed the evidence is strongly
suggestive of active collaboration between the two producers, although clearly with
the terms of cooperation dictated by Mittal SA. 88
85 See transcript dated 6 April 2006, page 1816 (Our emphasis).
86 Indeed Mittal SA’s own counsel describes Highveld as ‘hapless’. See Mittal SA Heads of
Argument, para 11.5.
87 Mr. Dednam for Mittal SA explains the stability of the respective market shares of Mittal SA and
Highveld in the following terms: Mittal ‘feel(s) comfortable at a certain level of market share and we
will not aggressively attack the market to take market share out of the market, because we are the
dominant player in the market. And that will provoke all kinds of other complaints I assume’.
88 This is borne out by the following statement of Mr. Dednam: ‘ I also hold the opinion that in any
price war, I don’t think that any producer is winning. I think everybody is losing in a price was
situation, except for the end user. The end user will definitely win in a price war situation. And I
assume that is basically the reason and if Highveld is thinking the same it holds the same type of
opinion about it.’ See also the testimony of Mr. Bernard Swanepoel at transcript pp. 18891 where
Swanepoel testifies as to how closely Highveld prices track those of Mittal SA and concludes at p191
42
[112] We repeat then, that the size and persistence of Mittal SA’s share of the
South African market for flat steel products and the extreme weakness of its token
opposition qualify it for designation as a ‘superdominant’ firm or monopoly.
[113] We have already noted the existence of some effective competition from
alternative products – for example, from plastic in the production of cans used to hold
liquid – and from alternative geographies. The auto industry, where the potential
allegedly exists for the importation of body panels from other parts of the
multinational auto assemblers’ supply chains, exemplifies the latter. These are the
customers who enjoy varying level of rebate off the Mittal SA list price. We note
however, that the extent of the rebates varies greatly. Certain of the rebates offered
are, by any measure, insignificant, and so result in an ultimate price for the rebated
product that differs only slightly from the list price at which the vast bulk of Mittal SA’s
output of flat steel products is sold.
[114] Mittal SA argues that its rebate programmes represent its responsiveness to
those of its customers who receive them and therefore an absence of market power
on its part. As an absolutely clear matter of law the existence of these discounted
segments has no impact whatsoever on the assessment of market power. That is to
say, Mittal SA’s share of the South African flat steel market clearly establishes its
presumptive dominance in terms of Section 7 of the Act.
[115] In any event, the complainants, for their part, have much the better of an
argument with their adversaries in which they aver that the manner in which Mittal SA
grants its rebates is, if anything, further confirmation of its market power. There is,
insists Harmony, and the testimony of customers supports this, little evidence of a
insists Harmony, and the testimony of customers supports this, little evidence of a
genuine negotiating process – rebates are granted, are bestowed, rather than
agreed. They are subject to capricious and sudden unilaterally determined
amendment which, several customers testified, made pricing of his product, the
as follows: ‘ Mr. Unterhalter: Yes. Now can I ask you in general terms in your experience as a
purchaser of steel, have you any experience as to whether Highveld is a competitive discipline upon
Iscor’s pricing? Mr. Swanepoel: I think certainly everybody in my organization believes that whatever
Mittal does gets followed by Highveld within a few days. I don’t think that there is any competition
evident or visible from where we sit in the chain’.
43
downstream product, a complex task. 89
[116] This is true even of the rebates granted to the auto original equipment
manufacturers (OEMs), those of Mittal SA’s customers who may reasonably be
thought to possess the greatest countervailing power vis a vis Mittal SA. Mittal SA
explained that the auto rebates are driven by the prospect that, should domestic flat
steel prices diverge too greatly from those available in other parts of the world, the
domestic auto OEMs may move the production of significant steel components
offshore by utilising their well established international supply chains, with the South
African plant then used only for purposes of assembling the components produced
offshore. This, insisted Mittal SA, is evidence of its responsiveness to its customers.
However, we have noted elsewhere in this decision that the ease with which even the
auto OEMs are actually able to rely on imported steel components has been strongly
questioned in another Tribunal decision which concluded that, precisely because of
the difficulties in the path of relying on imported steel for the auto industry, the
89 See testimony of Mr. Stephen Leatherbarrow at transcript pages 3589: ’Mr. Leatherbarrow: Okay.
During 2002 we approached Mittal to look at reviewing the way we could go forward with secondary
exports for tube and pipe. We made a strategic decision to try and grow that business and we needed
to obviously base the future on a firm foundation and we weren’t comfortable with the existing rebate
arrangement. Mr. Unterhalter: Why not? Mr. Leatherbarrow: At that time the rebate arrangement was
more retrospective than forward looking. It was on a quarterly basis. So it didn’t take into account
changes in the steel cycle monthonmonth. It didn’t take into account monthly exchange rate
fluctuations. We wanted to be more in control of our destiny to be able to build on and grow an
export business. So we needed something that was more transparent where it also put a certain amount
that we were prepared to take on our side, rather than leave Mittal to work out a rebate’. And then
further Leatherbarrow emphasises: ‘We felt that it (the computation of the rebate)was left very much to
a few people in the organisation with a view. We weren’t privy to the details of the calculation and
how it was worked out and that it wasn’t taking a forward view and the steel cycle and the exchange
rates adequately enough’. The lack of transparency in the computation of the rebate and the
capriciousness of changes in the rebate also comes through clearly in the lengthy examination of Mr.
Cohen, the conveyor belt manufacturer and exporter. See particularly transcript pages 4045. Cohen
also bemoans at page 409 of the transcript the impact that this has on the ability of a Mittal customer to
price in its own, downstream market: Mr. Cohen: When we submit a price to an end user, if we are
fortunate enough to be granted an escalation, it will be based upon our increase in costs and the
increase in costs will be…we have to pay a higher price for steel. We have to pay a higher price for
labour. We have to pay higher prices for nylon to produce the seals or for rubber to produce the belt,
etc. This system has no relationship to the costs, and that’s what’s making this thing complicated.
This system is based upon the price that Mittal can get in the marketplace based upon a base price,
which they are telling the market is going to prevail in 3 months time and a rate of exchange. But the
rate of exchange hasn’t actually affected Mittal. It hasn’t changed t heir costs. It only changed their
potential to earn money if the exchange rate has weakened. And that’s why it’s become so difficult for
an exporter, because an exporter can’t say here’s the price that I’m going to pay, it’s based on the cost
of iron ore or it’s based on the cost of steel. We’re saying here’s the price that you’re going to pay, but
we cant hold it firm for longer than 3 months, because if we export it in the 4 th month, there could be a
different price pertaining at that stage in time and that is based on the international prices and has
nothing to do with the costs that we’re faced with. That’s why this thing is so difficult to understand
and to implement and requires us to use consultants to monitor and administer it. (Our emphasis)
44
relevant geographic market for steel used in the South African auto industry was
national and not international. 90 Testimony from auto industry representatives at
these hearings vindicates that view. Certainly even the auto rebates are erratic in the
basis of their formulation and are, in their amounts, also subject to capricious and
significant and sudden change. An auto executive, Mr. Errol Classen, testifed that
the industry was recently simply advised by letter from Mittal SA of immediate
increases in the prices of steel of as much as 25%. 91
[117] At best for Mittal SA, what the evidence on the auto rebates suggests to us is
that at a certain point in the auto OEMs’ decision making process Mittal SA may be
somewhat vulnerable to the OEMs’ international supply chain but that once an OEM
has committed itself to the production of a particular model at a particular site and
has established its supply chains accordingly, the bargaining power then shifts right
back to the superdominant steel producer who, as the instance cited immediately
above indicates, does not hesitate to use it.
[118] Moreover, in our view, from the perspective of the decision that we are called
upon to make here, the most important learning to be derived from the Mittal SA
rebate system, is not its implications for the assessment of market power. We
emphasise that its massive market share is vastly in excess of the threshold of 45%
and this establishes that it is presumptively dominant and thus possessed of market
power. However, what the rebating system and the manner of its operation does
eloquently evidence are the lengths to which Mittal SA is prepared to go in order to
immunise the lion’s share of, on the one hand, its domestic market in which its
customers pay the full list price, from, on the other hand, those markets, be they
customers pay the full list price, from, on the other hand, those markets, be they
domestic or export, in which it discounts or rebates off the list price. We will return to
this critical aspect of our reasoning in relation to the rebates below.
[119] Note too that even were Mittal SA to refuse to discount to these select
customers this would not necessarily mean the importation of flat steel products into
90 See Trident Steel (Pty) Ltd and Dorbyl Limited, [20012002] CPLR 302 (CT).
91 Transcript, page 687. There is an allegation, denied by Mittal SA, that the increase in question was
in violation of a contractual commitment by Mittal SA to maintain particular pricing levels. This is not
for us to decide and is, for our purposes, not relevant. However what appears undeniable is the
vulnerability of even the auto industry to large and sudden – and largely unexplained – adjustments in
the price of their vital steel input.
45
South Africa. A refusal to discount may curtail the production of metal cans in South
Africa or it may result in the importation of steel auto panels from beyond South
Africa’s borders. It may, in other words, result in a shrinking of the South African
market for flat steel products, but it would not reduce Mittal SA’s share of that market.
[120] Nor does it appear that there is any realistic prospect of new entry. Certainly
it has never been suggested by any witness that this is a feasible prospect. 92 When
the giant LNM – now the Arcelor Mittal multinational – chose to enter South Africa it
did so by way of acquisition of ISCOR rather than by way of greenfields investment
in steel producing plant. Arcelor had, prior to its merger with Mittal, been a de
minimis participant in the South African market supplying, as far as we can ascertain,
only grades of steel not produced in the Mittal SA plants. There was some indication
that it, Arcelor, had intended setting up steel service plants in South Africa in order to
better serve, by way of imports, the steel requirements of South African auto
manufacturers. However these remained at the level of intention only and, with the
merger of Mittal and Arcelor, an intention that will now certainly not be realised. 93 We
note too that any new entrant would want to serve the domestic market and it would
have to confront the massive advantage bestowed on Mittal SA by its extraordinarily
favourable arrangements with respect to iron ore pricing.
[121] In summary then, Mittal SA is, for the purposes of the Act, clearly
dominant in the relevant market, the South African market for flat steel
products. However, as already elaborated, in order to establish the structural
basis for charging excess prices, something more than mere dominance is
basis for charging excess prices, something more than mere dominance is
required. In our view Section 8(a) demands a showing of extraordinary or
‘excessive’ market power, the power to price at a level beyond that available to
a mere dominant firm. The extent of Mittal SA’s market share taken together
with the height of entry barriers and its recent history of state support easily
92 Note that Mittal SA characterises the view of the UK Competition Appeal Tribunal (“CAT”) in
terms that would certainly suggest that the CAT would find that the underlying conditions in the South
African market for flat steel products would render Mittal SA a strong candidate for pricing
excessively: ‘ The CAT thus appeared to suggest that what distinguishes excessive pricing from
reasonable monopoly pricing is that the former takes place in circumstances where there is no threat
of competitive entry to restore prices to competitive levels, with the result that the monopolist can earn
supracompetitive profits in a completely uninhibited manner’. Mittal SA Heads of Argument, para
7.22.
93 See Mittal Steel Company N.V. and Arcelor SA , Tribunal Case No.: 53/LM/Jun06 .
46
establishes its status as a superdominant firm within the relevant market. It
has been proved that it is indeed an uncontested firm within an incontestable
market.
Excessive prices in the South African market for flat steel products
[122] There may well be a credible argument for ending our enquiry here. The
regulation of competition is underpinned by the observation – supported by an
elaborate theoretical framework and a wealth of empirical evidence that different
market structures produce distinctive outcomes as measured by output prices and
production costs or efficiency, including, in a dynamic product market, levels of
innovation. Along a spectrum that begins with the perfectly competitive paradigm of
pricetaking, fragmented, small producers and ends with a single, price fixing
monopolist, the structures with which competition enforcers engage most regularly,
and for which much of competition law is designed, are characterised in the literature
as ‘imperfectly competitive’ and ‘oligopolistic’. These markets are characterised by a
relatively small number of producers whose engagement may be underpinned by a
rivalry aimed at acquiring market share through producing the best quality goods and
services at the lowest possible price, or, in dynamic markets, at producing a product
sufficiently differentiated from those of its rivals to accord it a degree of pricing power.
[123] However, at the risk of repetition, this imperfectly competitive structure is
threatened by the prospect of profit maximising strategies other than ‘competition on
the merits’, the term commonly used to describe the procompetitive process
elaborated in the previous paragraph. One possible strategy is through the merging
of rival producers, hence the merger review powers characteristically extended to
of rival producers, hence the merger review powers characteristically extended to
competition authorities; a second is through the development of cooperative
mechanisms between nominally competitive firms, hence competition law’s particular
concern with horizontal agreements. A third possibility is that, through legitimate pro
competitive conduct, or, alternatively, through a history of government subsidy and
support, a single firm may come to dominate a market and may then choose to focus
its profit maximising strategy on devising mechanisms to exclude rivals from the
dominated market, hence the preoccupation with exclusionary conduct in abuse of
dominance provisions.
47
[124] Abuse of dominance is preoccupied with exclusionary conduct because of the
wellfounded view that holds that most markets are, to a greater or lesser degree,
contestable, that is, that potential entrants will respond to anticompetitive conduct on
the part of a dominant firm and the privileged margins that it enables by entering the
dominated market thus making substitute products available to the dominant firm’s
customers. In much the same way then that antitrust law is not directed at producing
perfectly competitive market structures, it is, conversely, not generally directed at
eliminating dominant firms. Its reluctance to disallow dominant firms is predicated on
a fear that it may, by so doing, inadvertently chill competition on the merits which is
legitimately directed at the attainment and maintenance of a dominant position vis a
vis competing producers. Dominant firms are thus viewed as beasts best dealt with
by entry, or even just the prospect of entry, into the dominated market, and this can
be ensured by a vigilant competition regulator enforcing rules designed to prevent
conduct directed purely at excluding actual or potential rival producers.
[125] However, the existence of incontestable markets – and hence of monopolies
capable of being sustained without resort to impeachable exclusionary conduct – is
recognised. In particular it is recognised that the public authority may choose or may
be compelled to govern entry through the assumption of licensing powers. In these –
and other circumstances in which markets are, for one or other reason,
incontestable, at least by the unilateral decision of a potential new entrant – the state
usually establishes a regulatory authority mandated to simulate competitive
outcomes tempered by whatever ‘public interest’ or noncompetition objectives are
deemed appropriate. In summary then, the cases of incontestable markets – and
deemed appropriate. In summary then, the cases of incontestable markets – and
hence sustainable monopoly – are rare and where they occur they are generally
dealt with by regulation. The case of a sustainable monopoly in an unregulated
market is a particularly rare phenomenon the more so in a large economy, the
context for which much competition law is written and in which most jurisprudence
has been developed. Hence the relative lack of attention paid by contemporary
competition law to what are termed ‘exploitative’ abuses – it is, we repeat, generally
assumed that exploitation of a dominant position will either be dealt with by new entry
or, where that is not possible, it will be dealt with by regulation.
48
[126] Clearly though the corollary of the recognition that the potential for
exploitation is limited by potential entry (or, conversely, by an absence of
exclusionary conduct) or, where necessary, regulation, is that, absent contestability
or regulation, exploitation – expressed either as excessive prices or gross inefficiency
– is a rational profit maximising strategy. There is, in these rare circumstances, no
incentive to behave otherwise. It is indeed this insight that prompted a wide array of
states to withdraw from direct involvement in the economy in the last quarter of the
20th century. Incontestable markets monopolised by state owned enterprises
engaged in ‘profit maximisation’ strategies that were most often characterised by
chronic inefficiency, by optimising the ‘quiet life’, rather than by excessive pricing.
However where these inefficient enterprises were privatised or partprivatised into
incontestable and unregulated markets, shareholder pressure ensured that the likely
profit maximisation strategy was the charging of ‘excessive prices’, prices, that is,
that accord with the extraordinary degree of market power, the superdominance,
enjoyed by the firm in question . This precisely describes the conditions of Iscor’s
privatisation and its continuing passage from inefficient state owned enterprise to
profit maximising monopolist. We note again, that for several years after its
privatisation, it appears that the state saw fit to regulate the price of Iscor’s product.
However, it was then left to its own devices and so, shortly after its privatisation, a
state owned monopoly had effectively been transformed into a privately owned and
unregulated monopoly.
[127] The insertion into the Act of an ‘exploitative abuse’ in the form only of
[127] The insertion into the Act of an ‘exploitative abuse’ in the form only of
Section 8(a)’s proscription of excessive pricing – all the other Section 8
abuses refer to exclusionary abuses – is then to cater for those rare beasts
who are subject neither to the constraining presence of a regulator or of a
potential entrant. A firm in a market that is both uncontested and incontestable and
unregulated is unconstrained by law or competition – it can exploit its structural
advantage without fear of competition, actual or potential, and therefore without
necessary recourse to impeachable exclusionary conduct and it is unconstrained by
regulation. While Mittal SA’s counsel has referred us to the draconian efforts to curb
monopoly power made – in 301 A.D and 483 A.D. respectively by the emperors
Diocletian and Zeno, he may have been better advised to heed the words of William
Shakespeare who in Measure for Measure tells us
49
‘O, it is excellent to have a giant’s strength: but it is tyrannous to use it
as a giant’
[128] Section 8(a) is intended to constrain the conduct of these giants, to constrain
‘tyrannical’ conduct, conduct that is enabled by their ‘gigantic’ strength.
[129] However the complainants (and antitrust generally), have effectively taken
the view that, Shakespeare’s injunction notwithstanding, giants of commerce do not
voluntarily constrain the exercise of their ‘tyrannical’ powers. Harmony insists that it
would be irrational – an ‘obvious absurdity’ is the term used by its counsel for Mittal
SA to extract a price lower than that which its structural superdominance enables it
to charge. 94 It will, in other words, as a matter of profit maximising rationality, price to
the full limit of its market power, and because the extent of its market power is
unrestrained by any competitive consideration, the price that it charges will rationally
exceed those whose pricing power is constrained by the likely responses of their
actual or potential competitors or, if it were subject to regulation, by the pricesetting
powers of the regulator. Because, given the unusual character of its uncontested and
incontestable market, Mittal SA’s pricing power extends beyond that even enjoyed by
a mere dominant firm and because its price is not subject to regulation, we should be
able to conclude, without further, that the price in question may well, as a matter of
profit maximising rationality, be reasonably construed as excessive because, in the
oft quoted words of the United Brands judgement, it does not derive from structures
compatible with any notion of ‘ normal and effective competition’ .
[130] There is much about this argument that is compelling. At the very least, it
would suggest that given Mittal SA’s structural capacity to price without restraint, and
would suggest that given Mittal SA’s structural capacity to price without restraint, and
the ‘absurdity’, within a profit maximising framework, of voluntary restraint, it is for
Mittal SA to establish that it has foresworn profit maximisation in favour of pricing
behaviour that would effectively see it leaving money on the table every time it sold
any output in the domestic market.
[131] However, prudent adjudication suggests that proof of structural super
94 Harmony Heads of Argument, para 120.
50
dominance is necessary, but not sufficient, to find excessive pricing. It may, after all,
be argued that all abusive conduct, indeed all anticompetitive conduct, is rational,
albeit illegal, profit maximising conduct. Just as dominant firms bear, relative to non
dominant firms, particular responsibility to restrain their unilateral conduct to
‘competition on the merits’ or risk prosecution, so are ‘superdominant’ firms
effectively required by Section 8(a) to leave a certain amount of money on the table
by restraining their pricing below that which their respective markets may bear or
face prosecution for excessive pricing even though a rational approach to profit
maximisation may dictate that they price to the limit of their market power. 95 Of
course, the constraints operative in the case of ‘mere’ dominant firms may well derive
less from voluntary restraint and fear of prosecution than from the predicted response
of their competitors or potential competitors in contestable, albeit dominated markets,
while the privileges of superdominant firms are not, by virtue of their super
dominance, similarly constrained by considerations of competition, actual or
potential.
[132] But it is, on the other hand, conceivable that even a super dominant firm like
Mittal SA, given the degree of expressed public and governmental anxiety with
regard to its pricing practices, may well voluntarily recognise some sort of obligation
arising from its superdominant status and restrain its own pricing conduct, and so,
we cannot, simply by reference to the rational conduct of superdominant firms,
conclude that Mittal SA is indeed in contravention of the prohibition on excessive
pricing. Indeed, Mittal SA’s claim – which we have rejected – that it has moved from
pricing. Indeed, Mittal SA’s claim – which we have rejected – that it has moved from
an import parity basis for price determination to one based on a basket of domestic
prices in a number of comparator countries is precisely meant to suggest that it is
engaged in a degree of voluntary restraint. Periodic media reports that speculate on
the prospect for agreement between Mittal SA and government on a pricing policy for
steel may also be intended to portray a monopolist willing to engage in voluntary
restraint.96 In short, while our examination of the relevant market and market shares
and entry barriers is a sufficient basis for our conclusion that Mittal SA is one of those
rare firms endowed with sufficient market power to charge excessive prices, it may
95 Harmony argues that ‘ as a super dominant firm Mittal has a special and more onerous obligation
not to abuse its position’. Harmony Heads of Argument, para 245.
96 Indeed Mittal SA avers that ‘ we submit that the Department of Trade and Industry’s intervention
and persistence has also had a constraining effect on Mittal’s pricing’. Mittal SA Heads of Argument,
para 13.1.
51
be an insufficient basis for finding that it has actually deployed that power in
contravention of Section 8(a).
[133] Moreover, all of Section 8 is ultimately directed at conduct. And we must
reasonably conclude that this is no less true of Section 8(a) than of any of the other
abuses described in the other subclauses of Section 8. This is true even though
structural remedies are available in respect of a first Section 8(a) offence. However
were we to derive our conclusions regarding the alleged existence of excessive
pricing solely by reference to structure, we would effectively be concluding that
certain structures – uncontested firms in incontestable and unregulated markets –
were prohibited per se. We do not believe that this accords with the character of
Section 8. It is conduct that abuses a structural advantage – dominance or, in
Section 8(a)’s case, ‘superdominance’ – that is prohibited. It is not the underlying
structure that is prohibited. To paraphrase Shakespeare, while it is permissible (we
hesitate to use ‘excellent’) to be a giant, it is the ‘tyrannous’ conduct that is enabled
by this advantageous state that is prohibited.
[134] Hence, in addition to examining the structural features of the market in
question, we must examine evidence which suggests that Mittal SA has engaged in
conduct designed to abuse its ‘super dominant’ position by charging an excessive
price. This is an enquiry mandated by the principles and practice of competition law
and economics. We emphasise that we will not approach this enquiry by considering
that evidence relating to actual price levels which effectively requires us, first, to
identify a particular level as unlawful (‘excessive) and then to impose a level of price
identify a particular level as unlawful (‘excessive) and then to impose a level of price
that would be lawful (‘nonexcessive’). This, we stress, is an approach consistent
with the practice of price regulation – it is not commonly found in the principles and
practice of competition law and economics.
[135] We must underline that the approach outlined above conforms to the
somewhat opaque statutory definition of excessive pricing.
[136] Our Act defines an ‘excessive price’ as:
a price for a good or service which – (aa) bears no reasonable relation to the
52
economic value of that good or service; and (bb) is higher than the value
referred to in subparagraph (aa) .
[137] We have already noted that this definition appears to borrow from United
Brands, the leading European case on excessive pricing. We should reiterate at
once that the obvious borrowing from United Brands in no way requires us to adopt
uncritically all elements of a European approach to excessive pricing despite the
rather curious attempt by Mittal SA to insist that this is what is required of us. 97 The
Competition Appeal Court – and indeed the Supreme Court of Appeal – have
precisely cautioned us against this sort of slavish adoption of international
jurisprudence.98 We hasten to add that given, as shall be elaborated below, the high
degree of confusion surrounding the efforts of both the various European courts and
enforcement agencies to apply United Brands , the cautious approach to international
jurisprudence commended by our own superior courts is particularly apposite.
[138] Furthermore any attempt to uncritically apply United Brands should at once
recognise the striking differences between, on the one hand, the European treatment
of pricing offences as contained in Section 82(a) of the Treaty of Rome and, on the
other, the manner in which Section 8 of our Competition Act treats various pricing
offences. Section 82(a) proscribes a litany of ‘unfair pricing’ and other pricing
practices and has been used to tackle, under the rubric of unfair prices, pricing that is
too low as well as pricing that is considered too high or excessive. The term
“excessive pricing” is in fact not to be found in the Treaty of Rome at all, but is a
product of case law, which decided that a species of the ‘unfair’ pricing targeted by
Section 82(a) of the Treaty was to charge an excessive price and the test in United
Section 82(a) of the Treaty was to charge an excessive price and the test in United
Brands is an attempt by the court to define when a price is excessive. The same
section which prohibits unfair prices also condemns prices that are too low or
predatory. In contrast in our law we have a provision – Section 8(a) dedicated to the
practice of excessive pricing while predatory pricing is dealt with separately under
97 See Mittal SA Heads of Argument, paragraph 4.10.
98 See Mondi Ltd and Kohler Cores and Tubes (a division of Kohler Packaging Ltd) v Competition
Tribunal [2003] 1 CPLR 25 (CAC) at 35J36B; and FederalMogul Aftermarket Southern Africa (Pty)
Limited v The Competition Commission and another [2005] 1 CPLR 50 (CAC) at 53AE. See also,
Standard Bank Investment Corporation Ltd v Competition Commission and Others ; Liberty Life
Association of Africa Ltd v Competition Commission and Others 2000 (2) SA 797 (SCA) at
814F815A.
53
section8(c) and 8(d)(iv). Moreover, in contrast with the European treatment, our Act
explicitly defines an excessive price – it does not leave this up to case law, except to
the extent that case law reads meaning into the language provided in the statute.
[139] Because we have a statutory definition of what constitutes excessive pricing
as opposed to a term such as unfair which then relies on case law to give it meaning
from time to time, our interpretive efforts must surely initially focus on the language in
our definition section. What did the South African legislators mean by the definition of
excessive price that it inserted into the statute? This enquiry must surely take
precedence over an uncritical borrowing from the decisions of a foreign court. We
emphasise that this is the approach that our superior courts have commended to us.
[140] Turning then to the statutory definition of excessive pricing, the concepts that
give rise to interpretive difficulty are contained in the phrase ‘bears no reasonable
relation to the economic value’ .
[141] The choice of words in the definition, ‘ bears’, ‘ reasonable’ and ‘ relation’ all
words connoting imprecision rather than exactness – immediately suggests that the
legislature did not intend that the relationship between the alleged excessive price
and its economic value be capable of precise calculation, that is to say, it is not
intended that we should find that the price is 34,5% over the ‘economic value’ and
then find that, on some or other basis, that this differential is excessive. Rather the
choice of language directs us to have regard to the ‘relationship’ between, on the one
hand, pricing that is alleged excessive, and, on the other hand, a notion of the good
or service’s economic value and then to judge whether that relationship is
reasonable.
[142] As we have already outlined at length, since this is a competition statute one
[142] As we have already outlined at length, since this is a competition statute one
can safely assume that a price that is the subject of functioning market forces will not
be deemed excessive or unrelated to the economic value of the good in question .
After all the critical premise of competition law is that functioning markets determine
what prices are reasonable. In other words, the judgement then that we are required
to make is not of the price level itself but rather of the market conditions that
generated the price level. In other words, we must ask ourselves whether the
54
relevant market in question is capable of functioning in a manner that is likely to
produce a reasonable relationship of price to economic value, or, rather, whether the
structure of the market and, conceivably, ancillary conduct that depends on that anti
competitive structure, forestalls the effective functioning of the market – forestalls
‘normal and effective competition’ in the words of United Brands thus generating a
price, the level of which, is unrelated to, is not influenced by, any cognisable
competition considerations .
[143] Thus the use of the phrase ‘ reasonable relationship ’ requires us to examine
the origin and extent of the dominant firm’s pricing power and then to enquire
whether the price of the good or service in question derives purely from an anti
competitive market structure and, which is the case here, from ancillary conduct that
relies upon the existence of that anticompetitive structure which, for the purposes of
founding a claim of excessive pricing, we have termed ‘superdominance.
[144] We adopt the same approach when defining the vexed concept of ‘economic
value’. Just as the practice of law is comfortable with terms like ‘r easonable’, terms
which have no precise meaning and intrinsic content but are given meaning by their
context, so with the term ‘ economic value’ in the discipline of economics. It too has
no intrinsic, quantifiable meaning. It is not a fixed level capable of prior specification.
That is, there is no fixed point that reflects the intrinsic ‘economic value’ of a good or
service. ‘Economic value’ like ‘reasonableness’ is also a product of context, and that
context is competition.
[145] Evans and Padilla note:
There is no generally accepted definition of what an “unfair” price is. For
Marxist economists, the “fair” price of a product is equal to the value of labor
Marxist economists, the “fair” price of a product is equal to the value of labor
involved in its production. Classical economists like David Ricardo also held
a costbased theory of value. For neoclassical economists, the “fair” value of
a good or service is given by its “competitive’’ market price, which is the
equilibrium price that would result from the free interaction of demand and
supply in a competitive market. This was also the interpretation given to the
notion of “fair” prices by Scholastic economic thought, and is also the
55
interpretation used by the ordoliberal school of economic thought, which had
a major impact on the development of competition policy in Europe. 99
[146] We should at once dispel the notion that the term ‘economic value’ in our Act
is intended to impute a costbased theory of value, much less one that is rooted in
any particular version of cost because if the legislature intended economic value to
mean marginal cost or average variable cost it would have said so since it uses these
terms explicitly in 8d(iv). That is to say, in assessing predatory pricing the legislature
intends us to use a costbased test and so Section 8(d)(iv) explicitly guides us in the
cost measurement that is central to an evaluation of an allegation of price predation.
However Section 8(a) and its accompanying definition make no reference at all to the
relationship between an excessive price and cost. The reference is rather to the
relationship between price and economic value .
[147] The concept of economic value consistent with the principles and practice of
competition law and economics is, in the words of Evans and Padilla, ‘the equilibrium
price that would result from the free interaction of demand and supply in a
competitive market’ or the ‘ competitive market price’. As we have already suggested
then, our judgement of the relationship between price and economic value rests on
our evaluation of the market conditions that underpin the price. If the examination of
the structure of the market and any relevant ancillary conduct reveals that price is
indeed determined by, what we have termed above, cognisable competition
considerations, then that price will bear a reasonable relationship to the economic
value of the good in question. However, if the price is the product of a market
structure and of ancillary conduct that reflects precisely the absence of cognisable
competition considerations then that price will be excessive in relation to the
economic value because it will not have been determined by ‘ the free interaction of
demand and supply in a competitive market’. As we are careful to explicate below,
‘cognisable competition considerations’ or a ‘competitive market’ do not necessarily
equate to conditions of perfect competition.
[148] Having rejected the view that the concept of economic value suggested by the
Act is costbased, we note the obvious point that this does not mean that cost does
99 See Evans and Padilla supra, at page 5
56
not play a major role in determining the absolute level of the competitive price or,
what is the same thing, the economic value of a good or service. Even if the market
for high performance cars is vigorously competitive and that for bicycles is
monopolised, a high performance sports car will always have a higher price or
economic value than a bicycle, and this for the simple reason that the underlying
costs of producing a high performance sport car would not allow a manufacturer of
these products to stay in business if he sold his product at the same price as a
bicycle. But to extend this analogy, it may well be that price and economic value are
satisfactorily aligned in the pricing of high performance sports cars (that is, there is
no excessive pricing) if their prices are the product of competitive market conditions,
while the price of bicycles may be found to be excessive in relation to their economic
value if they are priced under conditions of pure monopoly.
[149] Our approach is not dissimilar to United Brands’ concern with ‘normal and
effective competition’ 100 or Napp’s fear that prices would be excessive in a market
with high entry barriers and is devoid of ‘ effective competitive pressure’. 101 Mittal SA
is absolutely correct to insist that there is no warrant for reading ‘ normal and effective
competition’ or prices at ‘ competitive levels’ as conditions of perfect competition and
of prices that reflect that state of textbook grace. So too, we also emphasise that our
enquiry into the market structure and conduct, into the presence or absence of
‘cognisable competition considerations’, that generated the price alleged to be
excessive, similarly does not amount to a search for the holy grail of perfect
competition. In other words, we, like United Brands and Napp, certainly do not hold
that a price that bears a ‘ reasonable relation’ to economic value, must be a price that
is the product of perfect competition. Far from that, we have already clearly
recognised that the statute explicitly admits of the possibility of dominance – hence
Section 8 of the Act – and the pricing power that is a product of dominance. Hence
there can be no presumption that a price that reflects a degree of market power will,
for that reason, fall foul of Section 8(a) and its accompanying definition.
[150] Price formation under conditions of imperfect or oligopolistic competition is, to
repeat the phrase we employ above, clearly influenced by ‘ cognisable competition
100 See United Brands judgment, para 249.
101 Cited Mittal Heads of Arguments at para 7.21.
57
considerations’, even if it also reflects a degree of pricing power. We are, in other
words, perfectly content to acknowledge that pricing in a market with a dominant firm
and a number of other smaller players may reflect a degree of pricing power. Price
formation in a duopolistic market, particularly if entry barriers are not insurmountable,
may well reflect fierce rivalry and, hence, a competitive pricing outcome. In other
words, albeit that these markets are ‘imperfectly’ structured, their pricing outcomes
may well be the result of cognisable competition considerations. In these
circumstances the competition authority will be alert to the prospect of exclusionary
conduct or collusion but it will not attempt to secondguess the price because, in the
absence of collusion or exclusionary conduct, the price will be determined by
cognisable competition considerations and hence will bear a reasonable relationship
to economic value.
[151] Mittal SA – and, indeed, many of the scholars that have examined the
concept of excessive pricing – are concerned that the high priced product that is the
subject of significant innovation will fall foul of the proscription of excessive pricing.
However, while on a simple arithmetic interpretation of price and value along the
lines conducted by the various European authorities, the relationship may be
construed excessive or unreasonable, on our interpretation which requires an
examination of the underlying market circumstances that produce the price in
question, the price of an innovative product is unlikely to be at risk precisely because
it will, by dint of the process of innovation and differentiation – a cognisable
competition consideration ‘bear’ a ‘reasonable’ relation to its value. By contrast, we
competition consideration ‘bear’ a ‘reasonable’ relation to its value. By contrast, we
emphasise again, where the price appears to have no explanation other than the
pure exercise of monopoly power , then the price is not reasonable in relation to
economic value. In other words what is relevant in our enquiry is not the arithmetic
relationship between the price and some or other conception of cost. What is
relevant are the underlying considerations that underpin the price level. Are these
considerations founded in competition in its many degrees and guises or are they
founded in pure monopoly?
[152] In this case our finding is that the price of flat steel products in the South
African market is only explicable by reference to Mittal SA’s unusually high level of
structural dominance which, in turn, supports ancillary conduct that maintains the
58
price targeted by the monopoly steel producer. The ancillary conduct – which as we
shall elaborate below is the enforced segmentation of separately priced markets – is
a critical element of this decision because it demonstrates, as we shall elaborate, that
even Mittal SA’s structural superdominance was not on its own sufficient to
guarantee that it actually achieved its unilaterally selected target price. Instead it was
obliged to engage, in a clearly premeditated fashion, in ancillary conduct, conduct
that is only available to a superdominant firm, to achieve its desired price level in the
domestic market. In other words, our finding of excessive pricing does not derive
from an examination of the market structure alone; it also rests on the ancillary
conduct upon which Mittal SA relied, ancillary conduct that itself depends upon the
existence of structural superdominance, in order to achieve its pricing ambitions. It is
the cumulative impact of this structure and the ancillary conduct that puts Mittal SA’s
contravention of Section 8(a) beyond doubt.
[153] In summary then, our examination as to the source of the pricing power is
thus an examination into its reasonableness. Reasonableness in the context of a
competition statute must mean ‘economically reasonable’. Economically reasonable
in the context of a competition statute must mean having regard to the pro and anti –
competitive considerations that we normally apply. As we go on to argue in this
decision, the occasions where one can find no reasonable relationship between a
price and the economic value underpinning it are few indeed. The circumstances
giving rise to Mittal SA’s pricing power in respect of some of its domestic consumers
depends on the existence of a range of factual issues that we do not encounter in the
depends on the existence of a range of factual issues that we do not encounter in the
market place everyday, even in those markets habituated by long extant dominant
firms.
[154] Nor is there any need to dwell on dictionary definitions of what excessive
means. The term is a defined one and hence it is the statutory, rather than the
dictionary, definition of the word that we apply. The statutory definition as opposed to
the ordinary word ‘excess’ does not require one to conclude when a particular level of
differentiation is sufficiently large to constitute excess. Rather it requires one to find a
relationship between a price and economic value that admits of no reasonable
explanation, that is, of an explanation that does not rely upon the exercise of the
degree of market power that arises from superdominance. The finding of an
59
excessive price is then determined not by some arbitrary measure of difference but is
rather an enquiry into the rationality of pricing. It thus condemns pricing for which
unchallenged and incontestable monopoly is the only explanation as opposed to a
price that may simply be high but for which innovation or even branding – that is, pro
competitive measures provide the underlying rationale. 102
[155] For this reason we find that a reading of the Act that requires us to find
precise levels for the economic value and then the actual prevailing price and then to
correlate them to some notional competitive price to be overly mechanistic and
contextually unsupported. This reading might have some validity if we were meant to
act as price regulators and to order the price back down to the nonexcessive level.
We have already firmly rejected the implicit contention that the sparse wording of
Section 8(a) is intended to convert us from an agency that promotes and protects
competitive market conditions to an agency that determines price through the
simulation of competitive market conditions.
[156] We should add that another considerable problem that arises from an
approach that dictates that we must find three precise levels (namely, an excessive
price, a fair price and an economic value) is that it is too static. Prices and costs are
seldom static over time even when one may be dealing with the exercise of
monopoly power. In order to come to a conclusion under 8(a) there needs to be
some administrable durability to the pricing, one that will have some applicability over
time. Thus price movements are likely during any reasonable period of
measurement. Hence the Act, on our interpretation, is an enquiry into less precise,
measurement. Hence the Act, on our interpretation, is an enquiry into less precise,
but more durable, relationships between the respondents’ alleged excessive price
and its economic value or its costs. These relationships are the product of the
structure of the market and the ancillary abusive conduct enabled by the structure
102 The question of branding and reputation answers the question posed by two economists in a
newspaper column on the question of excessive pricing. They point out that a Porsche motor car is
expensive, but asks whether this means that its price is excessive? The answer is no simply because,
leaving aside questions of actual quality and cost of production differences with other automobiles, the
manufacturer has created a brand image for which consumers are willing to pay. Indeed, the price of a
Porsche may even be high relative to the price of other high performance sports cars, but as long as the
market for high performance sports car is competitive, the likely explanation for Porsche’s success in
persuading its customers to buy its unusually expensive car will probably be found in its branding
strategy and history which has produced a highly desired object which is able to command a premium
price. (see Johannes Fedderke and Volker Schoer ‘The price of attacking the wrong target’ Business
Day, 27 September 2006)
60
and hence the emphasis in this decision on those aspects in the evidence.
[157] European excessive pricing jurisprudence strongly evidences the pitfalls of
the many alternative conceptions of the meaning and measure of value and cost that
are all, in one way or another, bedevilled by the mistaken notion that ‘economic
value’ has intrinsically measurable content. United Brands suggests comparing ‘ if it
were possible’ the selling price and the costs of production which would then reveal
the profit margin and then notes ‘ the very great difficulties in working out production
costs’.103 Napp preferred to rely on a comparison between prices in different market
segments although the CAT conceded that ‘ there may well be other ways of
approaching the issue of unfair prices’ including comparing prices to costs, Napp’s
prices compared to the costs of its next most profitable competitor and Napp’s prices
compared to its competitors. 104 The latter measure was favoured by the court in
General Motors Continental NV, 105 while the court in British Leyland 106 preferred to
evaluate the extent of price movements over time. In the Port of Helsingborg case
the European Commission cautioned that the difference between revenue and cost
was not a sufficient basis for finding excessive pricing and suggested that ‘ customers
demand’ was also a relevant determinant of price. In this case the Commission
attempted to compare the price charged for ferry services (an uncompetitive market)
with the price charged by the same port for cargo services (a competitive market) but
concluded that the services offered on the two markets in question were themselves
not sufficiently comparable. 107 In Ministere Public v JeanLouis Tournier the basis of
comparison used by the court were fees charged in different member states of the
comparison used by the court were fees charged in different member states of the
European Union, the socalled ‘geographical comparison’ test. 108
[158] This brief survey offers a mere sample of the diverse measures attempted by
the various courts of the European Union and some of its member states, all of which
unfailingly emphasise the difficulties and shortcomings in the measures that they
used. Indeed the most revealing comment probably comes from United Brands,
103 See United Brands judgment, paragraph 251.
104 See Napp Pharmaceutical judgment, paragraphs 391392.
105 See General Motors Continental NV v Commission of the European Communities , Case 26/75.
[1976] 1 CMLR 95
106 See British Leyland Public Limited Company v Commission of the European Communities , Case
226/84.
107 See Scandlines Sverige AG v Port of Helsingborg , Case COMP/A.36.568/D3
108 Ministere Public v JeanLouis Tournier , Case 395/87, [1991] 4 CMLR 248, at paragraph 38
61
which after a survey of a large range of possible measures of excessive prices notes
‘Other possible measures may be devised – and economic theorists have not
failed to think up several – of selecting the rules for determining whether the
price of a product is unfair’.
[159] It is clearly not possible to glean a single European conception of a pricing
standard and measure of excessiveness, that is, an arithmetic relation between price
and an intrinsic, measurable economic value. Indeed a survey of the European
jurisprudence serves to confirm our view of the pitfalls of competition authorities
assuming a price regulating function as part of their excessive pricing jurisdiction. It
is precisely to avoid the confusion and uncertainty generated by the jurisprudential
maze outlined above that price regulators are accorded a specific statutory basis
which assigns them appropriate price determination powers and, indeed, often
prescribes the specific price determination mechanism that is to be employed.
[160] We need not detain ourselves further with this. As indicated, our view of
pricing is that a price that is ‘reasonable’ in relation to economic value is one that
emerges from, in the words of Padilla and Evans, the ‘ free interaction of demand and
supply in a competitive market’ . At the risk of repeating ourselves, where that market
structure admits – as it often does – of a degree of pricing power, the firm will
rationally conduct itself in a manner designed to maintain and extend its structural
advantages and hence its pricing power.
[161] As we have already elaborated much of this conduct is legitimate, pro
competitive conduct. Hence product innovation that seeks to differentiate the firm’s
output from that of its rivals and so maintain its structural advantage and hence
pricing power in a newly crafted market niche, exemplifies a procompetitive quest for
market power. Process innovation designed to achieve a position on the cost curve
that permits a firm to lower price and increase market share and so consolidate or
even extend its structural position is another standard category of procompetitive
conduct. All of this conduct produces market and, hence, pricing power – indeed if a
patent is successfully registered with respect to any of these innovations it may
produce monopoly market power. However, as elaborated, the price that results
62
from the exercise of power so acquired may thereby meet the test of
‘reasonableness’ that is required by the Act’s definition because it is the product of
competition as reflected in innovation.
[162] On the other hand, conduct by a dominant firm that is directed at excluding
rivals, potential or actual, may, depending on the nature of the conduct in question,
well fall foul of one or other of the exclusionary abuses of dominance described in
Section 8 of the Act. As already indicated, the focus of abuse of dominance on
exclusionary abuses is predicated on the view that, in the absence of specific
exclusionary conduct, attempts to abuse a structural advantage by excessive pricing
or by optimising the quiet life (inefficiency) will be met by new entry. Thus the price
of the ‘merely’ dominant firm may well reflect a degree of pricing power but this will
not be excessive because it is constrained by competition considerations, namely,
the contestability of the market, and antitrust is directed at ensuring, through the
proscription of exclusionary abuses, the maintenance of this contestability in order to
prevent an ‘exploitative’ abuse of dominance or ‘excessive pricing’.
[163] However in this case Mittal SA’s superdominance, its uncontested control of
an incontestable market, is the underlying basis for exceptional or ‘excessive’ pricing
power in its domestic market. But even its ability to price to the very limit of its
monopolistic power in the relevant geographic market is, superdominance
notwithstanding, potentially undermined by the fact that its level of output exceeds
the level of demand for steel in the South African economy at the monopolist’s target
price which, in this case , is the import parity price, the price of procuring steel from
beyond the boundaries of the relevant geographic market. And so, in order to
maintain its target price in its domestic market it is compelled to dispose of this
surplus output in markets – principally in the international market but also in certain
limited domestic market niches where competitive conditions oblige it to accept a
market determined price (a ‘competitive price’) that is below its domestic target price.
This immediately opens up the possibility for arbitrage between the separately priced
markets and downward pressure on the price in the higher priced segment. Mittal
SA’s response to this threat is to engage in the most fundamental and egregious
monopolistic conduct – it has effectively withheld supply from the domestic market by
studiously and purposefully preventing arbitrage, by maintaining the segmentation of
63
its markets. Formally expressed, and as earlier noted, it has contrived to move its
domestic supply curve leftwards along a downward sloping demand curve, the better
to achieve a price target approximating to the profit maximising price of a domestic
monopolist.
[164] This puts beyond doubt Mittal SA’s contravention of Section 8(a)
– it has, by virtue of its superdominance, the structural market power to
preselect a target price in its domestic market; it has imposed this pre
determined target price, in this instance the import parity price, on most
of its domestic market; and to support this preselected target it has
withheld supply from the domestic market, the most elementary and
offensive of monopolistic conduct. This does not mean that Mittal SA’s
offence is its superdominance; nor does it mean that a firm that is not
superdominant is not entitled to manipulate its supply – if such a firm
reduced output its competitors would quickly move to replace the lost
output. However, it is the cumulative impact of its structural advantage
(its superdominance) and the conduct thereby enabled (its purposeful,
unilateral withholding of supply from the domestic market) that results
in a price that is unconstrained by any competitive considerations
whatsoever.109 By withholding output, an option only available to a
superdominant firm, it has assured its ability to charge its preselected
target price, a price unconstrained by any competitive considerations in
its relevant market, and thus has contravened the Act’s proscription of
excessive pricing.
[165] Although it is not necessary for us to answer the question, it is nevertheless
interesting to ask why Mittal SA has not produced precisely to the level necessary to
accommodate its preselected domestic price. 110 There are a number of likely
109 We use ‘purposeful’ advisedly. Note statements from the transcript cited below where Mr.
Dedman acknowledges that the purpose of the market segmentation that is maintained through the
Macsteel arrangements and the various resale conditions contained in the rebate schemes is precisely to
maintain the preselected target price.
110 Note that Mr. Dednam clearly understands that a reduction of total output is an alternative to its
current approach which limits supply to the domestic market whilst simultaneously exporting at a price
64
answers. Firstly, it is probably as difficult for a steel monopoly as it is for a central
government planner to plan its output as closely as that. It would not want to risk
getting into a sustained position of excess demand and serious steel shortages and
rationing at its preselected price and nor would it want to overestimate demand for
fear of imposing downward pressure on price. Moreover planning at this level of
detail would require a degree of flexibility in managing output levels that is probably
not permitted by the large integrated steel mill technology that it manages. Secondly,
and most important, scale economy considerations probably dictate that, if Mittal SA
wishes to achieve the cost position of an internationally competitive steel producer, it
produce at a level of output that is in excess of local demand at its preselected
domestic target price. 111 In other words, Mittal SA wants it both ways: it wants to
produce at the lowest possible point on its cost curve, the better to engage profitably
in international markets, but, in order to maximise its profits in its monopolised
domestic market, it denies the fruits of these necessary scale economies to its
domestic customers by restricting supply in the this market, the better to extend its
margins in the domestic market. Of course, in addition to scale economies, the
underlying cost advantages that Mittal SA enjoys in South Africa – these by virtue of,
inter alia, its iron ore price and electricity price – also contribute to Mittal SA’s export
competitiveness. Indeed, as we shall elaborate below, the evidence suggests that it
is certainly profitable for Mittal SA to export even at the lower prices that it realises on
the international market.
[166] In short, there is no magic in Mittal SA’s mechanism to achieve its targeted
[166] In short, there is no magic in Mittal SA’s mechanism to achieve its targeted
lower than that attainable on the domestic market:’ Mr Dednam: Yes its rather difficult then in trying to
arrive at a mechanism that is good. So, the alternative that’s been put to us on the table is well why
don’t you use your export parity price as the comparator to your domestic price levels. What will
happen if we do not export at all? How do we determine our domestic prices then and how would we
get to then the competitive price, if we had not had the capacity to export and we curbed our total
production to such an extent that we are only geared to service the domestic market? Will we then say
to the domestic market that the price we are going to charge you will be exactly the same as what other
domestic consumers will pay in other markets?’ (Transcript, page 1868). The answer of course is that if
Mittal cut back actual production to the extent of current domestic demand at the prevailing price and
actually ‘hit the target’, then the outcome would be the import parity price, the price presently targeted,
and which is achieved by denying the domestic market output by means of market segmentation rather
than by cuts in total production. However, as explained in the rest of this paragraph, it would not cut
back production principally because this would raise its costs per unit of steel produced thus reducing
its margins in the domestic market and it would be denying itself access to an international market
which, we believe, is, given its scale economies and cost advantages, clearly profitable.
111 In relation to its long steel products Mittal SA’s website explains that ‘ the two mills {at which long
steel products are produced} account for total annual sales of 1.9 million tones, half of which is
exported due to the limited demand of the RSA market’
65
price in its monopolised domestic market. It does what any elementary textbook on
competition law and economics will reveal in its opening chapter about monopolistic
conduct – it exploits its structural power by reducing output in order to increase price.
In this instance it does not physically reduce its level of output. But it contrives, as
we shall elaborate below, to remove this ‘excess’ output from the domestic market in
order to maintain its preselected target price, which closely approximates, though,
as we have noted, occasionally deviates from the import parity pricy. This it achieves
by resort to the ancillary conduct to which we have referred and which we now
proceed to examine.
Ancillary abusive conduct
[167] The ancillary conduct by which Mittal SA ensures its ability to price
excessively comprises principally the segmentation which it studiously maintains
between its export market and its domestic market. It markets its domestic output
through a group of traders whose activities are confined, by agreement with Mittal
SA, to the domestic market. And its markets its international output through a single
trader, Macsteel International, the second respondent, whose trading activities are
confined, again by agreement with Mittal SA, which is a 50% joint venture partner in
Macsteel International, to the international market. Hence the pertinent terms of the
agreement between Macsteel Holdings and Mittal SA that govern the joint venture,
Macsteel International, the second respondent, are:
1. Mittal SA undertakes to market a specified range of steel products, which
include flat steel, only through Macsteel International in the international
market; (clause 30.1)
2. Macsteel International undertakes not to sell any of these steel products
in the domestic market without Mittal’s consent; (clause 29.1)
3. The Macsteel Group also makes a similar undertaking to Mittal SA that as
3. The Macsteel Group also makes a similar undertaking to Mittal SA that as
long as the agreement persists it will not market Mittal SA products in the
international market other than through the joint venture (clause 31.2);
and
4. Mittal SA undertakes to sell steel to Macsteel International at
“international related market prices”. (clauses 29.2.1. and 30.2)
66
[168] The arrangement with Macsteel International, the second respondent, is the
essential ancillary conduct whereby Mittal SA abuses its structural advantage to
maintain its preselected price level. It is, of course, conduct that is only available to
an uncontested firm in an incontestable market. If this were not the case, Mittal SA’s
traders would be able to turn to alternative suppliers of flat steel products in order to
meet demand that is unrealised at Mittal SA’s preselected domestic price level.
Mittal SA of course wishes to create the impression that there is no unrealised
demand. It wishes to create the impression that it satisfies all domestic demand and
that its export activities are simply a vent – an unprofitable vent, it moreover alleges
for a surplus that it would much rather sell into the more lucrative domestic market.
However this is, at best, only a halftruth and one that, when fully considered, does
considerable violence to the whole truth – certainly, Mittal SA meets all domestic
demand, but, and here is the crucial caveat, at its unilaterally targeted price level. If a
wouldbe purchaser of steel for use in South Africa were to approach Macsteel
International with an offer to purchase at a price below the prevailing domestic price
but above that which Macsteel International could realise on the international market,
the trader would, as a matter of profit maximising rationality, accept such an offer.
However, it is by agreement with Mittal SA, prohibited from accepting the offer
because to do so would, as Mr. Dednam candidly concedes, be to reduce the price of
steel across the whole range of Mittal SA’s domestic sales. Its willingness to enter
into such an agreement is, of course, predicated on Mittal SA’s super dominance – to
into such an agreement is, of course, predicated on Mittal SA’s super dominance – to
express it crudely, a firm that wishes to trade in South African steel is obliged to
accept Mittal SA’s trading conditions. The economics is disarmingly elementary –
indeed it is the first principle of monopolistic conduct.
[169] The segmentation that is at the heart of the Macsteel International JV is not
the only segmentation that Mittal SA maintains. We have already outlined how Mittal
SA segments the bulk of its domestic consumers from consumers in those market
segments in which it faces more competitive conditions. These are the markets in
which Mittal SA discounts its price. As we have outlined above, from the perspective
of this decision, the hallmark of these arrangements is not the level of the various
discounts relative to the domestic price, but rather the anxious efforts by Mittal SA to
ensure that these market niches are segmented from the rest of the domestic market.
67
[170] There is no need, for present purposes, to describe or analyse the Mittal SA
rebates in any great detail. A brief outline of some of its rebate programmes will
establish how they clearly demonstrate Mittal SA’s overriding anxiety to ensure that
as much of its domestic market as is possible pays the preselected target price.
[171] There are a range of rebates on offer. Mr. Dednam characterised them as
follows:
The strategic rebates, we have basically 3 types of strategic rebates that we
do. The one is for replacement of valueadded product imports. The other
one is basically for valueadded secondary steel exports, and the other one is
basically to be competitive against substitute products in the marketplace
itself.112
[172] These rebates have already been referred to in passing and there is little
reason to elaborate the detailed rationale for, and operation of, each of them. They
are, in fact, reasonably welldescribed by their names. Hence when the domestic
market of a local manufacturer of a steel intensive product is being displaced by
imports of the product, Mittal SA will consider a rebate on the steel input in order to
retain the domestic market for the domestic fabricator provided that it, Mittal SA, is
persuaded that it is a differential in the steel price that is at the root of the decline in
the competitiveness of the South African producer. Or similarly where a domestic
producer’s export market is being eroded by fabricators elsewhere, Mittal SA will also
consider rebating the steel input into the exported product in order to retain the South
African manufacturer’s international market. Competition in the instances described
may not only come from cheaper steel but from substitute products such as plastic or
aluminium or cement.
[173] We have earlier described and analysed the auto sector rebate, far and away
[173] We have earlier described and analysed the auto sector rebate, far and away
the largest of Mittal SA’s rebate system, from the perspective of market power. We
have, in our discussion of the auto rebate, already noted that it is characterised by
capricious shifts in the scale of the discount that it provides, a pattern which is
112 See transcript of 5 April 2006, page 1658.
68
indicative of Mittal SA’s market power and this is as, if not more, evident in the
rebates granted Mittal SA’s weaker customers. In support of this we cited the
evidence of Mr, Leatherbarrow, a pipe and tube manufacturer, and Mr. Cohen, a
manufacturer of conveyor belt systems. What we have not yet mentioned is the
extent to which the rebate programmes are characterised by a striking combination
of, firstly, surgical precision in deciding which sales to discount and, secondly, the
extraordinarily complex bureaucracy required to actually pass the rebate on to the
carefully chosen beneficiary.
[174] In fact this combination of precision and bureaucracy is all of a piece. If a
local fabricator is producing for the domestic market and the international market and
it has successfully persuaded Mittal SA that it requires assistance to maintain or
extend its presence on the international market, then Mittal SA’s overriding concern
will be to ensure that the only steel that gets rebated is that which is exported –
conversely expressed, Mittal SA is anxious to ensure that rebate does not undermine
its ability to extract its preselected target price on the steel used by the fabricator for
output sold on the domestic market because this is not where Mittal SA’s rebate is
‘required’.
[175] Consider the case of GRS, a firm producing steel roofing tiles, which was
granted a rebate by Mittal SA in order to enable it to better compete with producers of
cement roofing tiles. In the case of the hapless GRS, where Mittal SA is granting a
rebate in order to enable a customer to compete more effectively with a roofing tile
product produced with an alternative material, namely, cement, Mittal SA’s overriding
anxiety is to ensure that the rebate does not extend beyond the precise competitive
anxiety is to ensure that the rebate does not extend beyond the precise competitive
disadvantage of its customer. Not only did this give rise to wild fluctuations in the
size of the rebate – its gyrations were, it seems, determined by both movements in
the price of cement and the price of steel the rigmarole involved in actually
computing the precise level of the rebate ‘required’ could be considered quite comic,
if it were not indicative of the deadly serious business of a superdominant firm intent
upon maintaining the careful segmentation of markets necessary to achieve its target
price in a monopolised market. When Mr. Van der Westhuizen, a witness from GRS,
was asked to explain why there had been a sudden significant decrease in the size of
the rebate granted by Mittal, he testified:
69
I asked the question as to why and the reply I got was that the price of
cement has increased and for that reason the differential that we require or
the discount that we require to compete has reduced. 113
[176] In order to persuade Mittal SA to grant it a larger rebate Mr. Van der
Westhuizen and his team then presented to Mittal SA
‘ ..a full study of a roof, the timber structure included as well as the covering,
which could be the steel or the concrete plus all accessories, all the thrashing
that necessary (sic) to finish off a roof and we presented the two total
answers, in other words, what it will cost to do a roof in concrete and what it
would cost to do a roof in steel tile. That we then presented to Mittal’. 114
[177] Our point here is not whether GRS proved capable of persuading Mittal SA to
grant a larger rebate – it seems to have achieved partial success. The question is as
stated above: is this the conduct of a large steel producer intent upon squeezing the
last cent out of a small customer, or is it a large steel producer with a large domestic
market intent upon protecting its default target price over the whole of that market?
The answer is that it is clearly the latter. It is Mittal SA ensuring that its rebate is not
‘excessive’, that is, that it does not inadvertently price steel in the domestic market at
a level below its default target price unless it is absolutely required to do so by highly
particular and proven competitive considerations. It fears that a discount granted
‘unnecessarily’ may inadvertently start to exercise downward pressure on the pre
selected target price generally charged in the domestic market.
[178] Mr. Roy Cohen, whose firm, Melco, is a significant exporter of fabricated steel
products, was asked by the complainants’ counsel to describe the process whereby
products, was asked by the complainants’ counsel to describe the process whereby
his company gained access to Mittal SA’s rebate for secondary exporters. He
answered:
‘We as a company have opted to use a consultant. A consultant is more
113 Transcript, pages 765766.
114 Transcript, page 766.
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familiar with the rules and the interpretation of the rules. We started off the
first time we exported trying to submit the product ourselves, the application
for rebate ourselves and found that it was that difficult and complex and
required that much attention to the detail and an understanding of the
interpretation of the rules, that it was easier for us just to pay a fee to the
consultant and he undertakes that for us and submits the claims for us.’ 115
[179] This is representative of the experience of other recipients of Mittal SA’s
rebate. We recount it not in order to establish that Mittal SA possesses market
power, nor is it intended to evidence Mittal SA’s parsimony in the granting of rebates.
It is rather evidence of the highly selective manner in which it granted any rebate at
all and the care it took to ensure that rebating remained the exception, with the
default target price strictly maintained as the norm. It also explains why Mittal SA
used a system of rebating rather than discounting – before paying out the rebate it
required the beneficiary of the lower price to establish that the steel subject to the
rebated price had actually been used for its intended purpose and its intended
purpose only. Conversely expressed, Mittal SA required the beneficiaries to
demonstrate that by granting a lower price it, Mittal SA, was not putting its superior
margins in the South African market at risk. Mr. Dednam clearly articulates the
overriding purpose of the segmentation:
‘We are offering a very, very good price into the market that is equal to our
worst export price that we are offering into the market. And the way that we
are offering the price into the market is we would not like that particular price
are offering the price into the market is we would not like that particular price
eventually to erode the rest of the business and other transactions that’s
taking place in the domestic market at a domestic price level.
For that reason we’ve introduced all these measures to ensure that the
product that we are offering for that particular application will eventually end
115 Transcript, page 406. Indeed a reading of the evidenceinchief of Mr. Cohen conclusively
establishes the truly grotesque complexity of the rebate schemes. But for the fact that we found Mr.
Cohen to be a particularly wellinformed witness whose account of his dealings with the steel
producers and merchants was not subject to serious challenge by Mittal SA’s counsel, his testimony
could well have been received as a satirical lampoon of a particularly bizarre series of business
dealings. See transcript pages 399445.
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up in that particular application and will eventually be exported.’ 116
[180] Mr. Dednam characterises these as efforts to prevent the creation of a ‘grey
market’ in steel. 117
[181] Mittal SA’s discounting policy is then fairly characterised as a privately
conceived and managed industrial policy designed to maintain and promote the
utilisation of steel products in the South African economy – South Africa is, after all,
the geographic market in which Mittal SA earns its most attractive returns. But it is
applied highly selectively and with excruciating care lest it infect the higher margin
segments of its domestic market. Mittal SA’s margins in the South African market are
a product of the price that it is able to charge over the significant bulk of its domestic
sales and it will not compromise those margins, even if this permitted an expansion in
the South African market for flat steel products because it clearly calculates that the
additional volumes thus gained would be at the expense of a diminution of the
margins over all of its domestic sales. Accordingly, where the utilisation of South
African steel in clearly identifiable downstream market segments is under threat
Mittal SA will isolate those segments from the broader market and it will offer a
rebate, always ensuring that the rebate does not ‘contaminate’ those vast swathes of
the South African market over which its domination and its pricing power is
uncontested. While market segmentation and price discrimination is a hallmark of an
efficient monopolist, its unintended consequences may be severe if it enables ‘non
deserving’ customers to take advantage of the available discounts, thus
‘cannibalising’ its high margin market segments.
[182] We should add that this practice of segmenting its differently priced markets
[182] We should add that this practice of segmenting its differently priced markets
in order to protect its ability to charge its targeted domestic price has, in the past,
been bolstered by other conduct, equally offensive from a competition law
perspective. Hence, as already explained, prior to the acquisition of Saldanha Steel
by Iscor – Saldanha having previously been controlled by the Industrial Development
Corporation and Iscor – Saldanha and Iscor concluded a market sharing
arrangement in terms of which Saldanha agreed that it would not make its output
116 Transcript, page 1663 (Our emphasis).
117 Transcript, page 1665.
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available on the domestic market. Where it faced potential competition from another
domestic steel producer, Mittal SA (or Iscor as it then was) sought to rely on a market
sharing cartel to maintain its preselected domestic price. Having absorbed, through
merger, its potential competitor, it no longer required an anticompetitive horizontal
agreement to divide markets. It now relies on the unilateral imposition of anti
competitive conduct – effectively a withholding of supply from most of its domestic
market in order to price to the full extent of its uncontested market power.
[183] Nor is this the only market in which we have encountered this practice. In the
Tongaat Hullet/TSB 118 sugar merger and in the Sasol/Engen liquid fuel merger, both
of which were prohibited, the firms in question maintained the targeted import parity
pricing despite the existence of excess supply at that price level. In both the sugar
and fuel markets this was achieved, despite competitive market structures, by means
of anticompetitive conduct – in these instances a combination of regulation and
collusion – which effectively segmented the international and domestic markets. We
observed in Sasol, and this has been much referred to in these hearings, that
‘import parity pricing of fuel – or BFP – in a fuel exporting economy can only
be artificially maintained by administrative fiat…or by collusive agreement…or
by the unilateral exercise of market power.’ 119
[184] This conclusion is confirmed by the facts of this case. Here the mechanism
for maintaining the target price is neither regulation (there is none) nor cartelisation
(there is a single producer), but through the unilateral action of a monopolist
imposing upon those that trade in its product conditions that are designed to reduce
the supply available on the domestic market.
[185] Mittal SA has argued that this conduct should have been attacked under other
[185] Mittal SA has argued that this conduct should have been attacked under other
provisions of the Act. It has been suggested that the practice that is, in reality, under
attack is that of price discrimination and that the complainants should have brought
suit in terms of Section 9, the provision of the Act that proscribes price discrimination
and that would have allowed Mittal SA defences not available under Section 8(a). It
118 See Tongaat Hullet Group and Transvaal Suiker Bpk [19992000] CPLR 127 (CT).
119 Sasol Ltd and others / Engen Ltd and others [2006] 1 CPLR 189 (CT) at 233FG.
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is also suggested that the conduct complained of is in reality the exclusive dealing
agreement between Mittal SA and Macsteel International, a potential contravention of
Section 8(c), which, in contrast with the prohibition provided for in the Section 8(a),
requires the complainant to establish that the anticompetitive harm outweighs any
procompetitive consequences.
[186] We do not know whether the complainants have made their election on the
basis that a Section 8(a) offence is easier to prove than a Section 8(c) or Section 9
offence, but simply observe that this constitutes perfectly legitimate and appropriate
legal advice. We do, however, note that the extent of dominance that we require in
order to prove a Section 8(a) offence requires that the complainant clears a
particularly high hurdle in proving its case, considerably higher than the ‘mere’
dominance required by Section 7 in order to prove other abusive conduct or price
discrimination.
[187] Moreover, it is clear from the evidence that the complainant and the other
witnesses who are steel users believe that their commercial activities are
disadvantaged in their respective market places because of the price charged for a
‘must have’ input, steel. This is what has caused them to invoke Section 8(a) of the
Act they are aggrieved by the absolute price charged for steel. Hence what we
have been asked to pronounce upon is the inability of domestic producers to bargain
over the price of Mittal SA’s excess supply of flat steel products. What clearly
emerges is dissatisfaction – and a degree of puzzlement – at the notion that
domestic steel prices are based on market conditions in distant markets rather than
on supply and demand conditions in the South African market and that notional
transport charges are levied on a product that is not, in physical reality, transported
over the vast and costly distances that nevertheless constitute an important element
of the domestic price. The complainants clearly believe – as, we should add, does
the steel expert Mr. Fish 120 – that the price of steel should be determined by local
demand and supply conditions which, in their estimation – and they are correct –
would, if free of abusive conduct, produce a lower steel price. Hence the allegation
has been one of excessive pricing.
120 See Mr Fish’s testimony, transcript of 22 March 2006, pages 520521.
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[188] Comparative prices – and thus the question of discrimination – only entered
the equation because European jurisdiction, at least in some of its variants, has
approached the question of excessive pricing by comparing prices in different
markets and, in the South African case, the obvious markets to compare are the
domestic and international markets in which Mittal SA trades.
[189] We however have not approached the matter in this way. We have rather
asked whether the structure of the market admits of the possibility of excessive
pricing. This, as we have elaborated, requires a showing of exceptional or super
dominance. We have then examined the relationship between this superdominance,
on the one hand, and Mittal SA’s ability to price up to its preselected price target,
particularly given the existence of excess supply at that target price. What we have
found is that Mittal SA employs its superdominance to achieve its target price by
ensuring that the excess supply that exists at that price is removed from the domestic
market and that it does not reenter the domestic market again. And because Mittal
SA has no domestic competition to speak of it does not have to fear new supply from
a domestic source. This reduction of supply is the essence of its agreement with
Macsteel International and it is further built into the manner in which it grants rebates
off its list price to selected domestic customers. The result is a price in excess of that
which would prevail in the absence of Mittal SA’s superdominance and the ancillary
conduct that it enables.
[190] We should add that a careful reading of United Brands, evidences an
important conformity between our reasoning and that of the European Commission’s
advocates before the court. Subsequent reference to this case in litigation involving
advocates before the court. Subsequent reference to this case in litigation involving
excessive pricing allegations has tended to focus exclusively on the European
Commission’s and the Court’s approach to pricing comparisons. In the confusion
and obfuscation that arises from an examination of the European authorities’
decisions in the matter of price determination, it is often forgotten that in this leading
case the respondent, United Brands, was accused – and found guilty – of a number
of abuses of its dominant position. Principal amongst these was the imposition by
United Brands of conditions of resale upon those firms that purchased its green
bananas and ripened them for onsale into the various national European markets.
In commenting on these conditions of resale, the European court reports:
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According to the Commission these prohibitions and practices are both the
essential constituent of an overall system enabling the applicant to control the
entire marketing of its product and to restrict competition and also form the
basis of the three other abuses for which ubc (United Brands) is blamed. 121
[191] We emphasise that one of the ‘three other abuses’ referred to is that of
excessive pricing. This, the identification and elimination of the ‘overall system’ or
the ‘basis’ of the abuses, rather than price determination, is the approach that we
favour.122
[192] The other leading European case on excessive pricing is that of Napp
Pharmaceuticals. Again subsequent citations from the Napp decision have focused
on the question of a comparison between the price levels in the two markets in which
the product in question was sold. However it is absolutely clear that the excessive
price charged was a product of the careful segmentation of the two markets in
question and the practice of predatory pricing in the lower priced of the two markets
which had the effect of excluding new entrants to the higher priced market thus
enabling the charging of ‘quasimonopoly’ prices in that segment. Again we have in
Napp Pharmaceuticals gardenvariety monopolistic conduct with the respondent
segmenting its market so as to produce very low, in fact clearly predatory, prices in
121 See para 137 (Our emphasis).
122 We are also, of course, at one with the European Commission’s summary of its position following
United Brands and which is cited in the Mittal SA HOA: ‘The existence of a dominant position is not
itself against the rules of competition. Consumers can suffer from a dominant company exploiting this
position, the most likely way being through prices higher than would be found if the market was
subject to effective competition. However, the Commission in its decision making practice does not
normally control or condemn the high level of prices as such. Rather it examines the behavior of the
dominant company designed to preserve its dominance, usually directly against competitors or new
entrants who would normally bring about effective competition and the price level associated with it.
A dominant company therefore has a special obligation not to do anything that would cause further
deterioration to the already fragile structure of competition or to unfairly prevent the emergence or the
growth of new or existing competitors who might challenge this dominance and bring about the
establishment of effective competition’ XXIVth Report on Competition Policy (1994), point 207 cited
in Mittal SA’s Heads of Argument at para 5.9 (Our emphasis). Mittal SA cites this passage in support
of its view that we focus on exclusionary abuses despite its concession that both South African and
European law explicitly condemn the exploitative abuse of excessive pricing. However the position
that explicitly informs our decision is at one with the view that examines and condemns the basis for
excessive pricing rather than ‘the high level of prices as such.’ That practice, as we have emphasized at
length, is not the exclusion of a competitor (there is none) or a new entrant (barriers to entry do not
permit one) but rather the cumulative impact of Mittal SA’s superdominance and its purposeful
withholding of a portion of the supply of flat steel products from the domestic market.
76
one market which enabled it to limit entry – that is, control the supply available – to
the second market that then resulted in extremely high prices in the second
market.123 In our view the courts in both United Brands and Napp would have better
served competition jurisprudence by restricting themselves to identifying and
eliminating the basis for monopolistic price determination rather than by
supplementing the torturous European jurisdiction that has attempted to pass
judgement on particular price levels and their differentials. 124
[193] We should emphasise that just as we have not approached the question of
determining whether or not the price is excessive by a determination of the ‘correct’
or ‘incorrect’ level of the price, so, obviously, do we not approach the question of
whether or not the price charged is ‘excessive’ or ‘unreasonable’ by reference to the
123 Note the CAT’s summary at para 364 of the arguments of the Office of Fair Trading in Napp:’In
essence, the Director General’s case is that Napp charges excessively low and/or discriminatory
prices in the hospital segment and thereby sustains very high prices market shares in the community
segment of the market. These two aspects are accordingly interlinked. Napp’s pricing practices have
had the effect of placing significant obstacles against the successful entry of competitors, and in
consequence serve to preserve its quasi monopoly position in the community segment of the market and
enable it to continue to charge prices for MST higher than could be sustained in the absence of that
quasimonopoly position ie competitive prices…Accordingly the Director General does not seek to
condemn the price in the community segment in isolation; in other words, if his case should fail as
regards the exclusionary character of Napp’s pricing practice in the hospital segment, he does not
contend that the prices in the community segment violate the Chapter II prohibition simply because of
their absolute level’. The CAT continues : As stated above, it is the Director General’s case that
Napp’s conduct has had the effect of excluding competitors from the hospital segment, thereby
foreclosing the essential gateway for entry to the community segment. As a result Napp has been able
to charge quasimonopoly prices. In those circumstances, the charging of prices, which are higher
than Napp would have been able to charge in a competitive market, constitutes an abuse.’ (Napp,
paras 364365)
124 Napp Pharmaceuticals produced a slow release morphine tablet for terminally ill patients which it
sold to the public health authorities at a predatory price which effectively foreclosed this market, the
hospital market, from other competitors. When patients who had, in their hospital treatment, been
prescribed the Napp product left the hospital market and were prescribed the Napp product in the
‘community market’, it was only made available in this latter market at a significantly higher charge.
In short, by charging a predatory price in the first market Napp effectively foreclosed entry by
competitors into the hospital market which constituted a critical ‘gateway’ for participating effectively
in the second market. Thus its predatory conduct in the first market effectively prevented entry by
competitors into the second market , thus according Nap superdominance which enabled it to charge
an excessive price in the community market. The CAT decided the question of excessiveness on the
basis of price comparisons between the markets in question and then, in addition to imposing an
administrative penalty, ordered the price in the second market to be decreased by a seemingly arbitrary
15%. However the competition process may have been better served had CAT eliminated the
15%. However the competition process may have been better served had CAT eliminated the
underlying ancillary conduct (price predation) that led to Napp’s superdominance in the first market,
thus preventing entry through the ‘gateway’ to the second market. The upshot would have been an
increase in prices in the relatively small hospital market which would have enabled competitive entry
into that market. Entry into that ‘gateway’ market would then have enabled new entry into the much
larger community market and this would, through the process of competitive entry, have resulted in a
decrease in prices in the community market where prices were found to be excessive.
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scale of the difference between two price levels.
[194] Our approach to the question of establishing whether the difference is
‘excessive’ is consistent with our approach, as a competition authority, to the
question of pricing in general. We have – following our Act and the principles and
practice of competition law sought an ‘economically reasonable’ explanation for
Mittal SA’s pricing, that is an explanation that is not rooted in superdominance, that
is, in an absence, as the Napp Tribunal put it, of ‘significant competitive pressure’
and then in ancillary conduct designed precisely to manifest that superdominance in
a supracompetitive price level. That the price charged is clearly in excess of that
which would have been charged had Mittal SA not been superdominant and not
taken advantage of its superdominance to reduce the output of steel available to the
South African market, is clearly conceded by Mr. Dednam. We have earlier cited his
negative view of price wars, a potential reality of competitive life for all but the super
dominant and effectively discounted any possibility of a price war with Highveld Steel.
We have also cited his explanation of the segmentation of Mittal SA’s rebated
segment from the rest of its South African market as rooted in an effort to prevent the
rebated price
‘..eventually to erode the rest of the business and other transactions that’s
taking place in the domestic market at a domestic price level.’
[195] But, most important, Mr. Dednam also explicitly conceded that were Mittal SA
not deliberately, through its agreement with Macsteel International, relying on its
superdominance to engage in the ancillary conduct of ‘shorting’ the South African
market, that is, deliberately depriving South African customers of steel produced by
market, that is, deliberately depriving South African customers of steel produced by
Mittal SA, the price of its flat steel product would be lower than it is at present. Note
the following exchange between the Tribunal and Mr. Dednam:
Chairperson: I’m saying that my understanding is and my understanding
might be wrong, so correct me, but that Macsteel International sells on the
export market and only on the export market and let’s say the price it pays
there is $400,00. ISCOR sells to its least preferred customers, if I could put it
that way, on the domestic market at import parity price. That’s $600,00. The
78
big merchants get a volume discount that allows them to purchase this
product at $500,00, let’s say. I don’t know that there are any restrictions on
the amount of that discount that they retain or the amount of that discount
that they pass on, although I note that in the sort of pricing schedules what
seems to be passed on is simply the ISCOR price, which kind of makes me
think that they don’t pass on the volumetric discount that much and when
they tell their customer why their price has changed, they simply reflect the
change on the ISCOR price. And then you have a whole lot of special
customers like the car industry and others that get their price at $450,00.
What would happen?
I mean obviously the particular issue is between Macsteel International and
the IPP price, but there are all sorts of other prices in between. What
happens if all of these were open to trading steel in the domestic market and
in the international market? In other words, if Macsteel International wanted
to trade in the domestic market and Trident wanted to trade in the
international market and it was prepared to sort of buy 10,000 tons from
ISCOR, 2000 of which it intended putting into the international market.
Under those circumstances what would happen to price?
Mr. Dednam : Well, the lowest common denominator in the price would
actually prevail. So, if you look at the prices that Macsteel International is
basically paying and one should argue that that is the price that should
prevail for the whole market, then prices will tend down towards that
particular level. 125
[196] This is precisely our position. Mittal SA’s leading witness, Mr. Dednam,
concedes that structural superdominance and Mittal SA’s ancillary conduct in
maintaining the segmentation of its markets, conduct which itself relies on this
structural dominance, has placed a floor under prices, in the South African flat steel
market. Conversely expressed, prices would be lower but for Mittal SA’s super
125 Transcript of 6 April 2006, pages 18481849 (Our emphasis). All references to ISCOR can be read
as references to Mittal SA. There is value in perusing the entire transcript between pages 18461880
which consists of an exchange between the Tribunal, the witness, Mr. Dednam and Mr. Unterhalter,
counsel for Harmony.
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dominance which allows it to craft ancillary conduct that enables it to reduce supply
to its domestic market. No more is required in order to prove a contravention of
Section 8(a). In our view the temptation, to which the European competition decision
makers have generally succumbed, to then attempt to divine the precise level that
the competitive market, in its variety of degrees and characteristics, would find, is an
incorrect approach for a competition authority to adopt. It is much preferable to
identify the underlying bases for ‘ maintaining prices higher than would be expected in
a competitive market’ and then to eliminate these and then allow the competitive
features of the particular market, ‘imperfect’ though they may be, to determine a
competitive price level.
[197] Indeed we note that although Mr. Dednam contended that prices would ‘tend’
to the lowest price charged by Mittal SA (that is, currently the price at which Macsteel
International purchases steel), he conceded that there were differences in grades of
steel and in value added services provided to customers who required these services
and that these would serve to maintain a degree of price differentiation in the market.
However it would be differentiation based on services provided rather than on a
reduction of supply to the market. We agree with this and will discuss it more fully
below when we examine, in our discussion of the remedies to be imposed, Mittal
SA’s contention that it would no longer be able to operate profitably were prices to
decline in response to these competitive pressures.
Finding in respect of the excessive pricing complaint – alleged contravention
of Section 8(a) of the Competition Act
[198] We find that Mittal SA has contravened Section 8(a) of the Act by charging an
excessive price to the detriment of consumers.
The Inducement Complaint
excessive price to the detriment of consumers.
The Inducement Complaint
[199] The complainants have also alleged that the respondents have contravened
Section 8(d)(i) of the Act by inducing its customers not to deal with a competitor.
The complainants have asked:
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A. For an order declaring that the first respondent has engaged in abuse of
dominance in terms of Section 8(d)(i) of the Act;
B. For an order directing the first respondent to desist from such abuse;
C. For an order levying an administrative penalty on the first respondent of 10%
of its annual turnover for the financial year ended 30 June 2003 in the South
African flat steel market;
D. For an order directing those respondents who oppose the complaint to pay
the costs incurred by the complainants in prosecuting the complaint.
[200] While we appreciate that the sheer volume of the heads of argument are not
necessarily a measure of the merits of the case or the seriousness with which the
complainants pursue it, it is tempting to find some significance in the fact that the
complainants heads of argument in respect of the excessive pricing complaint run to
230 pages while those submitted in respect of the inducement complaint appear to
require no more than 5 pages.
[201] The brevity of the complainants’ treatment of this matter may account for
some of our difficulties in gaining a clear understanding of the facts at issue.
Essentially the inducement complaint revolves around a single piece of evidence. In
brief Mr. Bell of Bell Equipment, a leading South African producer and exporter of
specialised heavy industrial vehicles, imported a certain amount of steel which it
managed to obtain at a price lower than that on offer to Mittal SA’s domestic
customers. As noted in our discussion of the excessive pricing complaint it seems
that there are periods when Mittal SA has priced above its preselected target price,
the import parity price. Bell clearly spotted this and decided to import.
[202] The import deal having been concluded, it appears that Mittal SA responded
by offering steel at a discounted price to Bell. However Bell was unable to take up the
by offering steel at a discounted price to Bell. However Bell was unable to take up the
offer because in importing it had to place an order that met its needs for a six month
period.126 It is not clear whether this discount was still available by the time Bell
required further quantities of steel.
126 What this does evidence are some of the difficulties in relatively small purchasers importing
product. Mr. Gary Bell explained that his company would naturally prefer to hold as little stock of
steel as possible. However the ability of his company to do so is clearly limited if it has to resort to
direct importation.
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[203] It is then not at all clear why Mittal SA offered the discount at all. Indeed
counsel for Mittal SA suggested that his client had ‘perhaps rather spitefully or
otherwise dropped its price’ in the manner described by Bell. There are no domestic
producers who compete in the South African market with Bell who were able to take
advantage of the discount and so steal a march on Bell who had committed itself to
import at what now turned out, as a result of Mittal SA’s belated offer of a discount, to
be a premium price. Certainly had Bell been offered the discount prior to committing
itself to the import order it would have been better placed to compete in both the
South African and international markets with other producers.
[204] We are not satisfied that the facts as presented permit us to get to the bottom
of this rather peculiar chain of events. We would want to proceed with particular care
on an inducement allegation. After all, on the face of it, the practice of competition
consists precisely in inducement. While we can envisage – as clearly does the Act –
a species of anticompetitive inducement, the facts of this case are insufficiently clear
to arrive at so farreaching a conclusion.
[205] We should however comment on one aspect of Mittal SA’s response to the
inducement complaint. Mittal SA insists that the argument that it has conducted itself
so as to induce its customers not to import is tantamount to a concession that it
competes with importers who constrain it in it pricing behaviour.
[206] However there is no merit in this argument whatsoever. We have dealt at
length with the cellophane fallacy in our treatment of the excessive pricing complaint.
This attempt by Mittal SA to effectively divine a concession on the relevant market
from the framing of the inducement complaint is nothing more than a case of the
from the framing of the inducement complaint is nothing more than a case of the
cellophane fallacy writ large. At the heart of the cellophane fallacy is the
understanding that even a monopolist is subject to a price ceiling, that is, to a price at
which its customers will find alternatives or cease purchasing the product altogether.
The framing of the inducement complainant does not eliminate the cellophane fallacy
– it draws attention to it and to the persistent failure or, more likely, refusal, of Mittal
SA to come to grips with it.
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Finding in respect of the inducement complaint alleged contravention of
Section 8(d)(i) of the Competition Act
[207] The inducement complaint is dismissed.
Remedies
[208] Having found that Mittal SA has contravened section 8(a) of the Act, we must
now consider what remedy to impose. For reasons that become apparent later we
will not be concluding the issue of remedies in this decision. We will however
consider what remedies were sought by the complainants, how they evolved in the
course of proceedings, and our competence to consider the remedies. We will not,
for reasons explained below, impose the remedies yet.
The relief sought
[209] When the complainants referred their complaint to the Tribunal in February
2004 it sought the following relief in respect of the ‘excessive pricing’ complaint.
A. For an order declaring that Iscor’s practice of employing import parity pricing
(as set out in paragraph 11.1.5 above) in the South African flat steel market
amounts to an abuse of dominance in terms of section 8(a) of the Act;
B. For an order directing Iscor to refrain from charging excessive prices in the
South African flat steel market;
C. For an order directing Iscor to levy factory gate prices in the South African flat
steel market, irrespective of whether the product is intended for export or not;
D. For an administrative penalty to be levied on Iscor of 10% of its annual
turnover for the financial year ended 30 June 2003 in the South African flat
steel market;
E. For those respondents that oppose the complaint to pay the costs incurred by
the complainants in prosecuting the complaint. 127
[210] On 26 April 2006 Harmony brought to the Tribunal an application to amend
127 See Founding Affidavit of Ferdinand Dippenaar, Pleadings Bundle, page 23.
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the relief it had originally sought. The amendment sought related only to the
excessive pricing allegation and not to the alleged ‘inducement abuse’. Essentially,
the complainants sought the insertion of a remedy as an alternative to prayer C in the
original relief sought. We set out below the original relief sought with the amendment
sought in bold type.
“…the complainants intend to apply to the above honourable Tribunal to
amend their referral of complaint, form CT1, by substituting the relief sought
in the referral in respect of the claim of excessive pricing with the following:
“A For an order declaring that the first respondent’s practice of employing
import parity pricing (as set out in paragraph 11.1.5 of the founding affidavit)
in the South African flat steel market amounts to an abuse of dominance in
terms of section 8(a) of the Act;
B For an order directing the first respondent to refrain from charging
excessive prices in the South African flat steel market;
C For an order directing the first respondent to levy factory gate prices in
the South African flat steel market, irrespective of whether the product is
intended for export or not;
C bis In the alternative to prayer C above , for an order directing that:
1 The first respondent may not itself, or with any natural or juristic
person, or through any entity, vehicle, trust or other juristic
person in which it has an interest, export flat steel products from
South Africa;
2 The first respondent divest its interest in the second respondent
to an independent third party or parties approved by the
Tribunal within such period and on such conditions as the
Tribunal considers appropriate;
3 The first respondent may not:
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i. impose upon any customer of its flat steel products
any condition in respect of the customer’s use or
resale of those products; or
ii. reach agreement on a condition with a customer of its
flat steel products, or enter into any arrangement or
understanding with such a customer, in respect of the
customer’s use or resale of those products;
4 The first respondent waive in writing any condition in any
agreement concerning the use or resale of flat steel products by
a customer;
5 The first respondent make known in the public domain, at all
times, its list prices, rebates, discounts and other standard
terms of sale for flat steel products;
D For an administrative penalty to be levied on the first respondent of
10% of its annual turnover for the financial year ended 30 June 2003 in the
South African flat steel market;
E For those respondents that oppose the complaint to pay the costs
incurred by the complainants in prosecuting the complaint;
F For an order granting further and/or alternative relief.” 128
[211] On 31 May 2006 the Tribunal heard argument in the amendment application,
and subsequently delivered its judgment on 19 June 2006. 129 The Tribunal refused
the amendment sought insofar as it related to the insertion of Clauses C(bis) (1) and
(2) but it permitted the amendment insofar as the insertion of Clauses C(bis) (3),(4)
and (5) is concerned.
[212] Having been granted leave to amend the relief sought by the Tribunal the
relief now being sought by Harmony is the following:
128 See pages 14 of the amendment application.
129 See the Tribunal’s judgment in the amendment application, Tribunal Case No.: 13/CR/Feb04.
85
“A For an order declaring that the first respondent’s practice of employing
import parity pricing (as set out paragraph 11.1.5 of the founding affidavit) in
the South African flat steel market amounts to an abuse of dominance in
terms of section 8(a) of the Act;
B For an order directing the first respondent to refrain from charging
excessive prices in the South African flat steel market;
C For an order directing the first respondent to levy factory gate prices in the
South African flat steel market, irrespective of whether the product is intended
for export or not;
Cbis In the alternative to prayer C above , for an order directing that:
1. The First respondent may not:
i) Impose upon any customer of its flat steel products any
condition in respect of the customer’s use or resale of those
products; or
ii) Reach agreement on a condition with a customer of its flat
steel products, or enter into any arrangement or understanding
with such a customer, in respect of the customer’s use or
resale of those products;
2. The First Respondent waive in writing any condition in
any agreement concerning the use or resale of flat
steel products by a customer;
3. The First Respondent make known in the public
domain, at all times, its list prices, rebates,
discounts and other standard terms of sale for flat
steel products;
D For an administrative penalty to be levied on the first respondent of 10% of
its annual turnover for the financial year ended 30 June 2003 in the South
African flat steel market;
E For those respondents that oppose the complaint to pay the costs incurred
86
by the complainants in prosecuting the complaint.
F For an order granting further and/or alternative relief.”
Our remedial powers
[213] The Tribunal is empowered to impose wide ranging remedies for
contravention of the Act. Of relevance here, our remedial powers include interdictory
relief, declaratory relief, the imposition of an administrative penalty, an order of
divestiture and the power to void all or part of an agreement. These are set out in
Section 58, the relevant clauses of which are set out below:
1) In addition to its other powers in terms of this Act, the Competition
Tribunal may –
(a) make an appropriate order in relation to a prohibited practice,
including –
i) interdicting any prohibited practice;
(ii) ordering a party to supply or distribute goods or services to
another party on terms reasonably required to end a prohibited
practice;
(iii) imposing an administrative penalty, in terms of section 59,
with or without the addition of any other order in terms of this
section;
(iv) ordering a divestiture, subject to section 60;
(v) declaring conduct of a firm to be a prohibited practice in terms
of this Act, for the purposes of section 65;
(vi) declaring the whole or any part of an agreement to be void;
(vii) ordering access to an essential facility on terms reasonably
required;
[214] Section 59, insofar as it is relevant to us provides:
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(1) The Competition Tribunal may impose an administrative penalty only –
(b) for a prohibited practice in terms of section 4(1)(b), 5(2) or 8(a),
(b) or (d);
(c) for a prohibited practice in terms of section 4(1)(a), 5(1), 8(c) or
9(1), if the conduct is substantially a repeat by the same firm of
conduct previously found by the Competition Tribunal to be a
prohibited practice;
2) An administrative penalty imposed in terms of subsection (1) may not
exceed 10% of the firm’s annual turnover in the Republic and its exports
from the Republic during the firm’s preceding financial year.
3) When determining an appropriate penalty, the Competition Tribunal must
consider the following factors:
(a) the nature, duration, gravity and extent of the contravention;
(b) any loss or damage suffered as a result of the contravention;
(c) the behaviour of the respondent;
(d) the market circumstances in which the contravention took
place;
(e) the level of profit derived from the contravention;
(f) the degree to which the respondent has cooperated with the
Competition Commission and the Competition Tribunal; and
(g) whether the respondent has previously been found in
contravention of this Act.
[215] Section 60 deals with the question of ‘divestiture’ and provides:
(2) The Competition Tribunal, in addition to or in lieu of making an order
under section 58, may make an order directing any firm, or any other person
to sell any shares, interest or assets of the firm if –
a) it has contravened section 8, and
b) the prohibited practice –
(i) cannot adequately be remedied in terms of another provision of
this Act; or
88
(ii) is substantially a repeat by that firm of conduct previously
found by the Tribunal to be a prohibited practice.
(3) An order made by the Competition Tribunal in terms of subsection (2) is of
no force or effect unless confirmed by the Competition Appeal Court.
4) An order made in terms of subsection (1) or (2) may set a time for
compliance, and any other terms that the Competition Tribunal considers
appropriate, having regard to the commercial interests of the party
concerned.
Competence to grant the relief sought
[216] Our reasoning has placed considerable emphasis on those underlying
structural circumstances in the market and on the ancillary conduct that enables the
first respondent, Mittal SA, to sustain the charging of an excessive price for flat steel
products in the South African market. It is appropriate then that we should focus on
remedies designed to cure this underlying structure and/or the ancillary conduct.
[217] Harmony has not asked for a structural remedy. It is however clear that a
solution of the excessive pricing problem might be to order Mittal SA to divest itself of
either the Vanderbijl or Saldanha plants. As already noted, in the period when the
Saldanha plant was jointly owned by Iscor and the IDC there was an agreement in
place which specifically prohibited Saldanha from marketing its output on the
domestic market. Indeed the very location of the plant is clearly designed to favour
exports, or, conversely, to disfavour sales on the domestic market. This agreement
nevertheless clearly evidences the threat that Iscor perceived to its dominance – and
specifically to its extraordinary pricing power – in the domestic market even from a
mill located as unfavourably, from the perspective of domestic market sales, as the
Saldanha plant.
[218] However, it is not our intention to compel Mittal SA to divest itself of steel
[218] However, it is not our intention to compel Mittal SA to divest itself of steel
producing plant. We should record that our decision to eschew a divestiture remedy
89
of the sort suggested – that is, divestiture of steel producing plant – does not imply
acceptance of the argument advanced by counsel for the second respondent,
Macsteel International, that would seek to limit our remedial powers to those sought
by the complainant. 130 We do not impose an order of divestiture because it is our
view that, under present market conditions, there are adequate alternative remedies
available. However should these prove ineffective, or capable of circumvention, that
is, should it not prove feasible to proscribe Mittal SA’s outputreducing and, hence,
excessive pricing conduct in the future, then divestiture may constitute the only
appropriate remedy because in the words of the Act cited above “the prohibited
practice cannot be adequately remedied in terms of another provision of the Act.”. 131
[219] One of the remedies sought by the complainants is the imposition of an
administrative penalty.
[220] Mittal SA contends that an administrative penalty cannot be imposed at the
instance of a private complainant, that it is only the public enforcement agency, the
Competition Commission, that is competent to ask for the imposition of an
administrative penalty. We reject this argument. The appropriateness or otherwise
of a remedy is derived from the public and statutory nature of the offence, rather than
private nature of the complainant. We are, in other words, mandated to impose an
appropriate remedy for conduct which has inured to the disadvantage of the
consuming public, of whom the complainants are a small part. In any event, part of
the purpose of the administrative penalty is to disincentivise future conduct aimed at
maintaining an excessive price and we cannot see why the complainants would not
have a direct interest in this objective. We note too that the imposition of an
administrative penalty is specifically provided for in the Act – indeed the Act
specifically provides for an administrative penalty in the case of a first contravention
of Section 8(a). The Act also specifically provides processes for the prosecution of
complaints by private complainants. Had the legislature intended that, in actions of
this sort, the administrative penalty remedy was not to be applied then it would have
said so. Instead, the Act allows the private complainant to step into the shoes of the
130 Although we need not decide this point for the purpose of this decision, provided fairness was
accorded to a respondent in advance that the Tribunal was considering a remedy not sought by a
complainant, there seems to be no reason why the Tribunal is confined only to remedies contemplated
in the pleadings.
131 Section 60(2)(b)(i).
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Commission in the event of a nonreferral, as in this case, without restricting the
complainant to a lesser class of remedies. Indeed where the legislature has intended
to place such a restriction on a complainant, it has done so in express terms as in
section 49D where following a consent order the complainant is limited to applying for
the remedies set forth in section 58(1)(a)(v) or (vi) or an award of civil damages.
[221] We note too – and this surely conclusively disposes of any question
surrounding our power to impose a ‘public’ remedy at the instance of a private party
that the Supreme Court of Appeal in American Natural Soda Ash Corporation and
Another v Competition Commission of SA and others has recognized that a private
complainant can seek an interdict as a remedy in a competition case even when it
has not shown injury to itself. It follows then that the principle that private
complainants are limited to private remedies has been rejected by the SCA. In a
telling passage in that case Cameron and Nugent JJA’s held:
“Ansac likewise underscores that an applicant, to obtain interdictory relief
under the Act, must place on the scale of risk to it of ‘serious or irreparable
damage’, but ignores the fact that obtaining such relief may not be an
intervenor’s sole interest in the proceedings. ” 132
Quantum of fine
[222] We have decided that it is competent for us to impose a fine in a complaint
brought by a private complainant. We have not decided whether to exercise our
discretion in favour of a penalty or if we do so, what the level of that penalty should
be. Mittal has not addressed us on these issues at all in its Heads of Argument.
[223] Ordinarily, if a party failed to avail itself of the opportunity to lead evidence or
to make submissions on a relevant issue, then at the close of the case it would have
to make submissions on a relevant issue, then at the close of the case it would have
to face the consequences of this omission. In this case the situation is different. Prior
to the close of evidence in this case in April 2006, Mittal advised the Tribunal that it
had reached an agreement with Harmony’s legal team that evidence in this respect
132 See American Natural Soda Ash Corporation and Another v Competition Commission of South
Africa and Others , Supreme Court of Appeal decision of 13 May 2005, Case No. 554/03, at paragraph
34. Our emphasis
91
would only be led if the Tribunal had come to a decision on the merits and
determined that a fine was competent. 133 From the record it appears that this matter
was left in abeyance at the end of the hearing of the evidence. Much water has since
flown under the bridge and it is not clear to the Tribunal whether this matter was
further explored between the parties. It was however not brought to our attention in
the intervening period between the termination of evidence and the commencement
of final argument. Certainly, neither party advised the Tribunal after its decision on
the amendment application of a need to resolve this issue prior to final argument.
[224] In the course of final argument it became apparent that there is a dispute
between the parties as to whether such an agreement exists. Counsel for Harmony
contends that the agreement was only to allow Mittal an opportunity to lead evidence
on this aspect if it so wished, and claims that it has not availed itself of that
opportunity.134 Since we were not party to deliberations between counsel, we are not
in a position to decide this point. It is clear that Mittal has relied on this alleged
understanding not to lead any evidence in mitigation during the course of the
evidence.135 Whether its reliance on this understanding is erroneous or not, Harmony
has done nothing to clarify the matter on the record. Mittal will now be afforded the
opportunity to lead this evidence. Harmony will be afforded an opportunity to lead
evidence in aggravation. Note that whatever evidence led, if any, is strictly confined
to this issue.
[225] The tribunal will convene a prehearing conference shortly to make
arrangements for the further hearing of this evidence.
Other remedies
133 See transcript pages 21472149.
Other remedies
133 See transcript pages 21472149.
134 See page 2424 of the transcript of 29 November 2006, where Harmony’s Senior Counsel
responded to the Tribunal Chairperson’s question as follows: “Adv Unterhalter : Chair, on the last
score it is said by Mittal that they are not dealing with the merits of the administrative penalty because
they would have that traversed at a separate proceeding in due course. They refer to what they claim
to be an agreement struck to that effect. We would just ask you to have regard to the record at page
2148 where this matter was traversed in proceedings before you and we indicated on that score that if
there was evidence to be led, it might conveniently to be done when Mr Tomlinson’s evidence was
heard and certainly we have no agreement that the administrative penalty part of the relief would be
heard at some later date. We invited them simply to put up the evidence and have it dealt with…”
135 See Mittal SA heads of argument, paragraphs 44.34.
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[226] We could, of course, take a decision in respect of the remaining remedies
sought, as the record in respect of these matters is complete. However we consider it
undesirable to consider remedies in a piecemeal fashion. Accordingly, we will
postpone considering the remaining remedies sought, until we have heard the further
evidence in connection with the administrative penalty and then we will issue a
decision in respect of all the remedies sought.
______________
D. Lewis
Concurring: N Manoim and M Holden
Tribunal Researcher: T Masithulela
For the Complainants : Adv. DN Unterhalter SC (with him Adv. M Wesley)
instructed by Cliffe Dekker Inc.
For the First Respondent : Adv. CDA Loxton SC (with him Adv. G Pretorius SC,
Adv. AG Gotz, and Adv. M Sikhakhane) instructed by
Bell Dewar Hall Inc.
For the Second Respondent : Adv. JJ Gauntlett SC (with him Adv. A Cockrell)
instructed by Edward Nathan Sonnenbergs)
93