[33]
The complainants have sought to use these comparisons to demonstrate that those South African consumers who are charged the Mittal
SA list price pay a price that is relatively excessive in relation to the prices charged to the other purchasers of steel listed
above. As may easily be imagined this approach has entailed the presentation of massive quantities of empirical evidence regarding
steel prices across the globe and in every conceivable market segment in which flat steel products are consumed. This approach –
the use of comparators in other markets – finds echo in a number of decisions of the courts of the European Union and those
of its member states. Many of these decisions are referred to below.
[34]
Mittal SA, for its part, has not engaged much with the approach of its adversaries and, hence, with much of the voluminous evidence presented in support of the price comparison approach. It has taken a quite different approach to the question of excessive pricing. In essence Mittal SA has argued that a charge of excessive pricing can only be sustained if the complainants can demonstrate that this is reflected in excessive profits. This has entailed a detailed excursion into the complex world of profit
measurement, a concept which has different meanings for economists, on the one hand, and, on the other, for the accountants and auditors
who are charged with preparing the accounts of companies. We have heard the deeply contending views of a spiraling group of learned
academicians and practitioners on, inter alia, the measurement of profit and the cost of capital and on the correct approach to the question of depreciation. This too has entailed the presentation of reams of
empirical data.
[35]
This, as may be imagined, has given rise to some rather bizarre testimony, with Mittal SA’s expert economist, Dr. Mike Walker,
attempting to persuade the Tribunal that, his client, far from profiting excessively from its pricing practices, is, the conventional wisdom of the investment community notwithstanding, a firm in dire commercial straits, indeed is a firm whose very future existence is placed in doubt. This judgment is rendered all
the more peculiar because it is contradicted by Mittal SA’s current performance and its own bullish, public assessments of
its future prospects. Counsel for the complainants lost little time in pointing out that were Dr. Walker’s criteria to be applied
to other companies, most of the blue chip companies listed on the Johannesburg Securities Exchange would suffer from a similarly
negative assessment.
[36]
Moreover, because Dr. Walker rightly conceded at the outset that his contentions regarding profit assumed the ‘efficiency’
of the firm in question – an inefficient firm may charge excessive prices and still not show exceptional profits – we
have also had to consider the question of efficiency and its various measurements, also an issue that has necessitated the presentation
of volumes of empirical evidence and much conceptual debate. This has also meant that because of Dr. Walker’s concession regarding
efficiency, he was forced to argue that his client was simultaneously efficient and commercially unsuccessful.
[37]
We, for our part, have taken a quite different view of the question of excessive pricing. We will not attempt a summary of our decision
here – that is the subject matter of the pages that follow. We will simply emphasise that, in our view, the arguments of both the complainants and Mittal SA would effectively have the competition authorities adopt, by virtue of Section 8(a), the methodologies of price regulation. This is not our approach. While, as will be seen, we do not shy away from the responsibility imposed on us by Section 8(a) to pass
judgment on the pricing practices of monopolies or, what we have termed, ‘super-dominant’ firms, we do so using principles
and methodologies firmly rooted in the practice of competition law and economics. Although we have found that Mittal SA is indeed
charging excessive prices, and is thereby in contravention of Section 8(a), we have not reached this conclusion by assuming the mantle of a price regulator.
Mittal SA’s price setting methodology
[38]
We set out below the basis upon which Mittal SA establishes the price that it charges for flat steel products in the domestic market. We note that until 1984 Mittal – or Iscor as it then was- was subject to price control with prices determined on a ‘cost-plus’ basis. From 1984 until about 1992 Iscor’s prices simply followed the domestic inflation rate. Mr. Dednam testified that by 1992 this pricing policy resulted in ‘imports coming into the country’ (presumably because of a relatively high domestic inflation rate) and so from then on the import parity price principle was applied. Mittal SA Heads of Argument, para 11.10 citing Mr. Dednam’s testimony at transcript page 2112.
[39]
Mr Dednam further testified in his evidence-in-chief that the import parity price had formed the basis of Mittal SA’s price formation until the end of November 2005 at which time the pricing basis changed from import parity price to one based upon a basket of domestic prices prevailing in selected domestic markets. We comment on this claim below.
[40]
In brief, since about 1992 and, on Mr. Dednam’s version, until late 2005, Mittal SA had arrived at its domestic price by establishing an FOB price based on one or other European price ( the prevailing Black Sea price was often referred to), adding on the relevant logistical costs of transporting the product to South Africa, such as the shipping, the stevedoring, the handling,
and the port costs, as well as a commission of 2.5% onto the price, and an import duty of 5% to the price itself, and finally adding
on to that the South African logistical cost for port and railage delivered into the Gauteng region and converting the price from a dollar price to a rand price based on the prevailing exchange
rate. It is worth recounting at some length Mr Dednam’s version of this methodology:
“MR DEDNAM: The calculation of the international price parity discounts was done as follows. We determining (sic) the FOB global price for a specific commodity and we basically benchmarked 3 basic commodities in the steel range. We benchmark against
the prices that we achieve in the international market ourselves. We look at what are the published prices through CRU, Metro Bulletin
research and World Steel Dynamics and what they are saying. We are also engaging into an in-house weekly conference call on Mondays
where we learn from the other Mittal companies in the group what are the international prices doing in the different regions.
So out of the intelligence that we actually gather from all these sources, we arrive at a FOB global price for a specific commodity.
We do it for hot rolled coil, for cold rolled coil and for galvanised products. Then we add on the relevant logistical costs such
as the shipping, the stevedoring, the handling, and the port cost. When we did these import parity calculations then, we added in a commission of 2.5% onto
the price, we added in an import duty of 5% to the price itself. We added onto that the South African logistical cost for port and
railage delivered into the Gauteng region.
We converted this US Dollar price at the latest exchange spot rate to a Rand price and we compared this price with the actual prices
in the pricelist itself and then we determine from that the discounts applicable to the marketplace to reflect the difference in
the international price and the price in the pricelist.
[41]
In summary, then, in the import parity pricing regime Mittal SA sets its base prices for flat steel products in the domestic market by calculating the notional cost of importing those products. It then adds a 5% ‘hassle factor’, essentially a reflection of the additional costs or ‘hassle’ entailed in importing over the advantage of utilising a
domestic supplier. The import parity price is determined monthly by Mittal SA and is conveyed to customers as a discount or surcharge off a list price that is published every three months.
[42]
According to Mittal SA IPPD is calculated as follows:
See Mittal Steel SA’s heads of argument, pages 80-81, paragraph 11.16.
| 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. 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 super-dominant or, expressed otherwise,
an effective monopolist. We will show – and this is the core of our argument – that Mittal SA has deployed its super-dominant
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. The complainants submit that the IPP is an artificially established price rather than a price determined through effective competition
in the domestic market. We note – and the significance of this will become apparent – customers who received a price below import parity, be this the rate charged in the international market or the rates charged to those who
qualify for one or other of the rebate schemes, were contractually prevented from redirecting this discounted product into the higher priced domestic market. At very least they were, before receiving the rebate, obliged to prove that the rebated steel had been used precisely for its intended
purpose, largely for exporting or competing against imports, and no other purpose.
[44]
In his opening address, Mr Loxton – senior counsel for Mittal SA – indicated that the terrain has changed because
“Mittal [SA] no longer employs either import parity pricing, nor even international parity pricing insofar as it resembles import parity pricing
and instead has moved to and is moving to as a result of its discussions with government, to a position where it bases its prices
upon a basket of domestic prices of net export in countries”.
See Mr Loxton’s opening address, transcript of 15 March 2006, page 40.
[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.”
See transcript, pages 1653-1654. See also Mittal SA’s heads of argument, pages 80-81.
[46]
A lengthy debate ensued between the complainants’ counsel and Mr. Dednam regarding this claimed change in Mittal SA’s pricing basis, an argument that, in our view, the complainants had much the better of.
See Mr Dednam’s evidence-in-chief, transcript of 5 April 2006, page 1654. See transcript of Mr. Dednam’s cross examination on this point from page 1744 to 1889.
Suffice to say that in response to a direct question from the Tribunal regarding the claimed change in the pricing basis Mr. Dednam
averred that the new pricing regime had been announced in mid-December 2005 and had been implemented from January 2006. The hollowness
of this claim was thoroughly exposed under cross-examination - indeed it appears that it had not been part of the announcement of 15 December 2005. On further examination and questioning from the Tribunal Mr. Dednam acknowledged
that the claimed shift in the pricing basis had had no discernible impact on the actual price charged. Indeed it is disappointing that a witness who we generally found to be helpful and, on some important points, candid – we note particularly his honest responses
to the role of the anti-arbitrage provisions in Mittal SA’s agreements with its discount customers and its export merchant, Macsteel International – was prepared to blatantly mislead the Tribunal on this point. That it appears to form part of Mittal SA’s ‘offer’ to the Department of Trade and Industry suggests that it is willing to mislead the public as well.
[47] In any event the point is of no great moment. The argument that will be developed in this decision holds that a non-excessive price
is one that is determined by competitive conditions in the relevant market. The manner in which the IPPD pricing basis works is to
determine the price of flat steel products in South Africa by reference to demand and supply conditions that prevail in an arbitrarily selected market abroad (for example, the ‘Black Sea price’) markets and then to add to that price the notional costs of ‘importing’ the product to South Africa. The ‘basket’ approach that Mittal SA now claims to have adopted effectively uses demand and supply conditions –
that is, competitive conditions - in an arbitrary array of other selected national markets to determine prices in the South African
domestic market. It falls foul then of the same argument that we will use to condemn the targeting of import parity as the basis for setting the domestic price. We have no idea of what competitive conditions prevail in the arbitrarily
selected and diverse range of countries that Mittal SA claims to place in its basket. Suffice to say that it is a very peculiar way
of settling on a price in our market which, we will insist, must, in order to be non-excessive, be set by reference to competitive
conditions in the relevant market which is the South African market for flat steel products. As we will show the key competitive
conditions in our market are Mittal SA’s structural super-dominance plus ancillary conduct aimed at maintaining the segmentation
of differently priced markets, the cumulative effect of which is to produce a price that is not influenced by any competition considerations
whatsoever and is, because of this, adjudged to be excessive.
The relevant market
[48]
The complainants contend that the relevant product market is that for flat steel products.
[49]
Mittal SA has been less clear in its identification of the relevant product market. At the outset of the case, Mr Dednam argued that defining the relevant product market as that for primary flat steel products is an oversimplification.
See page 132, 145-147 of the Pleadings Bundle, paragraph 1.6. and 6.4 of Mr Dednam’s answering affidavit.
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.
See Annexure “CD2”, page 216 of the Pleadings Bundle.
He averred that each of these seven categories predominantly attracted different buyers from different industries with Mittal SA’s customers in the mining industry purchasing plates and hot rolled steel. He further claimed that in each of the broad categories to which he referred there is a different degree of beneficiation and value-add. He argued that in the different categories different possibilities of substitution apply. For example, galvanized steel supplied to the building
industry competes with, inter alia, roofing tiles as a possible substitute. For hoppers and skips utilised in the mining industry,
the stainless steel product known as 3CR12 or aluminium could be a substitute. He contended that Mittal SA monitors its sales to specific industries, and takes cognizance of signs of declining sales due to competition from the use of substitutes
or the importation of steel.
[50]
Harmony however averred that there is a basic distinction at the production stage between flat and long steel products, which are typically produced in different
types of plants.
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 15-16.
Mittal SA recognises this distinction in a number of its internal documents, including in documents dealing with pricing policies and sales reports and when it reports its annual results.
[51]
With the exception of the arguments advanced by Mr Dednam, nowhere did Mittal SA or any of its witnesses challenge the classification of the product market as that for flat steel products. Indeed much of Mittal SA’s analysis appears to be premised on the existence of a market for flat steel products. Mr Dednam himself confirmed this distinction in his evidence-in-chief when he testified about the production process of flat steel products at Vanderbijlpark.
See transcript, pages 1641-1647.
Dr Mike Walker, an expert witness called by Mittal SA, based his analysis on a market for flat steel products.
See Dr Walker’s Final Report, at 224-240, [53] – [78].
Mr Tomlinson – one of Mittal SA’s witnesses - referred frequently in his evidence-in-chief to flat steel products as the relevant product category when assessing Mittal SA’s prices. His testimony relied on defining flat steel - with hot rolled coil as the base product – as a relevant product
market for a number of conclusions he sought to draw. When discussing pricing Mr Tomlinson noted: 
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