A big fine, hopefully the last

Yesterday The Competition Tribunal announced a R534 million penalty on Sasol for overcharging within their chemical division between January 2004 and December 2007. Before we go into the details of the fine lets just put that value into perspective. In the 6 months ended December 2013 Sasol's energy cluster alone made R21bn operating profit. The Chemicals cluster made R3.6bn. When this news was announced the share price barely shrugged. The point I am getting at is that the amount is not significant. But it is important to evaluate for the future of Sasol as well as the kind of rhetoric to expect from influential institutions like the Competitions Tribunal.


From the release, this passage is the crux of the argument.


"Much of the Tribunal's judgment focused on the historical context within which Sasol was established, the significant State support and the protection which Sasol received over the years. These measures, the Tribunal found, contributed to Sasol Synfuels becoming one of the lowest cost producers of feedstock propylene, a by-product of Sasol's fuel production. Because of Sasol Synfuels' low feedstock propylene costs, SCI is a low cost producer of purified propylene and one of the lowest cost polypropylene producers in the world. SCI argued in the hearing that the Tribunal should ignore this cost advantage in arriving at its decision while the Commission argued that the cost advantage should be taken into account.


The Tribunal decided to take the cost advantage into account, finding that SCI's market positions in the markets under scrutiny were not the result of risk taking and innovation on its part since it has not engaged in any significant innovation in the production of either purified propylene or polypropylene, but rather due to past exclusive or special rights, in particular very significant historical state support for a considerable period of time."


So basically the tribunal is stating that Sasol's previous state support has resulted in a monopoly type position which they do not deserve to exploit. I guess that makes sense. Monopolies can be dangerous and do need to be regulated to a certain extent. But on the other side of the coin Sasol have very efficiently taken advantage of a fortunate situation. Just like the cement industry takes advantage of the abundance of limestone available or the Chinese have used their massive labour force to their advantage.


Sasol at the same time are adding value. Much of the concerns when it comes to African countries is the exporting of raw materials without adding value and then having to import the finished goods back at a premium. Yes, Sasol may have been reliant on the state in the past but today they are one of the countries biggest assets. In fact they are one of the biggest contributors to our fiscal system. Last year they paid R30.8bn in direct and indirect taxes. Wow! (They can probably just consider this fine an extra tax and feel good about it.)


But that is not all, they provide around 40% of South Africa's petrol requirements. That means that we need to import a whole lot less oil which is great for our trade figures. Sasol is not just important for shareholders (which includes the PIC) but for the whole country.

As you know, capital has choices and Sasol are currently spending billions of Dollars in the US. I wouldn't say it is purely because they are negative about South Africa, there is certainly a potential gap in the US gas to liquids market that only Sasol can fill. But these kind of findings is not helping the cause.