Company announcements

Harmony welcomes Competition Tribunal decision in landmark excessive pricing case

March 27, 2007

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Johannesburg. Tuesday 27 March 2007. After four years of investigation, discovery, hearings and testimony, Harmony’s CEO Bernard Swanepoel today said he welcomed the precedent-setting judgment by the South African Competition Tribunal in its case against the excessive pricing of flat steel by Mittal Steel SA.

The Tribunal has found that Mittal did in fact abuse its dominant position by engaging in excessive pricing. This was Harmony’s principal complaint and the focus of well over 90% of the case.

The Tribunal did not uphold Harmony’s secondary complaint that Mittal was inducing customers not to deal with its competitors and it has reserved its decision in respect of remedies to be imposed, pending a further hearing on the quantum of any administrative penalty to be imposed.

“It’s been a long haul, but knowing what an unashamedly cost-conscious mining house like Harmony stood to gain from lower steel prices – and the downstream market as a whole – made the battle worthwhile. The little guys, who didn’t have market power or alternative supply markets, suffered at the hands of Iscor and later from Mittal’s unilateral, monopolistic behaviour for many decades. We think today’s decision will change the way some industries in South Africa will do business,” Swanepoel said.

Harmony explained that to charge excessive prices meant these prices ‘bear no reasonable relationship to the economic value of that good or service’ and are unchecked in the absence of competitive rivalry.

“Clearly,” said Swanepoel, “imports are no constraint to Mittal’s ability to charge these excessive prices, despite their assertions. Imports only represent the upper limit of Mittal’s pricing ability.”

Indeed, the ruling itself points out:

“The import parity price is not the competitive price in this geographic market. It is simply the price Mittal SA has selected because of its close approximation to its profit maximising monopolist’s price.” (Refer page 22).

Were Mittal to face domestic competition and be unable to prevent arbitrage, argued Harmony, the excess of supply over domestic demand would inevitably give rise to prices that would tend towards Mittal’s export pricing, which was as much as 63% lower than prices for domestic steel.

This is the first time the Tribunal has ruled on excessive pricing.

The Competition Commission had previously initiated a number of cases that did not reach the adjudicative phase in the airline, electricity and telecommunications industries (industries that were historically state owned) because they were settled by consent. In this vein, Harmony’s Heads of Argument referred to a paper entitled, “Exploitative and Exclusionary Excessive Prices in EU Law” by Motta and De Streel, in which they argued that liberalised sectors are amongst the best candidates for antitrust intervention, in the absence of effective regulation.

Harmony and DRDGold’s case laid out that Mittal’s behaviour constituted two contraventions of the Competition Act of 1998, which formed the basis for the complaint:

• Mittal’s application of a notional, selectively applied import parity price for flat steel was demonstrably excessive and detrimental to customers, contravening Section 8(a) of the Act;
• the steel company dropped its prices in some instances when South African users of steel imported, undermining the benefits of importing and thereby removing the incentive to do so, which contravened Section 8(d)(i) inducing its customers not to deal with competitors.

The Competition Tribunal ruled in favour of Harmony and its co-complainant, DRDGold in only the first instance.

Harmony successfully refuted Mittal’s defence that it would not be profitable if it were to charge less than the prices it commanded since the implementation of its import parity pricing system.

“We’ve never sought to regulate Mittal,” said Swanepoel, “we just wanted natural market forces like supply and demand to be left unhindered to determine the prices they charge. We think their financial results demonstrated how extremely profitable they have been over the five-year period, which supports our assertion that they’ve had one story for their shareholders and another for the Tribunal!”

Harmony’s legal team demonstrated that local flat steel prices were excessive by contrasting them with a series of comparators:

• Mittal’s export price for the same products; domestic steel prices charged by other manufacturers internationally (despite Mittal’s significant cost advantages);
• its domestic long steel product market prices (where Mittal does face local competition); and
• the prices it charges domestic customers who can use alternative materials or who have sufficient clout to enjoy bargaining power.

While Mittal’s dominance was not in dispute, its abuse of that dominance was in essence the prohibited practice the Tribunal has condemned and will now seek to remedy.

In Harmony’s Heads of Arguments, the complainants explain:

Mittal is an entrenched monopoly with a production capacity based on its economies of scale that is far in excess of the demand of the domestic market. It also achieved dominance because of the active intervention of the state, which sought to create a “national champion” and effectively built the steel industry. As a result, Mittal has privileged access to raw materials, energy and infrastructure. In consequence barriers to entry are particularly high and the threat of entry by a potential rival particularly modest.

“What this means is that we’ll not only be able to buy steel at lower prices, but they’ll be prices set by market forces,” said Swanepoel.

He said his Board would decide in due course whether they would seek damages in the civil courts.

In his testimony, Swanepoel said Harmony estimated it had been over-paying for steel for many years and that it would over-pay another R1.5 billion over the life of its mines. One of Harmony’s witnesses calculated the cumulative loss to consumers over the period 2001 – 2005 alone was in the order of R20.6 billion.

Swanepoel also said he had been pleased to see his concerns echoed by government during the course of the hearings “the matter has also been taken up at policy level, which we see as another real positive coming out of this whole process.”

For more details contact:

Bernard Swanepoel
Chief Executive
+27(0)83 303 9922

Amelia Soares
General Manager, Investor Relations
Tel. + 27 11 684 0146
+27(0)82 654 9241

Lizelle du Toit
Investor Relations Officer
+27(0)82 465 1244