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South Africa: Competition Commission intends to launch Polymers Market Inquiry

3 April 2024
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Overview

  • The Competition Commission of South Africa (Commission) has published draft Terms of Reference (ToR) for a new market inquiry, this time in polymers (Inquiry).
  • The Commission believes that there may be features or a combination of features in the polymers value chain that impede, distort, or restrict competition.
  • It is not entirely clear from the ToR whether the Inquiry is intended to cover the whole polymers value chain, from inputs, through to plastic conversions, but the ToR categorises concerning features of the polymers sector and themes for the Inquiry, which are outlined in this article.

The Competition Commission of South Africa (Commission) has published draft Terms of Reference (ToR) for a new market inquiry, this time in polymers (Inquiry).   

This is the second market inquiry the Commission has launched this year, with four other inquiries currently ongoing.

The ToR notes that polymers are an essential input into many strategic and core segments of the South African economy and therefore, the polymers value chain is one of the Commission’s key focus areas for competition intervention and enforcement.

The ToR also notes that there are blockages in growing the South African polymers industry, despite it being identified as one of the lowest cost producers of polymers globally and the downstream plastics sector having access to relatively cheap feedstock produced domestically.

The Commission notes that the South African plastics sector has been performing poorly since 2002, with decreased employment, reduced production of complex products, less diversification, and an influx of cheaper plastic product imports.

Low margins in the plastics conversion sector (which is partly attributed to high input costs) has to some extent compromised plastic converters’ ability to invest in up-to-date equipment, resulting in missed opportunities for innovation and development in the domestic manufacture of plastic goods.

It is not entirely clear from the ToR whether the Inquiry is intended to cover the whole polymers value chain, from inputs, through to plastic conversions, but the ToR mentions that the features of the polymers sector and themes for investigation the Inquiry are as follows:

Inputs and raw materials: ethylene and feedstock propylene

Features that may impede, distort, or restrict competition

The Commission notes that there are only a few firms at this level of the polymers value chain supplying inputs/ raw materials. This, coupled with high capital costs and regulatory burdens, may allow current market players to sell at higher prices.

Topics for consideration/ assessment

  • barriers to entry and expansion of the raw materials market (i.e. coal, crude oil and natural gas) that supply feedstock;
  • barriers to entry and expansion for feedstock ethylene and propylene; and
  • price setting mechanisms for feedstock ethylene and propylene, encompassing an assessment on how feedstock prices are set, and whether these are at competitive levels.

Monomers and polymers

Features that may impede, distort, or restrict competition

The Commission notes that there are only a few firms at this level of the polymers value chain that produce ethylene and propylene, with no imports of these products. The Commission also notes that, due to insufficient volumes of feedstock ethylene, suppliers may abuse their market power by selling at prices that are not competitive.

Topics for consideration/ assessment

  • price setting mechanisms for propylene and polypropylene and whether these are priced competitively;
  • the price setting mechanism for ethylene and polyethylene and whether these are priced competitively; and
  • barriers to entry (e.g. regulatory, vertical integration).

Plastic converters

Features that may impede, distort, or restrict competition

At the plastic converters level of the value chain, the Commission is concerned with concentration levels and input costs.

The Commission notes that the plastic converters industry has some 1 800 players, but a few segments of the market are highly concentrated, including, PET bottles, supply of HDPE bottles for homecare and personal care and for beverages, supply of food grade chips using PET bottles and plastic refuse bags.

The Commission notes that high input costs in the plastic sector may have resulted in the sector becoming less diversified and producing less complex plastic products, and that the local plastics industry’s competitiveness has weakened, which has resulted in an influx of imports relative to exports.

The Commission also notes that the plastics sector has been identified as a priority sector by the South African Government, and that although the Plastics Industry Master Plan for Growth is in place, the plan does not appear to fully address features that may impede competition in the industry.

The ToR is silent on the topics for consideration/ assessment at this level of polymers value chain, and it is thus unclear whether this level of the value chain will fall within the scope of the Inquiry.

Next steps

Interested parties are invited to submit comments to the Commission on the ToR by 14 May 2024. All submissions will be reviewed, and a final ToR published by the Commission. The Inquiry will commence 20 business days after the publication of the final ToR and the final report will be completed within 18 months, as per the statutory requirements of the Competition Act, 1998.