“It is easy to imagine a group of buyers at first acting independently of each other and then forming an agreement to act in concert,” wrote British economist Joan Robinson in the mid-1930s, as she sought to set up her theoretical argument of monopsony. What followed was a series of dense prose, drawn straight from the Cambridge playbook of microeconomics. Yet a few pages on, hidden in a footnote, lay the following passage: “A monopsonist (single buyer) must decide upon the output that he will buy and allot it between different sellers.” Implied in this was the power not only of demand as an influence on price, but also the co-ordinated action enabled by “vergadering” every so often to manage prices by those who otherwise would be competitors.
A recent ruling by the Competition Tribunal took me back to Robinson’s theory of imperfect competition. As one of the first economists to lay siege to the assumption of perfect competition, she showed that buyers can exercise power too. Especially, as the tribunal ruling on the scrap cartel illustrates, when such co-ordination is given a veneer of legitimacy by mathematical formula. More importantly, 17 years after the end of the anticompetitive conduct cited in the market for iron-bearing scrap, regulation clearly matters. Especially, if prevailing relationships between ostensible competitors have “gamed” the price mechanism, at odds with competition laws as they have been understood since the late 1990s.
While Cape Gate (one of the scrap buyers) has filed an appeal, the episode further underscores why a mechanism to delink domestic prices (to enable local beneficiation) from international prices, especially when world prices are high, is crucial, as is the importance of it being enshrined in law and regulation. Five years after the alleged cartel conduct was said to have ended, the trade minister introduced a “price-preference point system” (PPS). For all the criticisms of this system, it is not unique. A similar (but fundamentally different in design) mechanism delinks domestic sugar, wheat and maize prices from artificially low global prices through an adjustable tariff administered by SA’s International Trade Administration Commission.
Such a system is crucial when world market prices for ferrous and nonferrous scrap surge due to shifts in demand conditions. Take copper, for instance. In the past 24 months, according to London Metal Exchange price data, the copper price has risen from just more than $8,000 a tonne in November 2023 to more than $11,000 a tonne by end-October. So too are the miners suggesting that the supply is not elastic (you cannot, as a finite resource, ramp it up in response to these favourable changes in price) such that the recycled material becomes crucial. Thus, deepening the incentive to export rather than sell to domestic foundries and mills that may melt it down for reuse in consumer and industrial applications in SA.
Furthermore, the PPS as a commonly understood framework for making such material available to local buyers, pre-empts the impulse to club together to game the price at which all of them buy. While most have derided the amendments made by the trade regulator to the price preference point system at end-October, the global context suggests that the mechanism is a crucial arrow in our quiver as we contend with global market uncertainty.
The rancorous noise will continue. We would be surprised if some were to be silent. However, from the debris of the imperfect competition of the early democratic period and the runaway incentive to export around the period of the global financial crisis, the PPS a decade in has not been without its errors or faults.
The tribunal judgment reminds us that its administration and the institutional advances now introduced, including the proposal of an industry-driven technical working group and prohibition of transactions in cash, are innovations worth welcoming. As they not only temper the incentive toward the “clubby” price-fixing “vergadering”, but also make material available when global conditions might make it scarce.
• Cawe is chief commissioner at the International Trade Administration Commission. He writes in his personal capacity.
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