AYABONGA CAWE: Price wars intensify amid global oversupply in key sectors

Gluts everywhere, as prices tank in key product markets and producers fret over the bottom line.

Two recent data prints gave a rare glimpse into the world markets for automotive and processed agricultural goods. As prices further depart from mythical marginal costs, a spectre of economic insecurity stalks the immediate future. And as our policy tools square up to the inadequacy of our assumptions, the reform of the arrows in our quiver becomes ever more urgent.

Announcements from WeBuyCars and the Rhodes Food Group (RFG) both illustrate that supply gluts in key product markets complicate the public response in a changing multilateral context in depressing prices and profitability here at home.

So too did the announcements confirm the prevalence of overproduction as a persistent (rather than episodic) economic feature of our societies.

Or, as the Chinese suggest, widespread nei juan (involution)-type competition. This is characterised by cutthroat price wars to the death. A brutal and distinguishably imperfect form of market competition.

“International revenue declined by 7.9% due to slower global demand arising from an oversupply of deciduous fruit,” read the announcement by fruit canner RFG. Bumper harvests, record yields and favourable weather conditions in key fruit-producing regions, along with improved logistics and technological innovations in processing technologies, have made the glut persistent.

Asian markets have also signalled depressed prices for certain categories of citrus arising from oversupply. So too is the global sugar market experiencing a surplus of 2.6-million tonnes from this year’s harvest, slightly more than the annual production of the South African industry.

In the automotive sector, the WeBuyCars Sens announcement suggested that the auto merchant was experiencing margin pressure from “the rapid rise of competitively priced Chinese brands”.

Notwithstanding the strong showing and nearly a quarter of a million in a full-year dividend announced by WeBuyCars, the observation is ominous for local vehicle assemblers. The Chinese form of involution has been domesticated here at home, with new imported vehicles sometimes priced at ranges found in the used car market.

The price war in the automotive sector and its externalisation in key destination markets, read along with the oversupply in sugar, citrus and deciduous fruits, all signal the extent to which world market prices remain untethered from any notion of perfect competition. Prices move ever nearer to production costs, in some cases sneaking in below the cost base, necessitating a varied set of public responses.

The Mexicans have increased tariffs on sugar to 210% for nations with which they have no preferential trade arrangements, and our own sugar industry has submitted applications for an adjustment to the dollar-based variable tariff as import volumes rise. While the commission has yet to initiate any investigation into the matter, it is clear that the price mechanism is out of joint.

In his seminal work The Road to Serfdom, Austrian-British economist Friedrich Hayek spoke of the “sanctity” of the price mechanism under conditions of perfect competition. Hayek suggested the price system functions like “an engineer watches the hands of a few dials”, enabling all to adjust their activities in response. This assumption lies at the heart of our understanding of what problems or market failures policy must remedy, thus limiting our understanding when such price competition and overproduction become the norm.

“The time is out of joint,” Shakespeare wrote in the first act of Hamlet, “O cursed spite that ever I was born to set it right.” Our own assumptions of how markets ought to work are also broken by the cold facts of our conjuncture and the rapid growth in technology and processing and industrial power to produce stuff: an expansion in power that outpaces the distribution of demand or purchasing power.

For our sins, we have in spite been born to make it right. An unenviable task.

• Cawe is chief commissioner at the International Trade Administration Commission. He writes in his personal capacity.