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Chapter 3
Competition issues and market distortions
3.1
This chapter reviews a range of competition issues, including the impact
of the market dominance of key players in the industry. The chapter also
discusses the nature and extent of a range of market distortions. The chapter
highlights the need for effective competition in the industry and for greater
transparency.
Market dominance
3.2
The dominant market position of key players in the industry, especially
Incitec Pivot Ltd (IPL) in eastern and southern states, and CSBP Ltd in Western
Australia, and the possible implications this holds for competition, was
commented upon extensively during the inquiry. For example, the National
Farmers Federation (NFF) noted that 'it is prudent to examine the effect of
increased rationalisation within the fertiliser supply market, particularly on
the east coast of Australia, on the prices offered to Australian farmers'.[1]
3.3
Submissions expressed concerns about the market dominance of key players
and the possible impact on fertiliser prices. The Australian Cane Farmers
Association stated that:
Our concern is that with recent mergers in the Australian
fertiliser industry, additional profit resulting from domestic market power may
also be embedded in the price increases. When accounting for currency, freight
and handling, and margin, the price differential between global and Australian
prices appears excessive.[2]
3.4
The Bookham Agricultural Bureau also raised similar concerns.
We are concerned at the perception that a monopoly power is held
by Incitec Pivot. That this monopoly power is beneficial to that company is
apparent from is profitability and burgeoning share price. On two occasions the
Australian Competition and Consumer Commission (ACCC) considered the
competitive effects of mergers and acquisitions in the fertiliser industry and
came to the conclusion that there would be no lessening of competition...One
company now has fifty percent of the domestic fertiliser market. Irrespective
of the global pressures on the price of fertiliser this cannot be a healthy
situation for the consumer.[3]
3.5
Similarly, Mr Rodney Abbott of the Australian Fertiliser Services
Association (AFSA) commented that:
Mr Abbott – They [IPL] effectively
control the market. They manufacture a very significant quantity of the
fertiliser consumed in Australia. They sell a portion of that manufacture to
the other wholesale suppliers so the market is very aligned, if you like, to
one manufacturing source.
Senator O’BRIEN—So there was an error made
in permitting the merger of Incitec and Pivot?
Mr Abbott—It certainly reduced
competition.[4]
3.6
CANEGROWERS Isis Ltd stated that IPL, through acquisitions and mergers,
'has all but removed the competition in Queensland and can manipulate the
market'.[5]
3.7
Similar concerns were raised in relation to the market dominance of CSBP
in Western Australia. One witness characterised the situation in the following
terms:
Traditionally, CSBP were the only supplier here until some
competition was introduced. They still have a strong presence and probably are
the market leader—the trendsetter...despite not having a large manufacturing
capacity these days, they have certainly maintained their market dominance.[6]
3.8
One submission stated that the fertiliser market in Western Australia is
'dominated by a small number of large suppliers'.[7]
Another witness described the situation in Western Australia as 'maybe a
duopoly or a cartel'.[8]
3.9
CANEGROWERS Isis provided a telling example of the use of market power
by IPL. The company attempted to facilitate bulk purchase orders with fertiliser
companies Incitec Pivot and Hi Fert, which ultimately proved unsuccessful. The
company stated that Incitec Pivot was not prepared to discuss the matter,
claiming it was a matter for their local distributor/retailer to offer.
CANEGROWERS Isis argued that it was their understanding that Hi Fert wanted to
build market share in the area but expressed concerns to CANEGROWERS at
possible retaliation by IPL (by reducing the price, sales would then flow away
from Hi Fert) and declined to negotiate an agreement.[9]
CANEGROWERS Isis expressed the belief that the companies 'were firm in their
knowledge that that growers had limited options but to buy fertiliser at the
prices charged'.[10]
3.10
Some submissions alluded to the existence of cartel-like behaviour
amongst major companies.[11]
One submission noted that in the eastern states there are strong business
linkages between the major suppliers of fertiliser which facilitates 'cartel-like
behaviours'.
Specifically, the main producer/wholesaler is IPL (Incitec-Pivot
Limited) a merger of the previous two main suppliers into South-east Australia.
IPL through its ownership of Southern Cross Fertilisers in Queensland is
currently a monopoly manufacturer of phosphorus products in Australia.
IPL’s next biggest competitor is Hi-Fert, which was once owned
by WMC and then BHP but is now wholly owned by Elders and Landmark. Yet two of IPL’s
largest wholesale/retail customers are Elders and Landmark.
Given the incestuous business relationships where various
entities are both customer and competitor there is reduced price competition
and increased opportunity for cartel-like behaviours.
IPL made a smart business decision, vertical integration, in
purchasing Southern Cross Fertilisers – manufacturer and exporter of phosphorus
products – and this seems to have contributed to their rapidly rising share
price. However how much of the fabulous IPL share price has been generated by gratuitous
profit made by wholesale and retail price gouging of the Australian farmer
using the excuse of world parity pricing?[12]
3.11
The question was posed as to how the government can effectively ensure
that farmers are protected from cartel-like pricing when the fertiliser
companies are vertically integrated and 'enmeshed in business arrangements with
competitors who are also their customers'.[13]
3.12
Another submission also noted that:
Instead of opening the market to other competitors, the
fertilizer industry has shrunk to eliminate local and international competition
and any semblance of customer service, with local dealers being little more
than debt collectors and delivery men for the cartels who control the market.[14]
3.13
AgForce Grains noted that while there seems to be little direct evidence
of collusion or restrictions on competition, individual farmers are concerned
that anti-competitive behaviour exists, particularly in the fertiliser market 'but
do not have the resources or scope to investigate and prove it'.[15]
PGA Western Graingrowers also noted that 'it is difficult, if not impossible
for growers to assess whether cartel behaviour is having an effect on the price
of fertiliser', just as it is for the Australian Competition and Consumer
Commission (ACCC) to determine these matters.[16]
3.14
As alluded to above, much of the focus of the debate during the inquiry
centred on the operation of Incitec Pivot due to various mergers and
acquisitions that have occurred in recent years. As noted in chapter 2, Incitec
Pivot is a relatively new company, created by the merger of Incitec Ltd and
Pivot Ltd in June 2003.
3.15
The ACCC, in its assessment of that merger, determined that despite the
merger leading to the merged party having very high market shares in some product
categories, the importation of fertiliser products was likely to operate as an
effective competitive constraint on the merged entity, thereby thwarting any
attempt to raise the price of fertiliser to farmers.
Although it is expensive to enter any of the markets through the
establishment of a new manufacturing facility, the importation of fertiliser
products is fairly routine and does not present an insurmountable barrier.
Independent imports of fertiliser products represent in excess of 20 per cent
of all fertiliser products used by Australian farmers.
On this basis, the Commission believes that the proposed merger is
unlikely to result in a substantial lessening of competition.[17]
3.16
Incitec Pivot's scale and production capacity was greatly increased in
August 2006 with the purchase of Southern Cross Fertilisers Pty Ltd,
Australia's only manufacturers of mono-ammonium phosphate (MAP) and di-ammonium
phosphate (DAP). Again, the ACCC assessed that the proposed acquisition was
unlikely to result in a substantial lessening of competition.
The ACCC considered that the availability and substitutability
of imports as an alternative to the domestic supply of phosphate fertilisers,
together with the prevalence of import parity pricing for these products, would
be capable of continuing to be a constraint on IPL (and SCF) post-acquisition.[18]
3.17
The committee questioned the ACCC in relation to the efficacy of the
threat of imports as a restraint on the exercise of market power. Mr Tim Grimwade,
General Manager, Mergers and Assets Sales Branch of the ACCC told the committee
that:
Often the threat is sufficient to constrain the exercise of
market power by the merged entity. Indeed, if there is import parity pricing
then that threat does exist. Market participants did point to—I am trying to
recollect in Southern Cross—a number of potential or actual importers,
including HiFert, and the threat of import by other participants in the
industry.[19]
3.18
However, when pressed by the committee to provide an example of this actually
occurring, Mr Grimwade stated that 'offhand, I cannot tell you'.[20]
3.19
More recently, Incitec Pivot announced the further acquisition of Dyno Nobel,
an explosives manufacturer and supplier that is also involved in the North
American fertiliser market. The ACCC concluded that the proposed acquisition
was unlikely to result in a substantial lessening of competition in the
manufacture and supply of ammonia, ammonium nitrate or fertiliser products.[21]
3.20
The fertiliser industry argued that, despite the market dominance of key
players, a competitive market situation exists in Australia. IPL stated that:
The supply of fertiliser in Eastern Australia is highly
competitive, and cannot be described as monopolistic. The high degree of
competition within the supply chain to supply product to distributors also
disproves any suggestion of cartel conduct within the industry.[22]
3.21
IPL conceded that although the company is 'unquestionably a large
player' in the supply of fertiliser in eastern Australia, other large manufacturers
and suppliers such as Hi Fert and Impact place a 'constant and substantial
competitive discipline' on IPL.
Competitive tension is further heightened within Australia by
the relatively low barriers to entry in the industry, given readily available
port and distribution facilities, limited brand loyalty given the commodity
nature of the products, and significant customer switching. IPL’s market share
in the distribution of fertilisers has dropped from 73% to 58.5% since 2003,
providing clear evidence of the competitive nature of the industry.
In addition to direct competitors, IPL faces competition from
numerous large, rural agribusinesses, some of which are also IPL’s own
customers. These include ABB and Hi Fert, which also directly import fertiliser
in competition with IPL.[23]
3.22
The committee questioned IPL in relation to the above assertions. IPL acknowledged
that its market share at the wholesale level is 70 per cent of the east coast
market – which is a considerable greater than its share of the retail market
(which is 58.5 per cent).
CHAIR—In your executive summary of your presentation, you
say:
The healthy state of competition in the industry means that
it cannot be described as monopolistic, or involving any cartel conduct.
How much of the Australian market do you supply?
Mr Whiteside—At a retail level, our
market share is—
CHAIR—No, at the wholesale level.
Mr Whiteside—It is around 70 per
cent of east coast Australia.
CHAIR—You do not think that is monopolistic? You are
pulling my leg, aren’t you?
Mr Whiteside—I think, if you look at
the structure of the market—
CHAIR—No. Isn’t 70 per cent of anything a monopoly?
Mr Whiteside—No, I do not believe it
is.
CHAIR –... Think about it: you do not think 70 per cent of
the market puts you in a monopoly position?
Mr Whiteside—If you suggest that
being in a monopoly position gives us control—
CHAIR—A majority.
Mr Whiteside—and means other
organisations cannot operate freely in that market—
CHAIR—That is not what I am saying at all. You are the
majority supplier with 70 per cent of the market. I would have thought you had
a monopoly on the market.[24]
3.23
The committee notes that monopoly situations are generally characterised
as situations where there is only one supplier and market barriers make it
impossible for new competitors to enter the market. A monopoly firm has no
competition and thus has market power. The committee notes, however, that complete
monopoly situations are rare but there are often situations where one large
firm dominates a market. In these situations, with only a few much smaller
competitors, this larger firm is able to exercise monopoly control. In this sense,
a monopoly-type situation in the fertiliser industry could be seen to exist
with regard to IPL and CSBP.
3.24
The committee further notes that barriers to entry in the industry are
high, especially at the manufacturing level. An IBISWorld study of fertiliser
manufacturing in Australia concluded that the barriers are high and 'these
barriers are increasing'. The study noted that large initial capital outlays
are required to enter the industry; strong customer loyalty derived from
existing ownership structures can pose significant entry barriers; and given that
the majority of raw materials are imported, manufactures must maintain a
significant network of international suppliers to provide raw materials for
fertiliser manufacture.[25]
3.25
Submissions and other evidence indicated a greater degree of competition
at the retail level than at the wholesale level. A NFF member survey showed that
on average, farmer survey participants had 3.3 distributors in their local
region. However, the NFF stated that while there are multiple suppliers/distributors
in each region there are only a limited number of fertiliser companies who
supply these distributors. For example, there are seven stores in Bundaberg
that sell fertiliser. Six of these sell Incitec Pivot and one sells Summit fertiliser.
Summit also sources some of its fertiliser from Incitec Pivot.[26]
3.26
The NFF further noted that approximately 9 per cent of NFF survey
participants also stated that they had only one fertiliser distributor in their
local region. – 'it is these situations that particularly concern the NFF, as
there is a greater potential for excessive profiteering and price gouging due
to monopolistic pressures'.[27]
3.27
The Australian Fertiliser Services Association also argued that
competition at the wholesale level has been reduced but competition at the
retail level 'is still very strong'.[28]
Committee view
3.28
The committee considers that the market dominance of large players in
the fertiliser industry seriously compromises effective competition in the
industry. This in turn has implications for the pricing of fertiliser products
in this country. The committee notes that recent mergers and acquisitions in
the industry have resulted in an increase in market concentration and a
lessening of competition.
3.29
The committee believes that an effective monopoly may exist in relation
to the fertiliser industry in Australia – with the market dominance of Incitec
Pivot in eastern and southern states and CSBP in Western Australia. The
committee considers that the fertiliser industry operates in a distorted market
not governed by the usual supply and demand factors and is, to a large extent,
a law unto itself in the setting of fertiliser prices.
3.30
The committee notes the widespread perception in the farming community
that fertiliser was stockpiled to inflate prices paid by customers. The
committee believes that fertiliser prices in these instances should not have
increased when 'old' stock was still available. Similarly, companies should, as
a matter of course, pass onto customers the benefits of the recent falls in
global fertiliser prices in local prices.
Market distortions
3.31
Concerns were raised during the inquiry that the market dominance of
key players in the industry have led to distortions in the market and
advantageous pricing structures for companies which have disadvantaged farmers.
Particular concerns were raised regarding the availability of supply of
fertiliser products from late 2007 to early 2008, and these issues are
discussed below.
Stockpiling of product
3.32
A number of submissions and other evidence alleged that there was
hoarding of fertiliser product in sheds and on ships and that it was not
released until prices increased.
3.33
The NSW Farmers Association stated that their members questioned how
there can be fertiliser stockpiled in sheds or on ships waiting to be unloaded
yet retailers do not have any available for sale or they cannot inform the
customer of when it will be available or at what price.[29]
3.34
The NSW Farmers Association noted that:
...people who have been saying to me that there is no shortage of
fertiliser; it is a matter of companies controlling the release of fertiliser,
which is applying pressure to the market. I do not know whether that is right
or not...I have heard similar stories where people do believe that there is product
out there, but the release of that product is applying the pressure and is
therefore applying pressure to the price variations.[30]
3.35
The Hon Dean Brown AO, Premier's Special Adviser on the Drought, South
Australian Government, provided a number of statements from farmers on the Eyre
Peninsula outlining serious concerns relating to trading practices, including
the stockpiling of product. The farmers were identified as Farmers A to E. In
the case of Farmer A the farmer had sought to obtain fertiliser from a company
but the company refused to supply it to the farmer, knowing that the price was
likely to go up; the company told the farmer to get the fertiliser elsewhere.[31]
3.36
Another farmer noted that:
It is also hard to work out the pricing of DAP this year and the
availability of it. I have been told that there is plenty of fertiliser
available but it is being held back as the price rises.[32]
3.37
The NSW Farmers Association noted that the Australian crop production is
relatively constant, as is the area of crop planted. Similarly, one would expect
the demand for fertiliser to be relatively constant, allowing fertiliser
suppliers to fairly accurately predict patterns of demand – 'it is difficult to
understand why with a relatively constant demand cycle how there can be a
shortage of product'.[33]
3.38
IPL rejected the assertions of hoarding of fertiliser product.
If people saw stock in our company’s sheds during a time when we
were not taking orders, then that stock had been either sold or allocated to
customers and was awaiting dispatch. At no stage in 2007 or 2008 have we had
fertiliser stocks in our sheds which we were unwilling to sell. Stock in
up-country sheds in most cases is owned by our distributors, and IPL has no
influence on its availability to farmers.[34]
3.39
The committee questioned IPL further on the allegations of hoarding. IPL
initially denied that there were situations where there were fertiliser supplies
in storage and that the company would not price or supply product.
CHAIR—Are you denying that there were fertiliser supplies
in storage that you would not price or supply?
Mr Rintel—Yes.[35]
3.40
This statement was later qualified by IPL to indicate that there was a
period when the company did not take orders due to insufficient stocks.
Senator NASH—Are you saying that on
absolutely no occasion did Incitec give any direction whatsoever to any agent
or reseller to withhold a price?
Mr Rintel—To the best of my
knowledge, absolutely not. There was a period of time in November and December
last year when Incitec Pivot had stopped taking orders for ammonium phosphates
as we did not have sufficient stocks in our shed to meet the unprecedented
demand, which had been brought forward significantly. On that basis, we were
not in a position to provide pricing on ammonium phosphate because we did not
have a known cost position on the product at that particular time.[36]
3.41
IPL provided to the committee, on a confidential basis, information on
the quantity of MAP, DAP and single superphosphate (SSP) held in storage over
the past two years and the overall storage capacity over that period. While the
data indicate substantial volumes of stock on hand in late 2007 and early 2008,
IPL noted that the stock on hand figures do not represent the volume of
fertiliser 'sitting in sheds' and available to be sold. During the stock
shortages in late 2007 and early 2008 IPL stated that up to 100 per cent of the
volumes indicated in some months were already committed to IPL's dealers and
agents.[37]
3.42
The committee further questioned IPL if any impediments were placed on agents
by the company limiting their capacity to resell fertiliser products.
CHAIR—Are you prepared to say here today that there were
no agents in Australia whom you supplied in the spring of last year that had
any restriction on their capacity to resell fertiliser as soon as it hit the
shed?
Mr Rintel—To the best of my
knowledge, no.[38]
3.43
The committee also questioned IPL about their export of fertiliser
products in late 2007, when farmers were experiencing difficulties in sourcing
supply.
Senator NASH—Given what you have said about
the importance of the Australian market, why did you continue to export at the
end of last year when there was obviously a supply issue here?
Mr Whiteside—We did not. We exported
at a time when we did not believe there was a supply issue...
Senator NASH—We are talking about September
last year onwards?
Mr Whiteside—I will get our export
program for you. Certainly by December we were not exporting any product. Our
exports occurred in July, August and September, and maybe into October, when
our forecast was that we would have sufficient product to meet domestic demand.[39]
3.44
As noted above, IPL stated that the company was not exporting product
'by December'. IPL subsequently provided information to the committee, on a
confidential basis, on the total quantity of fertiliser exported by month
between July and December 2007. The information indicated that the company did
in fact export fertiliser product to several overseas countries in July through
to October 2007 and in December 2007.[40]
3.45
The committee notes that IPL was exporting fertiliser products at the
same time as Australian farmers were having difficulties in obtaining supplies
locally.
3.46
The ACCC in its report on fertiliser prices stated that suppliers
withholding stock from the market in order to sell later at higher prices will
not generally breach the Trade Practices Act 1974 (TPA) unless it
involves some misleading or deceptive conduct on the part of suppliers. For
example, a supplier might misrepresent the reason for its inability to supply
or not truthfully explain why it chose not to supply.[41]
The committee notes that the TPA needs to be strengthened to address this
concern.
Price gouging
3.47
General allegations of price gouging by companies were made during the
inquiry. 'Price gouging' refers to situations where suppliers are said to be
taking advantage of rising international prices by increasing their own prices
beyond levels that could be justified in the circumstances.
3.48
One witness stated that:
It is hard to believe that there would have been no price
gouging. I believe there would have been product within Australia that was
sourced at much lower cost and the opportunity has been taken. It will be
difficult to achieve that evidence, of course, but it is very hard to believe
that it would not have occurred. It would also be useful to simply look at a
company like Incitec Pivot, which has been manufacturing here and making considerable
profits over time when the competition from overseas was very strong. Now that the
competition from overseas is different and there is a shortage of supply, they
are simply choosing to make more profit. It is nought to do with their cost of
production.[42]
3.49
Witnesses raised the issue of price gouging by companies in relation to
fertiliser that was in store yet companies were reluctant to provide information
on pricing or availability of the product.[43]
3.50
The committee also raised the issue of whether the expectation of high
grain prices and a shortage of fertiliser encouraged price gouging by
companies. The NSW Farmers Association argued that such situations may reflect
profiteering by companies.
The phrase ‘price gouging’ is very strong and there is a certain
amount of allegation there which I do not want to make. All I can tell you is
that there have been lots of discussions about people having concern in that
area. I suppose if you are sitting on the other side and you are a commercial
operator then obviously commercial operators are about making profits for their
companies so I cannot tell you what their basis of thinking is, but I can tell
you that ours is extreme frustration at the prices.[44]
3.51
The committee notes that in evidence to the inquiry, IPL rejected
'outright' any accusation of price gouging or unfair conduct.[45]
3.52
The ACCC, in its report on fertiliser prices, found little evidence of
price gouging. The report noted that practices such as raising of prices by
suppliers until a sufficient number of purchasers drop out of the market, unless
carried out in conjunction with anti-competitive arrangements 'is neither
illegal under the Trade Practices Act nor economically inefficient or
undesirable'. The ACCC noted that charging higher prices in a time of shortage is
not uncommon and 'is not of itself a breach of the Trade Practices Act'.[46]
Again, the committee notes that the TPA needs to be strengthened to address
this issue.
Availability of fertiliser
3.53
Evidence to the committee indicated that the availability of fertiliser
was a problem for farmers, especially in the period from late 2007 to early
2008. The NSW Farmers Association stated that members reported that when they
approached their retailer they were unable to get information on when
fertiliser would be available. Furthermore, when farmers attempted to order fertiliser
they were unable to receive any certainty regarding price. The Association also
reported that when farmers had managed to purchase fertiliser, the price had
suddenly increased when the product arrived.[47]
3.54
The Association stated that:
This year would appear to me to be a very different situation.
If you go back and have a look over the last 10 to 15 years, many fertiliser
companies were actually offering fertiliser with payment two, three and four
months down the track. Now you are getting into a situation where you cannot
even get a price for the product in some cases because they are not sure what
it is going to be, or we are led to believe they are not sure what it is going
to be.[48]
3.55
The Association noted that this creates a great degree of uncertainty
for buyers in the market.
...many members of ours and many members of the industry are out
there and are extremely frustrated. They struggle to have control over any
pricing and inputs they really must be using. They do have a lack of control
over any pricing, a lack of ability to budget...We do not know where it will be
in six months time and, when we have to do some key budgeting for all of these
things, it is impossible to work that in.[49]
3.56
The Australian Fertiliser Services Association (AFSA), which represents
small and medium size businesses in the retail sector, complained about the
lack of transparency with regard to information from manufacturers and
importers concerning fertiliser supply and pricing. The Association argued that
their members are the 'meat in the sandwich' between manufacturers and their
customers – the farming community. Mr Abbott, National President of AFSA,
noting difficulties in sourcing supplies of fertiliser, stated that:
These supply limits are affecting most regions but are
particularly severe in Victoria. The reasons and mechanisms for these supply
limits to date have been poorly communicated by the manufacturing and importing
sectors, creating an element of distrust in the market.[50]
3.57
Mr Abbott noted that 'in the case of our own business, we were unable to
source fertiliser from our normal supplier for two months, without
explanation'.[51]
AFSA also noted that small retailers:
...[have] little or no control over the content, accuracy and
timing of communication from manufacturers and importers about current and
future supplies. A lack of communication raises concerns about transparency and
therefore what is likely to happen in the industry in the future.[52]
3.58
IPL acknowledged difficulties in meeting demand in 2007-08. IPL noted
that while fertiliser suppliers can generally anticipate likely farmer demand
based on historical consumption and forecast conditions, in 2007-08 there was a
significant change in farmer purchasing patterns which resulted in many farmers
bringing forward fertiliser purchases. In addition, there was an improved
rainfall outlook across many regions in eastern states after years of drought.
The combination of these factors led farmers to bring forward
their fertiliser purchases and resulted in an unforeseen level of early season
demand for fertiliser in Australia, well beyond forecasts. In the period
October 2007 to February 2008, IPL experienced a significant increase in
fertiliser demand compared to the same period 12 months earlier.
Domestic suppliers moved rapidly to meet this unanticipated
demand. However, their ability to source substantial volumes on very short
notice was affected by global supply chains. Lead times for delivery of
imported product meant that during December 2007, and January and February
2008, IPL stocked out of fertiliser at a number of its distribution facilities.[53]
3.59
The committee questioned IPL as to why the company failed to anticipate
the increased demand from farmers, given that all in the industry – both
farmers and suppliers – were aware of likely price increases.
Mr Rintel—It was not reflected in
the forecast which we rely on our business partners to provide us of, firstly,
quantity of produce and, secondly, timing of requirement...
Mr Whiteside—...we did everything we
could to bring forward supply. We brought forward a number of imported vessels
to try and meet early demand but we were not able to meet all additional demand
because of the short notice.[54]
3.60
IPL noted that there was 'unforecast demand' in the spring for the
subsequent winter cereal crop 'which we had never experienced before' which
meant agents and dealers were unable to supply product.[55]
3.61
IPL provided to the committee, on a confidential basis, information on historical
demand and known demand forecasts for fertiliser products for 2007 and 2008.
The data indicates a significant bringing forward of demand in December 2007 to
March 2008, with actual sales well above the previous year levels and
significantly above forecasts. The data shows that while IPL was able to supply
more fertiliser than it had anticipated in response to demand, there were
inadequacies in meeting overall demand.
Failure to honour contracts
3.62
The inquiry received numerous allegations of companies failing to honour
contracts. The farmers in question were then compelled to renegotiate contracts
but at a higher price.
3.63
Mr Dean Brown provided a number of statements of concern in relation to
trading practices from farmers on the Eyre Peninsula. The farmers were
identified as Farmers A to E.[56]
In one case, Farmer B, had ordered fertiliser from a rural supply outlet at an
agreed price. The company withdrew from the contract, having reached an earlier
agreement to supply it. As a result, the farmer's only option was to re-order
at a higher price. Farmer C placed an order with a supplier. The supplier
informed the customer that their supplier had refused to honour the order, yet
there was ample product in store.[57]
Mr Brown observed that:
Each of these cases reflects a rising fertiliser price. The company,
having agreed to a price—this is for the breach of contract—then pulled back
from supplying it and eventually the farmer had to buy it at a higher price.[58]
3.64
Further statements were provided by Mr Brown involving alleged breach of
contract. Farmer D alleged that a company broke a contract to supply fertiliser
that had been ordered via a local agent. This resulted in a dramatic loss of
income for the farmer as the crops were unable to be sown in time. Farmer E
also placed an order for the supply of fertiliser which the company did not
honor – 'the result of all of that was that Megafert did not end up supplying
the fertiliser. It was sold to someone else, apparently at a higher price'.[59]
3.65
Mr Brown also cited the case of a farmer near Ceduna:
...where they had actually had a firm, written contract for a
certain tonnage but where they only got about half that tonnage at the contract
price and then had to pay about $300 more per tonne for the other half is, I
think, a clear example of an extreme breach of a contract and there was
absolutely no doubt in that case exactly what had occurred.[60]
3.66
Mr Brown indicated that the cases cited above reflected the 'norm' in
terms of problems encountered by farmers on the Eyre Peninsula.
In the examples I have had of personal conversations with
farmers, I think there are much more extreme cases than these. In some cases,
though, the farmers were not willing to provide evidence...So I stress the fact
that I think there are much more extreme cases than are outlined in the letters
from farmers A to D.[61]
3.67
The committee notes that IPL stated that 'the broken contracts that the
committee has heard about in South Australia are not contracts involving
Incitec Pivot; they are contracts between farmers and fertiliser distributors'.[62]
3.68
In other evidence to the committee, a farmer stated that he had placed
an order with a company which he understood to be a binding agreement at a
particular price, but that the supplier refused to honour the order. The farmer
participated in verbal negotiations, but this was later confirmed in written
advice from the company, including their buy-in price.[63]
We were given a delivery date...On the day the fertiliser was to
be dispatched from Incitec we got a message from our local rep, who said that
they had turned the trucks around and they were not going to deliver the fertiliser.
This caused some ructions with our supplier. We rang them and they said they
had found some product and they were going to continue with the supply...We
kept ringing and eventually it got to the point where, in early February, the agreement
was withdrawn and we had to meet another agreement to secure supplies. It cost the
group I am involved with about $60,000 extra, over the cost of the fertiliser.[64]
3.69
The witness indicated that although he may have a civil claim against
the company, he was reluctant to pursue the claim through the courts because of
the imbalance in potential resources available to a small group of producers
vis-a-vis the supplier involved.[65]
3.70
The NSW Farmers Association stated that indicative prices are often
quoted but this is often not the final price paid by farmers:
We have certainly had people who have gone in to get indicative
prices of fertiliser and been told a price, only to be told another price later
on. It is not my experience that firm contracts have been written, but it is
most definitely my experience that indicative prices have been given. I think
some of the companies have been very cautious in how they are giving those
indicative prices because of the volatility in the market. There is some of
that going around; there is no doubt about that. It also adds very much to the
frustration when people think they have locked it in at a price and have then
gone and done their budgets on that, only to turn around and find that the
input costs due to fertiliser increases have moved once again. It is something
that has happened. You have heard it from growers and we have most definitely
heard it from growers. All I can say is that that sort of thing has been
worrying people.[66]
3.71
The ACCC, in its report on fertiliser prices, stated that it was not
provided with specific allegations of suppliers failing to honour contracts on
a systematic, or even individual basis, with the allegations being general in
nature. The ACCC noted that commercial disputes such as these are of a
contractual nature and generally do not fall within the ambit of the TPA.[67]
3.72
The ACCC indicated to the committee, however, that if allegations of
bullying or intimidation were involved it could come under the unconscionable
conduct provisions of the TPA. The ACCC, could not, however, cite a successful
prosecution under these provisions in recent years, although three cases are
before the courts at present.[68]
The committee considers this situation again highlights the need for a
strengthening of the TPA.
Misuse of market power
3.73
Other examples of the misuse of market power were highlighted during the
inquiry.
Port access
3.74
Some witnesses argued that there is difficulty in accessing portside
warehousing space for imported fertiliser products, in circumstances where companies
wish to deal directly with overseas suppliers. Mr Andrew Helps of Climate
Friendly Fertiliser Pty Ltd stated that:
It is always a problem when quasi-monopolies are operating in a
marketplace, when there is no genuine competition. You look at what is
happening and you say, ‘Gee, I could make a dollar; I could bring some cargoes
in there,’ but you cannot get them in because there is no port capacity.[69]
3.75
The committee also received in camera evidence supporting these
arguments.
3.76
Other witnesses argued that port access is not a major problem. Mr Paul Duckett
of the Australian Energy Company stated that:
One of the features of the industry is that, as long as you have
the storage capacity at the ports, anyone can order a shipload of urea or
phosphate fertiliser and bring it in tomorrow. In fact, we have seen a number
of start-up organisations in recent years which have done just that.[70]
Restricted distribution arrangements
3.77
Confidential information was received from a fertiliser manufacturer
indicating that for over 30 years the company has been unable to purchase raw
chemicals directly from an overseas manufacturer or their Australian agents but
instead has to go through several middlemen to make a purchase which forces up
the price of the product.
Other issues
3.78
Other questionable business practices were highlighted during the
inquiry.
3.79
The committee received evidence of alleged intimidation of resellers
where a single supplier operates. One witness noted that:
Mr Katter—I am reluctant to say anything that would
indicate any of my retailers, because—
CHAIR—They are intimidated.
Mr Katter—They are definitely intimidated. I would not
like to go beyond saying that there is an implied intimidation out there. None
of them would divulge that because they have to rely for a range of products—
CHAIR—On a sole provider.
Mr Katter—Yes. There is no-one else in Australia
who can provide that range of products, so if you want to be a single-stop shop
then you better stay in with Incitec.[71]
3.80
In other evidence, the committee received confidential information of
sugarcane farmers on 30-day accounts having the costs to the reseller passed
onto the users of the 30-day account from the original supplier at 18 per cent
per cent. Mr Brian Cassidy, Chief Executive Officer of the ACCC,
indicated that such practices may be a breach of the unconscionable conduct
provisions of the TPA.
If in the contract you have a unilateral variation clause which
allows you to subsequently change the contract having signed it, you can change
the contract and say that the percentage is going to be 18 per cent a month.
That is something that is able to be examined under the unconscionable conduct
provisions. I cannot give you a straightforward answer on that. It would really
depend on the circumstances surrounding how they get charged the 18 per cent.[72]
3.81
Other practices also came to light. In confidential evidence, a reseller
stated that notification of fertiliser price increases are often advised close
to close of business with little time given to pick up the fertiliser product.
Previously, price lists were notified allowing a period of grace to collect the
product.
Addressing anti-competitive behaviour
Review of the Trade Practices Act
3.82
Many of the allegations cited above relating to stockpiling of
fertiliser products, price gouging, and problems related to the availability of
fertiliser raise important issues concerning the role of the Trade Practices
Act and the ACCC.
3.83
The Trade Practices Act contains a number of provisions related to
anti-competitive practices and misuse of market power. The relevant sections of
the Act are outlined below.
Part IV – restrictive trade
practices
Section 45 – Anti-competitive
practices
3.84
Sections 45 to 45E of the TPA deal with a variety of prescribed
agreements and anti-competitive arrangements between businesses. This section
applies to cartel behaviour, although the TPA does not specifically use that
term.
Section 46 – Misuse of market power
3.85
Section 46 provides that a corporation that has a 'substantial degree of
power' in a market shall not 'take advantage' of that power for the purpose of eliminating,
or substantially damaging, a competitor in that, or any other market; preventing
the entry of a person into that or any other market; or deterring or preventing
a person from engaging in competitive conduct in that or any other market.
Section 47 – Exclusive dealing
3.86
Section 47 of the TPA prohibits anti-competitive exclusive dealing which
has the purpose of substantially lessening competition in a relevant market.
Section 48 – Resale price
maintenance
3.87
Section 48 of the TPA states that a corporation or other person shall
not engage in the practice of resale price maintenance.
Section 50 – Mergers and
acquisitions
3.88
Section 50 prohibits acquisitions which would have the effect, or be
likely to have the effect, of substantially lessening competition in a
substantial market in Australia, in a state or territory.
Part IVA – Unconscionable conduct
3.89
The concept of unconscionable conduct generally involves a stronger
party exploiting an evident special disability or disadvantage suffered by another
party.
3.90
During the inquiry concerns were raised as to the effectiveness of
existing powers under the TPA to address anti-competitive practices and misuse
of market power. One submission commented on the 'complacency' of the ACCC
which has allowed monopoly or near monopoly situations to develop.[73]
3.91
The limitations of the TPA in addressing anti-competitive behaviour was
illustrated in evidence from the ACCC. Mr Cassidy stated that:
The Trade Practices Act, as it currently stands, does not make
unlawful so-called price gouging, price exploitation or any other name that you
might want to use for prices rising more rapidly than perhaps they should.
Whether they should or not is a matter for the government. As the law stands at
the moment, there is nothing that we can do to stop prices from increasing.[74]
3.92
The committee believes that there is a need for a strengthening of the
competition provisions of the TPA to better protect consumers from
anti-competitive behaviour.
Industry codes of conduct
3.93
Industry codes of conduct provide a mechanism for enhanced transparency
especially in relation to pricing and supply issues for certain industries. The
TPA provides for the establishment of industry codes of conduct. There are a
number of different types of industry codes – non-prescribed voluntary industry
codes of conduct, prescribed voluntary codes of conduct and mandatory codes of
conduct.
3.94
A non-prescribed voluntary industry code of conduct is administered by
the industry itself and sets standards that are voluntarily administered by the
industry. The Commonwealth Government does not have a role in enforcing
non-prescribed voluntary industry codes of conduct.
3.95
A prescribed voluntary code of conduct is a code that is binding on
signatories and is enforced by the ACCC under the TPA. A breach of a prescribed
voluntary code of conduct is also a breach of the TPA. There are currently no
voluntary codes of conduct prescribed under the Act.
3.96
Mandatory codes are administered and enforced by the ACCC and are
binding on the industry they cover. There are currently three mandatory codes
in operation – the Franchising Code, the Oilcode and the Horticulture Code of
Conduct.[75]
3.97
The committee will examine the efficacy of industry codes of conduct and
their applicability to the fertiliser industry in its final report.
Monitoring role
3.98
Part VIIA of the TPA enables the ACCC to examine the prices of selected
goods and services. The ACCC's functions under this Part are:
- to hold price inquiries in relation to the supply of goods and
services, and to report the findings to the responsible Commonwealth minister;
- to examine proposed price rises when, for example, the minister
has declared the relevant goods or services to be 'notified' goods or services;
- to monitor the price, costs and profits of an industry or
business under the direction of the minister and to report the results to the
minister.
3.99
The committee believes that an increased monitoring role for the ACCC in
relation to the fertiliser industry has some merit and is another option that
it will examine further in its final report.
Committee view
3.100
Evidence to the inquiry raised serious concerns regarding the degree of
protection available to farmers and others from anti-competitive practices and
abuses of market power under the Trade Practices Act. Instances of the
stockpiling of fertiliser product; price gouging; difficulties in securing
supply of fertiliser; uncertainty regarding price; and a failure to honour
contracts were provided during the inquiry.
3.101
The committee believes that the powers of the ACCC need to be
strengthened so that the Commission can more effectively fulfil its role in
promoting competition and fair trading and in providing for effective consumer
protection. The committee will examine in greater detail the most effective
means of achieving this outcome in its final report.
3.102
The committee will also examine, in its final report, the potential for
increased transparency of the fertiliser industry through the introduction of
an industry code of conduct. It will also examine the efficacy of
implementation of an increased monitoring role of the industry by the ACCC.
Senator the Hon
Bill Heffernan
Chair
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