DOJ Protects U.S. Electric Arc Furnace Mill Operators

On September 27, 2017, the DOJ announced Showa Denko K.K. (“SDK”) will be required to divest SGL Carbon SE’s (“SGL”) entire U.S. graphite electrodes business in order for SDK to proceed with its proposed $264.5 million acquisition of SGL’s global graphite electrodes business.

According to the DOJ’s complaint, SDK and SGL manufacture and sell large ultra-high power (UHP) graphite electrodes that are used to generate sufficient heat to melt scrap metal in electric arc furnaces. The complaint alleges that SDK and SGL are two of the three leading suppliers of large UHP graphite electrodes to U.S. electric arc furnace steel mills, and that the two firms together have a combined market share of about 56%. The third domestic player has a 22% market share. While the rest of the market share (22%) is held by a number of importers, the DOJ alleged that none of the importers could individually or collectively are in a position to constrain a unilateral exercise of market power.

In the United States, individual EAF customers solicit bids from three domestic producers of large UHP graphite electrodes, and these producers develop individualized bids based on each customer’s Request

for Proposal. According to the DOJ, the bidding process enables the three large UHP graphite electrode producers to engage in price discrimination. In other words, they can charge different prices to different EAF customers. U.S. customers prefer to buy from domestic producers because they need technical services and reliable supply so imports really are not a factor.

The acquisition, as originally proposed, would have eliminated one of the three major suppliers of large UHP graphite electrodes to U.S. electric arc furnace steel mills. The alleged loss of competition between SDK and SGL would likely result in higher prices and lower quality of delivery and service to U.S. electric arc furnace customers.

Under the terms of the proposed settlement, SDK must divest SGL’s entire U.S. graphite electrodes business, including its manufacturing facilities in Ozark, Arkansas and Hickman, Kentucky, to Tokai Carbon Co., Ltd., or an alternate acquirer approved by the United States within 45 days of the stipulated hold separate order. The DOJ said that the divestiture will remedy the acquisition’s anticompetitive effects by providing the acquirer with the domestic manufacturing presence and robust local service capabilities that U.S. electric arc furnace steel mills prefer. Moreover, the settlement will ensure that U.S. electric arc furnace mill operators continue to benefit from robust competition for this critical input in the steelmaking process.

Observations

The DOJ’s enforcement action demonstrates that it is willing to force a divestiture in a situation where competition is being reduced from three to two domestic suppliers in a bid market. It is also interesting to note that although imports make up 22% of the share, the DOJ discounted the importance of importers because neither individually nor collectively could an importer or importers constrain a unilateral exercise of market power. Here, the DOJ entered into a stipulated hold separate order so that the merged firm will keep the divestiture assets economically viable as it searches for a buyer. This demonstrates that the new administration may be amenable to approving settlement agreements without having a finalized contract with the upfront buyer.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com