Black Diamon(d)-ite: Arch Resources, Consol Energy Merger May Risk Antitrust Investigation

Written by: Angelina Maria-Vita White

Arch Resources Inc. and Consol Energy Inc. have definitively agreed to an all-stock merger to create a new coal-based production company, “Core Natural Resources.” The new company will host 17.4% of the overall coal production market and begin with market capitalizations of approximately $5.2 billion. This comes as an industry development after Peabody Energy Corp., the largest coal producer in the US, called off a $9 billion merger with Coronado Global Resources in 2022. Merger between rivals Arch Resources and Consol Energy may run risks of investigation by the United States Federal Trade Commission (FTC) and Department of Justice (DOJ) (jointly “the Agencies”). While coal producers and energy giants have not been targeted for antitrust violations in since the 20th century, markets functions and trends have changed. With this change, and decades-old mechanisms used for investigating antitrust violations have not updated with the times. Consequently, the guidelines utilized to determine violations to antitrust laws are somewhat outdated.

The Agencies investigate mergers that are potentially in violation of antitrust laws, specifically the Sherman and Clayton Acts. The Sherman Act, instituted in 1890, ensures that contacts or conspiracies cannot restrain trade or commerce, while the Clayton Act, from 1914, fills in the gaps of the Sherman Act by outlawing specific monopolistic conduct. If found guilty of violating antitrust law, the individual or company would be guilty of a felony, with penalties including substantial fines and prison sentences.

The Clayton Act requires the Agencies to assess whether a merger may risk market competition. If there may be a risk, investigations of antitrust violations begin when companies propose a merger. The Agencies have authority to investigate further to determine whether a merger violates antitrust law. To show that a merger is unlawful, Section 7 of the Sherman Act requires that a plaintiff show that the merger’s “effect ‘may be substantially to lessen competition’” between companies. The Agencies make this determination by considering all evidence available. They first ask “how firms in this industry compete, and does the merger threaten to substantially lessen competition or to tend to create a monopoly?” To answer this, the Agencies look to the eleven traditional guidelines set forth in the Agencies’ 2023 Merger Guidelines. However, the Agencies are not limited to these guidelines in determining whether the merger violates antitrust law.

Antitrust investigation typically occurs more broadly by investigating all companies in an industry, thus making an investigation into just one company unlikely and controversial. Investigating one company for antitrust violations is controversial because creating the boundary between acceptable and unacceptable behavior using one company versus all companies in the industry engaging in the same conduct is picking certain companies to face liability for their violations when others get away with conduct that has similar market harms. The specific guidelines that may be applicable to Arch Resources and Consol are Guidelines 1 and 7.

Guideline 1 shows how to determine whether a merger violates the Sherman and Clayton Acts by “significantly increase[ing] [market] concentration in a highly concentrated market.” Highly concentrated markets of a few large companies eliminate competitive advantages for consumers, such as lower prices and more options in the market. To determine whether the market is highly concentrated, the Agencies will use the Herfindahl-Hirschman Index (HHI) to measure market concentration levels. For the coal production industry, the HHI of the top 21 companies after the merger occurs would be 825.01, almost 1,000 less than an HHI the Agencies would consider highly concentrated. With this, the merger cannot significantly increase concentration in a market that is not already highly concentrated.

Guideline 7 explains another way to determine whether a merger violates the Sherman and Clayton Acts. They specifically use this “when an industry undergoes a trend toward consolidation” of companies. They consider “whether [the consolidation] increases the risk a merger may substantially lessen competition or tend to create a monopoly.” The Agencies  here will look towards consolidation of major competitors in the industry which inherently decrease competition and increase prices. This would also make new entry into the market impossible.

Factors considered in determining whether the guideline is violated include trends towards vertical integration, or merging with companies in all parts of the production, manufacturing, and distribution process, and horizontal integration, or merging with other companies in the same process as the business is in. Here, the merger would not consolidate enough to substantially lessen competition or create a monopoly. Since Consol Energy makes up 4.1% of the total production shares and Arch Resources makes up 13.2%, there is no significant horizontal integration within coal production companies. Since the company with the highest shares, Peabody Energy Corp, produces 17.2% of the coal in the U.S., this merger would still allow for competition to occur outside of the merger. Therefore, the merger would not violate Guideline 7 considering the factors described by the Agencies’ guideline.

Since the merger initially passes the traditional tests that would warrant investigation, the merger may not be investigated for violation of antitrust law. However, if mergers continue to occur with other top-20 U.S. coal producers, or if the guidelines modernize to recognize less market-share monopolization, then Arch Resources may be investigated in the future. If antitrust guidelines do not modernize, the Arch Resources and Consol merger may ultimately be safe from antitrust investigation.

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