Industrial companies with operations in Europe are under significant pressure from persistently high energy costs, resurgent tariff barriers, and longstanding social and environmental liabilities. These pressures are leading to strategic reviews, sales, JVs, and site closures. Merger control plays a prominent role in how companies think about these strategic options. This note summarizes the current state of play and offers some practical thoughts on how to approach transaction feasibility.
An excellent starting point for understanding the Commission’s current thinking is an article published in autumn 2024 by Daniele Calisti (then head of unit for Mergers in Basic Industries, Agriculture and Manufacturing).1 In the article, Calisti and colleagues examine the European Commission’s application of physical structural metrics to the assessment of industrial and manufacturing mergers.2
Capacity is key
Calisti explains how the Commission’s approach to merger enforcement has “significantly evolved” by tightening of enforcement of horizontal transactions.
In Calisti’s analysis, the Commission’s assessment of deals concerning steel, metal processing, production of chemicals and cement, and the manufacturing of industrial inputs of all kinds, now focuses on capacity shares, as well as a concept he describes as “pivotality.”3
Deals between merging parties that are “pivotal” are more likely to be problematic. To avoid being pivotal, there needs to be so much spare capacity outside the merging firms that total demand can be met without the merging parties supplying any of it.
Assuming that the merging parties have significant market share in some dimension, this implies that large amounts of spare capacity need to be available in the market post-merger for it to act as a sufficient constraint on the merging parties’ competitive position.
How to measure market power
Market power (i.e., the ability to affect price or output in a market) describes the impact a company has on customers, direct competitors, and downstream rivals. In most industrial settings, market power is closely linked with the size of the relevant entity. Calisti explains that the Commission now favors two primary metrics of market share in industrial contexts that can be used as an initial indicator of market power:
- Merchant sales: Merchant sales are sales to third parties (i.e., excluding captive production/ consumption). Market shares based on this metric have the advantage of capturing the significance of players established outside the reference market (such as imports for geographic markets narrower than global) and provide a measure at the same level on which price competition occurs.
- Capacity shares: Capacity shares refer to production capacity at the relevant level of the value chain and provide a measure of manufacturing capabilities available within the reference market.
Capacity shares are useful in assessing competition in manufacturing industries as they reflect structural patterns of supply regardless of whether the output is used captively or sold to third parties. Investment in plant and machinery is a major cost that is often largely sunk. Its operation involves incurring fixed costs that are slow to adjust to cyclical movements in demand; steel, cement, or oil-refining equipment cannot easily be turned off and on, and skilled labor cannot typically be scaled up and down easily (other than through temporary shift pattern changes). Capacity therefore reflects underlying trend levels of supply.
The Commission’s decisional practice, in Calisti’s analysis, has put structural capacity firmly in the spotlight as the most appropriate and informative starting point for assessing long-term market power in industrial contexts, particularly those characterized by homogeneous products and vertically integrated players (e.g., steel, copper, aluminum, and chemical manufacturing).4
The major weakness in capacity shares as a measure of competitive pressure in a market is that they are highly sensitive to geographic market definition. In other words, capacity measures exclude imports from outside the geographic market. This makes geographic market definition very important to predicting case outcomes.
How to measure geographic markets
The geographic reach of industrial players is limited by the distance over which they can or do typically sell their products, which in turn may be determined by the physical characteristics of the products in question. Long-distance shipping is progressively more unlikely to be economic or logistically practical for heavy, bulky or lower-value goods, goods with specific technical or preservation requirements, or goods that require frequent or recurring supply rotations.
As Calisti notes, the Commission has more recently approached these features of industrial manufacturing with greater sophistication. First, the Commission has adopted geographic market definitions that use a catchment area determined by a measurable distance (radius) or time (isochrone) centered around supplier locations, or possibly, in markets with customer-specific prices, customer locations. This approach is also reflected in the updated Market Definition notice5 and marks a change from the historic practice of defining geographic markets as either national, EEA-wide or global. Second, the Commission has recognized that conditions of competition are not uniform within a given catchment area (a concept referred to as “geographic differentiation”) and, for goods with a high transportation-cost-to-product-value ratio, such as cement, competition may be stronger between suppliers that are located in proximity to each other.
In practice, this represents a trend toward narrower geographic frames of reference. Together with the preference for capacity shares, this leaves competition from imports at risk of underrepresentation in the analysis. Calisti acknowledges this issue: “The competitive assessment in basic industries […] starts in a sense from the observation of physical bodies in an industry, through the observation of their mass. This obviously does not account for potential imports of the relevant products, which will also have to be assessed.” While the acknowledgement is helpful, relying on import constraints from outside the market in practice is difficult, especially at phase 1 where there is limited time for detailed substantive argument.
This is unfortunate. In many industrial markets, imports perform a balancing role and effectively act (after transport costs) as the marginal cost producer, thereby having a significant impact on pricing. This is especially so if the current U.S. tariff policy is sustained, as this will generate import diversion from U.S. to Europe. Export producers with excess supply could easily divert products to Europe to maintain economies of scale or cover fixed costs. This will generate intense competition, driving down prices in Europe. Indeed, it is what the EU’s trade defense instruments are designed to tackle. Yet this is also the competitive pressure that is most at risk of being underrepresented in the merger assessment framework Calisti describes.
Pivotality
In addition to a preference for capacity shares, the Commission has more recently relied on the concept of “pivotality.” A firm post merger may be considered pivotal when all other competitors are capacity-constrained to the extent that they are unable, together, to cover the entire demand in the market; in such situations, the pivotal firm’s capacity is necessary to cover some part of total demand.
The underlying argument is that while smaller amounts of spare capacity may generate an ability for rivals to expand output in response to a price rise from the merging parties, they may well not have the incentive to do so; since, if the merged parties are ‘pivotal’, some customers will need to transact with the merged parties at the higher price. This pulls up the market price generally, which is likely to benefit rivals. The critical evidence to support this often comes from the internal documents of both merging parties and their rivals. In its decision prohibiting the Tata Steel-ThyssenKrupp merger, for example, the Commission found that “the Parties’ synergy planning documents confirm a strong likelihood that the Transaction would result (i) in production capacity reductions […] in a context of already tight supply, (ii) in the elimination of competing R&D efforts and (iii) at the very least in significant price increases in the EEA steel markets.”6
While there remain other considerations for the Commission to fully capture the reality of competitive dynamics (e.g., customer preferences, innovation, sustainability), the clear message Calisti has for industrial companies is that physical structural metrics provide the best lens through which to assess the competitive effects of a transaction. This has important implications for deal planning.
In particular, pivotality implies that significant spare capacity outside the merging party is needed to constitute a sufficient competitive constraint.
This is in direct tension with the deal rationale for many industrial transactions in Europe currently. Persistently high energy costs, resurgent tariff barriers and longstanding social and environmental liabilities are reducing capacity utilization and capex incentives in Europe. Taking out underused capacity is a major deal rationale and key to finding a sustainable level for European production—but reliance on capacity shares and pivotality by the European Commission will make these transactions more difficult. See the practical thoughts below on how to plan for and manage this issue.
Political considerations
The geopolitical environment has changed significantly in the months since Calisti’s article was published. The Trump administration’s erratic approach to tariffs has upended global trade flows to a far greater degree than expected; the EU in general and Germany in particular have recognized the need for significant increases in defense spending—which has a direct impact on preserving European industrial capacity and resilience.
We also have a new European Commission, with Teresa Ribera as the commissioner responsible for competition who comes to the portfolio with a background in environmental and social policy rather than competition. These factors create some potential for unexpected outcomes. For instance, reducing capacity may create competition concerns, but it also improves capacity utilization and lowers average costs, making industrial production in Europe more economically sustainable. How this weighs against ‘pivotality’ and the considerations discussed in this note will be key for many transactions now being considered.
Getting a transaction cleared by reference to political considerations alone in Europe is difficult and high risk. Most deals will be best served by working through the analysis in the normal way, with wider considerations playing at the margins, perhaps in weighing evidence relating to entry or incentives of existing players to use spare capacity or when negotiating the perimeter of a remedy.
Key takeaways for industrial companies when assessing deal feasibility
Look primarily to capacity shares rather than sales
- This will be the fastest way to filter the likely difficulty of the transaction, but ought to be done against a range of plausible geographic market definition approaches (see below).
Invest time to consider appropriate catchment areas (rather than EEA or national shares)
- This may involve reviewing internal assessments of catchments and delivery mileage. Consider working with an economist to test different merger outcomes under different catchment definitions and centering on both sources of supply and demand.
Be mindful of the "consolidation race"
- Many transactions in European chemicals and industrial contexts are motivated by capacity rationalization—taking out inefficient and underutilized spare capacity.
- The first transaction to seek approval will benefit from the capacity remaining in the rest of the industry—an especially significant advantage if "pivotality" is going to feature prominently in the antitrust assessment.
Remember that spare capacity is not a “silver bullet”
- Historically and intuitively, the existence of spare capacity outside the merging firms was often considered sufficient to defeat unilateral price effects.
- More recently, the Commission has recognized the importance of considering whether firms have not only the ability to expand output but also the incentive to counter price increases by utilizing their spare capacity (or whether, if a merged entity were to increase prices, other players would benefit more from simply increasing their own prices).7
Build evidence of the impact of imports
- Imports do not sit well with the Commission’s framework for the assessment of basic industries mergers, even if they may play a key role in competitive dynamics.
- We are also now in a period of significant import disruption. It will be important to collect evidence of import volumes and reflect that these have been and are expected to be structural rather than cyclical features. Referring to internal documents, such as modelling of capital investment, may help evidence this.
Structural remedies solve structural concerns
- Where remedies are required to alleviate potential competition concerns, the Commission, like most antitrust agencies, has a stated preference for structural remedies (i.e., divestments) rather than behavioral remedies (e.g., access to manufacturing facilities)—a preference that is increasingly honored in the breach8 but does still tend to operate in industrial transactions. Appropriate remedies should take into account the particularities of relevant value chains, including considering the viability of any divestiture package in industries where vertical integration provides a competitive advantage. A divestment proposal that does not include upstream capabilities or essential inputs is unlikely to constitute a comprehensive and effective remedy. Merging parties may have to include primary production assets even if the competition concern relates to downstream markets.
- Remember that in industrial contexts, the Commission is likely to often require an upfront buyer (i.e., a buyer to be identified and approved, and a divestment sale signed before the reviewed deal can close).
- Plus, the viability of the remedy will likely turn on customer perception of quality, expertise, R&D, logistics and market reputation.
Our sector knowledge
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Footnotes
1. Daniele Calisti has since moved to a new role as head of unit for Merger Case Support and Policy where he leads development and oversight of EU merger policy, including current review of the Commission’s merger guidelines.
2. Daniele Calisti, Pilar Córdoba Fernández, Amine Mansour, “Mass, space, and gravity-merger enforcement in basic industries,” Journal of European Competition Law & Practice, Volume 15, Issue 6, September 2024, pp. 386-399
3. Calisti cites a paper by Thomas Bueetter, Andrea Cilea and Massimiliano Kadar (2016) ‘Horizontal Mergers in Homogeneous Goods Industries: When is Spare Capacity Sufficient to Offset Unilateral Effects?’ World Competition, Volume 39(1) pp57-65.
4. Cases M.8444, ArcelorMittal/Ilva (2018); M.8674, BASF/Solvay’s Polyamide Business (2019); M.8713, Tata Steel/ThyssenKrupp/JV (2019); M.8900, Wieland/Aurubis Rolled Products/Schwermetall (2019); M.9076, Novelis/Aleris (2019); M.9409, Aurubis/Metallo Group Holding (2020); M.10658, Norsk Hydro/Alumetal (2023).
5. See paragraph 73 231107 Market Definition Notice (rev) (PresCab).docx.
6. Case M.8713, Tata Steel/ThyssenKrupp/JV (2019), para 1227
7. Cases M.6471, Outokumpu/Inoxum (2012); M.6905, INEOS/Solvay/JV (2014).
8. See Chapter 2 of the A&O Shearman Global Trends in Merger Control 2025, where we identify over half of remedy cases globally having a behavioral component.
