The opinion of the court was delivered by: James B. Zagel United States District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff Standard Iron Works, a direct purchaser of steel, has alleged, on behalf of itself and all others who purchased steel products directly from Defendants between January 1, 2005 and the present, a multi-year antitrust conspiracy amongst Defendant domestic steel producers to reduce the production of steel products in the United States in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1.*fn1 Specifically, Plaintiffs collectively allege that on at least three occasions during the class period -- mid-2005, late-2006, and mid-2007 -- each Defendant implemented coordinated production cuts for the express purpose of raising the price of steel products. Absent a collusive agreement, Plaintiffs allege these production cuts were against the individual competitive interests of each participating Defendant. Defendants filed a joint motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted.
Federal Rule of Civil Procedure 8(a)(2) requires that a complaint contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations and quotations omitted). To survive, factual allegations must be enough to raise a right to relief above the speculative level. Id. A complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." Id. at 570.
The proper standard for pleading an antitrust conspiracy through allegations of parallel conduct was enunciated in Bell Atlantic Corporation v. Twombly, 550 U.S. 544 (2007). Twombly, which applied Rule 12's general standards to a § 1 claim, held that "stating such a claim requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made." Id. at 556. "And, of course, a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and 'that recovery is very remote and unlikely.'" Id. (citing Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)). However, an allegation of parallel conduct and a bare assertion of conspiracy will not suffice. Id. at 556-57. Even "conscious parallelism," a common reaction of firms in a concentrated market that each recognize their shared economic interests and their interdependence with regard to price and output decisions, is not in itself unlawful. Id. at 553-54 (citations and quotations omitted). Allegations of parallel conduct must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action. Id. at 557. "[W]ithout that further circumstance pointing toward a meeting of the minds, an account of a defendant's commercial efforts stays in neutral territory." Id. To state a claim, the factual allegations must cross the line between factually neutral and factually suggestive. Id. at n.5. "Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief." Ashcroft v. Iqbal, No. 07-1015, 2009 WL 1361536, at *12 (U.S. May 18, 2009). It is under this plausibility standard that Defendants contend that Plaintiffs' antitrust post-Twombly complaint must be dismissed.
For purposes of this motion, I accept the following well-pleaded facts from Plaintiffs' complaint as true:*fn2
A. United States Steel Market
Raw steel, an alloy of iron and carbon, is a commodity good that is the primary input for a variety of steel products manufactured and sold by Defendants in the United States. All Defendants manufacture raw steel, which they convert into steel products such as flat sheets, coils, plates, beams, rails, bars, rods, wire, wire rods, or pipes for sale to direct purchasers in a variety of industries. The price of Defendants' steel products is impacted directly by the production, supply, and price of raw steel.
Raw steel is made primarily by two different methods: (1) the basic oxygen furnace ("BOF"), and (2) the electrical arc furnace ("EAF"). The BOF method is used by "integrated" steel producers that combine iron ore, limestone, and coke (baked coal) in a large blast furnace, which produces molten iron. Iron produced in this manner is then transferred to a basic oxygen furnace, where it is combined with other elements and purified with oxygen to create usable raw steel. Defendants ArcelorMittal*fn3 , U.S. Steel, and AK Steel are integrated steel companies. ArcelorMittal is the largest integrated steel producer in the United States, controlling approximately 20-25% of total domestic raw steel capacity during the alleged conspiracy period. U.S. Steel is the second largest integrated steel producer in the United States, controlling approximately 16% of total domestic raw steel capacity. AK Steel controls approximately 5% of the total domestic raw steel capacity.
The EAF method primarily uses recycled scrap to make raw steel. EAF "minimills" melt steel scrap and other inputs in an electric arc furnace and reconstitute these materials into usable raw steel. Defendants Nucor, Gerdau, Steel Dynamics, Commercial Metals, and SSAB operate minimills exclusively. ArcelorMittal and AK Steel, which are primarily integrated producers, also have some EAF facilities. Nucor is the largest EAF producer in the United States and controls approximately 21% of total domestic raw steel capacity. Gerdau, Steel Dynamics, IPSCO*fn4 , and Commercial Metals control approximately 10%, 4%, 2.5%, and 2%, respectively, of the total domestic raw steel capacity. In total, Defendants control approximately 80-85% of steel production in the United States.
Raw steel is solidified, rolled, and sometimes further processed. The finished products range from "flat products" such as hot rolled coil, cold rolled sheet, corrosion-resistant sheet, and tin mill products, to "long products" such as beams and other heavy structural sections, concrete reinforcing bar, merchant and special quality bar, wire rod, and rails. With respect to these "flat" and "long" product groups, the market for domestic production is similarly concentrated. ArcelorMittal, U.S. Steel, and Nucor are the leading flat-rolled producers in the United States, controlling over 70% of this segment of the market. AK Steel, Steel Dynamics, and IPSCO are likewise major flat producers, controlling much of the remaining domestic market. Nucor, Gerdau, Commercial Metals, and Steel Dynamics are the leading domestic producers of long products, together controlling approximately 80% of this segment of the market. ArcelorMittal is also a significant producer of long products.
While the steel market is concentrated in the hands of relatively few producers, no single U.S. producer has the power to control supply and price unilaterally. As Nucor and Steel Dynamics explained to the International Trade Commission ("ITC") in 2006, "attempts by any single U.S. producer to maintain prices by cutting production are unlikely to be successful."*fn5
Similarly, during ArcelorMittal's half-year 2006 earnings conference call, Joseph Kinsch, Arcelor's chairman of the board of directors, acknowledged that other competing steel producers are not irrelevant in Arcelor's calculations for controlling inventory levels: "I think we are very clear that they are not irrelevant . . . they play an important role."
Plaintiffs also maintain that unilateral attempts to manipulate the supply of steel poses substantial risks. Idling or slowing steel production is costly because revenue and market share are lost to competitors while fixed costs - facility, labor, maintenance, and overhead - remain the same. Further, Plaintiffs allege that the prevailing market price of steel was, at all relevant times, substantially higher than Defendants' marginal cost of production. In this atmosphere, a steel producer's incentive to maximize production is particularly strong because cutting output would mean substantially less operating profits.
In addition, at all relevant times, annual domestic demand for steel is alleged to have far exceeded the production capacity of Defendants and other domestic producers. Estimates from Goldman Sachs reveal that the annual domestic demand for steel was approximately 125-130 million tons between 2005 and 2007, while domestic raw steel production totaled approximately 105 million tons per year. This capacity shortfall rendered the U.S. market naturally "tight" and thus ripe for supply manipulation. According to Plaintiffs, Defendants' cooperative downtime exacerbated this supply shortage, thus squeezing the market and inflating the prevailing market price for steel.*fn6
Plaintiffs further allege that the U.S. market for steel is characterized by significant barriers to entry, including high capital requirements and regulatory barriers, while import competition is limited by transportation costs (including ocean freight rates), trade duties, and currency exchange rates. Restraints on imports impose substantial costs on imported steel, which effectively insulate domestic producers from import competition and allow them to raise prices in the U.S. market.
In sum, Plaintiffs allege that the steel market was characterized by economic factors that courts, antitrust experts, and economists agree make an industry conducive to collusion: high concentration on the supply side (80-85% controlled by Defendants) and diffusion on the demand side, high barriers to entry (huge costs to build mills, high transportation costs, and tariffs on imports), a commodity good (raw steel, which is the primary input for all downstream steel products), high fixed costs, and a natural capacity shortage in the domestic market that made a supply cartel particularly likely to succeed in inflating price.It is against this backdrop that Plaintiffs allege the specifics of their Section 1 antitrust claim.
Plaintiffs allege that Defendants' conspiracy began following a dramatic period of restructuring in the domestic steel industry. Historically, many financially strapped domestic steel producers overproduced in periods of weak demand in a desperate effort to cover the high fixed costs of production. Between 2000 and 2004, a series of bankruptcies (more than 40), mergers, and acquisitions consolidated what previously had been a fragmented market. The change was due in part to both a sharp rise in the cost of raw materials and a significant increase in imports. Following the restructuring, Defendants ArcelorMittal, U.S. Steel, and Nucor emerged as dominant producers, controlling over 55% of domestic raw steel capacity.
The industry's rapid consolidation coincided with strong demand, prices, and earnings through mid-2004. By early-2005, however, the market was retreating from these record highs and Defendant ArcelorMittal recognized the need for improved industry "discipline" to increase prices and profits. In February 2005, ArcelorMittal chairman Lakshmi Mittal "said the growing consolidation in the sector, led by his group, had led to a greater focus on profitability, making companies more likely to cut output than prices in any downturn."According to Plaintiffs, ArcelorMittal executives recognized they could not unilaterally control the price of steel and conspired with other Defendants to limit the industry's total production and output. Consistent with Lakshmi Mittal's vision of a more "disciplined" industry, Mittal executives appeared at a series of 2005 trade meetings and are alleged to have delivered their message directly to competing executives.
The logic of Mittal executives' strategy was simple - rather than compete on the basis of price, the industry should instead exercise "discipline" in the production of raw steel. By restricting industry output, producers could squeeze the market and inflate their margins. Mittal's COO, Malay Mukherjee, explained in 2005, the goal was to "squeeze the cycle a little bit and cut your production . . . Control supply." Having recently announced the acquisition of International Steel Group, Mittal was the largest domestic steel company and in a powerful position to encourage its strategy in the U.S. market.
On March 1, 2005, Mittal executive Louis Schorsch addressed a steel industry meeting in Chicago and criticized the industry's traditional business model, which "ensured that most producers would cut price before reducing volume." Schorsch referred to 2004 as "a watershed year" that "mark[ed] the resolution of many of these structural issues." Looking to the future, he remarked, "if we are going to see improved conduct and thus improved performance, it will only be because the consolidation we have undergone encourages a change in behavior to match the industry structure. This means an emphasis on value instead of just cost, a focus on profits rather than on tons, and an ability to manage strategically rather than just for the short term." Schorsch urged the industry to make "adjustments in operating rates" to halt "an inevitable race to the bottom." A representative of U.S. Steel and the CEO of Gerdau were in attendance at the meeting.
Mittal COO Mukherjee, repeated similar remarks on May 9, 2005, when he explained at a meeting of the Association for Iron and Steel Technology that:
"what is needed from the industry is a disciplined approach to bringing on supply and managing capacity. A better collective understanding of the microeconomics of our industry, meaning the cost structure and other aspects of the supply side, the likely scenarios for demand growth and what these imply for fair, long run prices will help ensure that we achieve a better match of supply with demand, more stable price levels and a financially healthier industry overall."
Mukherjee was joined at this event by the CEOs from U.S. Steel, Nucor, Steel Dynamics, Gerdau, and Commercial Metals.
One week later, Schorsch was joined by CEOs from U.S. Steel, Nucor, Steel Dynamics, Gerdau, and IPSCO, and the CFO of U.S. Steel, at the annual meetings of the American Iron and Steel Institute and the Steel Manufacturers Association, two prominent trade associations that met jointly at the Ritz Carlton in Washington, D.C. Keith Busse, chairman and CEO of Steel Dynamics, voiced optimism that the industry could eliminate price volatility by controlling production; the consolidation of capacity meant that "[t]he industry no longer has to deal with the desperate acts of dying men." This marked the third time in three months that executives met and spoke about the need to control the supply of steel.
Immediately following this series of executive-level communications concerning the need to restrict industry output, Mittal and U.S. Steel curtailed several domestic blast furnaces in May 2005 for the express purpose of reducing the market supply of steel. U.S. Steel did so despite its CEO's projection only a few weeks earlier that steel inventories were balanced and that, "[l]ooking forward, key economic data suggest that North American demand for [U.S. Steel products] will remain favorable."
Approximately one month later, from June 20-22, 2005, executives from each Defendant convened in New York City for the Steel Success Strategies trade conference. According to Lakshmi Mittal, the conference brings together "the most influential stakeholders in the steel industry today . . . this event [is] a must-attend for anyone involved in the industry." In attendance were CEOs from Mittal, Nucor, Gerdau, Steel Dynamics, IPSCO, and AK Steel.
Executives or senior managers from U.S. Steel and Commercial Metals were also there, as was Nucor's Executive Vice President. During the conference "industry leaders discussed at length the changes the industry has gone through in the past 12 - 18 months -- especially the impact of consolidation and its ability to bring newfound discipline to what traditionally has been an unruly market." Executives participating in a panel called "Global Steel: Fewer Players and Tight Metallics: What's the Consequence," "made the point that steel's resurgence in demand and profitability during the past 18 months can be sustained-but only if capability and production are brought under control now." ...