How a Salt Monopoly Could Spike Car Accidents in the Midwest
Michael Milken, private equity, and a salt roll-up are showing we're in for shortages and price spikes.
|Matt Stoller||Mar 15||46||22|
Welcome to BIG, a newsletter about the politics of monopoly and finance. If you’d like to sign up, you can do so here. Or just read on…
I write a lot about big tech, but today’s issue is about something so basic and fundamental we literally don’t think about it. Salt. Salt mining is one of humanities’ oldest industries, with wars fought over this commodity. Cities like Venice monopolized the salt trade in the middle ages for geopolitical reasons, and the British tried to block colonists from access to salt during the American Revolution to prevent their ability to preserve food.
Today salt is still used in everything from chemicals to food preservation. Its main use is deicing our roads, because salt from mines across North America, and shipped in from overseas, makes it possible to drive in all sorts of weather. Salt saves lives, stops car accidents, and makes our economy run.
And in the U.S. and Canada, salt mining is being monopolized, as we speak.
Plus I’ll have short items on a recent remarkable circuit court decision breaking up an industrial conglomerate, a discussion on the conservative legal movement’s relationship to monopoly, and a note on how Republican Marco Rubio endorsed the Amazon unionization drive in Alabama on right-wing cultural terms. And I’ll touch on Lina Khan’s nomination to the Federal Trade Commission, as well as several hearings that took place this week in the House and Senate on antitrust.
I’m starting to post shorter web-only items, which you can access here. I’ll also include them in these newsletters, so don’t worry if you don’t want to check the web. I just think it’s fun to have conversations on more narrow topics, and I enjoyed what people had to say about Waze and the hiking media roll-up Outdoor.
Junk Bonds and Car Accidents
I write a lot about big tech, but in the winter, when it’s really cold and snowy, what Americans need is not a competitive semiconductor industry or better app stores. They need salt. And not the kind of salt that flavors our food, but the kind that melts snow and ice. If we don’t have salt, no one can drive, because salt is what keeps our roads manageable. Without salt, trucks can’t deliver supplies, people can’t get to stores or work, and the economy comes to a standstill.
And people die. A lot of them.
Every year, over 1300 people die in car accidents due to snowy, slushy, or icy pavement, with another 117,000 injured. Snowy weather is also a huge waste of time and money, costing roughly $500M a day, and 544 million vehicle-hours a year of delay. Road salt doesn’t eliminate this problem entirely, but it comes close, reducing collisions by up to 88% and injuries by 85%. Studies show that deicing salt pays for itself within the first 25 minutes after it is spread. Roughly 40% of domestic salt, produced largely from mining, is used not for food or chemicals, but for deicing. It’s a major expense for cities and states, and commercial customers like shopping malls. And because weather leads to demand spikes, and America tends to operate in just-in-time style inventory models instead of managing risk by storing surpluses of critical commodities, there are often shortages of road salt precisely when everyone needs it most.
And that’s why I paid attention when ex-convict and junk bond king Michael Milken’s alleged private equity firm, Stone Canyon, bought two major salt producers over the last year. Early in 2020, Stone Canyon acquired Kissner, a producer of deicing salt, private label consumer salt, and salt-related chemicals. Then, nine months later, Stone Canyon bought Morton’s Salt, the largest producer in the world, for $3.2 billion, and it is now awaiting antitrust approval. Kissner is itself a roll-up of the salt industry, having bought Central Salt and Lion Salt and turned itself from a small Ontario-based regional distributor of ice melt into one of the giants of the industry. So Stone Canyon is overseeing a roll-up of roll-ups.
This series of mergers should terrify cities across the upper Midwest, who have to buy salt in unpredictable spot markets and often deal with shortages when the weather gets bad. Minnesota, for instance, bought roughly 1.5 million tons of salt for the 2020 season. Salt is a regional business, it’s just not economical to move extremely bulky road salt over land more than 150 miles, so while port cities can get salt from abroad in ocean vessels, and salt can be barged up the Mississippi river, much of the upper Midwest and Canada has to buy local. (It doesn’t help that America’s rail system is monopolized.)
And Kissner’s mine, called the Detroit Salt Mine, and Morton’s mine, in Windsor Ontario, are within a few thousand meters of each other. “You can literally connect the two salt mines underground,” someone in the industry told me. There are a few other players: Compass Minerals and Cargill also compete for Midwestern markets, but Cargill is a small presence and is essentially shutting down a good chunk of its operations because of problems with its mining capacity. American Rock Salt, another player, exists, but it is located in New York.
The salt industry is an oligopoly, and the number of suppliers to Governments in regions of the Great Lakes markets will shrink from 4 to 3 and in some geographies from 3 suppliers to 2. There are two consequences of this consolidation of salt production. The first is that prices will go up, and municipal budgets will be stretched.
Salt is sold in blind bidding processes. Governments put out tender offers, and then suppliers bid. When bidding, suppliers will set prices by considering the supply levels among competitors. If there are only two competitors in a market and one of them has committed their salt production for the year, then the remaining one is a monopolist who can just set the price. This is particularly true for a bunch of Midwestern states, like Michigan, Ohio, Indiana, Illinois, Wisconsin, and Minnesota.
But the much more serious problem is that of shortages. The industry manages demand spikes from weather not by having spare production capacity or lots of storage, but by overpromising salt deliveries. The rule of thumb is that one out of every five years will see a mild winter with few sales, three out of five will be snowy but normal, and one out of five will involve extreme weather and much higher demand. Of course, rules of thumb have gone out of the window now that there’s more extreme weather, which means demand drops and spikes will be more common.
One of the best ways of winning market share is to bid low, and then if demand is high, to simply not deliver to Commercial customers (Landscapers that service residential and commercial customers are almost always shafted first, meaning driveways and sidewalks go unsalted.) There are penalties in contracts for doing this to government customers, but when the snow hits, it doesn’t matter and the producers often pay the penalties if they are even enforced by the government entities. All customers need the salt when it snows, and a contract dispute doesn’t get in the way.
It’s quite possible, and indeed likely, that shortages will worsen. Without competition, it will be much harder to go to a different supplier, because there won’t be any other suppliers. And private equity takeovers in general are operational nightmares, which means that it’s likely Kissner and Morton will have problems with production and distribution purely because mergers tend not to work out.
There’s one final piece of the problem. Because private equity firms have too much money and not enough acquisition targets, prices for mid-market industrial companies are really high. So Stone Canyon almost certainly overpaid for both Kissner and Morton’s. To justify its investment, Stone Canyon is going to have to cut costs and reduce capital spending, which will harm production, because salt mining needs a lot of investment. Then it will likely have to raise prices. In other words, if the merger goes through, the financial pressure of paying such rich prices for salt firms will force significant price hikes, and potentially shortages in the market.
There are other issues in this merger. Morton’s has a very popular consumer brand of salt, one of the most recognizable brands in the United States. And Kissner is a private label producer of salt, so it makes supermarket brands. Combining these two introduces a significant conflict of interest, because the combined firm will now be making consumer brands of salt for supermarket customers, even as it has a competitive product on their shelves. (This dynamic is a bit like Amazon controlling a marketplace and competing on it, though consumer salt is a more competitive market.)
But mostly, this merger means stressed municipal budgets across the Midwest, car accidents, slipping and falling, more traffic, and no deicing salt for consumers and businesses when it really matters.
And this brings me to the politics of antitrust.
What Happens When a Merger Wave Meets an Anti-Monopoly Movement?
As we emerge from the pandemic, and as money floods into the economy from the Biden stimulus, we are on the cusp of a historic mergers and acquisitions wave. And so stories like this salt roll-up will become more even more common. Instances of financiers overpaying for mid-market companies are accelerating. That means the problems introduced by this roll-up are likely to be replicated across the economy, in every industrial sector, especially as Biden puts money to work in infrastructure.
This is an obvious problem, and yet still, no one in the private equity or mergers and acquisitions world takes antitrust merger controls seriously. Disdain for enforcers is so rampant that last year Exxon and Chevron discussed merging, which would essentially reconstruct the Standard Oil monopoly.
This current merger in the salt market would have been unthinkable just ten years ago. State attorneys general know about problems in this market, often investigating non-deliveries after municipal officials call them up angry that they can’t get the salt for which they contracted. But enforcement is so pathetic that now it’s happening with barely anyone noticing.
And yet, even as this crazy merger wave is on deck, and among absurd stories like a Michael Milken-affiliated private equity firm monopolizing Midwestern road salt production, the policy environment for a massive change in antitrust has never been more exciting. It’s hard to overstate the change in the political discourse on monopoly power. From 2009-2015, the House and Senate held virtually no hearings on antitrust, so much so that reporter Dave Dayen titled his 2016 New Republic article on antitrust “The Most Important 2016 Issue You Don’t Know About."
What a difference a few years have made.
Just in the past two weeks, news leaked that Joe Biden will appoint anti-monopoly scholar Lina Khan to the Federal Trade Commission. Khan is an antitrust rock star, having served as the key investigator during last year’s House Antitrust Subcommittee examination of big tech firms. Besides the news about Khan, the Senate and House both held meaningful hearings on antitrust where virtually every witness on both sides agreed we have a monopoly crisis. At a state level, the Arizona Senate is likely to debate a bill on app stores this coming week, and Missouri is voting to ban non-compete agreements.
That’s just in the last two weeks. And yet, the utter ridiculousness of these mergers goes on without pause, and virtually no one in a powerful position in Silicon Valley or on Wall Street believes political leaders are willing or capable of changing anything meaningful in how they organize markets. This disjuncture is profoundly weird.
At any rate, if something can’t go on forever, it won’t. And for a lot of reasons, I think it’s unlikely the ridiculous post-1981 era of monopolization will continue as it has. And hopefully, an antitrust enforcer, either in one of these states, in Canada, or in the Federal government, will take a stand somewhere. It might as well be in the salt market.
Judges Break Up Door-Making Conglomerate: I generally try to avoid the ‘what an amazing court precedent’ style of writing, but this is too important to let pass. Last month, three judges on the fourth circuit issued an extraordinary decision against a window and door making firm called Jeld-Wen. Three judges - two appointed by Obama and one by Trump - ordered a break-up of Jeld-Wen. And it wasn't even the government who brought the case, but a private plaintiff.
Jeld-Wen makes what are called door skins, which make up the back and front of a door, and are expensive and difficult to produce. Jeld-Wen sold door skins to door makers, but Jen-Weld also made and sold doors as well. So it both sold to its door skin customers, and competed with them as the final buyer of doors.
There were three makers of door skins until 2012, when Jeld-Wen bought one of its main competitors, CMI. Obama’s Department of Justice investigated the merger, twice, but didn’t do anything about it. Once there were only two players in the market, Jeld-Wen began cutting off its customers from being able to buy door skins. Steves and Sons filed a suit in 2016, and a district court ruled in the plaintiff’s favor, ordering Jeld-Wen to sell the factory it bought from CMI. The fourth circuit just agreed.
This is remarkable, and an important precedent. It is also an embarrassment for public enforcers. Private litigants have broken up more firms - one - than government enforcers have in two decades. (link)
Marco Rubio Attacks Human Resources Departments, Endorses Amazon Unionization Drive: It’s hard to overstate the importance of what Republican Senator Marco Rubio did in supporting workers in Alabama over Amazon, as it has been an article of faith since the 1970s that unions and the Republican Party are mortal enemies. What’s fascinating is how Rubio approached the problem in cultural terms. After saying that “the days of conservatives being taken for granted by the business community are over,” he then went on to attack human resource departments. Here’s Rubio:
Uniquely malicious corporate behavior like Amazon’s justifies a more adversarial approach to labor relations. It is no fault of Amazon’s workers if they feel the only option available to protect themselves against bad faith is to form a union. Today it might be workplace conditions, but tomorrow it might be a requirement that the workers embrace management’s latest “woke” human resources fad.
Want to Remember Your Password? Pay Up. In 2019, Elliott Management and Francisco Partners bought software provider LogMeIn, which produces a password management tool. Two weeks later, it raised prices on those who are locked into its system. Every one of these PE transactions makes the world ever so slightly worse.
Why Local Stores Can’t Keep Products in Stock: CNN’s Nathaniel Meyersohn has an important story on why independent and smaller grocers still can’t stock up items like toilet paper. Basically, suppliers and distributors are making sure their biggest customers, so-called “power buyers” like Walmart, are serviced first. This isn’t about economies of scale, it’s about power. Meyersohn writes, “In September, Walmart announced it would introduce new standards for suppliers. In February, Walmart began charging suppliers a cost of 3% of delayed goods if 98% of an order is not delivered to stores or warehouses on time.” That means bare shelves in local stores. We have a law on the books to address this kind of problem. It’s called the Robinson-Patman Act, and it prohibits discriminatory practices used by power buyers. And surprise surprise, it hasn’t really been enforced in any meaningful way since the 1970s.
Conservative Anti-Monopoly Breakthroughs: Last week, journalist Glenn Greenwald testified before the House Antitrust Subcommittee on the topic of big tech, monopoly power and journalism. I found his argument, which you can read here, quite fascinating. Greenwald argues there is a tacit collusion between the cultural power of elite media outlets and the raw communications power of big tech, and that this combination engenders society-wide censorship. Greenwald was one of the witnesses invited by the Republicans, and he endorsed the subcommittee’s recommendations to break up big tech.
The acceptance of writers like Greenwald by the right is part of a shift in how the conservative movement imagines the role of the corporation and the problem of private power. I wrote a short essay on changes in the conservative legal project that describes a bit more about why some right-wing thinkers are reconsidering their approach to political economy. Greenwald’s arguments, and the increasing acceptance of the monopoly problem by the right, suggest that there’s a real political breakthrough happening.
Thanks for reading. Send me tips, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.