Affected market: Steel tubes
The OFT’s decision on reference under section 33(1) given on 15 March
2007. Full text of decision published 21 March 2007.
Please note that square brackets indicate text or figures which have
been deleted or replaced with a range at the request of the parties and
third parties for reasons of commercial confidentiality.
Caparo Precision Tubes Limited (Caparo), a wholly owned subsidiary
of Caparo Group Limited, manufactures various categories of steel tubes,
including small welded precision carbon steel tubes, in the UK.
Hayes Tubes Limited (Hayes) exclusively manufactures small welded
precision carbon steel tubes in the UK. In the year ended 31 March 2006,
Hayes had a UK turnover of £7.2 million.
Caparo proposes to acquire 100 per cent of the issued share capital of
The OFT’s statutory deadline for deciding whether to refer the merger
to the Competition Commission (CC) is 15 March 2007.
As a result of this transaction Caparo and Hayes will cease to be
distinct. The parties overlap in the manufacture and supply of small
welded precision carbon steel tubes in the UK, where their combined
share of supply is [25-35] per cent, and consequently the share of
supply test in section 23 of the Enterprise Act 2002 (the Act) is met.
The OFT therefore believes that it is or may be the case that
arrangements are in progress or in contemplation which, if carried into
effect, will result in the creation of a relevant merger situation.
FRAME OF REFERENCE
The parties overlap in the manufacture and supply of a number of types
of Electric Resistance Welded (ERW) carbon steel tubes, which is a
specific type of steel end-product. These products are used in a range
of typically light industrial and commercial low-technology products.
Bespoke tubes are used in the automotive, aerospace, pharmaceutical and
There are a number of different types of ERW carbon steel tubes. Caparo
produces all types manufactured by Hayes (that is, mild steel tubes,
aluminized tubes, pre-galvanized tubes, conduit tubes and perforated
tubes), as well as flo-coat tubes and plastic coated tubes. In terms of
volume and value, the main overlap is in mild steel tubes and, to a
lesser extent, in aluminized and conduit tubes.
Evidence provided by the parties indicates that there is supply-side
substitution between the five types of ERW carbon steel tubes where they
overlap. For both parties, all five products are made from the same
rolling machinery as mild steel tubes with few relatively minor changes
to the manufacturing process and limited investment in terms of time and
cost. Competitors who commented to the OFT on the issue of supply side
substitutability agreed with the parties' submission.
The five overlapping tube types do not seem to be substitutable from a
demand perspective. Customers tend to favour particular tube types for
particular end-uses, even though for some uses more than one tube type
However, the degree of supply-side substitution is such that the OFT
considers the relevant frame of reference to be at least as wide as the
five overlapping tube types, which will be hereinafter referred to as
small welded precision carbon steel tubes (SWPCSTs).
In line with past European Commission decisions [See note 1], the parties
submitted that the geographic scope of SWPCSTs is at least as wide as the
European Economic Area (EEA). In addition, they consider that manufacturers
from countries outside the EEA such as China and Turkey also constrain UK
The level of imports into the UK as a proportion of the overall UK sales
of SWPCSTs is high (at least 35 per cent), the vast majority of which
comes from the EEA and Turkey. A number of third parties raised issues
regarding the quality of imported products, but they mainly concerned
imports from outside Europe. In terms of prices, competitors considered
that imports are competitive, whereas customer comments were mixed.
However, all customers that responded to a question on price
competitiveness said that they would import SWPCSTs in response to a
5-10 per cent price increase by national suppliers. In fact, a number of
customers already import or have imported in the past. Analysis of
bidding data from the parties also suggests that imports are an
important competitive constraint.
The OFT therefore considers that the geographic scope of the manufacture
of SWPCSTs is at least as wide as the EEA. It might be the case that it
is wider still, but it is not necessary to conclude on this as it does
not impact the outcome of the present case.
At an EEA level, the parties' combined share of supply is of around
[0-5] per cent (increment less than [0-5] per cent). In the UK,
their combined share of supply is about [25-35] per cent (increment of
less than [0-5] per cent) and there are two competing suppliers with a
share of supply of about 20 per cent, but, as discussed above, this is
an excessively narrow geographic frame. In any case, even on this basis
the increment arising from the merger is small.
Analysis of Caparo’s bidding data suggests that Hayes does not pose a
stronger competitive constraint on Caparo than other UK manufacturers
and imports. In fact, in the past three years Caparo lost bids
representing a substantially greater amount of business to other UK
manufacturers and to imports than to Hayes.
The majority of customers that responded to the OFT were concerned about
the merger. However, half of them already imported SWPCSTs, which is
consistent with an EEA-wide frame of reference.
The other concerned customers are active in the automotive sector.
However, there are a number of factors to suggest that the loss of Hayes
as an independent player does not mean the loss of an effective
constraint on Caparo for automotive customers.
First, data from the parties and from customers shows that foreign
manufacturers are participating – and winning contracts – in bids to
supply British customers, and that the threat by customers to switch to
imports is a credible one. Second, a number of customers dual- or
multi-source SWPCSTs, which can be used to offset any logistic risk
associated with sourcing from abroad. Third, there does not seem to be
any differences between SWPCSTs for automotive use and SWPCSTs in
general which would cause this particular segment to be less competitive
than others. Fourth, as it is the case for SWPCSTs in general, switching
costs seem to be low, and there no physical barriers to switching.
Finally, prices in the automotive segment have fallen in the last year
in line with costs, and automotive customers do not seem to have faced
price changes greater than those experienced by customers in other
THIRD PARTY VIEWS
The majority of customers that responded to the OFT were concerned about
the merger. In contrast, no competitors were concerned. Customer
concerns were dealt with in the 'horizontal issues' section above.
The parties overlap in the manufacture and supply of five types of small
welded precision carbon steel tubes (SWPCSTs), which is a specific type
of steel end-product.
Evidence before the OFT on the level of imports, the delivered price and
quality competitiveness of imports, and past switching to imports in bid
data suggests that imports are part of the geographic scope. The market
therefore appears to be at least as wide as the EEA, where the parties'
combined share of supply is minimal and existing competitive constraints
will remain after the merger. Some customers were concerned about the
loss of a UK-based supplier, but nevertheless did import SWPCSTs or used
the threat of imports as a negotiating tool.
Consequently, the OFT does not believe that it is or may be the case
that the merger may be expected to result in a substantial lessening of
competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission
under section 33(1) of the Act.
- Case No COMP/M.2382 Unisor / Arbed / Aceralia 19 July 2001; Case No
IV/M.0315 Mannesmann / Vallourec / Ilva 31 January 1994. Note however
that these decisions did not address the UK as a candidate market, but
focused on trade within the EEA.