Affected market: Galvanzing
The OFT’s decision on reference under section 33 of the Enterprise Act 2002 given on 26 May 2006. Full text of decision published 22 June 2006.
Data in square brackets have been ranged for reasons of commercial confidentiality.
Hill & Smith Holdings plc (Hill & Smith) is a UK public limited company active principally in the supply of products and services, including steel galvanizing services, used in construction and infrastructure.
Metnor Galvanizing Limited (Metnor) is a UK company active solely in the provision of galvanizing services.
Hill & Smith is proposing the acquisition of Metnor. Completion of the transaction is conditional upon obtaining merger clearance from the OFT. Hill & Smith filed an informal submission with the OFT on 15 March 2006. The OFT’s administrative target for reaching a decision in relation to the transaction is 26 May 2006.
As a result of this transaction, Hill & Smith and Metnor will cease to be distinct. The parties overlap in the supply of galvanizing services in the UK and, given that their combined shares of supply in 2005 was approximately 30 per cent, 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.
Galvanizing is a means of protecting metal, principally steel, from corrosion. After cleaning by means of chemical processing, steel is dipped into baths containing molten zinc and is then either quenched in water or air-cooled. The zinc reacts with and bonds itself to the surface of the steel, providing robust protection against water and rusting.
Of the total 810,000 tonnes of steel that was galvanized in the UK and Ireland during 2003, 17 per cent was galvanized in-house by manufacturers of steel components. However, the vast majority of steel galvanizing (approximately 83 per cent) was contracted out to third parties (the ‘jobbing’ market).
The parties propose that the relevant product scope for the purposes of competition analysis is that for the provision of services in the jobbing market. In-house galvanizing should be considered as separate since the sales of such services are generally captive. However, Hill & Smith also submits that the jobbing market is constrained by degrees of competitive pressure from two sources.
In the first place, there are those who currently or could in future galvanize in-house – since these are potential entrants into the jobbing market. The majority of third party customers, on the other hand, submitted that building in-house galvanizing facilities was not an attractive commercial proposition. They considered that although construction could be completed within approximately one year, at £2-3 million, the capital investment required was too high.
In the second place there was the use of corrosion protection painting – which the parties do not see as a sufficiently close substitute to form part of the same frame of reference – but a competitive constraint nonetheless. Most third party comments also indicated that corrosion protection painting was not a substitute for galvanizing.
Without prejudice to the possibilities of the product scope actually being wider, the analysis in this decision is on the basis of a conservative approach by which the frame of reference is narrowly defined as the supply of galvanizing services within the jobbing market.
The parties propose that, by and large, the geographic scope for the jobbing market is likely to be England, Scotland and Wales. The parties do not tender for work in Ireland and are aware of only two examples of Irish customers who procure steel galvanizing services in Great Britain. However, the parties also felt that the scope in some cases has local or regional characteristics, as steel transportation costs are substantial and a jobbing galvanizer’s proximity to its customer base is an important competitive factor.
Customers’ views on the geographic scope of the market were mixed. Steel parts and components vary considerably in length. In the case of particularly long steel parts there is a limited number of jobbing galvanizers considered capable by some customers of meeting service requirements. Such customers are therefore prepared to arrange for their steel to be transported up to a distance of approximately 200 miles to reach those providers. In the case of more ‘standard’ sizes of steel parts, however, customers are generally less willing to transport their products to be galvanized at locations more than 50 to 100 miles away.
For the purposes of this decision, both narrow and wider geographic scopes have been considered in order to assess the competitive effects of the merger. Given that the OFT’s assessment is that no competition concerns arise, the question of the exact geographic scope of the market has been left open.
The parties’ shares of the supply of galvanizing services in the jobbing market by volume at national level will be about [20-30] per cent (increment about [0-10 per cent) post merger. There will remain one larger competitor at about [30-40] per cent and a substantial tail of competitors with shares of supply between one per cent and five per cent.
It appears that competition in the supply of jobbing services is intensified by the need to maintain volume throughput in order to gain efficiencies obtained from running plant at high capacity levels and keeping (albeit at high energy costs) the zinc in a molten state. This magnifies the competitive impact of customers switching or threatening to switch and grants customers a degree of countervailing buyer power. Customers confirmed that switching costs are low.
As previously discussed, where galvanizing services for standard sizes of steel parts are concerned, markets are more localised and national shares of supply are not a true reflection of actual competitive conditions. In each of the locations where one of the merging parties operates a galvanizing plant, competitive constraint will be posed by other local plants. In order to assess this more localised competition, the OFT considered mapping/location information supplied by the parties. This information demonstrates that the merging parties’ respective plants are not located near each other and are therefore not each other's closest competitors in terms of the provision of galvanizing services for standard steel parts.
For more specialised steel parts – particularly longer items – customers have indicated that the geographic scope for the supply of galvanizing services is wider. The acquisition will reduce from three to two the number of competitors capable of offering galvanizing services in baths of 12m length or longer. One third party was initially concerned at this particular impact of the merger, but this concern was not shared by other customers who required galvanising services for longer steel parts.
The majority of customers who require their long steel components to be galvanized in long baths are also producers of standard steel components capable of being galvanized in smaller baths. Such customers are able to exert disciplinary commercial pressure on the owners of long baths by separating standard and specialised steel parts and diverting, or threatening to divert, consignments of standard size steel parts to competitors operating smaller baths.
The third party noted above has a large requirement for galvanizing services and subsequently remarked the threat of switching a large bulk of its order to a competitor would confer significant bargaining power. Further the third party conceded that commercial discipline on the owners of long baths can be exerted by switching (or threatening to switch) to the alternative of ‘double-dipping’ such items in smaller baths or ‘splicing’ smaller items together after the galvanization process has been undergone.
More generally, there is evidence that any such barriers to entry or expansion are surmountable. Most recently, Premier Galvanizing Limited Market opened a plant in Hull in 1999 and in Corby in 2002 with a capacity of at least 10,000 tonnes per plant per year. Another competitor, Corbetts, expanded its capacity in 2005 by building a second bath in its Telford plant.
One third party raised a concern regarding the vertical link between Hill & Smith’s galvanizing business and its production of palisade fencing. The correspondent submitted that there were currently only two jobbing galvanizers capable of galvanizing palisade fencing (a highly competitive market with low price-cost margins) on a commercially viable basis. Metnor was not one of the two although the commentator did say he had used Metnor in the past. He considered that Hill & Smith’s own production of palisade fencing coupled with its acquisition of Metnor would give it the incentive and ability to raise prices. This is notwithstanding that the two suppliers of galvanizing services existing prior to the merger are the same two remaining post-merger. The complainant added, however, that if prices were to rise, more competitors would probably start to supply galvanizing services to the palisade fencing sector. On balance, the OFT considers that Hill & Smith’s acquisition of Metnor is not expected to give rise to significant concerns of a vertical nature.
THIRD PARTY VIEWS
The majority of customers were unconcerned, as were most competitors. Of the third party concerns received and not addressed above:-
- One customer was concerned that the merger removed future opportunities for playing off one of the merging parties against the other. However, the customer had not had occasion to do so in the past, and the OFT considers that this suggests that such play-off is not necessary in order to obtain competitive prices.
- One competitor was concerned that the parties might close one plant and increase operational output at a plant nearer to it and thereby encroach more aggressively on its customer base. However, there is no indication of the parties’ intention to close that plant nor that any such decision to close would have an adverse impact on competition.
- One competitor was concerned that Hill & Smith would have increased buyer power in its purchases of zinc. Given that zinc is in relatively short supply, the competitor was concerned that Hill & Smith would benefit from cost advantages and thereby encroach on its customer base. However, the OFT considers that, if Hill & Smith were able to procure zinc at better prices, it would have the potential to be more rather than less competitive. Given that Hill & Smith’s share of supply is in the order of [20-30] per cent and that it is not the largest competitor, any increase in buyer power is not expected to push other competitors out of the market.
The parties overlap in the provision of steel galvanizing services: a process which offers protection against corrosion by dipping steel components into baths containing molten zinc. The zinc reacts with and bonds itself to the surface of the steel and provides robust protection against water and rusting.
As a result of the proposed merger, Hill & Smith would remain the second largest competitor in Great Britain, its share of the total supply being around [20-30] per cent (increment [0-10] per cent). Post-merger there remains a larger competitor and a significant tail of smaller competitors. Given that efficiencies are gained by operating plant as full as possible to capacity, prices are consequently constrained by operators being dependent on and competing for volume and throughput – and on the customer's ability to switch. Although the merger would bring about a reduction in the number competitors supplying galvanizing services in long baths (ie 12 metres or more in length) there are alternative methods for galvanizing larger pieces of steel and buyer power can be leveraged by diverting, or threatening to divert, volume and throughput in the form of standard steel pieces away from suppliers with long baths. In addition, the majority of third parties were unconcerned.
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.