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
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
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
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
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
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
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.