Changing Times for Galvanising in Western Europe

Changing Times for Galvanising in

Western Europe

Frank Henze

January 1999

Changing times for galvanising in Western Europe

By Frank Henze

A growth market within the steel industry

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 Changing Times for Galvanising in Western Europe

The galvanising of steel sheet products has been a success story over the last 50 years. Compared with a
total Western European steel market that grew on average only 0.5% per annum in the second half of the
century, galvanised sheet products achieved growth rates of up to 8% per annum.

There is little surprise that galvanised products now have the largest share of the Western European flat
products market. In 1997, Western Europe consumed 63.3 million tonnes* of flat products, with
galvanised products accounting for 19.0 million tonnes or 30% of that market. Including tinplate and
organically coated products, Western Europe’s total coated product ratio stood at 41% compared with
32% in the US.

Graph 1: Western European Flat rolled steel market 1997

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 Changing Times for Galvanising in Western Europe

Today the galvanised market is far from homogeneous and has become a key competitive battleground.
Mills have tried to gain a competitive advantage through differentiation, which has boosted the number
of products available. However, some market complexity has recently started to decline as customers,
especially car manufacturers, have started to standardise the type of coating for particular applications.
This makes product differentiation more difficult to maintain, but places the onus on mills to differentiate
by commercial strategy.

Hot dip galvanised dominates the zinc-coated market with 75% market share, electro galvanised accounts
for 25%. A small percentage of the hot dip galvanised sheet is further treated to produce galvannealed. In
addition to pure zinc hot dip coatings, there are a number of zinc-aluminium and aluminium coatings,
accounting for 5% of the total market.

Graph 2: Western European galvanised sheet market by type 1997

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 Changing Times for Galvanising in Western Europe

Why did galvanising turn out to be so successful?

Customers were looking for products that could combine formability and weldability with corrosion
protection. This fuelled the development of very innovative galvanised products and allowed galvanised
sheet to gain strong market positions in a few key industries and applications.

Demand focuses primarily on three industries: automotive, construction and large domestic appliances
which accounted for nearly two thirds of galvanised consumption in 1997. The remaining third is
consumed in a myriad of different end-use sectors, comprising applications like agricultural machinery,
brown goods and furniture.

Graph 3: Western European galvanised sheet demand by industry 1997

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 Changing Times for Galvanising in Western Europe

Automotive

The automotive industry consumed 7.3 million tonnes of the galvanised sheet market in 1997.
Consumption has been rising steadily over the last 15 years as most European car manufacturers switch
to fully galvanised bodies. This process is nearly completed which means that the growth in the
automotive sector can be expected to slow in future.

Electro galvanised sheet was initially the material of choice for auto markets but improved hot dip
galvanising qualities and the market entry of galvannealed have lead to a decrease in electro galvanised
consumption since both hot dipped products have a cost advantage over electro galvanised. Electro
galvanised is still more frequently used in the automotive industry in Western Europe than in the US. It
accounted for 41% of automotive galvanised sheet consumption in 1997 but is expected to reduce to US
levels in the near future (of about 35%) as galvannealed is gaining market share rapidly.

Construction

Galvanising has also been a success story in the construction industry, where, in 1997, 4.1 million tonnes
of bare galvanised and 2 million tonnes of organically coated galvanised sheet were consumed in
Western Europe.

The use of flat rolled steel in construction is more or less confined to commercial and industrial
buildings. Despite the strong efforts of most of the integrated mills to promote steel for residential
construction in Europe, the growth in steel-framed housing is unlikely to match the rates seen in the US
in recent years. Traditional building materials still dominate the market for residential construction.

Large domestic appliances

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 Changing Times for Galvanising in Western Europe

Large domestic appliances represent only a small fraction of the market and account for 3% of demand.
While this sector is important due to its high quality demands, it is unlikely to grow significantly as the
white goods market in Europe as it is today is close to saturation.

Unlike in the US market, nearly all flat products produced in Western Europe are made from BOF steel
produced by the integrated mills, with EAFs and mini-mill operations largely confined to the long
products sector. These integrated producers have had to respond to a broad challenge as privatisation and
restructuring have taken place. The more successful producers have responded typically by focusing on
value-added products and high quality applications. Galvanising, coupled with a focus on the automotive
industry, has fulfilled both objectives.

Since mini mill operations have not emerged in flat products in Western Europe, ownership of
galvanising capacity remains with the integrated mills. Independent galvanisers account for only 3% of
Western European capacity.

Thus the industry structure in Western Europe differs markedly from the more disaggregated shape of
North America. The influence of the large integrated mills along the value chain is dominant.

Is there a market imbalance?

Galvanising capacity in Western Europe grew in the last 10 years by 5.0% per annum, lagging behind
consumption growth of 8.1% per annum during the same period.

The supply and demand balance varied over this period. High demand levels in the late 1980’s persuaded
mills to invest in capacity which came on line in the early 1990’s, when markets turned down and prices
declined. By 1996, consumption growth had outpaced production once more, leading to a tight market
situation, rising prices and high utilisation. This has lead to the announcement of thirteen new projects
and will ultimately increase supply by 4.3 million tonnes per year by 2002.

Most mills expect the automotive industry to be the largest growth sector and to absorb the new capacity.
Consequently 80% of new installations are geared towards that sector.

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 Changing Times for Galvanising in Western Europe

However our analysis forecasts that demand levels will only grow by 2.5 million tonnes per year by
2005. Demand growth under this scenario will not absorb the planned capacity increases.

Graph 4: Western European galvanised demand forecast 1997 - 2005

We believe there are four main reasons for this:

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 Changing Times for Galvanising in Western Europe

1. Economic growth is likely to be sluggish in Western Europe over the next few years as a result of
increasing world-wide economic uncertainty. This will particularly affect the construction industry.

2. The automotive industry in Western Europe is entering a phase of restructuring. Capacity reduction
and output cuts are likely to be the consequence. Ford and Rover of the UK have already announced
cutbacks.

3. Galvanised sheet consumption has grown considerably over the past decade primarily at the
expense of cold rolled and now many applications are showing signs of saturation. Further market
penetration will be difficult to achieve.

4. Lightweight and substitution pressures are leading to further gauge reduction or in some
applications to replacement by substitute materials. Aluminium and composite plastics have already
gained a foothold in some applications in the automotive industry.

Issues for producers

· Galvanised sheet markets are expected to grow faster in future than other flat rolled steel products
but at a slower pace than witnessed in the recent past.

· Mills will continue to drive increases in their coating capabilities in an attempt to further upgrade
their product mix.

· This will lead to more intensive competitive dynamics and the need to create more value for
customers and continue to reduce costs

· Producers need to understand that this means more than adding value in a physical sense but
tailoring the whole value delivery system towards the customer’s needs. It means a shift from a
production-oriented towards a customer-oriented business design. Product quality alone is less and less a
source of competitive advantage but market and application niching and new distribution and support
systems will be essential.

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 Changing Times for Galvanising in Western Europe

· Continuous cost reduction is important. Producers should avoid the North American experience of
building too much high cost automotive galvanising capacity. New lines need to be tailored to the variety
of markets and their economics to achieve the most efficient, but also the most effective business
structures for the future.

* tonnes throughout this paper are metric tonnes

Frank Henze is a consultant in Beddows & Company’s London office.

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