UK steel: down but not defeated

February 2016  |  FEATURE  |  SECTOR ANALYSIS

Financier Worldwide Magazine

Engulfed in crisis, in terminal decline, facing lingering death and an industry buckling under the weight of cheap Chinese product – these are just a few examples of the emotive language being used to characterise the current state of steel production in the UK.

Plainly, the plant closures and job cuts that have permeated the UK steel industry over the past six months – including SSI in Redcar, Tata Steel in Scunthorpe and Caparo Industries at several UK sites – all add up to a catastrophe, losses which have succeeded in bringing a proud industry to its knees.

A recent parliamentary report – ‘UK steel industry: statistics and policy’ – sets out the reality for the industry in cold, hard facts: 2200 jobs will be lost when the Redcar steelworks in North Yorkshire is closed; 1700 are at risk due to parts of Caparo Industries’ steel operations going into administration; and approximately 1200 jobs are scheduled to go at Tata Steel’s plants in Scunthorpe and Lanarkshire.

Overall, with more than one in six of those employed in the UK steel industry – which accounts for almost 20,000 people – in the process of losing or at risk of losing their jobs, the outlook is exceedingly grim. Gareth Stace, Director of UK Steel, the trade association for the UK steel industry, called the mothballing of the Redcar plant an “extremely worrying development” and warned that “the time for warm words had passed”.

Whether warm words are superseded by tangible action remains to be seen; however, UK Steel and the manufacturers’ organisation EEF, among others, have called on the government to act decisively, by stemming the tide of cheap Chinese steel imports and reducing the energy costs and business rates which many companies claim discourages investment, to limit the damage being done to an industry which largely underpins manufacturing in the UK.

The vagaries of international demand

2015 saw a 1.7 percent drop in international demand for steel, largely due to the economic slump in China. This, combined with a continuing growth in production, has resulted in a surplus of steel flooding the international market, pushing down steel prices. Such trends unfavourably highlighted the comparative expense of UK steel, which has higher operating overheads than a number of other countries. For the industry in the UK, this plummeting demand for steel, where levels have failed to return to those seen pre-financial crash, is one of the main reasons for the current crisis.

The outlook for the UK                                                                                              

Following the 2015 UK Steel Forum’s examination of the outlook for the industry and a Business, Innovation and Skills Committee inquiry into the scale of the job cuts, the industry consensus is that action needs to be taken sooner rather than later. “Time is not on our side,” said a troubled Mr Stace. “The industry needs to see results to give it the confidence to push on. Failure to do so could have disastrous consequences for the remainder of the industry. There are other measures the government can take now to help ease the problems facing the entire UK steel industry, including representations to the Chinese government about the issue of Chinese steel being dumped in the European market – a topic seemingly not discussed to any great degree during president Xi Jinping’s visit to the UK in October. We need a clear indication from the UK government that it will honour its commitment to compensate steel from the cripplingly high cost of energy – and to do so earlier than the original April 2016 due date. Failure to do so could mark a potentially disastrous tipping point for the industry,” warned Mr Stace. Mr Cameron has now pledged that compensation will be paid once the UK gets EU clearance.

European steel: halving the industry?

Steelmaking production in the European arena boasts 330,000 jobs, over 500 sites and a capacity of 200-210 million tonnes. But Wolfgang Eder, chairman of the World Steel Association, the steel industry’s global trade body, believes that due to worldwide trends the industry needs to “halve in size over the next 15 years” in order to secure “a solid base in the long run”.

In terms of the crisis in the UK steel industry, Mr Eder, refers to it as a “negative role model” for the wider European industry, struggling as it does with a “cost structure that is not commercially competitive in the long run”. Decline, he believes, is inevitable.

Conclusion: vital or passé

Despite British prime minister David Cameron describing the contribution of UK steel as “vital” and pledging his support for the industry, its economic viability going forward is being increasingly questioned – although several parties have expressed an interest in acquiring UK-based steel producing companies.

How vital the prime minister considers steelmaking in the UK to be will ultimately be shown by the action yet to be taken, leaving the industry, and its dependents, to contemplate whether or not it is on the threshold of an irrevocable decline.

© Financier Worldwide

BY

Fraser Tennant