Tuesday, April 05, 2016

What Future for British Steel?

For the last two months, our media has been dominated by the EU Referendum. This frenzy of wild claim and counter-claim will continue until June 23rd. But the decision by Tata, the Indian industrial conglomerate to sell off its interests in steel manufacture within the UK has taken over the headlines. Rightly so. It's a big decision but cannot have come as a shock though. Tata have been losing £1,000,000 a day at its Port Talbot works. No business can carry on for long with ongoing losses on such a scale.

There has been lots of debate about what has brought about this sorry state of affairs. The fundamental reason is reduction in demand for steel, especially in China. As a consequence there is a huge amount of spare steelmaking capacity around the world. Inevitably, production greater than demand causes a fall in prices and profits. The position has been made worse in the UK as a consequence of the UK Gov't's decarbonisation policies. This have meant higher energy prices, rendering British steel uncompetitive. This comes as no surprise to some of us, who have warned about 'green taxation' leading to the export of energy intensive businesses for years. Chickens/home/roost. 

Nothing is gained about arguing about the past. It's where we go from here that matters now. In an ideal world some shining 'white knight' company will ride out of the darkness to buy Tata Steel as a going concern. It's not going to happen. Tata are a very good company, which has invested billions into the business, and has still been losing £1,000,000 a day.  It's unlikely anyone could do it better than Tata. Any new owner will need to restructure operations at Port Talbot in order to create a viable business. Already we learn of one potential buyer, with a turnaround track record. We don't know what it involves yet, but there are reports of changing the plant to one that recycles steel. And we don't yet know what this means for jobs, wages, long term security etc. but it does give us hope. What matters to the UK Government is that it does everything possible to help.

One of the reasons for the current crisis (arguably the main reason) is a massive over-supply of new manufactured steel made in China. We read reports that the Chinese are taking an amazing 500,000 jobs out of steel manufacture. That will take time. There is much calling for extra taxes on Chinese imports to EU countries. The Government knows only too well that this may be a superficially attractive response, but is a dangerous road to travel. Tit-for-tat import restrictions would undermine world trade and cause long term damage to British interests - cutting off a nose but demolishing the entire face. 

There are also calls for the British steel industry to be 'nationalised'. This is not going to happen either. If under the management of Tata, losses are £1,000,000 per day, I can envisage that becoming £2,000,000 per day in fairly short time!! I do think we will see the UK Government providing financial help, including big cash injections to support restructuring, pensions, energy costs etc.. But I cannot envisage actual ownership by the Government. 

I do not pretend to be optimistic. I am not. But I do want the UK Govt to do all it reasonably can to retain steel making in the UK. We must hope that an acceptable deal emerges over next few weeks. 

1 comment:

IanJ said...

Thanks for a reasoned view over this.

There is an argument that a country should keep the ability to produce a certain %age of its needs which tends not to be recognised in free trade agreements. I normally think of this in terms of food more than manufacturing.

One issue with Steel which may require more direct intervention is that I believe some equipment can be expensively damaged if shut down