Steel: State of the Nation
The news that British Steel has entered insolvency has brought the industry into sharp relief once more. It also poses the question – who (if anyone) is to blame?
The immediate turmoil that has engulfed the company reflects several factors - economic, political and organisational. Brexit uncertainty has also played a part. Over forty percent of the company’s product is sold in the EU. Order books are constructed well in advance of purchase and in the absence of relative certainty over the outcome of Brexit on the cost of exports and the ability of producers to fulfil orders, customers simply look elsewhere. The increased cost of raw materials, traded in US dollars, reflects a weaker pound.
Legitimate questions can be asked about Greybull’s’ stewardship. The early optimism of its purchase of the then-Tata Long Products Division for a nominal £1.00 subsided as Greybull misjudged the trajectory of steel prices. Its injudicious selling of carbon permits was a bet that went badly wrong. The steel industry has an insatiable appetite for investment and the amounts needed to swing the company back into systemic profit - £400m planned - was always going to be challenging. Not all product lines are profitable but first year trading figures were impressive. Time, however, simply ran out for Greybull. It seems luck did too – production was lost through a damaged blast furnace.
The continuing crisis in the UK steel industry, manifested in the parlous state of British Steel and the travails of Tata Steel, reflect many systemic factors. Compared to other nations, UK steel producers are saddled with high energy costs; 50% more than France and Germany. A recent report on energy indicates that the Government does not have the appetite to resolve a problem which would require a new political settlement on who foots the bill for energy. The current business rate regime militates against capital investment. More broadly, UK Steel (the trade body for the UK steel industry) estimates that through the impact of EU trade defence measures, deflected imports from the USA and the possible post Brexit loss of Free Trade Agreements, as much as 97% of UK steel exports will be negatively impacted. For any industry, these are huge odds to battle against.
Beyond the UK, the impact of the US tariff policy on steel imports is affecting the dynamics of the European industry. This has been made worse by exporters of steel to the US displacing their products to alternative markets, one of which is Europe. A report from Eurofer, the EU steel employer’s federation, notes that between 2017 and 2018, imports to the EU increased by more than 12% whilst demand increased by only 3.3%.
However, there was reason for optimism too - the recent UK Steel Charter has committed key stakeholders to support the industry and to resolve to increase public procurement of UK steel. The Government has also committed to underwriting the receivership of British Steel.
Neither British Steel nor the UK steel industry are basket cases. Steel is not a sunset industry. It is at the heart of the economy and can provide the impetus for a green manufacturing sector. But for these ambitions to succeed, there needs to be an understanding of the importance of Foundation Industries such as steel, with their stimulus for R&D, innovation and productivity, to the wider economy. Steel provides relatively well paid, high skilled jobs generally to poorer regions and is associated with significant economic and social multipliers.
It would be an act of economic and social folly to allow British Steel to go to the wall. Its workers and managers have given too much for this to be permitted. The cost of its demise in lost tax revenues, lost wages hence reduced demand, welfare provisions, increased imports and supply chain disruption, far outweigh the cost of government support. State aid is possible. The importance of an industrial strategy with a multi sector focus has never been more sharply brought into relief.
Dr Ian Greenwood, Associate Professor in Industrial Relations and Human Resource Management, Leeds University Business School