UK manufacturers unfazed by shrinking steel sector

Oct 26, 2015

When Tata Steel told the smokestack town of Scunthorpe last week that it was scaling back the 150-year-old steelworks, it pinned the blame on the government. Britain would have to “rekindle its desire” for industry, one executive said, or see the door finally closed on a proud history of manufacturing.

The crisis gripping Britain’s steel industry — with more than 4,000 jobs lost since the summer — has raised questions over the government’s commitment to manufacturing. While chancellor George Osborne may have pledged in 2011 to see “Britain held aloft by the march of the makers”, Sajid Javid, the business secretary, was forced to admit last week that “there are limits to what we can do for the steel industry”.

His comments drew fire from unions, political opponents and industrialists. They blame the government for policies that have left the industry with energy costs much higher than the competition and crippling business rates, and for failing to press the EU to stem the tide of cheap Chinese imports. Failure to address these issues, they argue, will signal the end of Britain’s hopes for a vibrant manufacturing sector to drive jobs and economic growth.

Yet the difficult truth is that there appears to be little evidence that declining UK steel production will condemn British manufacturing to extinction. “If there were no sources of supply in Europe, that would be serious,” says Chris Beauman, an adviser to the steel industry. “We have had a pretty Darwinian cull of British industry in recent years and those who remain have something going for them. But it probably is not primarily their access to UK steel.”

This is the experience of other countries. US steel production has declined 13 per cent over the last 35 years, yet manufacturing volumes have more than doubled over the same period and the country is now the world’s largest importer of steel.

Britain is a relatively small steel producer, making 12m tonnes a year, or 0.7 per cent of global output. But manufacturing output has actually risen since steel production began a steady decline from its peak of almost 19m tonnes in 1988. UK industry has long had to buy much of what it needs abroad, mainly from continental Europe. The steel for Trident nuclear submarines, for example, has for many years been supplied by a specialist in France. Nissan’s Sunderland plant only takes 25 per cent of its steel from the works at Port Talbot.

Last year UK industry met 60 per cent of its needs with foreign steel, a record high. The rise of imports is in part down to globalisation of supply chains, the type of product needed, and a strong pound making imported steel cheaper.

Manufacturers are also buying cheap low-grade steel from China, which is flooding the global market and dragging down prices across the board. Chinese steel accounted for 8 per cent of demand in the first half of this year, double the level of three years ago. Meanwhile, the percentage of UK-produced steel taken by British customers has remained steady, at about 40 per cent since 2012.

The recent UK plant closures and production cuts are unlikely to alter that profile and manufacturers expect little impact on their supply chain. The blast furnace at Redcar, Europe’s second biggest, was owned by Thailand-based Sahaviriya Steel Industries and almost all of its production of slab steel went to Thailand for processing.

The mill at Scunthorpe, owned by Tata Steel, makes mainly commodity long products such as rails and has been up for sale for more than a year. It is halting production of steel plate, largely used in construction and widely available elsewhere, including in the UK.

Big manufacturers — even in the UK’s dynamic automotive industry, a big user of the metal — say steelmakers’ woes are not keeping buyers awake at night. “It is not a hot topic for us,” said one person at a major car company. “We buy our steel abroad,” says another. “We used to source [in the UK], but they stopped making the steel we were buying.”

As for construction, it was buying abroad even before Chinese exports surged. Imports of fabricated steel have risen 111 per cent in five years, while foreign purchases of steel used for piling have increased 80 per cent, according to the Construction Products Association.

Smaller users of steel say they are confident they will be able to source through the intermediaries that supply more than half the market and are accustomed to buying throughout Europe. “I don’t see at the moment that it is a disaster for industry,” says Roy Taylor, managing director of Malthouse Engineering, a West Midlands company that cuts and fabricates steel products for industries ranging from healthcare to nuclear plants. “We can adjust.”

But that phlegmatic view may not last if conditions change, warn producers and some manufacturers. “Today’s surplus didn’t exist only a few years ago,” says Bob Jones of Tata Steel. “At that time UK steel consumers were very concerned about shortages and would have faced serious difficulties without access to domestically made steel.”

Many manufacturers also worry about security of supply should demand pick up again or too many steel mills go under. But that applies as much to Europe as to the UK. “Our future does not hinge on having a domestic steel industry,” says an executive at one of the UK’s biggest manufacturers. “For us it is about having a diversity of suppliers.”

That does not mean the future of UK steel is irrelevant to the country’s manufacturers, however. The steel sector employs almost 30,000 people and 4,000 households will now be wondering how to pay the bills.

“Skilled, well-paid manufacturing jobs are being lost in areas where alternative skilled employment may prove difficult to find,” says Lord Bamford, chairman of JCB, the British construction equipment manufacturer. “It also means our balance of payments, which is already negative, will be in an even worse position due to a further decline in steel exports.”

Nor does it mean that the government can ignore the deeper problems of UK steel. “What would be a tragedy and fundamentally unacceptable,” says Terry Scuoler, chief executive of the EEF manufacturers’ organisation, “is if through government policy the sustainability and viability of UK steel were to be damaged. We have to give steel a fighting chance.”

Source: Financial Times