Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. Good afternoon, gentlemen. Perhaps, Mr Leahy, you could introduce all of your colleagues and we will get started?
  (Mr Leahy) My name is Michael Leahy. I am General Secretary of the ISTC, which is the iron and steel unit. On my left is Michael Walsh, who is Head of Research for ISTC. On my immediate right is Bob Shannon, who is National Officer for the AEEU with principal responsibilities for steel and metals. On his immediate right is Paul Collier who is national officer for the AEEU with specific responsibilities for SIMA, the Steel Industry Management Association, and Paul is based in Wales. Unfortunately, Mr Gordon Hopwood, who is the national officer, sends his apologies to the Committee and Paul is standing in.

  2. Can we offer from the Committee apologies for the small number of colleagues I have with me today. Some are held up on motorways delayed by flooding, there is at least one case of illness and there are others who, for other reasons relating to the weather, have been unable to attend. I can assure you that the agenda which we have set ourselves will be covered in the questions that we would like to ask you that I am sure we will be able to address. Perhaps we could start off, Mr Leahy. A lot of the concerns that we have been getting are in the context of the euro. In your estimation what is the impact of the strength of the pound against the euro on the steel industry at the present moment?
  (Mr Leahy) Chairman, it is very significant. I think it is agreed that for every ten pfennigs that the deutschemark rises against the pound then that means £100 million off the bottom line. The fact is that we are producing more steel with less people than we did in 1996-97 when Corus, the principal producer in the steel industry, made one billion pounds. It is now making losses and in large part it is down to the exchange rates. I do not know whether my colleagues would like to supplement that?
  (Mr Shannon) Chairman, there is no question that it is having a considerable impact on the company but it is not alone in that. Corus is not the only company that deals in exports in this way. Through both the ISTC and AEEU's evidence we will supplement that as the meeting goes on, but where I think we part company is how you deal with what is a very real effect on a major exporting company.

  3. Mr Leahy, your organisation states in your submission that you support British accession to the single currency at a sustainable rate. I think we are all agreed that there is quite a sizeable gap at the moment. Do you think that immediate accession would solve these problems given the disparities of the fall-out which might occur if we had to try to adjust quickly to the prevailing euro exchange rate?
  (Mr Leahy) I think the fact of the matter is that it is having a significant effect on the trading position of steel producers and the rest of manufacturing. As an organisation, and I am speaking here for ISTC not the AEEU, we believe that we should go in as soon as practicable. Those five economic tests that the Government has placed on record should be met but it should be at a level that is sustainable. We have a view about that, we believe it is around 2.70/2.80 deutschemarks to the pound. Our major complaint to the Government is that there should be a clear indication from the Government that we should enter the euro and talk the matter up rather than talking the matter down because there are a lot of misconceptions, particularly among the public at large, about this particularly complex issue.

  4. Is that a view that is shared by you, Mr Shannon?
  (Mr Shannon) I would emphasise that as an organisation the AEEU supports the five criteria that are laid out. We do believe that a firmer statement as to when those criteria will be met will assist industries in planning. The complaint that we get is that the vacuum that that leaves makes it very, very difficult to actually plan your investment. If you know there is a timetable attached to that then you can actually make your decisions based around that particular timetable. At the moment, because there is a great deal of doubt as to that particular timetable, it is a fair point for companies like Corus to come back and say that does affect their planning in the short and medium term.
  (Mr Leahy) The problem is that our complaint against Corus is they complain repeatedly to us that it is an enormous problem but they do not make any public pronouncements on that. I think their policy is no different from that of the ISTC or the AEEU but they make no public pronouncements on the fact that they too want entry into the euro at a sustainable level but believe that it is a party political matter and, therefore, they do not make any public pronouncements on these matters.

  5. Maybe we could move things on a wee bit in the sense that the burden of your evidence, both of your organisations, rests in large measure on your concerns about job losses. Indeed, it has to be said that we would not be asking you questions today about the future of the British steel industry were there not a haemorrhaging of the labour. Is this all attributable to the exchange rate and the fact that we are not in the eurozone? Is there any part of it that you would lay at the door of the employers? Do you think these could have been avoided?
  (Mr Leahy) I think in large part, Chairman, it is about the exchange rate but the fact is also one has to take into account that steel is a cyclical business, as the document states, and prices go up and down. There has been a softening of prices and we are trading now, I think the statistics show, on average at £310 per tonne instead of £400 even 12 months ago. There is a combination of things. Where we have a complaint with the employer here is that we all agree that this is a short-term problem but they are taking long-term measures which will have a deleterious effect on the industry. We believe that the steel industry is significant in its strategic importance for manufacturing, the economy at large and the defence of the realm. This is not being taken into account when these decisions are being made. It is of fundamental importance that Government has an influence over the future of the steel industry because it does have that strategic importance to the economy.

  6. Do you think the redundancies could have been avoided in any way?
  (Mr Leahy) I think they could not have been avoided in that sense but the depth of those redundancies and the announcement of those redundancies, particularly in terms of the consultation that we had hours before these were announced and they were trotted out in different periods amounting to 4,400, the way that they were announced, the possibility of putting alternatives particularly to Corus, were not there. I think it is fundamentally important that we, the workforce, are properly consulted about these issues and have an opportunity to put alternatives.
  (Mr Shannon) Could I add to that. Part of the redundancies certainly could have been avoided if you had a different investment strategy. I think that is the key to large multinationals and it is the short, medium and long-term investment strategies where we continually run into difficulties with Corus. It is very hard to draw that out of them. If they are repositioning the company in terms of their global commitments then it is very easy to see the knock-on effect in the UK economy. In our submissions we have particularly pointed out the job losses in Workington but with a different investment strategy they could have been avoided. Our problem still, and it has not changed, is that the company is enormously reluctant to enter into those discussions before they make strategic decisions that affect the rail industry in the UK. In fact, they have moved our only strategic part of the rail industry from the UK to Europe, no discussions were had with the unions and, as I understand, very little discussions were had with our Government. We continually press them that if they had those types of discussions then at least the workforce could see that if at the end of the day redundancies are unavoidable that everyone has a transparent policy that they could accept.

  7. Maybe you could set the investment issue aside just for a moment. There seem to be a couple of points emerging from what you have said. One is the specific criticism of Corus and the way in which they handle the announcement of redundancies and their consultative procedures that they adhere to. The impression we get is that you are told and in 48 hours men and women are going down the road and that is it.
  (Mr Leahy) Correct.

  8. Is that correct?
  (Mr Shannon) Yes.

  9. Is this the way that old British Steel in private ownership—I do not think we need to go down the road too far—behaved and is this the way that other employers within the steel industry across the UK behave towards organisations like yourselves representing the workers?
  (Mr Leahy) I think it is a traditional British Steel model of consultation, that is true, in public and in private ownership. It is a model that we advocate must change because it is now a multinational company, a significant proportion is now in the Netherlands and there are significantly different procedures that are applied over there. For instance, they knew that the merger was taking place nine months before any British worker knew that merger was on the cards. There is a significant difference between the way they consult their individual employees in the Netherlands, in France and in Germany than they do in the UK.

  10. Would you say that other firms in the UK in the steel industry treat you differently from Corus?
  (Mr Leahy) I think that there is a more general willingness to be open about future planning, particularly in terms of investment, and the problems that the industry faces. It is true that particularly during the 1980s and 1990s Corus—British Steel then—had a particular modus operandi which is no longer relevant to the steel industry because now it is a different company, it is not a British company any longer, it is a multinational company, and you cannot, in our view, treat employees working for the same business differently.
  (Mr Shannon) If I could add, because it is the same point on that. It is now a metals company, it is not just a steel company, part of its production now is in aluminium and it actually calls itself a metals company, not a steel company. Because it is the largest metals company from a steel position in Europe and, I think, the third largest in the world, to answer the question directly, at the moment there are a number of aluminium mergers taking place between equally large companies. Consultation with the units is moving apace on that, they are kept informed and there is a discussion that does not impinge on their competitiveness but is in a totally different atmosphere from the one with Corus or the old British Steel. To answer the question directly, there is a distinct difference in approach and attitude toward this particular merger and these issues from other large metals companies.
  (Mr Leahy) If we take a company like Avesta, which was 51 per cent owned prior to the changes recently by British Steel, they proposed that they would close a works in Sweden and because of the consultation period that is required by law they ended the consultation period and, in fact, decided to keep that plant open with a new product range. Under the plans for Avesta the plant in the UK was due to stay open but what happened was the Swedish plant stayed open and the British plant closed.

  11. Are you suggesting that the old british steel—small "b"—industry approach to consultation and redundancy is being sustained as much as anything because that is all that is required, whereas on the continent within the EU there are different requirements of companies in relation to employees, in relation to consultation? They do the minimum that is required here and they adhere to what is required on the continent, but unfortunately from your point of view more is required of employers in the Netherlands than there is in the UK.
  (Mr Leahy) And the net effect is that the Netherlands' employees and representatives are far better briefed on what is going to happen, for instance, to Llanwern than the employees in Llanwern.

  12. Could you perhaps provide us with some documentary evidence of this, not only in relation to the Dutch experience but also the Swedish one to which you have alluded.
  (Mr Leahy) Yes.

  13. In a number of industries we have had statements made by colleagues, particularly in relation to the car industry and engineering, where it has been suggested that it is easier and quicker to sack folk in Britain. Not always cheaper, I have to say, but easier and quicker to sack in the UK than it is in parts of continental Europe. If you could provide us with that.
  (Mr Leahy) I will do, Chairman.
  (Mr Shannon) Can I just reinforce that point. One of the ways without the financial element in there is if you have a good consultation process that allows you to mount a different strategic argument then by definition you are liable to be more successful in the defence of that industry. It is not just a matter of them taking a hard-nosed commercial view, they know when they look at the two parts of the industry, one in the Netherlands, one in the UK, that they have got a more difficult approach and they have got to justify that in greater detail and over a longer timescale than they have in the UK. Now if you are faced with two parts of two plants on an equal footing, which one will the employer choose in terms of which is the more difficult one to close in consultation terms as opposed to the other one? That is the effect we are seeing of the differences in legislation. They still shut plants in Europe. That does not mean to say plants never close in Europe, they do on economic grounds, but the route that they get to is in that sense more difficult than it is in the UK.
  (Mr Leahy) I will give you another example: Corus decided to shut their long products business in Ijmuiden in the Netherlands and they also decided at the same time to shut down Shelton works. Shelton works was shut down earlier and people were made redundant earlier, not within a 90 day period but within a very short period. The Ijmuiden plant were given 18 months to two years for those redundancies to take effect. It was a completely different situation.

Mr Morgan

  14. Just to pick up that last point, was that because of legislative provisions in the Netherlands or are you aware of any other reason why that was the case?
  (Mr Leahy) They have the regulations and they have to go through that process, so they are duty bound to stick by the legislation. Corus's policy is whatever the minimum standards are in each country, they will observe those minimum standards. They treat their business as a British business unless they have to treat it differently because of the regulations in various countries.

  15. You talked about investment earlier on and certainly your submission seemed to indicate that you feel there is not enough investment in the UK industry. Can you tell us why you think that is the case?
  (Mr Leahy) We can give you an example and that is rail. We have one rail producer in the UK, and that is Workington. There was a question about whether or not—we were not consulted about this—Corus would invest in longer rails. It would have cost around £35 million in our estimate. Instead, they invest in Sogerail in France and they pay £80 million to the company and invest a further £25 million. Michael will give you the details. In total this was in excess of £100 million. We now have a situation where Workington is on short-time working and shifts have been reduced. We are told by Corus even though this is the only rail producer, if there is an increase in demand, notwithstanding the £80 billion that is going to be spent on the infrastructure, they are probably to come from France. Now, I have to say if that was reversed and we were talking about using all British produced rail to invest in France, I think the French Government would have something to say about that.

  16. There certainly seems to be no shortage of demand for rail in the future given what has happened in the last couple of weeks. I do not think you have told us why that is the case. Is it simply currency?
  (Mr Shannon) No, it is not. They would argue—they will speak for themselves—it is how you perceive your overall position. The investment in Sogerail in France, which we would have argued had we been consulted was short-term and indeed uneconomical, because they are currently saying to us they believe in terms of the London network and the amount of money that would need to be invested there, they can actually import it cheaper from Sogerail in France into the London network than they can from Workington. We then asked for the statistics and the facts to support that argument but those were denied to us. When we say to them "if you can actually show us the economic evidence of this, open the books so we can see that", we run into a brick wall. We get no economic or financial justification for that. All of our figures show that for a proportion of that investment into somewhere like Workington you can actually supply the UK network cheaper and they do not produce any evidence to show otherwise, they just say to us "we have taken a strategic decision and that is an end to the debate".
  (Mr Leahy) I think what is fundamentally important is they would argue that when we transfer steel into Europe, 50 per cent of all steel that we produce in the UK is exported, 50 per cent of it, and 75 per cent goes to Europe. If we had the chief executive here he would say transportation costs are a significant element. We estimate that it costs £40 a tonne to import rail from France. He tried to tell us at a meeting that I was at that it is more expensive to transfer rail from Workington to the South of England than it is to transport it from France to the South of England. We have asked, with the Council, to look at all these things, as Bob said, to go into the detail and come up with some alternatives. They have said no to that. We are suspicious that there is a cover-up here going on, that it is about strategically investing abroad rather than investing in the UK notwithstanding the temporary problem with the exchange rate.

  17. What you are saying is that they have made a strategic decision basically to rationalise their UK capacity, to run it down, because they see it in their long-term interests to invest elsewhere and at the end of the day that will be better for them as a business?
  (Mr Shannon) No, I do not think it is going to be better for them as a business. I think they made a decision on figures that (1) we cannot see and (2) they will not show us. If any company, it does not have to be a steel company, has an economic case to make then they should make it in an open and transparent way that does not affect their competitors. We cannot get Corus to actually make that case to us. All of our figures show the reverse of that, that it is more economic to maintain that part of the UK infrastructure in the UK. Otherwise all we have is a statement to rely on. Yes, they do say that but there are no statistics or facts to support it.
  (Mr Leahy) The other very important thing about this announcement of running down Workington is we believe that five shift operations are unsustainable economically and it will eventually close. It cannot run economically on five shifts. Inevitably, if this decision is not revised Workington will close. It is our only strategic rail producer and, if Corus has the business, all of Railtrack's needs will be produced in France. We say that we have a strategic issue here and the Government should look very carefully in terms of its rail investment, the £80 billion that the Deputy Prime Minister announced, from our strategic national interest.

  18. You have said that Corus say it is cheaper for them to produce abroad yet they have not produced the figures. Either they are right and they just do not want to produce the figures or they are wrong. How could they be getting it so wrong?
  (Mr Shannon) It would not be the first company that has got a problem. There is a graveyard full of companies that have made mistakes, just as the prisons are full of lawyers who have made mistakes over the years. That in itself is not unusual. We have adopted a very, very constructive position towards the company itself and the workforce has shown that over the years. There has been mention of other industries where there are tripartite talks that address the real problem and understand the change. Ship building is a good example of that, they understand the changing nature of the industry itself. In the end what you do get is an acceptance from all sides of the base facts and then you can build on them or not from there. Our difficulty all the time is we are continually confronted with just the decision making, the sharp end of this process, without any discussion. You could easily then become very cynical and say the problem the pound has got is being used as part of an argument to invest elsewhere because although it is a real argument you could use that at every stage of every part to cover up any incompetence or inefficiency in the decision making process and simply say "it is all a currency problem". Although that is a major part of it, it is not all about the currency.

  19. If it is not the currency, what is it? What has driven them to take a strategic decision to invest elsewhere?
  (Mr Shannon) I think that when they merged with Hoogovens in terms of the companies' view, they did not sit down as two companies and work out what was in their own strategic interest and where they were going. Both companies needed a merger in terms of their own future prosperity and both of them had aborted attempts to deal with this in the past. We think what they had was almost a shotgun marriage that came together very, very quickly. It has still got two chief executives, which is unusual in any merger, even though the old British Steel is the majority partner in that organisation. We are suffering now from the lack of that strategic overview of the new company. For instance, it argued very strongly and correctly that it was going to provide metals solutions, that is why it has retained the aluminium arm and it is unique, it is the only metals company in the world that keeps both of these parts of its organisation intact in that way. It has not moved from that position and is now taking the opportunity to rid itself in that sense of its workforce in the way that we described earlier.
  (Mr Leahy) It is true to say that they did take a strategic decision that they wanted to be closer to what they saw as a bigger market. Maybe they did not see at that particular time—this decision was made over 18 months ago—any future in rail production in the UK. Of course, the announcements have been made and the horrific disasters have occurred and with the investment that is now going in, we have said to them "listen, you need to rethink your strategy because circumstances have changed" but they have devoutly said "no, we are not". The reality is that £80 billion in the infrastructure, if things do not change, will be produced in France.
  (Mr Walsh) There is just one point. The Hatfield disaster has caused a rethink on the part of Railtrack. They need to replace the existing rail much more quickly than they had anticipated. They need to do it in a short time. The capacity at Workington is there at the moment and, all being well, Workington should be fully employed for a time more. If the disaster had happened a year down the line and Workington had gone out of business there would not have been that strategic resource there to replace the rail, except from overseas where the costs would be greater and there are always possibilities of disruption of supplies from the continent.

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