Memorandum submitted by UK Steel Association
"GOING THROUGH THE MILL"
EXECUTIVE SUMMARY
AND CONCLUSIONS
Executive Summary
1. This year will be a record year for world
steel consumption, but the UK industry has never had it so tough.
2. Every thing you use in everyday life
is either made from steel or using steel. For all practical purposes,
steel is fundamental to all manufacturing. As a result the supply
chains from producer to end user are often very complex.
3. The steel business environment is one
of constant change, caused by the ebb and flow of fluctuating
demand, tied to economic growth in each of the world's five major
steel consuming regions. Because regional steel demand and production
are never perfectly matched in all markets world-wide 40 per cent
of steel produced is exported to another country.
4. The biggest phenomenon influencing the
steel industry and its plans for the future is globalisation.
By contrast to sectors such as automotive and aerospace, steel
is still a relatively fragmented industry, with the top 20 companies
only accounting for 37 per cent of world-wide steel production.
5. Metallurgical skills and materials application
know-how are key to the UK's domestic manufacturing efficiency.
Manufacturing economies depend on steel producers for the drive
to extend and propagate this knowledge.
6. The UK steel industry is highly competitive
and a prime example of how the "new" economy (application
of IT in all facets of manufacturing and commercialisation) raises
productivity.
7. The UK's manufacturing base is shrinking.
Total UK steel consumption, including the steel in end products
such as cars and washing machines, grew 9 per cent from 1989 to
1999. The "problem" for the UK manufacturing is that
the steel contained in imported finished goods is now the biggest
"source" of steel used in the UK. The UK doesn't make
the goods, it imports them.
8. In general terms, the British economy
is performing much better these days. Inflation is low and stable.
The public finances are in good order.
9. But there are serious concerns to be
faced. The loss of critical mass in some areas of manufacturing
threatens to undermine the economy's ability to compete. Investment
is weak and mostly in "maintenance" projects.
10. The UK raises proportionately more tax
from businesses than most if its European competitors. This is
in part a vestige from the 1980s. Worryingly, from a manufacturing
perspective, it seems to reflect a UK policy bias that favours
"consumers" of things over "producers" of
goods. Combined with "The City's" apparent obsession
with short-term returns, they create serious additional "uncertainty"
for business investment and long-term viability.
11. The euro has depreciated 20 per cent
against sterling since its launch. In euro terms, UK pay per head
has soared 40 per cent since 1996, more than nullifying the efficiency
gains that the industry has achieved. Since 1996 the average value
of each tonne of steel exported fell from £410 to £300
last year.
12. Electricity prices remain up to 40 per
cent higher than for our European competitors and Government attempts
to do something about it continue to falter. Meanwhile gas prices,
which, following liberalisation, had been lower in the UK for
a few years, are now shooting up (+50 per cent in a matter of
weeks).
13. Although the steel industry is working
hard to reach an agreement with government on the Climate Change
Levy, the sector still has serious concerns. Penalties for non-compliance
will treat complete and marginal failure the same; eligibility
criteria will distort competition; and the steelmaking process
that relies exclusively on recycling scrap will be disadvantaged.
14. Some UK local rates are high. We have
found some UK plants paying as much as 8-10 times the equivalent
local rates in another EU Member State. And now Government proposes
the Business Supplementary Rate.
CONCLUSIONS
15. Current economic policies are severely
reducing steel companies' strategic options in the UK. The critical
mass customer base in competitive manufacturing seems to be slipping
away. With ROCE at less than the rate of interest paid by a bank,
UK outlook for most steel companies is grim. Unfortunately that
could mean further retrenchment and consolidation to drive costs
out of the system.
16. Investment overseas (with open access
to the UK market) is more attractive currently than taking on
the burden of extra costs due to the sterling/euro exchange rate
and the likes of the Climate Change Levy, the Business Supplementary
Rate and UK electricity and gas prices.
17. Nonetheless steel companies are doing
all they can in areas where they have control. They are continuing
to invest heavily in employees' skills (£65 million a year).
They are using e-commerce to improve efficiencies and extending
research and development to add value to their product offering.
In this way they have maintained exports, albeit some 5 per cent
down on last year.
18. The steel industry is integral to UK
manufacturing. In broad terms if UK manufacturing is successful,
UK steelmakers are too. There are direct links and shared concerns
right across the piece. The priority is to re-establish profitability.
And the key to that is making the UK economic framework a more
competitive base from which to make and trade goods into Europe.
19. By taking closer account of manufacturing
in policy formulation and ensuring that detailed full cost impact
analyses guide policy decisions to achieve and maintain a positively
competitive framework, Government would then:
— Acknowledge that the sterling/euro
exchange rate is a problem and stimulate an informed debate.
— Change the MPC's target from RPIX to
the Harmonised Index (HICP).
— Appoint an additional MPC member with
real industry experience.
— Ensure that the spending plans announced
in the Comprehensive Spending Review go on investment goods, not
on inflationary wages.
— Widen capital allowance to all companies
for IT and research.
— Work for competitive energy prices compared
to those in other EU manufacturing countries.
— Reduce FED to help rebalance UK competitiveness
in Europe, because there are better ways to change "environmental"
behaviour.
— Open policy to favourably consider European
Commission initiatives when it proposes to impose anti-dumping
duties.
OVERVIEW OF
THE WORLD
STEEL MARKET
Constant ebb and flow of steel world wide
With 40 per cent of all steel produced exported to
another country, steel is one of the world's most heavily traded
man-made materials. That's because steel demand and production
are never perfectly matched in all markets at the same time. Deficits
in one market or region are filled by imports from another. Surpluses
in one market wash out onto the world market, looking for a buyer.
Demand for steel ratchets up or down in each
market according to local economic growth. Demand for steel rises
in one area and falls in another because one area is growing,
while another may be developing more slowly or perhaps even facing
a decline. The divergent growth rates where clearly shown in 1998,
when steel demand in Asia, the CIS and South America fell quite
severely, but rose in Europe and the USA.
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