Select Committee on Trade and Industry Minutes of Evidence

Memorandum submitted by UK Steel Association



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.


  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.


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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