Select Committee on Trade and Industry Minutes of Evidence

Memorandum submitted by UK Steel Association (continued)


As percentage of tax revenues
As percentage of GDP
United Kingdom

Source: OECD Revenue Statistics 1999.

  This is not a new phenomenon. It is partly a vestige from the 1980s, when the UK Government sought to reduce direct personal taxation. Corporate tax levels go up, as government seeks to keep personal tax levels low.

Britain starts losing its business appeal

  Many inward investors of course are able to benefit from different tax arrangements. Be that as it may, they have still come to the UK for other reasons than the level of tax. The strength of the financial centre, language, corporate governance, EU membership and the flexible labour market have all been important considerations.

  However, the continued emergence of Frankfurt as a financial power house, the adverse position of sterling as an export currency into Euroland, increased regulation and the creeping adoption of some of the rigid European social programmes are all taking the edge off the UK's competitiveness. In the World Economic Forum rankings of most competitive countries, Britain has now fallen from forth to ninth in two years.

"City's" focus on short-term returns

  Recent public discussion has highlighted how the banking sector is now held in the thrall of the telecommunications giants having helped to underwrite the huge investments made to acquire the digital licences. These funds, some £21 billion in the case of the UK, have gone directly to Government, and are no longer available to the economy at large.

  Meanwhile, manufacturing and steel companies are in competition with sectors like telecommunications for funds. Unable to provide the large short-term gains, they are not favoured by the UK banks and have increasingly had to depend on foreign sources of capital for investment, hence the large number of foreign investors in UK manufacturing companies.

  When financial markets lose their perspective, the consequences can be dire for the rest of the economy. Are the current market mechanisms sufficient to both deal with and help facilitate the huge and rapid changes taking place as ICT (Information and Communications Technology) processes are taken up across all sectors of the economy?

EU Enlargement

  Some of the Central and Eastern European Countries (CEECs) seeking EU membership have relatively large steel industries (Poland, Hungary and the Czech Republic out of the first wave, and Bulgaria, Romania and Slovakia out of subsequent waves).

  Because these industries were developed to meet the needs of centrally planned economies and consequently focused on heavy products intended primarily for the armaments industry, they paid little attention to energy efficiency and are often poorly sited (away from transport or shipping infrastructure). Productivity is low, 20 per cent of EU levels and that gap has been widening over the last 10 years.

  There is significant potential for European market disruption and trade conflict with these countries.

  We believe that the Government should ensure before they enter the EU that:

    (1)  the CEECs adopt the full Acquis Communautaire;

    (2)  their steel industries implement agreed restructuring plans, based on realistic market analyses;

    (3)  the process of privatisation is completed, with all forms of state assistance and involvement terminated.

  It will be better to have a more prolonged pre-accession period than allow them early entry with transitional arrangements that give them favourable treatment at the expense of jobs and plant in the UK.


  These issues all run counter to the Government's clearly expressed policy of encouraging business competitiveness. Some seem to share a common root, all too common in the UK, in that they stem from policies framed from a "consumer" perspective, rather than from a knowledge and understanding of making things and trading them internationally.

Euro exchange rate and its impact on steel's customers as well as steel

  UK stability has been achieved at a cost. Imbalances between different sectors of industry and regions of the country have increased. Indeed, large parts of the traded sectors have suffered, losing orders and seeing margins squeezed. This has forced them to cut jobs and delay much-needed investment.

  Stability may have been achieved in the domestic economy, but there is still huge volatility in the currency markets, wreaking havoc with UK steelmakers' gains in international efficiency.

  The euro, the key currency for UK steelmakers, has now depreciated by nearly 20 per cent since January 1999. So, for example, despite pay restraint to contain wage increases to levels below inflation, the strengthening pound means that in euro terms, pay per head has soared over 40 per cent since 1996. Although the industry has been able to improve labour productivity, this has of course seriously eroded steel's competitive position internationally.

  Since 1996, the average value of each tonne of steel the industry exports fell from £410 per tonne to £300 last year. If the euro/sterling exchange rate had remained unchanged during 1999, UK steelmakers would have earned an additional £300 million on the export sales they made to Euroland. This would have cancelled out their losses. With no change in the situation this year, the only option is to attack the cost base.

  Government should acknowledge that the sterling/euro exchange rate creates a problem for the UK. It should stimulate an informed debate about euro membership, the MPC and its composition and the divergence of interest rates between the UK and Euroland.

  The Government should change the MPC's target from the Retail Prices Index excluding mortgage interest payments (RPIX) to the Harmonised Index of Consumer Prices (HICP) and reduce the target to 2 per cent (in line with that of the ECB), retaining its symmetrical nature.

  The Chancellor should appoint an additional independent non-academic economist to the MPC who has significant experience of working in industry. The person should be seen as somebody with general industrial experience rather than a specific sector representative.

  Independent and detailed research should be commissioned immediately to look at the possibility of incorporating the exchange rate and other asset prices into the current monetary policy framework.

Energy prices

  Steelmaking is energy intensive. Companies have worked hard to minimise energy use. Compared to 1970 the industry now uses 40 per cent less energy for every tonne of steel produced.


  However, UK steel producers are still having to pay up to 40 per cent more for their electricity than their European competitors. And now the new trading arrangements (NETA), which were to have been brought in in November, have yet again been delayed for "technical" reasons, so that they will not now be implemented until February 2001 at the earliest. Government estimates that NETA will cut electricity costs to industry, which are amongst the highest in Europe by 10 per cent. This will clearly not be enough.

  These high prices have had a direct impact on UK steel production patterns. One of the two steelmaking processes uses electricity to produce molten steel from scrap. This Electric Arc (EA) process has increased its share of steelmaking throughout the EU by 27 per cent since 1984. But in the UK it has fallen by nearly a third.


  The industry also suffered very high gas prices, until some years ago, when market liberalisation eventually delivered competitively priced supplies. But this has only lasted a few years.

  Now gas prices have doubled since January 2000 (see graph), in the yearly contract negotiations. They have tended sharply upwards to continental levels (which are linked to the price of oil) as a result of the influence of sales of UK gas through the Interconnector. This is ruining 10 years' work in liberalising the gas market and threatens further cuts in manufacturing capacity and therefore jobs.

  Government has recently shown itself to be more alive to the way UK energy prices undermine UK manufacturing competitiveness in the European Single Market. However, more needs to be done to actually deliver competitive prices. After all the UK has half of all the EU's oil reserves and a fifth of all the natural gas.

  Regulatory action is required at UK and European levels to re-establish a competitive market. Offshore regulation should be strengthened particularly with regard to the use of the Interconnector by national monopoly gas producers.

  While no one wants NETA to be introduced prematurely for a "still birth", the delay certainly does not serve the interests of big industrial electricity users like steel, whose competitiveness is fundamentally affected by energy input prices. Government should not let them get away with it any more.

Fuel excise duty

  As an environmental measure the fuel tax has clearly failed. Despite having the biggest fuel taxes in Europe, a higher percentage of passenger miles are still travelled by car in the UK than in any other EU country. Yet UK diesel prices, that are 40 per cent higher than the EU average, place an additional cost burden at every stage of the supply chain, with a cumulatively adverse impact on UK competitiveness all the way down the supply chain.

  Studies have shown that the availability of viable alternatives has a far greater impact on transport choice than taxes.

  The Government should therefore substantially reduce fuel excise duty for diesel, and commit itself to ploughing the remaining receipts from FED into further public transport investment.

Climate change levy

  The Committee was fully briefed on this issue last year. However, as an aide-memoire there are still, in our view, three issues that should be dealt with differently.


  DETR's proposed penalties for non-compliance in the negotiated agreements make no allowance for marginal failure. Thus companies reporting 99 per cent compliance and 100 per cent failure would be treated with equal rigour and suffer the equivalent of 100 per cent of the tax. The EU's draft guidelines on State Aid recommend proportionality, which we believe should be applied in the UK.


  Only companies that operate plant covered by the Integrated Pollution Prevention and Control (IPPC) Directive are eligible to enter a negotiated agreement. This will raise costs and distort competition within the steel sector:

    —  The production of oxygen, an important gas for the steel industry, is not eligible despite the fact that its production is very energy intensive and does not produce CO2. Steel companies will have to absorb extra costs of some £6 million a year, equivalent to 42p per tonne of steel produced.

    —  A steel wire company that has replaced acid pickling with mechanical descaling (for environmental reasons) will be excluded from an agreement, whilst a company retaining pickling may enter an agreement, even though they may be making the same product for sale in the same market sector.


  Steel produced by re-melting scrapped steel requires 69 per cent less fuel per tonne of product than the primary route, producing "virgin" steel. Nevertheless, under the CCL, the levy charge per tonne of steel is considerably higher when using scrap materials than for "virgin" material. The CCL will cost the steel industry £10 million in direct taxes. Indirect costs, such as those passed on by for example oxygen suppliers will add further costs. An exemption on the melting of ferrous scrap in electric arc furnaces would result in a loss of tax to the Treasury of less than £1.9m per annum, or under one fifth of the sector's commitment under the CCL.


  Government sponsored reports into competitiveness have already highlighted the cost of land as one of the key disadvantages that business has to overcome in the UK. We have not undertaken detailed research into rates, but where we have been able to make direct comparisons, we have found some plants paying as much as 8-10 times the equivalent of another EU Member State.

  Further, after the workplace parking levy, which hits car-dependent away-from-town-centre work locations particularly hard, Government is now proposing to introduce the Business Supplementary Rate (BSR). After five years, BSR could add an additional 5 per cent to businesses' rate bill. The BSR's aim is to encourage business and local authorities to consult with one another over the spending of these additional sums. To business it is going to look like little else than an extra charge to stop vandalism. It is yet another example of a "good idea" from a consumer perspective looking like a complex anti-manufacturing tax.

  Scrub both proposals and get to understand how such ideas, that clearly disadvantage manufacturing, can be repeatedly put forward and gain currency, instead of proposals that would actually help manufacturing activity.

Capital investment allowances

  Government has limited its capital investment allowances to SMEs. SMEs depend on the financial health of larger companies for their own viability. Each year, the steel industry alone pays nearly £600 million into SMEs directly supporting 11,000 man years' work.

  Government should widen allowances to include all companies, thereby encouraging investment. In the first instance, Government should give all companies whatever their size, the same rights as SMEs in IT and research and development.


  Some trade surges do serious damage to prices and therefore to producers. However, naturally enough, given that we export half of all the steel we produce we are ardent advocates of free trade with the proviso that it is fair.

  Since the mid-1980s, the UK Government has shown little enthusiasm to support EU cases into suspected steel dumping or other trade distortions. The USA is nothing like so reticent. Its trade laws provide far more effective short-term remedies than EU procedures. In the EU, provisional duties are applied 270 days after a case is filed, at the earliest, provided the Commission and a majority of Member States are satisfied that material injury has been caused to them by the imports. In the US an anti-dumping case has a very low injury hurdle to jump in the very first days of the investigation. After that, the imposition of provisional duties, at the very latest 210 days after filing, are a foregone conclusion. This has a trade freezing effect, as exporters stop selling as soon as the initial (low threshold) injury determination is reached.

  Government should support the European Commission, when it proposes anti-dumping duties against imports that are threatening the European steel industry.

  In the next WTO round, Government should support world-wide harmonisation of the way in which anti-dumping rules are implemented.

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