Examination of Witnesses (Questions 60
MONDAY 6 NOVEMBER 2000
60. I believe a feasibility study was done at
Workington about using it for the production of long rail. I believe
that report has not been made available. Would it be possible
to make that report available?
(Mr Pedder) I am not aware of that report but I am
sure I can come back to you on that one.
61. If you would we would be very grateful.
My understanding is you have refused to let the local authority
up there have sight of that report. If you would take that on
board. It seems strange that you are not aware of it. Obviously
under the new transport policy, which the Government is committed
to, we should see more new investment into Railtrack and the extra
money that has gone in but also we will see investment in the
coach industry. What help and assistance will that give to the
steel manufacturers if we see an expansion of the bus and coach
industry? I do not know how you will all benefit from that. What
share of the market do you expect to pick up?
(Mr Siddall) I cannot say I have a lot of knowledge
about the bus and coach industry but obviously steel and other
metals are extensively used in the coach industry. One would hope
that would secure extra work for our industry. I am sorry, I cannot
comment about that industry.
(Mr Bagshawe) If I may just come in there. Historically
there has been a strong presence in the West Midlands in particular
in the coach and Railtrack industry. I think that has changed
into a lot of foreign ownership over the last few years. There
is business there that obviously everybody in this industry will
be going for with a passion to secure those orders and make sure
wherever possible they do not go overseas.
62. Moving on to exports, in your written submission
on page 18 you note that 75 per cent of UK steel exports go to
the European market. Is it because we are so exposed to the European
market that the weakness of the euro matters so much?
(Mr Siddall) Sorry, I did not catch that last part?
63. In your written submission on page 18 you
have noted that 75 per cent of UK steel exports go to the European
market. Is this because we are so exposed to the European market
that the weakness of the euro matters so much? How important is
the euro to this?
(Mr Rea) I think you are quite right there. Europe
has increasingly become the home market for the UK steel industry.
We have a very strong presence in most of the major European markets
and consuming sectors. In most of the companies anyway there is
a strong policy of hanging on very tightly to customers, staying
very close with the people we have a partnership with. It has
been an exceedingly painful experience over the last couple of
years. Companies are losing a lot of money hanging on to customers
and supply contracts and trying to stay there.
(Mr Siddall) Can I just say, the euro has depreciated
by 20 per cent since January 1999. In my case, where my company
supplied a lot of components into industries in Europe, those
orders are very hard won but they are very, very easy to lose.
One tends to keep in there even if one is supplying at cost or
below cost. It is very easy to lose a customer and very hard to
win one. Obviously one tries to keep in there and supply these
64. Is the exchange rate creating these uncertainties?
What sort of impact is the exchange rate having?
(Mr Siddall) The exchange rate has had a terrific
impact on our industry, particularly if one is trying to plan
ahead. If planning ahead secures certain markets and requires
investment in capital, one bases that investment in capital on
the exchange rate at the time. If, as what happens to the euro
happens, it just throws us out of the window. The manufacturing
industry does need stability. Purchasing capital plant can often
take six or nine months for that capital plant to come through.
In the meantime if currency has depreciated by 10 or 15 per cent
that can make a nonsense of those figures but one has still gone
ahead with the investment.
(Mr Bagshawe) If I could just come in there. I think
not only on the medium term that Peter Siddall has talked about
but even on the short term we are experiencing some quite significant
variations in the value of the currencies. When we have been fighting
to keep in a European market for 18 months now, even small fluctuations
can make the difference between an order being acceptable and
making some contribution and having to walk away from an order.
When we have fairly rapid variations, as we have had recently,
it can be an embarrassment of actually when you have quoted an
order it being profitable and when you come to get it you are
making no money for your business and that makes life very difficult.
65. Would you say the Corus merger was a leap
in the dark by the Dutch given the volatility of the markets at
(Mr Pedder) I think the Corus merger has proved with
hindsight, which is always a good way to look at things, perhaps
not to have been as helpful to them as it might have been. I am
sure they had different expectations of currency relativities
when they were considering the merger but I am sure they did the
merger for a variety of reasons, of which that was one. I think
the size of Corus, the critical mass, the breadth of products,
were all very strong features which were in their mind. If I can
refer to my Dutch colleagues as "they", they, like us,
the former British Steel employees, are of course extremely disappointed
at how the results of the merged companies have turned out. It
is something that obviously neither side would have hoped for
and we are working very hard to try and rectify it. If I can just
pick up a comment you made earlier about the importance of the
European market. Certainly as far as the Corus product range is
concerned, in the main we are producing bulk quantities. We are
large steel makers as opposed to specialist producers, in the
main. We do have a number of specialist products. For the bulk
products margins tend to be thin in world steel because of competitiveness
and margins tend to be small relative to the transport costs of
moving to distant markets. Therefore, Europe, by its very geography,
is a natural next market beyond UK for the UK end of our production.
The Northern European region is a natural market for our Dutch
operations in the bulk steel sector. Therefore, the impact of
changes in the euro's relativity really do hit us very quickly
and very hard and that has been seen in the financial results
that we produce and which are on public record.
66. Exports last year were up by 1.4 million
tonnes yet on page 26 you indicate that since 1996 the average
value of each tonne of steel exported by the UK steel industry
fell from £410 per tonne to £300 last year. Are most
of your companies exporting at a loss?
(Mr Pedder) I can assure you so far as Corus is concerned,
our exports are not profitable. We are running really hard, as
Peter Siddall said, to retain customers, to retain orders, to
avoid major configuration changes. Our export business is exceptionally
poor. Indeed, if you look at steel generally for our products,
the impact of German prices is very strong in the bulk steel product
area. The relativities have meant that our UK prices are not the
most remunerative either at this point in time. We are working
extremely hard to try and keep our configuration as close to where
it is but take costs down to give us some prospect of generating
some returns so we can continue to invest. I can assure you on
the exports, specifically the question you raised, these are very
unremunerative for us at this point in time.
67. Are you running at a loss or a minimal profit,
(Mr Pedder) On exports?
(Mr Pedder) On exports we are running at a loss.
(Mr Siddall) I can assure you as well in my own company
in contrast to Corus, which is absolutely tiny, it often takes
you a couple of years to get in with a customer to develop a component
with him, to give him the quality of service that he wants, to
give him the price that he wants, you are very, very loath to
walk away from that customer. You do everything you can to keep
that customer. It can mean often paring your operation down to
the bone because you want to keep that customer, you want to keep
jobs, you want to keep the company going. Many, many of those
things we do at the moment are running at a loss. The weakness
of the euro has absolutely stifled us in a sense in my own company.
(Mr Rea) May I add a further point on that. I think
there is an important question underlying this and that is the
ability of companies to invest. I said at the beginning of the
answer to this question how companies now in the UK steel industry
work far harder than they did 20 years ago at holding export business
and staying with those customers just as much as they wish to
stay with home market customers. If you are doing it at a loss
the one thing which goes, and goes early, is investment. That
obviously means the business is being run away in the sand whilst
you are hanging on to that export business. That is something
which is going to come home to roost in years to come, you cannot
catch up with that once you have missed investment. The next point
on from that is that we have seen exactly the same thing going
on in UK manufacturing as well. This is not something that is
unique to steel. Investment in manufacturing in the UK is drying
69. Are there any good export prospects anywhere
that you feel you would need some assistance with or is it all
just doom and gloom?
(Mr Bagshawe) I think, speaking from my own company's
basis, the one significant saviour over the past 18 months has
been the strength of the American economy and the fact that there
have been opportunities there for us to redirect our exports from
mainland Europe into North America. As we all know, the North
American market has been very strong and it has given us that
opportunity over the last 18 months. The American market is arguably
a little bit off the boil at the moment, whether that is a structural
change or whether that is an adjustment to stocks, I think it
is too early to say.
(Mr Pedder) Certainly as far as Corus is concerned,
we have had the same experience. We have worked very hard in the
North American market and would be one of the major importers
into that market. Of course that runs the riskgoing back
to dumpingthat you can get caught in that crossfire as
it starts. Therefore, we have to watch our position very carefully.
Additionally, right now, as Mr Bagshawe said, the market has gone
off the boil to some extent. Corus also in the past has been very
active in the Asian market and we have been one of the biggest
suppliers of structural steel products for the various construction
activities that were in the Asian market, going back four or five
years, but of course that is nothing like as buoyant as it was.
70. Are there any export barriers you can sell
to the USA? You probably heard earlier submissions regarding the
countervailing duties that it imposed on exports of British Steel
products after an EU ruling that British steel ceased to benefit
from Government subsidies. What are your views about that?
(Mr Pedder) I think, generally speaking, that the
trade actions that have been taken against us are working through
their course and sunset reviews are taking place and we are proving
to have some success in getting rid of any historic duties which
might have been applied to us for reasons that we may have disagreed
with at the time. I think that is all, with one exception, working
through very sensibly at this point in time. I do not think it
will change the fundamentals of our ability to sell more in the
short-term because that is very much market related, and our need
to make sure that we do not get excessively active in that market
and take more than is reasonable.
71. Is this an issue that you have raised with
the British Government?
(Mr Pedder) Yes. We have talked to the British Government
about the US market and the various restrictions that apply and
they have supported us in getting rid of some historic duties
that have applied to us, certainly as far as Corus is concerned.
72. A couple of points. Mr Bagshawe, your bosses
are American, they denominate profit in dollars but do they denominate
losses in dollars as well?
(Mr Bagshawe) All financial numbers at the end of
the day are translated into dollars, I am afraid, that is the
measure. My American owners bought our businesses some 18 months
ago and they bought them for the long term. They bought them to
develop an operation this side of the Atlantic. It is my job to
deliver on their vision. It is not the easiest job in the world
at the moment, but as one of my bosses a long time ago said "I
never promised you an easy job", which is fair comment. It
is hard work to develop a European subsidiary at the moment. The
size of the American market is so much bigger than the UK and,
indeed, significantly in terms of the European size and there
are some different ways of doing things in the States perhaps.
73. I only hope John Maynard Keynes' remark
about "in the long run we are all dead" does not come
into play too prematurely. One last point: we have had British
Trade International before us in the past and UK Trade Partners.
Do you get much assistance from them when you are trying to sell
abroad? Do you find that the DTI/Foreign Office arm is getting
behind you in your endeavour to export? Is there much evidence
of that or do they think that they should not throw good money
(Mr Rea) BTI as such is a new and young organisation.
We are hoping, shall we say, for better and more consistent performance
from that in the future. It has certainly been our companies'
experience that on occasions, and in some markets, DTI and HMG
have been extremely helpful and there are very good success stories
in that category. Across the piece though there have been problems
and there have been some disappointments at the overall standard
of understanding from the people who are out there in the external
markets. Maybe that is partly our fault in the degree to which
we have input into that system in order to help them help us.
We hope BTI will do better. They complimented us in certain respects
in their recent study on sectoral organisations and they made
some positive proposals for how they might aid and abet sectors
focusing on certain export markets and I hope we shall do well.
74. Just a supplementary on this. You said your
new owners had wanted to establish a presence on this side of
(Mr Bagshawe) Yes.
75. Is there an implication there that they
wanted to establish a presence in the eurozone?
(Mr Bagshawe) That was indeed the attraction. There
are an increasing number of companies either owned this side of
the Atlantic or the other side of the Atlantic that have manufacturing
operations both sides of the Atlantic. Our desire as we move more
and more towards global purchasing is that we have an operation
that is capable of supplying customers with an identical, or almost
identical, product both sides of the Atlantic. At the moment I
am discussing with a number of customers in a wide range of industries
global sourcing, which will not only include Europe but North
American supply as well.
(Mr Siddall) At the end of the day it really is all
about our ability to be competitive, that is really the crucial
issue. I am sure we would welcome a chance to broaden that debate
76. You yourselves have provided us with some
quite interesting statistics in your written submission. You have
said, or indicated, that there has been something like a nine
per cent growth in demand for steel from the UK from 199899
and yet at the same time in terms of imports we have seen steel
deliveries from outside the UK increase from 29 per cent to 44
per cent. This has led to a pretty huge decline in the UK domestic
product in terms of market share. What is the reason for this?
Is it about quality? Is it about productivity? It is probably
partly about price but surely it is not going to be wholly and
completely about price. What is the reason for this?
(Mr Pedder) Certainly, speaking as far as Corus is
concerned, it will be a range of factors. First of all, let me
assure you that we try to win every order we can in the UK market
from our UK facilities because, as I said before, that is the
best place for us to be in the spectrum of sales. Our customers
want to exercise choice. They like to keep us honest, I am sure,
by having a percentage of their purchases with somebody else and
that means having a second, if not a third source. There are not
all qualities of steel that are bought in the UK market that we
produce, not all products or qualities, for the reason that you
cannot cover the entire range, although we cover it fairly comprehensively.
I do not believe that the issue in terms of any orders we lose
is to do with quality or our delivery performance, and it is certainly
not our competitiveness because we are very anxious to compete.
Customers will exercise choice and, as I say, there are some products
that we just do not make.
77. I will respond to that by saying that perhaps
in terms of looking at statistics that you have provided, they
have exercised choice one can say maybe for the first time or
they have changed their position with regard to choice pretty
rapidly if we have seen, as your figures indicate, steel deliveries
from outside of the UK increasing from 29 to 44 per cent. That
is a huge leap if it is just exercising choice.
(Mr Pedder) And I think price will come into that
on some occasions. As currency relativities move, it becomes more
attractive for outside suppliers to supply into the UK market
and we have choices to make as to whether we respond to every
price that comes into the UK market. That is the balance that
we are trying to keep in terms of our sales. We are, I can assure
you, trying to win every order we can.
78. Looking across the piece, the whole of your
industry within the UK, you have said yourself, Mr Pedder, that
there are certain steels you do not manufacture, you do not produce.
Fine, but is that something that is accelerating as a process?
Have you got out of certain elements of steel production which
hitherto you were in? I am just interested in why we have seen
such a huge step change in terms of imports over a relatively
short period of time from your figures. I am just going from your
written submission that you have given to us: a nine per cent
increase in steel consumption within the UK and yet this huge
figure of a 15 per cent or more increase in imports.
(Mr Pedder) I think what we need to do is look behind
the figures. I will come back on that, if I may, with some specifics.
There are no major areas where we would say we have come out of
the manufacture of products, generally we are covering most of
the products that we were several years ago.
(Mr Rea) If I could broaden that out, Chairman, from
beyond Corus. There are very, very few steel product lines or
grades that are not made in the UK. There may be a question about
the amount of capacity there is to make and the volume there is
to make but there is virtually no grade that you cannot buy from
a UK source. Price is undoubtedly the biggest factor by a street
in the mixture of factors at the moment which are affecting the
figures you have just pulled out.
79. They are your figures, not my figures.
(Mr Rea) You have pulled out that particular aspect
and, as Tony said, there is a range of factors that go into a
purchasing decision, but price has been the predominant one in
recent times for the very obvious reason. It was also a point
made perhaps earlier on in the session before you joined us where
the President pointed out that steel in imported goods is now
the biggest single source of steel into the UK market. That is
exactly the same factor, price is affecting manufactured goods
coming into the UK. That is where an awful lot of steel is now
entering at a very low price through the manufactured goods.
(Mr Siddall) Can I just say, Mr Laxton, as well, in
my own case, where my company makes components, those types of
components are things used all over the world, particularly obviously
our European competition has looked at the UK and found it an
extremely attractive market. I must point out that when UK buyers
of components are buying them, they owe no allegiance to the UK
at all, they will go where they can buy those products most cheaply
at what they see as the best quality and the best price. They
will see no allegiance, their allegiance is to their own company.
With the strength of the pound that makes life very difficult
indeed in my business.